Group Performance

Labuan Re reported a net profit of USD 24.0 million, marking a notable turnaround from the USD 13.0 million loss in 2022, primarily attributable to marked-to-market losses in the Fixed Income portfolio.

Underwriting

The Group’s insurance contract revenue increased by USD 2.0 million to USD 132.2 million from USD 130.2 million, reflecting a growth of 1.5%. Despite this modest revenue increase, the insurance service results saw a significant improvement, rising by USD 25.9 million to USD 24.6 million from a USD 1.3 million loss in 2022.

The new MFRS17 had introduced a new category as net insurance financial results, which specifically segregated the economic effects of interest rates and foreign exchange rates from the measurement of (re)insurance contracts for the objectives of transparency, effective analysis and better comparison with the peers. The said result went down by USD 8.9 million to a deficit of USD 11.6 million from its earlier gain reported at USD 20.5 million in 2022.

The underwriting results were fundamentally bolstered by resilient and disciplined risk management, facilitated through a proactive approach to portfolio management. Our underwriters meticulously monitor the historical and current performance of risks using a real-time dashboard. The Group is committed to fulfilling its contractual obligations to clients by maintaining a sustainable portfolio through fair and equitable pricing of risks in exchange for the capacity provided.

Additionally, the Group has exercised selectivity and prudence in its involvement with syndicates at Lloyd’s, guided by the principle of achieving sustainable profitability within our risk appetite. Currently, the Group maintains its participation in 4 syndicates.

Investment

Our full-year interest income yield significantly increased to 3.8% from 2.1% in 2022, driven by higher interest rates earned on deposits with financial institutions. This yield even surpassed the 3.4% achieved by one of the largest reinsurers globally. The Group’s interest and dividend income grew by USD 5.1 million to USD 11.5 million from USD 6.4 million in 2022, buoyed by strategic investments in high-coupon investment grade corporate bonds and a favorable reinvestment strategy benefiting from higher interest rates.

Profit-taking activities further enhanced realized gains, increasing by USD 4.6 million to USD 2.4 million from a loss of USD 2.2 million in 2022. Moreover, the investment portfolio registered a marked-to-market gain of USD 7.2 million, a significant improvement compared to a fair value loss of USD 22.5 million in the previous year.

In 2023, the anticipated recession in the United States did not materialize as the economy demonstrated resilience. Throughout the year, the Federal Reserve (“Fed”) incrementally raised the Fed Funds rate by a cumulative 100 basis points in response to persistent inflationary pressures. Despite geopolitical tensions stemming from the conflicts in the Middle East and Ukraine, global equities performed strongly, with the S&P Index rising by 24% and the MSCI World Index increasing by 21.3% over the same period.

In the Malaysian market, the Overnight Policy Rate (“OPR”) has been maintained at 3% since a surprise 25 basis points hike in May 2023, reflecting confidence in the robust domestic economic outlook.

Capital

Labuan Re’s capital position remained strong, with its Insurance Capital Adequacy Framework (ICAF) ratio being comfortably above its Internal Target Capital Level as of 31st December 2023.

The most substantial component of our balance sheet is our loss reserves, which support our liabilities and currently stand at USD 266 million. We adopt a conservative approach in managing reserves, proactively recognizing adverse developments while exercising caution in acknowledging favorable developments. Our reserve adequacy is currently robust, positioned at the 75th percentile.

Environmental, Social & Governance (ESG)

Labuan Re is steadfast in its commitment to sustainability. The Group has embraced the Labuan Financial Services Authority (Labuan FSA)’s Guiding Principles of Sustainability Taxonomy, aligning our operations with sustainability objectives and ethical standards within the Labuan International Business and Financial Centre (Labuan IBFC). The Sustainability Taxonomy provides a structured framework for categorizing and assessing economic activities that promote environmental sustainability. This framework encourages responsible investment, enhances transparency, and drives positive contributions towards a sustainable future.

While Labuan FSA currently does not mandate ESG (Environmental, Social, and Governance) reporting, Labuan Re is taking proactive steps to comply with evolving regulatory requirements and prepare for future disclosures. In 2024, we have engaged a consultant to enhance the quality and effectiveness of Labuan Re’s Sustainability Statement. This includes conducting a materiality assessment, defining key performance indicators, outlining activities, and implementing strategies for the years ahead.

Our underwriters have integrated ESG-related questionnaires to assist clients in understanding and managing sustainability requirements. In asset management, we systematically monitor and evaluate our corporate bonds and listed equities based on their ESG scores, ensuring alignment with our sustainability goals.
It is our ambition at Labuan Re to foster leadership diversity throughout our organization. We are committed to creating an inclusive environment that supports the personal and professional growth of all our employees. In addition to our internal efforts, we actively participate in corporate social responsibility events and support charitable initiatives as part of our commitment to giving back to society.

Outlook for 2024

In 2024, Labuan Re continues to prioritize underwriting discipline, exemplified by our successful January renewals. We remain steadfast in managing costs effectively and nurturing strong relationships with our clients.

Despite ongoing geopolitical tensions and recent unpredictable risk events like the Dubai flooding, including those exacerbated by climate change, we anticipate a favorable reinsurance market environment this year. This environment allows Labuan Re to leverage its strengths by collaborating closely with insurance clients to offer robust risk-transfer solutions, aligned with our commitment encapsulated in our tagline, “Your Partner in Growth, Your Safeguard Against Risk.”

While our foundation lies in prudent underwriting practices, Labuan Re strategically allocates reserves towards opportunistic investments in high-grade corporate bonds and marketable securities. Additionally, we are exploring opportunities to expand capacity to suitable Lloyd’s syndicates that align with our risk appetite and underwriting criteria. The Group is committed in its strategic objectives, which are (1) delivering positive underwriting results, (2) providing positive investment income, and (3) strengthening the Shareholders’ Fund.

The Role of Reinsurance

Labuan Re has been consistent in our conviction that reinsurance plays a critical role in absorbing volatility. Unlike other market participants who have fluctuated in their perception of reinsurance over the years, we assert that any wavering is rooted in a fundamental misunderstanding of its value within the value chain.

Reinsurance is most effective when used to mitigate balance sheet volatility for our customers, serving as an efficient form of capital for this purpose. However, it is not sustainable over the long term when used solely to offload significant income statement risks. We firmly believe that cedants must retain ownership of the risks they underwrite to ensure that they are appropriately priced and managed. At Labuan Re, we are committed to fostering a clear understanding of reinsurance’s strategic benefits and its integral role in enhancing financial stability and risk management across the insurance sector.

Over the past decade, the distinction between cedants and reinsurers has blurred as cedants increasingly transferred less risk, while reinsurers, buoyed by a mix of structured retrocession products and third-party capital seeking returns, assumed more exposure. This trend led to an imbalance in the relationship, exacerbated by successive years of catastrophic events and resurging inflation, culminating in a severe capital squeeze by the end of 2022, posing a threat to market stability. Labuan Re is actively engaging in addressing these challenges by playing a proactive role in the market’s recovery. We are quoting and providing capacity at pricing and terms necessary to restore rate adequacy. By doing so, we aim to rebalance the market dynamics, ensuring sustainable pricing and enhancing overall market health.

Looking ahead, Labuan Re anticipates ongoing demand for reinsurance, fueled by economic uncertainties, geopolitical factors, and the escalating effects of climate change. Simultaneously, we recognize that the capital markets and reinsurance supply are becoming less tolerant of volatility, influenced by rising loss costs and attractive yields in alternative asset classes. Our strategic focus at Labuan Re remains centered on meeting this demand by providing essential capacity while upholding rate adequacy. This approach ensures that we effectively manage risk while delivering sustainable value to our clients and stakeholders in an evolving marketplace.

MFRS 17: A Catalyst for Transformation

As stated under the Operating Environment, the adoption of MFRS 17 is a complex process. The reporting requirements profoundly impact many functions within Labuan Re, including data requirements, system processes, actuarial modeling, and finance reporting processes. The Group looks at MFRS 17 as more than a mere compliance requirement. By retooling the data and systems, information previously obscured is made transparent.

This includes the Contractual Service Margin (CSM), which represents the expected future profits, and Loss Recognition on Onerous Contracts which represents the timely reporting on Day 1 the expected losses of the fulfillment of the insurance contracts.

As such, the Group will truly ensure that rates are truly adequate while keeping the costs of fulfilling the contracts as low as possible. We will be even more selective in our risks. We will scrutinize the regions and markets that we are currently in and planning to expand into.

This directly gives us a robust bottom line and translates to a stronger balance sheet. With a stronger balance sheet, we can provide much-needed capacity and liquidity to our cedants. Hence, our Vision is to be Your Preferred Reinsurer and Our Mission is Enhancing Stakeholder’s Value.

Acknowledgement and Appreciation

I would like to take this opportunity to express my sincere gratitude to our dedicated staff for their diligence and hard work throughout the year. Despite the challenges posed by the tough operating environment, their commendable performance has been instrumental in achieving our goals. Together, we are actively building a stronger Labuan Re committed to delivering exceptional value for our clients and shareholders. Thank you for your continued dedication and commitment to excellence.

I would also like to extend my heartfelt appreciation to all our shareholders, ceding companies, broking partners, and the Office of the Director-General of Labuan FSA for their unwavering support of Labuan Re. Your collaboration and trust are invaluable to our success, and we look forward to continuing our strong partnerships as we navigate the future together.

In addition, a note of heartfelt thanks is due to Puan Saira Bainu Chara Din and Encik Rizal Mohd Zin, for their contributions. I would also like to take this opportunity to welcome the new Directors, Encik Ahmad Fairus Rahim from Telekom Malaysia, Madam Sharmini Perampalam from Malaysian Re and Encik Ahmad Shahril Mohamed Nazar from Lembaga Tabung Angkatan Tentera.
Finally, I wish to record my appreciation to all my fellow Directors for their relentless assistance, support and guidance during the year.

Thank you.

George Oommen