On behalf of the Board of Directors, it is my privilege and pleasure to present the Annual Report of Labuan Reinsurance (L) Ltd for the year ended December 31st, 2014.
Global economy expanded gradually at 3.4% in 2014 (2013: 3.0%). This was at the back of an uneven pace of growth across the economies, led by the US as the growth engine for the advanced economies compared to the subdued growth in the Eurozone and Japan. The year saw weakness in global demand amidst the oversupply of global crude oil that resulted in a significant decline in oil prices. This in turn aggravated the concerns over global growth due to its adverse impact on the oil-producing economies, which resulted in a broad-based financial market volatility. The Malaysian economy, on the other hand, recorded a much stronger growth at 6.0% during the year (2013: 4.7%) anchored by its solid private domestic consumption and exports to the advanced economies.
Whilst major catastrophes for the year had generally been described as well below average, the year was marred by high profile aviation incidents which accounted for 3 of the top ten major non-catastrophic losses. The major aviation incidents were the disappearance of the Malaysian Airlines MH370, the downing of the Malaysian Airlines MH17 and the Air Algerie AH5017 crash. The prominent losses in the year was also related to Cyclone Hudhud that struck India’s East Coast, and Typhoon Hagupit that hit across Central Philippines. In Malaysia, the year ended with severe flooding in five states mostly in the East Coast.
The reinsurance industry continued to be challenged by price declines, higher commissions and tougher terms and conditions, hence eroding profitability. Across the board, rating agencies had downgraded the outlook of the global reinsurance sector citing intense competition attributed by the oversupply of capital from the traditional reinsurers to alternative capital, which includes cat bonds and hedge funds.
The Group recorded a net profit after tax and zakat of USD3.2 million during the financial year ended December 31st, 2014 on the back of an operating revenue of USD257.5 million. In comparison to the 2013 results of a net profit after tax and zakat of USD6.9 million, this represents a 53.6% decrease mainly caused by a decrease in net earned premiums and an increase in expenses.
On November 7th, 2014, A.M. Best reaffirmed the Company’s financial strength rating of A- (Excellent) and issuer credit rating of “a-“. The outlook of both ratings is stable. AM Best has acknowledged that the rating reflects adequate capitalisation as well as continuous remediation of its underwriting portfolio.
The Group registered gross premium of USD248.7 million in 2014, an increase of 2.8% from USD241.9 million recorded in the previous year. The Non Lloyd’s overseas business constituted 27.8% of the premium, with the remaining 21.7% from the Non Lloyd’s domestic business. The Lloyd’s business contributed around 50.5% of the premium. Fire contributed 52.5% of the class of business underwritten, followed by Marine, Aviation and Transit at 20.8%; Miscellaneous at 18.7%; Engineering at 5.1%; and Motor at 2.9%. Net premium recorded was at USD171.9 million, a decrease of 9.7% from USD190.3 million a year earlier. Key markets for the Non Lloyd’s business (apart from the Malaysian market) include China, Hong Kong and Turkey.
Net claims incurred for the Group in 2014 was USD104.1 million and this showed a marked improvement from the USD114.6 million registered in 2013. Major losses recorded during the year were from the East Coast flood for the domestic business (USD5.3 million), whilst the overseas business was affected by the explosion of the oil storage tanker in Abu Dhabi (USD1.9 million) and fire at the refinery plant in Kuwait (USD2.1 million).
In terms of underwriting profitability, the Non Lloyd’s and Lloyd’s businesses registered a loss of USD3.8 million and a profit of USD5.9 million respectively.
Gross retakaful contribution was at USD6.3 million in 2014, a growth of 6.8% from USD5.9 million in 2013. A deficit of USD3.0 million was recorded by the retakaful fund in 2014 (2013: a loss of USD0.3 million) mainly due to the East Coast flood in Malaysia. Key markets for the retakaful business were Malaysia, Pakistan, Brunei and Indonesia. The growth in the ASEAN takaful market stood at an average rate of 20% between 2013-2014. In 2014, the takaful market size was at USD6.1 billion in Malaysia and USD1.7 billion in Indonesia, with each market growing at 9.0% and 34% respectively from the previous year. The Pakistan takaful market has seen bourgeoning opportunities due to the regulatory approval for the conventional insurance players to operate its own takaful windows.
The Company’s retrocession programmes continued to be arranged on an excess of loss basis to protect the non-marine, marine, motor and energy portfolios. Except for motor, the non-marine, marine and energy portfolios were restructured to achieve a more cost-effective protection. The programmes continued to be led and supported by reputable securities, with 91.7% in the A-rated category.
In 2014, the Group participated in six Lloyd’s syndicates with a capacity of USD78.6 million (USD97.2 million in 2013). The lower capacity was mainly due to the cessation of participation in two syndicates as they no longer required third party capital. Furthermore, obtaining a similar or more capacity replacement from other suitable syndicates had been difficult given that the Lloyd’s market continued to be flushed with capital.
Amidst the low interest rates environment, the Group’s investment income fell by 15.2% in 2014 to USD9.5 million, compared to USD11.2 million in the previous year. It also reported a realised loss of USD0.3 million in 2014 due to the rising bond yields and volatile equity market condition.
The Group’s investment strategy continued to be defensive with cash deposits forming about 55.5% of the total investment assets, followed by the fixed income securities at 33.6%, equities at 9.8% and other investments at 1.1%.
The Group had a two-fold growth in its asset class exposure in government securities to USD115 million in 2014 (from USD54 million a year earlier) due to the shift in the strategy to low risk investments and to reduce volatility in the valuation of these securities.
Outlook for 2015
Global economic growth is expected to remain moderate, with uneven prospects across the main countries and regions. The economic fundamentals of the advanced economies are expected to improve, while growth in the emerging markets and developing economies is projected to be lower. 2015 also remains exposed to the macroeconomic and geopolitical risks, including the oil and gas price volatility, the conflict between Russia and Ukraine, Greece’s possible exit from the European Union and China’s slowdown impact on global trade. Given such uncertainties, investment climate will likely be challenging.
In the industry, one of the key trends is the intensity of M&A activities and consolidation. Diversification strategy has increasingly been embedded in the reinsurers’ business model as opposed to focusing on the traditional underwriting in a limited number of classes to enable survival, growth and business sustainability. Hence, competition should remain fierce in 2015. Reinsurers are expected to forcefully maintain their positions in a subdued market by actively protecting their reinsurance portfolios (albeit at thin margins) and reducing their budgets to overcome the aggressive pricing over some placements.
Regulatory changes are inevitable and will continuously affect the way the industry players operate, manage and sometimes innovate to adhere to the rules. One of the biggest developments in Asia comes from China with the impending implementation of its new risk-based solvency framework called the “China-Risk Oriented Solvency System” (C-ROSS) in 2016, which will bring insurance supervision standards in China closer to those in the advanced markets. The upcoming ASEAN Economic Community in December 2015 presents a stronger case for national regulators to strengthen and align their solvency and capital standards.
Shaping Realities into Opportunities
The Group has been in operations for almost 22 years since its inception in 1992 and it is currently at a critical stage to transform itself into a more resilient and agile player to face the morphing adversity of the operating environment. The manifestation of the Group’s Fourth Strategic Plan for 2015-2019 has laid out the key foundations of this transformation stage and the monumental task to deliver it. The enhancement of the current underwriting strategy, such as tapping into new geography or class of business, and optimising the opportunities within the Company’s shareholders’ businesses are only a few pillars of the Strategic Plan that is hoped to galvanise the Group’s position competitively in the future.
Seeding this hope is also pinned down by the relentless effort of Labuan Re’s staff working as a team to meet the distinct needs of our customers. Focused execution and delivery excellence in the provision of quality services and solutions to our clients has always been one of the key strategies for the Group. At this juncture, for your continued commitment and dedication, on behalf of the Board members, I would like to extend my gratitude to all staff of the Company.
I would also like to express my sincere appreciation to all the shareholders, ceding companies, broking partners and the Office of the Director-General of Labuan Financial Services Authority for their continuous support to Labuan Re.
Finally, I wish to record my appreciation to all my fellow Directors for their relentless assistance, support and guidance during the year.
Labuan Reinsurance (L) Ltd