Apart from the pandemic, we saw the devastation in Europe as heavy rains swept across western Germany in July 2021, and the same in Malaysia which also experienced one of its worst floods in history in December 2021. This provided further evidence that extreme weather events were related to climate change.The 2021 Aon Benfield Annual Report on Weather, Climate and Catastrophe Insight indicated that global insured losses from natural catastrophes in 2021 amounted to USD130 billion (2020: USD97 billion), whilst the economic losses were valued at USD343 billion (2020: USD268 billion) 71% of the global insured losses were recorded in the United States, which included Hurricane Ida, the Polar Vortex (which also affected Mexico) and other severe weather phenomenon. Other major natural catastrophes in 2021 included floods in Western Germany, east coast of Australia and Henan, China.
2021’s Results Overview
The Group delivered another year of positive results with Profit After Tax (PAT) of USD6.1million (2020 PAT: USD11.1 million). The PAT is a 45% decline from the FY2020 mainly caused by Malaysia’s worst floods in decades in December 2021. This had impacted all the (re)insurance players in the market including Labuan Re. At the same time, the investment environment was unfavourable for the Group in 2021 which resulted in a substantial reduction in its investment income. Nonetheless, we have reported lower net investment and are thankful for our positive results despite the challenges faced in 2021.
I am pleased to note that the Group had recorded an increase in revenue of 5.4% to USD176.3 million compared to USD167.3 million in the preceding year. This was primarily driven by new businesses obtained from the non-Lloyd’s portfolio. We continued to restructure our Lloyd’s portfolio by decreasing our participation in the syndicates further as they were not aligned with our overall strategic objectives.
The Group’s investment income saw a decline of 39.3% to USD9.1 million compared to USD15.0 million in 2020. The decline was driven by the low interest rate environment, lacklustre performance of the Malaysian equity market and continued volatility of the equity and fixed income class. Despite this result, I would like to provide assurance to all stakeholders that our investment portfolio is being monitored closely and that we remain prudent in all our investment decisions to meet our ongoing and future needs.
On December 8th 2021, AM Best had revised the Company’s rating outlook to Stable from Negative and affirmed its Financial Strength Rating of A- (Excellent) and Long-Term Issuer Credit Rating of “a-“. This was a reflection of the Company’s balance sheet strength, which AM Best assessed as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.
Market Outlook for 2022
Global GDP growth is expected to moderate to 3.6% in 2022 (2021: 6.1%) as indicated by the International Monetary Fund (IMF) in its April 2022 report. Nations continue to be impacted by economic disruptions due to COVID-19 as well as rising inflationary pressure. Nonetheless, the economic disruptions could be slowed down with a faster rollout of COVID-19 vaccines and additional fiscal support from the advanced economies. Risks to global growth remain on the downside primarily to the continuing war in Ukraine, and from China’s slower-than-expected recovery. Lloyd’s of London is expected to take a hit from the war in Ukraine, and is expecting a significant but manageable overall loss, since their activities in Russia and Ukraine represent less than 1% of the business.
AM Best had reported in December 2021 that the global reinsurance industry for 2022 is projected to maintain its stable outlook caused by the heightened demand for reinsurance capacity, continued positive pricing momentum and a disciplined underwriting environment, which will continue to offset the negative factors of low interest rates on fixed-income investments and social inflation. Price improvements are expected to be seen, albeit at a slower pace, for a majority line of business in the reinsurance renewals. The losses from the European floods and Hurricane Ida, as well as Winter Storm Uri are expected to contribute to the hardening of rates in 2022 locally and overseas. most dramatic rate increase in 2022.
Domestically, in May 2022, Bank Negara Malaysia expects the Malaysian economy to grow between 5.3% to 6.3% in 2022 (2021: 3.1%). Amidst a challenging environment of COVID-19, ongoing geopolitical conflicts, and elevated cost and price pressures, the continued expansion in external demand supported by the tech upcycle will be major contributors to the Malaysian economic growth. Demand contraction and currency fluctuations may provide significant challenges.
In addition, as Malaysia enters into its endemic phase, the reopening of international borders would provide support for its economic recovery. Malaysia’s investment projects, focused governmental actions, and an expedited Covid-19 booster vaccination programme contributed to boosting Malaysia’s economic activity and bolstering the recovery’s momentum.
With the Stable rating outlook, the Group is looking to focus its attention on the key strategic priorities of better underwriting results, higher investment income and stronger shareholders’ fund amidst the continued challenging business environment.
We are clear in the belief that the use of technology is a must to enhance operational efficiencies. On this, the work behind the scene has been on-going to automate the processes for the Underwriting, Finance and Claims functions. And it is hoped that the transformation would bring benefits not only to our clients, but also in the workplace for our employees to have a better work-life balance. Touching on our employees, we took cognisance that commuting puts a strain, not only on the environment but also on the mental health of the employees. Thus, we have embraced a hybrid working environment in the belief that this arrangement provides a perfect platform to enhance our employees’ morale.
As we make progress in 2022, we have been warned that the hurricane season in the Atlantic basin is expected to be at an above-average frequency of storms and would be more intense. I am glad to note that we have strengthened our ability to withstand these events which primarily stems from the Lloyd’s syndicates by reducing volatility from the CAT and Property exposures as they contribute the most losses.
In terms of growing our reinsurance and retakaful businesses, the underwriting team is actively looking at opportunities to work with our partners both in the domestic market as well as overseas. We realise that our strength lies in a much-improved underwriting capabilities backed by a solid foundation of data driven decision-making process. Under the existing stewardship, this will hold us in good situation as we can be more responsive to our clients and selective when evaluating the risks to be underwritten.
In addition, the Board has emphasised that sustainability should be earmarked for enhancement in the Group. As such, the Management is looking into incorporating an Integrated Reporting in its 2022 Annual Report to account for the activities of the Group.
From the regulatory compliance perspective, the Labuan Financial Service Authority (LFSA) has issued Guidelines on Digital Governance Framework and Guidelines on Anti-Money Laundering, Countering Financing Terrorism and Targeted Financial Sanctions for Labuan Key Reporting Institutions which comes into effect on January 1st, 2022 and July 1st, 2022 respectively. The Group has taken appropriate measures to strengthen its internal process to ensure compliance with the requirements.
Acknowledgement and Appreciation
September 14th, 2022 will be the 30th anniversary of the Company and its mission remains consistent – enhancing stakeholder’s value. The methods may evolve over the years, but the spirit remains.
I joined the Board as the Chairman on October 25th, 2019 at its most turbulent time. After three consecutive years of Negative rating outlook, AM Best’s revised rating outlook to Stable at the end of 2021 demonstrates the Group’s resilience in challenging times to continue serving our clients, taking care of our employees, and preserving our shareholders’ capital.
Therefore, as we continue our journey in the new normal, I wish to convey my utmost appreciation to our shareholders, clients, broking partners and the office of the Director-General of LFSA for their continuous support to the Company.
I also wish to record my appreciation to my fellow Directors for their knowledgeable advice and wisdom during the year which had helped the Group to successfully achieve another profitable year. On behalf of the Board, I would like to extend a warm welcome to our new Board member, En. Rizal Mohd Zin of MNRB Holdings Berhad. I am confident he will bring his wealth of experience for the benefit of Labuan Re.
Finally, I would like to acknowledge the contributions of the Management and staff for giving their best and displaying continued passion to help the Group achieve a commendable performance. I am sure our people will continue to be diligent and tenacious in overcoming the challenges in the coming years thus propelling Labuan Re onto greater heights.