The consolidated results of the Middlesea Insurance Group for the six months to 30 June have been materially impacted by the negative results registered by the Italian subsidiary Progress Assicurazioni SpA, executive chairman Mario C. Grech confirmed in an interim statement published this week.
The local business operations of Middlesea Insurance plc (MSI), Middlesea Valletta Life Assurance (MSV), and International Insurance Management Services (IIMS), continued to achieve favourable results. However, the positive contribution from domestic operations was outweighed by losses registered by Progress Assicurazioni. The severe challenges of the Italian market have persisted during the first six months of 2009. As a consequence, the group on a consolidated basis registered a loss before tax of e17.7 million for the first half of 2009.
The chairman said that domestic insurance operations had performed well, with total income from the operations in Malta and Gibraltar after allocation of investment income amounting to e1.53 million. This was a marked improvement from the loss of e0.14 million registered as at June 2008. The significant improvement on the company’s investment income, together with the positive technical performance yielded a total profit from operations (excluding any group dividend income) of e1.28 million, as compared to a loss of e1.54 million as at June 2008.
“Following a difficult first quarter, the period since March has seen a marked improvement in sentiment in the investment markets, which improvement has benefited the MSV portfolio,” remarked the chairman, noting that this improvement mainly impacts the policyholders’ funds rather than the emerging profits to shareholders. The improvement of such performance in favour of policyholders resulted in an increase in the long-term technical business provision of e34 million, while the technical provisions for linked liabilities also increased by e1.28. Total shareholders’ funds of MSV stood at e90 million at end June 2009, and shareholders have already committed to subscribe to a further capital increase of e2.5 million by the end of August 2009 to further strengthen the capital base of the company in order to accommodate the continuing growth of its operations.
Turning to the operations of the Italian subsidiary, Progress Assicurazioni SpA, the chairman stated that these had persisted in the negative territory, and contributed a loss of e19.4 million to the group results for the half year. The further strengthening of technical reserves resulted in an unfavourable movement on the prior year’s claims of e16.6 million, and this had contributed to 86 per cent of the consolidated loss for the period.
“As reported during the annual general meeting held in June, the whole Italian motor liability market is going through a negative cycle,” observed Mr Grech, stating that this was partly due to the impact of the introduction of the Convenzione tra Assicuratori per Risarcimento Diretto (CARD), but also due to increased claims costs and frequency, and increased moral risk. Progress, which is predominantly a motor liability insurer, along with the rest of the Italian market, is suffering from these negative trends.
Mr Grech stated that during 2008 and 2009, a number of actions directed at improving the situation of Progress have been undertaken, which included management restructuring at Progress, curtailment of certain classes of business, implementation of premium rate increases, termination of poorly performing agencies and the engagement of external claims handling experts.
The chairman said that the board of directors have determined that the level of business undertaken by Progress should be significantly curtailed, and the company is in discussion with the relevant Regulatory authorities in this regard. As he had reported during the annual general meeting, given the nature of the insurance business, the impact of the corrective measures undertaken do not have a direct and immediate impact on results; “however the board of directors remains totally focused on the continuous implementation of the necessary corrective measures, and these efforts will be on-going,” said Mr Grech.
The loss registered by Progress during the first six months of 2009 has also negatively impacted the level of shareholders’ funds of the company and, in accordance with the prevailing regulatory requirements, an injection of e4.9 million of capital will take place following an extraordinary general meeting of Progress, scheduled for the beginning of September.
The group’s subsidiary providing insurance management services to the group and international clients, International Insurance Management Services (IIMS), has registered positive results. Fee income increased from e0.77 million last year to e0.98 million this year, and the company contributed e0.24 million to the pre-tax results of the group compared to the e0.17 million contributed last year.
The total assets of the group increased by 2.1 per cent during the period, with total assets now amounting to e322.5 million. The reported group loss for the period has however, resulted in a decrease in shareholders’ funds which reduced by 27 per cent to e45.2 million.
The chairman stated that “the board of directors believes that given the losses incurred in 2008 and the first half of 2009, it would be appropriate to strengthen the group balance sheet through the raising of additional capital. Discussions are ongoing with major shareholders and regulators in this regard, and further information will be provided to all shareholders via a company announcement and a special meeting immediately there are more specific developments to report.”
Mr Grech explained that the core operations of Middlesea’s local insurance businesses continued to register positive results during the first six months of 2009. The stability in insurance premiums underwritten by the local operations, together with a positive technical result, present a satisfactory result overall. The consistent strategy of Middlesea Insurance plc to adopt a strict underwriting policy and strength in its reserving policy and thus focusing on the underwriting results rather than turnover, remain the important elements of how the company continues to do business. The associate company Middlesea Valletta remains wholly committed to delivering on its commitments to the policyholders through a prudent investment strategy. Shareholders’ equity in MSV amounted to e90 million as at 30 June 2009. The chairman remarked that operations of the Italian subsidiary remain the biggest challenge for the group for the remainder of 2009. The implementation of the detailed measures in curtailing the operations is vital and is directed at contributing to the future stabilisation of the results of the operation.
The board of directors continues to monitor this subsidiary closely, and is committed to implement further measures as deemed appropriate following discussions with the relevant regulators. Mr Grech stated that the board is also actively reviewing the balance sheet position of the group, in order to continue to maintain, as has always been the case, the strength of its shareholders’ funds, which provide it with the necessary capital to sustain the growth of its local operations, and provide stability for its Italian subsidiary.
The board of directors has not proposed an interim dividend.