Chairman s Statement Meng Zhao Yi Ph.D. Chairman SYNOPSIS Having suffered tremendous shocks from a chain of catastrophe events during 2011, 2012 ( the Year ) witnessed both opportunities and challenges for the reinsurance industry. With strong support of China Taiping Insurance Group (the Group ), Taiping Reinsurance Company Limited ( TPRe ) achieved an inspiring turnaround back to profit-making as a result of its sound financial standing and properly executed strategy, even though the unexpected sharp deterioration of the 2011 Thai flood claims during the 1st half year of the Year posed challenges to the company, and hampered the underwriting result. 6 Taiping Reinsurance Company Limited Annual Report 2012
Due to quantitative easing policies being carried out in major economies, global economy was slowly recovering in 2012. Excessive capital funds flowed into the reinsurance industry, triggering a more complex and competitive market environment with excess supply. However, with unwavering spirit and efforts dedicated to enhancing its competitiveness and striving after the Group s doctrine of outperforming the market and peers, TPRe proactively confronted challenges and vigorously pursued opportunities which were brought about by the changing market. SNAPSHOTS OF 2012 OVERALL RESULT The operating result of TPRe for the Year has turned around, with net profit after tax of HK$112.08 million (2011 (restated): loss of HK$41.86 million), representing a swift return to profit for TPRe after its first ever loss year of 2011. The turnaround was mainly due to reinforced underwriting risk controls resulting in better business quality and performance, absence of major catastrophe claims in its core Asian markets and strong investment income. These positive factors effectively offset the impact of the underwriting deficit solely caused by the sharp deterioration of 2011 Thai flood claims during the first half of the Year. The combined ratio for the Year was 106.9% (2011 (restated): 103.9%). 1.1208 4,186 106.9% 103.9% 7
KEY PERFORMANCE INDICATORS The key financial data and key performance indicators are summarized below: For the year ended 31 December, HK$ million 2012 2011 (Restated) 4 4 Change Gross premiums written 3,435.30 3,431.08 +0.1% Net premiums written 3,073.24 3,073.66 Net earned premiums 2,994.50 2,905.24 +3.1% Net claims incurred (2,291.52) (2,131.55) +7.5% Underwriting expenses (75.69) (73.76) +2.6% Net commission expenses (835.77) (812.31) +2.9% Underwriting loss (207.83) (111.72) +86.0% Total investment income 328.49 130.66 +1.5 times Net exchange gain 25.53 8.58 +2.0 times Other administrative expenses (12.78) (11.82) +8.1% Profit before taxation 131.08 19.01 +5.9 times Profit (loss) after taxation 112.08 (41.86) Technical reserves ratio 171.1% 154.2% +16.9 pts Retained ratio 89.5% 89.6% -0.1 pt Earned premiums ratio 87.2% 84.7% +2.5 pts Loss ratio 1 1 76.5% 73.4% +3.1 pts Expense ratio 1&3 1 3 30.4% 30.5% -0.1 pt Combined ratio 2 2 106.9% 103.9% +3.0 pts Remarks: 1 Both the loss ratio and expense ratio are based on net earned premiums. 2 The combined ratio is the sum of the loss ratio and the expense ratio. 3 The expense ratio is comprised of underwriting expenses and net commission expenses. 4 During the Year, TPRe has changed its accounting policy for measurement of unearned premium provisions for the year ended 31 December 2012 in order to align itself with the other property and casualty insurance subsidiaries of the Group. The above changes in accounting policy have been applied retrospectively and the comparative figures for 2011 have been restated accordingly. 1 2 3 4 8 Taiping Reinsurance Company Limited Annual Report 2012
ELABORATION OF THE 2012 RESULT OF TPRe TPRe s gross premiums written for the Year increased by 0.1% to HK$3,435.30 million from HK$3,431.08 million in 2011. If the one-off non-renewable reinsurance contract with a major Hong Kong client in 2011 is excluded, TPRe would have registered a premium growth of approximately 10% for the Year. During the Year, TPRe enhanced underwriting risk control by tightening underwriting terms and conditions for its core Asian- Pacific markets. The Mainland China market, which is the vital engine for fast and sustainable premium growth, continued to demonstrate favorable underwriting and investment performance. Premium incomes from most of the other regions have also shown stable growth in accordance with its territorial diversification strategy. 34.3108 0.1% 34.3530 10% TPRe s geographical distribution of gross premiums written is summarized as follows: For the year ended 31 December, HK$ million 2012 % of Total 2011 % of Total Hong Kong & Macau 431.94 12.6% 705.92 20.5% Mainland China (& Taiwan) 1,521.36 44.3% 1,271.29 37.1% Japan 209.85 6.1% 180.63 5.3% Rest of Asia 668.97 19.5% 677.65 19.8% Europe 380.21 11.1% 391.59 11.4% Others 222.97 6.4% 204.00 5.9% 3,435.30 100.0% 3,431.08 100.0% 2012 was a sanguine year for TPRe in respect of claims activity since no major catastrophes impacted its portfolio. However, the incurred loss amount relating to the 2011 Thai floods deteriorated sharply during the first half of 2012, by around HK$640 million, mainly due to belated claims notifications from a number of ceding companies. During the Year, claims reserve provisions and development pattern were routinely reviewed, and thorough studies and analysis were conducted on the adequacy of major catastrophe claims reserves, resulting in the release of redundant loss reserve provisions of HK$215 million. The net incurred loss ratio for the Year increased to 76.5%. (2011 (restated): 73.4%). 6.40 2.15 76.5% 73.4% 9
During the Year, TPRe moderated the asset allocation in its investment portfolio by drastically reducing the equity securities investment holdings early in 2012 while enlarging the debt securities investments. In doing so, the recurrent interest income from debt securities was assured, while volatility arising from equity securities investment was circumvented. Therefore, debt securities, debt schemes, cash and bank deposits constituted a combined total of approximately 96.8% of the total investable assets as at 31 December 2012 (2011: 91.4%). 96.8% 91.4% TPRe s total investment income recorded a gain of HK$328.49 million for the Year, representing a significant increase from HK$130.66 million in the last year. The growth of the debt securities portfolio generated larger net investment income, thus reducing the volatility of the total investment income for the Year. OUTLOOK 3.2849 1.3066 Although terms and conditions as well as renewal premium rates were tightened and increased respectively in early 2012 after detrimental catastrophes took place in 2011, the market turned soft in the second half of 2012 amid abundant capacity, reflecting the high sensitivity of the reinsurance market against the change of market environment. Looking ahead into 2013, reinsurance industry will continue to encounter numerous challenges: renewal premium rate would likely turn downward given no major catastrophe event outside the USA was recorded in 2012; demands on reinsurance may shrink as mega insurance corporations grow stronger after regrouping and/or mergers; competition will become fiercer as exemplified by the fact that non-traditional players jump into the field with ample capital funds. In addition, the record low interest rates have undermined investment income and push the market competition even tougher. 10 Taiping Reinsurance Company Limited Annual Report 2012
Nevertheless, as a member company of China Taiping Insurance Group, which in turn is a Chinese state-owned insurance conglomerate and is directly supervised by the central government, TPRe has accumulated over 30 years of operating and managing experience in both Mainland China and overseas reinsurance markets with strong financial strength, and it has dedicated to strict risk management discipline. By consistently pursuing a sound and prudent underwriting and reserving policies, TPRe embarks on implementing a comprehensive and rational management system and framework. Therefore, TPRe is confident in meeting the changing market demands, steering against various risks and providing sustainable long-term value for all customers, staff and shareholders. Looking ahead, TPRe will confront its challenges and commit to improve its capabilities and competence in delivering quality service, managing the operation, enabling innovations and enhancing collaboration with its Group members, thus fostering healthy and sustainable development for the company. ACKNOWLEDGEMENTS On behalf of the Board of Directors of TPRe, I would like to extend my heartfelt gratitude to the Group for the timely capital injection of HK$250 million in the second half of 2012, which enhanced TPRe s capital strength in coping with the market challenges and business development needs. Meanwhile, I am sincerely grateful for the trust and support of the clients, business partners and associates over the years. Moreover, I hereby express my appreciation to all the staff and management of TPRe for their dedication and hard work in turning the company around. With the whole team s commitment, I am confident that TPRe will continue to rejuvenate the company and stride forward with fruitful development. 2.5 Meng Zhao Yi Chairman 25 April 2013 11