Labuan Reinsurance remains exposed to natural catastrophe risks emanating from its regional reinsurance operations and through its participation in several Lloyd’s of London syndicates with international exposure, albeit the reinsurer has sought to actively reduce its peak peril exposures over the past few years, notes AM Best.
The global credit rating agency has affirmed the Financial Strength Rating (FSR) of A- (Excellent) and the Long-Term Issuer Credit Rating (Long-Term ICR) of “a-” of Labuan Re. The outlook of these credit ratings is negative.
Balance sheet strength
The ratings reflect Labuan Re’s balance sheet strength, which AM Best categorises as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management (ERM).
Labuan Re’s balance sheet strength assessment is underpinned by its risk-adjusted capitalisation that is expected to remain at the strongest level over the medium term, as measured by Best’s Capital Adequacy Ratio . Positive balance sheet factors include the company’s typically conservative investment portfolio, with a focus on good quality fixed-income securities. Partially offsetting balance sheet factors include Labuan Re’s modest-sized absolute capital base and limited internal capital generation over recent years.
AM Best views Labuan Re’s operating performance as adequate, albeit the continued negative outlook for the FSR and Long-Term ICR reflects pressure on this assessment. Over recent years, the company’s underwriting performance has been impacted adversely by a series of global catastrophe events and from an increased frequency of large losses on its domestic property portfolio.
The company’s combined ratio was 109.3% in 2019, with a five-year average of 106.4% (2015-2019). During the first nine months of 2020, Labuan Re continued to report an underwriting loss driven by a combination of catastrophe losses and provisioning related to the COVID-19 pandemic. Investment operations over a number of years have aided to offset technical losses partially, with a five-year average net investment yield of over 2% (2015-2019).
Prospectively, AM Best expects Labuan Re to continue to execute remedial actions, which are aimed at enabling technical and op
Over the medium term, AM Best expects the company to exhibit a declining trend in gross written premium, as it continues to embark on a voluntary retrenchment of unprofitable business and scale back its participation in Lloyd’s of London syndicates.
Labuan Re continues to develop its technical pricing and risk selection capabilities as part of its remedial actions aimed at improving its prospective underwriting performance.