2011 will go down in history with record high catastrophe losses to the global insurance industry. Two thirds of the global economic loss, estimated at USD105 billion was contributed by Asia. The costliest ever natural disaster of the year had occurred on March 11th in Tohoku, Japan when giant tsunamis hit the eastern coast of Japan. During the months of May to October, devastating floods engulfed Thailand. This was the worst flooding that the country had experienced in more than 50 years.
Despite these significant catastrophic losses affecting the earnings of most major reinsurers, the reinsurance sector showed its resilience with only a marginal deterioration in capital.
I am pleased to report that for the financial year ended December 31st, 2011, the overall operating revenue for the Group showed an increase of 6.9% at USD274,282,304 compared to the previous year of USD256,660,395.
The Group recorded a growth of 7.8% in gross premium income at USD261,728,063 compared to the previous year’s figure of USD242,848,400.
Premium income from the overseas business had marginally increased to 77.9% from 75.6% of the Group’s overall premium volume (inclusive of the business derived from Lloyd’s). The remaining 22.1% was from the domestic market.
Net claims incurred for the Group was USD186,370,888 representing an increase of 44.7% compared to USD128,771,805. After providing for the net claims incurred and the net commission, the Group posted an underwriting loss of USD50,197,221.
The Group’s investment income decreased by 9.1% in 2011 to USD12,554,241 compared to USD13,811,995 in the previous year.
After taking into account management expenses, net other income less expenditure , taxation and zakat payment of USD2,092,998 and net wakalah fee income of USD905,129 from the general retakaful fund, the Group recorded a net loss of USD57,551,578 for the year compared to a profit of USD13,053,437 in 2010.
The loss for the financial year was largely attributed by the Company’s involvement in some significant natural catastrophes that occurred in various parts of Asia (including Australia and New Zealand) in 2011, notably the floods in Queensland, Australia and Tohuku earthquake/tsunami in Japan, the earthquakes in Christchurch, New Zealand and the extensive floods in Thailand.
Whilst the Company’s claims exposures from the floods in Australia, the earthquake/tsunami in Japan and the earthquakes in New Zealand were considered relatively small, its exposure from the Thai floods was much larger. The total economic loss from the Thai floods was estimated to be approximately USD44.48 billion, whilst the insured loss was estimated to be approximately USD15.45 billion.
Besides the foregoing catastrophe events overseas, the Company’s underwriting performance was also affected by some notable loss events which occurred in Malaysia such as the floods in Melaka and Johor, as well as a fire loss at one of the Petronas’ oil platforms.
The Group’s solvency surplus at the end of 2011 has reduced to 232.3% of the required margin from 396.2% recorded in 2010. The decrease in solvency surplus was attributed to the increase in net premium underwritten for the year and the decrease in net asset position caused by the loss after tax of USD57.6 million.
The other financial details are included in the Audited Accounts as shown on pages 13 to 78 of the Annual Report.
For the year under review, the Group had experienced a very challenging underwriting environment. The primary insurance and reinsurance market conditions in most markets still continued to be intensely competitive, resulting in generally soft market terms, conditions and pricing.
Despite the inconsistencies shown in the investment markets, the Company’s 2011 investment result was positive for the year under review.
The Division’s gross retakaful contribution had increased by 72.6% to USD4.85 million from USD2.81 million recorded in 2010. A deficit of USD1.2 million was recorded by the retakaful fund mainly due to the increase in claims paid and provision for outstanding claims.
In 2011, the Company had provided for GBP65.0 million capacity in Syndicates 1084, 1176, 2121 and 4242 that had yielded a loss of USD0.5 million.
Financial Strength Rating
On December 21st, 2011, the Company’s financial strength rating was put under review with negative implications and affirmed at ‘A-‘ (Excellent) by A.M. Best Company. Fitch Ratings had also taken a similar action on January 22nd, 2012 by affirming the Insurer Financial Strength rating of ‘A-‘ but revising the outlook to negative from stable.
These actions were taken as both rating agencies were concerned on the impact on the financial performance and capital level of the Company arising from several catastrophes in 2011 and also the impact of the indirect participation in Syndicate 1965 which is being run-off.
Subsequent to the rating actions, several measures have been put in place by the Company. These included strengthening of the capital base via issuance of a sub-bond, improving the underwriting portfolio through a de-risking exercise of the business portfolio and tightening of underwriting standards. A Quota Share retrocession treaty was also arranged to provide some degree of capital relief.
A.M. Best Company had, on July 9th ,2012 removed ratings on the Company from under review with negative implications and affirmed the Company’s financial strength rating of A- (Excellent) and issuer credit rating of “a-“. The outlook assigned to both ratings is stable.
Outlook for 2012
The global economy is expected to be sluggish in 2012 with the Euro sovereign debt situation taking centre stage. China is making a concerted effort in slowing down growth to prevent overheating of its economy. Repositioning of investment strategies whenever necessary to account for market developments will be necessary in light of this.
It is expected that the increasing frequency and severity of natural disasters would be prominent moving forward. Hence, underwriting acumen will be stressed upon with risks being priced according to technical discipline.
Corporate Social Responsibility (CSR)
In 2011, 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.
Polis DiRaja Malaysia, whose funds were used to buy wheelchairs for injured / handicap police personnels, families of police personnels who are killed in the line of duty, safety programmes for the public, etc.
INCEIF Fisabilillah Trust Fund. The contribution was part of the Company’s zakat to sponsor students who require financial aid to pursue their studies at INCEIF (International Centre of Education in Islamic Finance).
Despite the unprecedented loss recorded by the Group in 2011, I would like to put on record that Management has shown its commitment in turning the result in the forthcoming year. I therefore urge the management and staff of Labuan Re to remain steadfast in the belief that through the measures implemented, the Company will do better next year. For your continued commitment and dedication, on behalf of the Board members, I would like to extend my gratitude to all.
I would also like to express my sincere appreciation to all the shareholders, ceding companies 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