The global insurance and reinsurance industry had suffered major natural catastrophe losses in 2011 from the Australian floods, New Zealand earthquake as well as devastating Tohuku earthquake and tsunami in Japan. The severe flooding in Thailand in the same year had changed the underwriting landscape and perceptions in writing business in non-catastrophe markets. According to reports, 2011 had incurred the highest economic losses from natural catastrophe and man-made disasters and the second highest insured losses on record.
Hurricane Sandy that hit the US and Caribbean in late 2012 had led to an ever increasing number of natural disasters that resulted in an insured loss of USD72 billion in 2012. However, Hurricane Sandy did not have a significant impact on the global reinsurance markets and thus, 2012 was a year of generally benign natural catastrophes.
The much improved performance in 2012 had led to the acceleration in the volume of fresh capital through a variety of sources resulting in a competitive environment. It was estimated that the global reinsurance capital stood at USD500 billion.
For the financial year ended December 31st 2012, the overall operating revenue for the Group showed a decrease of 5.05% at USD265,130,903 compared to the previous year of USD279,218,589.
Similarly, the Group wrote gross premium income of USD251,229,360 in 2012, a reduction of 5.76% from USD266,576,245 recorded in the previous year. Overseas business constituted 81.00% of the Group’s overall premium volume with the remaining 19.00% were from the domestic market.
The decrease in premium volume was a direct effect of the de-risking exercise that had started towards the later part of the 2012 renewal season, undertaken by the Company to improve its underwriting portfolio.
Net claims incurred for the Group was USD137,700,984. This was a marked improvement from the USD190,427,439 registered in 2011.
The Group’s investment income rose by 9.96% in 2012 to USD13,901,543 compared to USD12,642,344 in the previous year. This was a commendable performance as the Euro-zone was still blighted with its sovereign debt problems.
After taking into account management expenses, net other income less expenditure, taxation and zakat payment, the Group recorded a net profit of USD1,738,199 for the year compared to a loss of USD58,850,131 in 2011. Since the Company is now adopting the Malaysian Financial Reporting Standards, the performance of the retakaful fund has been combined with the results of the Company and the Group for reporting purposes.
The Group’s solvency surplus at the end of 2012 had reduced further to 211.1% of the required margin from 231.2% recorded in 2011. The decrease in solvency surplus was attributed to the increase in the required margin and change in the net asset position due to profit recorded for 2012.
The other financial details are included in the Audited Accounts as shown on pages 15 to 82 of the Annual Report.
For the year under review, the Group would have performed better if not for some non-recurring items such as an additional increase of USD7.1 million in the claims reserve for the Thailand flood losses, and an additional reinsurance cost of USD3.56 million for the purchase of back-up cover following the catastrophe events in 2011.
There was also an increase in the IBNR claims reserves of USD3.36 million.
Notable losses for the year were three large fire losses in Oman, Miri and Johor which amounted to USD5.83 million.
Through its participation in the Lloyd's syndicates, the Company was not spared from the Hurricane Sandy losses in the USA which contributed to a total loss of USD3.75 million.
The gross retakaful contribution from the Division decreased by 35.5% to USD3.13 million from USD4.85 million recorded in 2011. A deficit of USD0.9 million was recorded by the retakaful fund mainly due to the increase in claims paid and provision for outstanding claims.
The Company had provided new capacity in Canopius Syndicate 4444 in 2012. This was in line with the strategy of ensuring continued participation at Lloyd’s which had generally been profitable for the Company.
A profit of USD0.8 million was registered for the financial year 2012 on the back of GBP71.9 million capacity allocated to Chaucer Syndicate 1084 and 1176, Argenta Syndicate 2121, ICAT Syndicate 4242 and Canopius Syndicate 4444.
Financial Strength Rating
On December 12th, 2012, A.M. Best Company had affirmed the financial strength rating of A- (Excellent) and issuer credit rating of “a-“ of the Company. The outlook of both ratings is stable.
AM Best has acknowledged that the rating reflects adequate capitalisation as well as improved underwriting risk management.
Outlook for 2013
The global operating environment is expected to be challenging in 2013. The availability of new capital had prompted traditional reinsurers to recognize the challenge to their existing portfolios. For primary insurance companies which value sustainability, the new model of fast capital will bring many challenges.
Capital market alternatives like CAT bonds, collateralized quota-share reinsurance vehicles (sidecars) and other risk transfer structures represent an increasingly viable alternatives to the use of traditional reinsurance.
According to a study, almost half of the EUR2.2 trillion growth in worldwide premium income from 2012 to 2020 will come from Asia Pacific and the premium income in Asia Pacific region will double to EUR1.2 trillion in the next eight years.
Based on this report, it is expected that there is going to be a significant increase in demand for insurance in Asia and thus increasing business opportunities in the reinsurance markets. The influx of reinsurers in Asia will present a great challenge to the Company.
Maintaining a positive investment return is an increasingly arduous task as the US Federal Reserve is now signaling the tapering off its Quantitative Easing programme. Hence, bond yields are on the rising trend, whilst the equity markets are falling as investors sit on the sideline. In light of this, the investment strategies will need to be re-positioned whenever necessary to account for market developments.
On the domestic front, it is believed that the Malaysian economy will remain positive with Bank Negara Malaysia’s prudent policies thus ensuring the financial sector in general and the insurance sector (in particular) to be resilient in 2013.
Corporate Social Responsibility (CSR)
In 2012, the Company had played its part in CSR activities, namely:-
The Heart Foundation of Malaysia, whose funds were used for awareness programmes for the community, cardiac rehabilitation counseling, heart support group, financial aid to heart donor families, etc.
Pertubuhan Pembangunan Orang-orang Buta Malaysia (PPOBM) .
In order to stay competitive, 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 its human and technological resources to raise its service level and/or standards. 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 the Labuan Financial Services Authority (Labuan FSA) for their continuous support to the Company.
Finally, I wish to record my appreciation to all my fellow Directors for their continuous assistance, support and guidance during the year.
Labuan Reinsurance (L) Ltd