The financial year 2019 was a pivotal moment for Labuan Re as the Group was put under tremendous pressure to deliver a positive result. The Group responded with enthusiasm as shown in the rebound to a positive performance for the year despite another tough year experienced with natural catastrophe events and fire losses. With the refinement of the Group’s growth strategies amidst the additional challenges from the Covid-19 pandemic, the Management is optimistic that the Group will be able to achieve a sustainable profitable performance going forward.
On behalf of the Board of Directors, it is my pleasure to present the Annual Report of Labuan Reinsurance (L) Ltd for the year ended December 31st 2019.
The Economic Landscape
The economic environment in 2019 was challenging plagued by the unresolved trade tensions between the US and China, slowdown in investment and trade activities, heightened financial market volatilities and geo-political uncertainties.
Global economy grew at 2.9% in 2019 (2018: 3.6%), the weakest pace since the global financial crisis a decade ago, as trade tensions between the USA and China worsened the downturn in global manufacturing and investment activities.
Amidst the tough global economic condition and supply disruptions, the Malaysian economy had expanded moderately at 4.3% in 2019 (2018: 4.7%), sustained by the resilient private sector spending and accommodative monetary environment.
The Global Reinsurance / Insurance Environment
The global insurance market place in 2019 was impacted by the major natural catastrophe losses with USD232 billion total economic losses and USD71 billion total insured losses. Approximately 51% of the global insured losses occurred in the USA, which included the Mississippi Basin Floods, Hurricane Dorian and other severe weather phenomenon. Further major natural catastrophes in 2019 included Typhoons Haibis and Faxai in Japan. Consequently, the reinsurance pricing environment of the global non-life reinsurance segment improved as views of risks changed and risk appetites adjusted, while the sector still faced secular headwinds.
Global reinsurance has remained resilient despite the insured losses from natural catastrophes reaching a record back-to-back high over the past two years. Some reinsurers had taken advantage of the higher premium rates to increase their exposure to catastrophe risk. (Source: 2019 Aon Benfield Annual Report on Weather, Climate & Catastrophe Insight)
In 2019, the Group generated an operating revenue of USD196.6 million (2018: USD216.2 million), and a net profit after tax of USD1.4 million (2018 net loss: USD24.1 million) despite a challenging financial market and consequential weather condition across the world. The Non-Lloyd’s Conventional portfolio generated a net loss of USD0.8 million, whilst its Retakaful business produced a net profit of USD5.5 million. The Lloyd’ market, on the other hand, generated a net loss of USD3.3 million. Although the Group recorded a stellar investment income of USD18.6 million, its underwriting performance was affected by a few large losses, including Typhoons Lekima, Faxai and Hagibis.
On November 21st 2019, 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 registered a gross written premium (GWP) of USD187.2 million in 2019, a decrease of 9.3% from the USD206.5 million recorded in the previous year. This was a deliberate action by the Management to remediate the non performing accounts of the Non-Lloyd’s portfolio in order to improve the underwriting results, and to limit the Group’s natural catastrophe exposure in the Lloyd’s portfolio.
The Non-Lloyd’s portfolio recorded a GWP of USD90.7 million, a decrease of 9.8% from the previous year. Meanwhile, the Lloyd’s portfolio contributed a GWP of USD96.5 million, a decrease of 8.9% from 2018. The Lloyd’s business constituted 51.6% (2018: 51.3%) of the Group’s premium, followed by the Non-Lloyd’s Overseas business of 32.7% (2018: 30.5%), and the Non-Lloyd’s Domestic business of 15.7% (2018: 18.2%).
Net claims incurred at the Group level in 2019 was at USD99.1 million (2018: USD116.4 million), lower by 14.9% as compared to 2018. Major Domestic business losses arose from several fire losses amounting to USD5.2 million. The losses from the Overseas business were mainly from Typhoons Hagibis and Faxai amounting to USD7.0 million. Meanwhile, Lloyd’s incurred net claims were at USD42.9 million (2018: USD50.8 million), a 15.6% decline over the preceding year, due to the Company’s restructuring exercise of its Lloyd’s portfolio and benign US Catastrophe activities.
In 2019, Gross Retakaful Contribution was at USD13.5 million, a decrease of 1.5% as compared to 2018. This was mainly due to the portfolio rationalization exercise in Pakistan and the impact of the split license requirement for the Family Takaful and General Takaful businesses in Malaysia. The latter had affected our business as several takaful operators had lapsed their treaty programmes since they no longer carry out general takaful business. The Company’s main markets continued to be Malaysia, Pakistan, Brunei and Kuwait, contributing to 89.3% of its total Retakaful portfolio.
Net claims incurred for the Domestic Retakaful portfolio in 2019 was at USD1.4 million, while the Overseas portfolio was at USD0.7 million owing to a write back of outstanding reserves and lower claims experience. There were no major natural catastrophe losses affecting the Retakaful portfolio during the year, which contributed to its positive performance.
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% in the A-rated security rating. The programmes had effectively protected the Company’s net position from the Japanese Typhoons in 2019.
The Group’s total capacity participation in the Lloyd’s syndicates was at GBP57.1 million (2018: GBP63.1 million). The reduction was due to the portfolio restructuring exercise where the Company had exited or reduced its participation in poor performing syndicates. The Group continues to sustain its Lloyd’s business by participating selectively in syndicates which meet its risk-return appetite, as well as those which could offer business synergies.
The Group posted a net investment income of USD18.6 million, surging 354% from USD4.1 million in 2018. Despite the volatile market condition during the year, the Group’s investment portfolio had a stellar performance boosted primarily by the optimism in the global equity market which ended positively for the year.
The Group continues to uphold a conservative investment philosophy. As at the end of 2019, the Non-Lloyd’s asset allocation stood as follows: 48.8% (2018: 62.1%) in bonds; 43.8% (2018: 26.1%) in cash deposits; 4.3% (2018: 8.7%) in equities; and 3.1% (2018: 3.1%) in other investments. The substantial increase in cash deposits was a reflection of risk aversion as the Group had significantly reduced the amount of funds outsourced to the external fund managers amidst the volatile market condition in the 1H2019.
Outlook for 2020
The unprecedented COVID-19 pandemic and the sharp decline in crude oil prices are expected to result in the global economy contraction and heading into a likely recession. The Malaysian economy too is projected to contract/ grow at between -2.0% to 0.5%. Across the globe, measures implemented to contain the quick spread of the virus, such as travel restrictions, business closures and restrictions on social activities, have evidently suppressed the economic activities. Hence, many governments have intervened with unprecedented scale of fiscal and monetary policies to cushion the economic disruption caused by the pandemic in their respective countries.
Reinsurance pricing is anticipated to gain a favourable momentum, and it is expected that the market will be responding with price correction and stricter exclusions across some lines of business. While certain lines like D&O, Marine, Energy and Engineering have seen the hardening of terms even prior to the pandemic, the current condition has exacerbated the importance of staying focused and disciplined on attaining underwriting profits. Having a robust risk-adjusted capitalisation means that reinsurers are in a good position to absorb any potential COVID-19 losses on both the underwriting and investment side of the balance sheet. While expectations from some analysts suggest limited impact from the global coronavirus pandemic, depending on the reinsurer’s portfolio composition, clearly, the outcome still remains uncertain and only time will tell what the financial cost will be for the reinsurance sector.
The Group had formulated its 3 years’ Strategic Plan (2020-2022) at the end of 2019, with the primary focus of achieving a sustainable underwriting profit. However, with the unprecedented Covid-19 pandemic, the Management would require to adjust the Company’s business and operational strategies for preparedness of the uncertain business environment for the remaining of the year. This would include the Group’s adjustment to risk tolerance and appetite, evaluation of new underwriting environment and revised objectives for its 2020 plans and beyond.
On the operational side, the Management is prudently eliminating the non-essential costs. These include business travelling and marketing & staff activities arising from the restricted movement of staff due to the pandemic. In improving operational efficiencies, several departments are currently streamlining and reviewing their operational processes with the new reinsurance system. The Management is also currently tapping into the Company’s new reinsurance system’s database and its regional reach. The variety of property risks in the countries that Labuan Re underwrites provide a wealth of data pool for its actuarial pricing team to gather and analyse. The Management is developing a market database to be able to price new and existing property risks in a more robust manner, in tandem with its ongoing de-risking exercise and ensuring pricing adequacy to its Facultative portfolio. The Management has also started its MFRS 17 Insurance Contracts Implementation Project and is committed to adopt this new Insurance Standard when it comes into effect in 2023.
On the staff’s well-being, measures have been taken to ensure they are being informed of the safety practices at the workplace. The Company has also adopted the work from home arrangement. The new-norm would certainly need to be adjusted and the Management is ensuring that staff remain productive and are able to achieve their deliverables.
On behalf of the Board of Directors, I would like to extend my heartfelt gratitude to all the staff for their dedication, passion and tireless contributions in helping to translate our vision to reality, and build 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, especially in the face of a challenging year.
In addition, a note of heartfelt thanks is due to the retired Chairman, YBhg. Dato Sharkawi Alis. I would also like to record my heartiest appreciation to two directors who had resigned from the Board, YBhg. Dato’ Carol Chan Choy Lin and YBhg. Datuk Zakaria Sharif, for their invaluable contribution. I wish to take this opportunity to extend a warm welcome to the new members of the Board, YM Raja Azlan Shah Raja Azwa of MISC Berhad, and Mr Amalanathan Thomas of HICOM Holdings Berhad. 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, support and guidance throughout the year.
Labuan Reinsurance (L) Ltd