Middlesea Insurance held an extraordinary general meeting last Friday to update shareholders on the company’s financial situation.

In his address, Middlesea executive chairman Mario C. Grech reminded shareholders that during the annual general meeting held earlier this year, he had explained that Middlesea’s operations in 2008 were adversely affected by both the considerable technical loss of Progress Assicurazioni, the Italian subsidiary, and by the crisis in the world financial markets.

The group’s financial results for the first nine months of 2009 reflected the ongoing substantial challenges emanating from Progress operations in Italy and the substantial improvement achieved by the group’s Malta operations. The consolidated pre tax profit generated by the group companies, operating in Malta, amounted to e6 million. However, the challenges of the Italian subsidiary persisted during 2009. The impact of the subsidiary effectively wiped out the positive performance of MSI, MSV, Growth and IIMS.

Mr Grech explained that the negative impact the Italian operations had on the Middlesea Group is a matter of great regret for the Board of Directors. Progress registered a profit for the group since its acquisition in 2001 up to the end of 2007.

The substantial losses incurred since were caused by the confluence of a number of complex factors – the combination of which (at a time when Progress was expanding its operations in Italy) had a devastating impact on the financial performance of the company. These included the impact of the newly introduced direct settlement process (CARD), the down cycle in the motor business sector (RCA), a disproportionate RCA portfolio mix, the adverse run off arising after 31 December 2007, structural deficiencies in the bonus-malus system operation, the marked deterioration in the quality of business from a number of agents, the increase in the moral hazard risk experienced by the market as a whole, the agency cancellation costs and the prevailing market conditions resulting from the global financial crisis and the consequent impact on investments performance.

The Board of Directors undertook corrective action from 2008 with a series of measures. These included steps to right size the portfolio through the termination of non-performing agencies that would substantially reduce the premium income for 2010. Other measures taken were the increase in premium rates (tariffs), the appointment of motor claims management specialists, a management restructuring process and the purchase of an appropriate reinsurance treaty with a reinsurer of international repute. At this point Mr Grech highlighted the fact that the nature of insurance operations are such that it often takes time for problems to emerge – and then for counter measures to take effect. This was explained during the AGM held in June 2009 and that any positive effect of the measures taken could require 18 to 24 months to be reflected in the results.

However, in view of the damage caused by the Progress results and the impending rights issue, the Board of Directors thought it appropriate to place a safety net against the further deterioration of the claims position in respect of business written through to December 2008. Accordingly, specialised negotiations were undertaken for the purchase of an appropriate reinsurance treaty, and Mr Grech told shareholders that Progress had successfully concluded an agreement for an adverse development reinsurance treaty with a reinsurer of international repute. This reinsurance contract would cover any deficiency in reserves, with a cover of e40 million over and above the existing reserves on open claims for the period between 1 January 2001 up to 31 December 2008.

The Board of Directors would continue to monitor closely the operations of Progress and further action would be taken as and when required in a timely manner in the best interest all stakeholders.

In his address, the EGM Mr Grech reviewed the operations of the Middlesea Group for the first nine months of 2009 and explained that the global financial crisis that had negatively impacted the results of all group companies during 2008 had subsided and 2009 was showing a return to profitability of all local operations of the Middlesea Group.

Mr Grech added, “The forecast of the group for the end of 2009 projects encouraging positive results for all local operations. The group projects that the technical operations of the companies operating in Malta will maintain the growth in performance experienced during the first three quarters of the year. However, the forecasted post tax loss for 2009 is estimated to amount to e41.75 million. This is due to the anticipated losses for Progress Assicurazioni – since the measures undertaken to right size the operation and the capping of an adverse run off on claims attracts additional costs for the company, estimated at e21 million. This was a material impact on the group’s forecasted loss.”

The projected loss for 2009 resulting from the subsidiary Progress will totally outweigh the positive performance of the Maltese operations. The actions taken at Progress together with further actions that may be identified by the board and undertaken in the interest of all stakeholders, provided us with confidence that the group will return to profitability in the short to medium term.”

The losses sustained by Progress during 2008 and 2009 have placed an unprecedented strain on the capital resources of the Middlesea Group with its capital base reducing from e85.8 million as at December 2007 to e40.1 million as at September 2009. This reduced capital base was inadequate to support the operations of the group and the Board of Directors has determined, in the interest of all existing stakeholders, the need to make a call for capital of e40.2 million through a rights issue in order to re-establish the strength of the group’s balance sheet and thus provide for the future sustainable growth of the group within the statutory and regulatory parameters.

Middlesea Insurance was planning to issue 67,000,000 new ordinary shares of a nominal value of sixty euro cents (e0.60) each at a Share Issue Price of sixty euro cents (e0.60) per share. These shares are being offered to eligible shareholders on the basis of 2.68 New Ordinary Shares for every one Existing Ordinary Share (subject to rounding up or down to the nearest share) held on 12 November.

Mr Grech informed the shareholders that all three main institutional shareholders, namely Bank of Valletta, Mapfre Internacional and Munich Re that in aggregate hold 62.5% of issued share capital, had given their irrevocable commitment that they shall support the rights issue and have agreed to subscribe for their Proportionate Entitlement. This would account for e26 million of the proposed rights issue of e40.2 million.

In addition, both Bank of Valletta and Mapfre Internacional confirmed their willingness to further support the rights issue and have given their written commitment to subscribe to any new ordinary shares not taken up by eligible shareholders and to apportion such acquired shares between themselves so as to secure the equalisation of their respective shareholding in Middlesea Insurance plc. As a result of these undertakings it was assured that the proposed rights issue would be fully subscribed.

The necessary regulatory approvals had also been obtained from the Malta Financial Services Authority.

The proceeds from the proposed Rights Share Issue of e40.2 million will serve to reinstate the capital resources, and the regulatory and statutory capital requirements of the group.

Mr Grech informed the shareholders that the summary note and an application form were being mailed to all eligible shareholders who have the option to whether to accept the offer in full or in part, and/or subscribe to additional shares and/or transfer the rights to third parties. The full prospectus would be available in hard copy from authorised financial intermediaries and from the Middlesea offices in Floriana. The prospectus would also be downloadable from the corporate website.

In conclusion, Mr Grech said, “The proposed above-mentioned capital injection together with the current negotiations for bank financing of e8.5 million, will enable the Middlesea Group to re-establish an adequate capital base for operational requirements and to maintain a level of prudential capital, commensurate with the scale of the business. The group will now primarily focus on a strategy to strengthen its position in Malta, by consolidating its participation in a market which has potential space for substantial growth.”

The EGM approved all seven extraordinary resolutions and one ordinary resolution that were presented to shareholders thus paving the way for the rights share issue. The Board of Directors held a board meeting immediately after the EGM and approved the rights share issue.