2020 proved to be one of the most challenging years in history not just for Labuan Re, but for many business sectors in the world as the COVID-19 pandemic caused an economic slowdown. Despite the COVID-19 losses and other natural catastrophic events, the Company had maintained its resiliency and pulled through with renewed enthusiasm to achieve a profitable performance.
On behalf of the Board of Directors, it is my great pleasure to present the Annual Report of Labuan Reinsurance (L) Ltd for the financial year ended December 31st 2020.
The Economic Landscape
The COVID-19 pandemic had overshadowed the anticipated moderation in the US-China trade tension which had been impacting the emerging markets’ economic recovery following their trade deal in January 2020. The presumed immediate benefits of the trade deal, however, did not materialise as nations began to grapple with drastic measures to contain the spread of the COVID-19 virus by closing their borders.
In 2020, the global economy contracted by 3.3% (2019: +2.8%), that was touted to be the deepest global recession since the 1930s Great Depression.
As the pandemic is a global phenomenon, the Malaysian economy had also contracted by 5.6% (2019: +4.3%) as the country enforced movement restriction orders (MCO) and closed its borders.
The Global Reinsurance / Insurance Environment
The global insurance market place in 2020 was impacted by the major natural catastrophe losses with USD268 billion total economic losses and USD97 billion total insured losses. Approximately 76% of the global insured losses occurred in the USA, which included Hurricane Laura, Hurricane Sally and other severe weather phenomenon. Further major natural catastrophes in 2020 included the seasonal floods in China and Cyclone Amphan in South Asia. The major natural catastrophe and COVID-19 losses had thus translated to the hardening of the reinsurance pricing with tighter terms and conditions. (Source: 2020 Aon Benfield Annual Report on Weather, Climate & Catastrophe Insight)
Despite the unprecedented economic hardship in 2020, the Group posted a net profit after tax of USD11.1 million (2019 net profit: USD1.4 million) on the back of an operating revenue of USD173.9 million (2019: USD196.6 million). The Non-Lloyd’s Conventional business had performed well with a net profit of USD26.9 million (2019 net loss: USD0.8 million) and was able to cushion the net losses from the Retakaful business of USD7.0 million (2019 net profit: USD5.5 million) and the net losses from the Lloyd’s portfolio of USD8.8 million (2019 net loss: USD3.3 million). Meanwhilst, the Group recorded a lower investment income of USD15.7 million (2019: USD18.6 million) amidst the low interest rate environment and volatile equity market condition during the year.
On December 3rd 2020, A.M. Best had reaffirmed the Company’s Financial Strength Rating of A- (Excellent) and Long-Term Issuer Credit Rating of “a-”. The outlook for both ratings remains “negative”. These ratings acknowledge Labuan Re’s strong risk-adjusted capitalisation and balance sheet strength, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management features.
The Group’s gross written premium (GWP) registered a decline of 10.6% to USD167.3 million in 2020. This decline was primarily driven by the restructuring of the Lloyd’s portfolio which saw the Group exiting and reducing its participation in 3 loss making syndicates.
Although the Non-Lloyd’s portfolio recorded a growth in GWP by 9.4% to USD99.3 million, this was not able to sustain the 29.5% decline in GWP from the Lloyd’s portfolio which ended the year at USD68.0 million. The proportion of business from Non-Lloyd’s had exceeded Lloyd’s for the first time since 2017 at the ratio of 59.4%: 40.6% (2019: 48.5%: 51.5%) of the Group’s premium, as our Underwriters placed more emphasis in growing the in-house business profitably.
Net claims incurred at the Group level in 2020 was at USD85.4 million (2019: USD99.1 million), lower by 13.8% as compared to 2019. Major Domestic business losses arose from the Energy portfolio amounting to USD6.1 million. Meanwhile, the losses from the Overseas business were mainly from the Fire and Energy portfolios amounting to USD4.0 million. Lloyd’s incurred net claims were at USD42.5 million (2019: USD42.9 million), a 1.0% decline from the preceding year, due to the COVID-19 business interruption and event cancellation losses, as well as Hurricanes Laura and Sally, both making landfall in the USA in August and September 2020, respectively.
In 2020, Gross Retakaful Contribution was at USD14.6 million, an increase of 7.8% as compared to 2019. This was mainly due to the higher premium written in Pakistan and Indonesia. The Group’s main markets continued to be Malaysia, Pakistan, Brunei and Kuwait, contributing around 89.7% of its total Retakaful business.
Net claims incurred for the Domestic Retakaful portfolio in 2020 was at USD6.8 million, while the Overseas portfolio was at USD3.7 million, mainly due to the floods in Malaysia and fire losses from Pakistan, UAE and Brunei.
The Company renewed its Non-Lloyd’s retrocession programmes as per their expiring structures since they continued to provide adequate protection up to a return period of 1 in 250 years. These programmes covered the Company’s Non-Marine, Liability and Marine & Energy portfolios. The programmes were led and supported by reputable securities, with 95% having at least an A-rated security rating.
The Group’s total capacity participation in the Lloyd’s syndicates was at USD65.8 million (2019: USD64.0 million). The Management continued with its remedial exercise of the Lloyd’s portfolio by exiting and reducing its participation in 3 syndicates that persisted to show deterioration in their performance. The Management continues to monitor the development of the remaining syndicates which still meet the Group’s risk-return appetite, as well as those which could offer business synergies.
The Group posted a net investment income of USD15.7 million, lower by 15.5% compared to USD18.6 million in 2019. The investment return was dragged by the low interest rate environment as the allocation in cash deposits was increased in order to preserve capital during the highly uncertain financial market condition.
The Group continues to uphold a conservative investment philosophy. As at the end of 2020, the Non-Lloyd’s asset allocation stood as follows: 58.7% (2019: 43.8%) in cash deposits; 33.8% (2019: 48.8%) in bonds; 3.8% (2019: 3.1%) in other investments; and 3.7% (2019: 4.3%) in equities. The high level of cash deposits was a manifestation of the Company’s risk aversion following the COVID-19 pandemic- induced stock market crash in February 2020.
Outlook for 2021
The International Monetary Fund (IMF) has projected the global economy to grow by 6.0% in 2021 from a contraction of 3.3% in 2020. Locally, the Central Bank of Malaysia expects the Malaysian economy to grow between 6% and 7.5% in 2021 from a contraction of 5.6% in 2020. The successful transition of the Biden administration has given the market a clearer direction of the USA Government’s COVID-19 relief package to stimulate its economy. Interest rates are expected to stay low in the near term, while central banks around the world continue to prioritize their policies to prevent lasting damage to their economies.
The global reinsurance industry for 2021 as reported by AM Best, is projected to be on a stable outlook as positive pricing momentum and tighter terms and conditions continue to offset the negative factors such as claims reserve development associated with previous years’ property catastrophe events, social inflation, and more recently, business interruption and casualty lines, related to COVID-19 . The COVID-19 pandemic has added more uncertainties to the classes of business that have experienced increased loss activities in recent years. The reinsurance markets have put more emphasis on attaining underwriting profitsandcan no longer depend on investment income to show overall profitability. Additionally the reinsurers’ ability in the past to rely on favorable prior years’ reserve releases have diminished due to lack of underwriting margins compounded by the poor investment returns in the capital market. These reserves acted like shock absorbers during turbulent underwriting years but continued market softening during the last decade has decimated the supply of these funds. In addition, further uncertainty is becoming apparent due to the model accuracy of the supposedly well-understood risks such as the US hurricanes and the harder to model risks, such as wildfires and cyber.
As the Company submits into the “new normal”, the Management maintains a cautious but optimistic view of the challenges posed by the impact of the COVID-19 pandemic and the ongoing lockdowns locally and internationally. As soon as the Movement Control Order (MCO) in Malaysia was implemented in March 2020, the Management began participating in frequent discussions on the risks faced and the potential future circumstances that might impact the Company. These robust discussions had enabled the Management to highlight the important areas that could be impacted and took the required steps to establish mitigation measures for scenarios that could develop.
Looking beyond the MCO, the Management has set sights on key strategic areas to improve the Company’s performance and deliver value to its stakeholders. Generally, the Company’s business strategies have assumed a steeper economic recovery in 2021, arising from the COVID-19 induced recession in 2020. On the business side, the Management is being more selective when evaluating growth opportunities specifically in ensuring sustainable profitable growth.To complement its strategic initiatives, the Underwriting team had refined its departmental structure and is addressing competency gaps to build a robust portfolio through refined risk selection and portfolio management. At the same time, the Company is cautiously growing its Non-Lloyd’s portfolio including having a more balanced book of business in terms of territorial diversification and range of classes of business being written. Robust underwriting controls in terms of dynamic infrastructure and tools have been put in place to target sustainable profits. In terms of providing value-added proposition to the clients, the Underwriting team is working on offering structured solutions, schemes and retail initiatives in support of long-term growth.
Meanwhile, in addition to the capital preservation principle at the heart of the Company’s investment, the Management has also started to embed the Environmental, Social and Governance (ESG) criteria in its investment decision as a step towards delivering more sustainable returns to its stakeholders.
Operationally, the Management is looking into automating its processes to continuously improve its operational efficiencies. In terms of Technology, the Company is striving to stay at the forefront on the required compliance by the regulators, and is working to fortify its cyber security measures.
Human capital remains our most important asset and to that end, the Company is embarking on initiatives to enhance our human capital framework, especially with regards to building staff capabilities to support business transformation and create development opportunities. The Management is also ensuring the Company is well equipped to attract, retain, reward and develop its best talents for the future.
In our effort to achieve service excellence, Labuan Re’s relentless commitment is crucial in delivering its promises to its clients. During this trying period, trust brings the utmost priority to doing business as opportunities become scarce.
In order to stay competitive, the Management will need to enhance its marketing efforts by developing business relationships with its clients, while at the same time augmenting its technical capability in human and technological resources to raise its service level standards.
I take this opportunity to thank our staff for their diligence, passion and commendable performance achieved this year despite the tough operating environment. I would also like to express my sincere appreciation to all the shareholders, clients, broking partners and the office of the Director-General of Labuan Financial Services Authority for their continuous support to Labuan Re.
I wish to record my heartiest appreciation to three Directors who had resigned from the Board, Encik Mohd Din Merican, YBhg. Datuk Ir. Lim Tong Kang and Miss Lum Joy Deng, for their invaluable contribution to the Company’s success. I also wish to take this opportunity to extend a warm welcome to the new members of the Board, Puan Syarina Yaacob of Tenaga Nasional Berhad, Puan Saira Banu Chara Din of Lembaga Tabung Angkatan Tentera and Ms. Chong Chooi Wan of CIMB Bank Bhd. I am sure they will bring their wealth of experience to benefit the growth of Labuan Re.
Finally, I wish to record my appreciation to all fellow Directors for their continuous assistance, commitment and support during the year.
Labuan Reinsurance (L) Ltd