It was a tough year for the Group as fire losses, hurricanes in the USA and typhoons & earthquakes in Asia had dashed the hope of a continued positive performance for the Group.
Despite these events, we remain optimistic that this is a temporary setback, and the Group will bounce back with renewed enthusiasm to achieve a profitable performance.
The Economic Landscape
The global economy was projected to sustain a robust growth in 2018, with global trade and economic growth on an upward trajectory in the first half of the year. However, the growth lost momentum in the second half and the trend reversed in the face of a number of headwinds, such as the escalation of global trade tensions which resulted in higher tariffs and uncertainties.
In the UK, the outcome of the Brexit negotiations remained uncertain, while the pace of US monetary policy normalisation was unclear which led to a volatile global financial market condition. At the same time, huge capital outflows from the emerging markets and the volatile commodity prices had affected the global growth momentum. Against this backdrop, global economy grew modestly at 3.6% in 2018 (2017: 3.8%)
On the local front, the Malaysian economy was expected to sustain its growth following a robust 5.9% it attained in 2017. However, the economic sentiment was weakened by a major political and policy shift post the 14th General Election in May 2018, global trade tensions (between US and China), Brexit and US monetary policy. Nonetheless, as domestic spending remained resilient, Malaysia recorded a respectable 4.7% growth in 2018.
The Global Reinsurance / Insurance Environment
In terms of Catastrophes, 2018 was an elevated yet manageable year with USD225 billion of total economic loss and USD90 billion of total insured loss. It marked the 3rd consecutive year of catastrophe losses surpassing the USD200 billion threshold and the 4th costliest year since 2000. 64% of the global insured losses occurred in the US, which included the California wildfire and Hurricanes Michael and Florence. Other major natural catastrophes in 2018 included Typhoons Jebi & Trami in Japan, and Typhoon Mangkhut in Oceania. Notwithstanding the huge losses which arose from these catastrophes, the reinsurance pricing environment of the global non-life reinsurance segment had remained stable in 2018, albeit at levels still below the long-term adequacy. (Source: 2018 Aon Benfield Annual Report on Weather, Climate & Catastrophe Insight)
Against the backdrop of this challenging environment, the Group generated an operating revenue of USD216.2 million (2017: USD196.2 million) and a net loss of USD24.1 million (2017 net profit: USD9.4 million) in 2018. The high frequency and magnitude of catastrophic events in 2018 had affected both the Non-Lloyd’s and Lloyd’s performance.
On November 29th 2018, A.M. Best had reaffirmed the Company’s Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of “a-” with the outlook revised from “stable” to “negative”, over concern of the Company’s ability to maintain adequate operating performance amidst the challenging market conditions.
The Group registered a gross written premium (GWP) of USD206.5 million in 2018, an increase of 10.3% from the USD187.2 million recorded the previous year. The Non-Lloyd’s portfolio recorded a GWP of USD100.5 million, an increase of 8.3% from the previous year. The growth in premium income for Non-Lloyd’s was mainly attributed to the higher premium from Southeast Asia (excluding Malaysia) of USD5.1 million and China of USD3.2 million.
The Lloyd’s portfolio contributed a GWP of USD105.9 million, an increase of 12.3% from 2017. The Lloyd’s business translated to 51.3% of the Group’s premium, followed by the Non-Lloyd’s Overseas business of 30.5%, and the Non-Lloyd’s Domestic business of 18.2%.
Net claims incurred at the Group level in 2018 was at USD116.4 million (2017: USD93.3 million), higher by 24.8% as compared to last year. Major Domestic losses arose from several fire and energy-related claims amounting to USD8.2 million. The losses from the Overseas business were mainly from Typhoon Jebi of USD3.8 million and Indonesian earthquakes of USD3.4 million. Meanwhile, Lloyd’s incurred net claims were at USD50.8 million (2017: USD53.3 million), a 4.7% decline over the preceding year. The losses were mainly from Hurricanes Michael, Florence and California wildfire, and spill over from HIM which totalled up to USD20.6 million.
In 2018, the Retakaful Division registered a gross retakaful contribution of USD13.7 million, a decrease of 13.4% as compared to 2017. This was mainly impacted by the closure of a few takaful operators in Malaysia in order to comply with the Central Bank of Malaysia’s requirement where the takaful operators had to relinquish their composite licenses and conduct their life and general insurance businesses under separate subsidiaries by 2018. Nevertheless, the Company’s main markets continued to be Malaysia, Pakistan, Brunei and Kuwait, contributing 91.7% of the total Retakaful contributions.
The Company renewed its Non-Lloyd’s retrocession programmes as per their expiring structures as they continued to provide adequate protection up to a return period of 1 in 250 years. The Programmes cover the Company’s Non-Marine, Liability and Marine & Energy Portfolio. The programmes were led and supported by reputable securities, with 95% in the A-rated security rating.
In addition to the Non-Lloyd’s retrocession programme, the Company had purchased a Stop Loss Programme to protect the loss exposure of its Lloyd’s portfolio.
The Group’s total capacity participation in Lloyd’s syndicates was at USD85.3 million (2017: USD71.8 million). The increase was due to the change in one of the syndicates’ accounting treatment from Net to Gross basis and an additional pre-emption capacity from one of the freehold capacities. The Group continued to sustain its Lloyd’s business by participating selectively in syndicates which met the Group’s risk-return appetite, as well as those which could offer business synergies.
The Group’s investment income increased by 7.8% to USD9.7 million, from USD9.0 million in 2017. The better performance was due to the higher interest income from the bonds portfolio, as well as the fixed and call deposits amidst the rising US interest rate environment during the year.
The Group continues to uphold a conservative investment philosophy. As at the end of 2018, asset allocation stood as follows: 62.1% (2017: 58.5%) in bonds; 26.1% (2017: 26.5%) in cash deposits; 8.7% (2017: 11.9%) in equities; and 3.1% (2017: 3.1%) in other investments.
Outlook for 2019
Global economic growth is projected to be challenging, with the IMF expecting it to ease to 3.3% in 2019 from 3.6% in 2018. The lower upward trajectory is attributed to a slowing growth in the US as well as in most emerging market and developing economies. The GDP in the UK is expected to moderate due to low business confidence following uncertainties amidst the ongoing Brexit negotiations.
The Malaysian economic growth this year is expected to moderate at 4.5% as compared to 4.7% in 2018. The reduction is premised upon the uncertain outcome of the extended US – China trade negotiations and ongoing economic moderation in major global markets, including China, the European Union and the US. Over the medium term, growth is expected to improve with the support from the domestic and external demand. Although challenges exist, capital outflows have been manageable.
Reinsurance pricing is anticipated to trend up modestly through 2019 as demand outpaces the ongoing abundance of capacity. Insurtech will also be a trend as companies continue to invest in capabilities to improve product development, sales and distribution, policyholder services, underwriting, and claims management.
The Group is in the midst of formulating its next 5 years’ Fifth Strategic Plan (2020-2024) with the primary focus of achieving a sustainable underwriting profit. The Company is undertaking a portfolio rationalisation exercise of its Non-Lloyd’s business with more stringent underwriting considerations. Focus is also given on strengthening its reinsurance programmes to provide adequate protection to its portfolio. For Lloyd’s, the Company has restructured its portfolio of syndicates and will continue to monitor & adjust the portfolio composition so as to ensure it meets the Company’s risk appetite and generate positive income. These strategies are to ensure the FSR by A.M. Best remains positive.
In achieving service excellence, Labuan Re’s relentless commitment is crucial in delivering its promises to its clients. Several initiatives have been in place, one of them being the introduction of a new reinsurance system which will be implemented in October 2019. This is to maximise efficiency of its underwriting administration and claims settlement processes. The Group is also working on strategic partnerships with selected clients on new products.
On behalf of the Board of Directors, I would like to extend my gratitude to all the staff for their dedication, passion and tireless contributions in building Labuan Re into a resilient and robust organisation that can endure through the challenging circumstances.
To our shareholders, clients, broking partners and the office of the Director-General of Labuan Financial Services Authority, thank you for your continued trust and support to us, especially in the face of a challenging year.
I wish to record my appreciation to all my fellow Directors for their invaluable guidance and relentless assistance throughout the year. I would also like to record my heartiest appreciation to Miss Raziyah Yahya, Mr Nazmi Othman and Mrs Rozainah Awang, who have resigned from the Board, for their invaluable contribution. Finally, I wish to take this opportunity to extend a warm welcome to the new members of the Board, Mr Muhammad Balyan Suleiman of Energas Insurance (L) Ltd and Y Bhg. Datuk Lim Tong Kang of Tenaga Nasional Berhad. I am sure they will bring their wealth of experience to benefit the growth of Labuan Re.
Dato Sharkawi bin Alis
Labuan Reinsurance (L) Ltd