MSI prunes Italy operations

In 27 years, Middlesea Insurance shareholders have received a total gross dividend of €38.5 million. For the first time, there will be no cheque in the mail this year as the storm in the equity markets lashed one of Malta's top three insurers to a loss after tax of €20.6m for the year ended December 31. In 2007, it had posted a profit of €6.9m.

Despite not holding toxic assets, the group's capital losses ran into €14.7m and MSI's Italian subsidiary Progress Assicurazioni SpA registered a post-tax loss of €19.1m.

There were silver linings. Gains on the fixed income securities portfolio totalled €2.6m, the life company Middlesea Valletta Life Assurance posted a profit after tax of €1.92m, and onshore manager International Insurance Management Services registered a 48 per cent increase in post-tax profits and contributed €1m to group results.

Once approved, planned group restructuring should better position all operations.

"The core business of the companies within the Middlesea group is primarily that of underwriting risks," MSI plc executive chairman Mario Grech told The Sunday Times.

"I have always emphasised the importance of a strong balance sheet, and this stood us well in such challenging times; hence the importance of revisiting the group restructuring for the purpose of enhancing clarity and segregation for regulatory, risk and capital rationalisation.

"These planned changes, once approved by shareholders, will facilitate the achievement of the group's long-term strategy. The prospect of an immediate return to profits becomes even more challenging, considering the economic environment and prevailing uncertainties in the markets. I continue to believe in our collective determination to overcome these mammoth tasks, which remains our major objective this year."

Was the group considering moving more funds into fixed income securities or could it afford to wait for the upturn?

Mr Grech explained that the group companies' long-term investment strategies provide for matching of technical liabilities with fixed income securities in currency and duration similar to that of the liabilities. Assets in excess of liabilities may be allocated into return-seeking investments, like equity and property. This allocation depended on the risk appetite of each company.

He pointed out that the risk budget allocation takes into account principles of spread, diversification, relative taxation treatment of different asset classes, marketability, liquidity, and admissibility of assets depending on solvency cover.

"In 2007, the group had taken some defensive measures," Mr Grech explained. "The equity allocations were scaled down, and all new money was channelled into short-term liquid instruments. The group still suffered losses last year in view of the magnitude of the fall in the equity markets locally and overseas. Equity exposure is actively followed in relation to each company's solvency position."

With the exception of long-term business, all companies within the group registered growth in their underlying business. Gross written premiums in general business through operations in Italy, Malta and Gibraltar increased by 15 per cent to €120m last year.

Mr Grech said MSI's medium-term strategy is to identify international partners for further expansion in the Euro-Med region with a focus in primary insurance markets. Companies within the group follow the fortunes of the countries in which they operate.

The Italian operation has proven particularly challenging over the past year, and a special committee appointed by the MSI board, assisted by foreign shareholders, is studying options for its future direction.

Mr Grech explained: "In view of the new challenges presented by the Italian market - including a probable down cycle - it has been decided to prune the agency/intermediary motor liability portfolio. There will be added focus on extended territorial base and improved business mix, ensuring an adequate pricing tariff that is commensurate with the risks underwritten.

"A challenging economic environment and a softening of markets and cut-throat competition which are currently emerging, led to Middlesea planning a reduction in Italian general business in 2009."

He recalls how in February 2007, Italian authorities introduced a complex mandatory system, Convenzione tra assicuratori per risarcimento diretto (Card). The 'direct settlement' system aimed to speed up settlement and facilitate motor claims between insurers for the benefit of the insured.

Under the system, an insurer is obliged to indemnify the full damages of his own insured (who is not liable for the accident) and then recover 'fixed' amounts (in accordance to models based on national averages) from the party at fault's insurer - irrespective of the amount paid by the insurer settling the claim.

Mr Grech said the group knew this would work mainly against insurers with a small motor liability portfolio as a result of the law of large numbers.

"Over 2007 and 2008, Progress Assicurazioni incurred a €9m as a result of Card," he said. "It appears that most other Italian insurers also experienced unfavourable results. The only way to limit the damage is to attain high efficiency in the settlement of claims. Damages for injury and fatality losses are continuously escalating in Italy and, as a result, Progress increased its technical provisions for the year by 28 per cent to €160m."

Mr Grech described the acquisition of Progress Assicurazioni in 2000/01 "a formidable challenge" as the group sought to expand its business in the Italian primary market - and it was felt that an up-cycle in the market was in the offing.

Business objectives were attained as the operation registered the desired portfolio mix of 70 per cent motor business, balanced with other non-motor business. Agencies were extended to Sardinia and the Mezzogiorno from the business's original concentration in Sicily. Encouraging technical results were registered between 2001 and 2006 and all profits were reinvested in the company.

Between 2007 and 2008, management even began to appoint some agencies in northern Italy.

But there were new challenges last year: an overall increase in the frequency of motor liability claims, and a considerable increase of claims from the difficult Campania region. Increased late reported claims further contributed to the considerable loss in 2008.

Back in Malta it was different.

Last November, International Insurance Management Services Ltd signed a management agreement with Munich Re of Malta plc, a subsidiary of top international reinsurer Munich Re, further enhancing its third party client portfolio.

Set up in 1992, IIMS provides insurance management services to the group's companies, and third party insurance, reinsurance companies and captives established locally to transact insurance business from Malta.

Mr Grech said that while the group recognised the current interest in protected cell company structures, it would not be looking to combine any such structures under existing insurance carriers or insurance management company in accordance with its risk management policies.

"The potential of the setting up of a protected cell company is on the drawing board," he said, "and its implementation, or otherwise, is totally dependent on the projected sustainability of demand for such structures. The incorporated cell company structure would be studied once legislation in this respect is enacted."

Are measures being taken to streamline management remuneration packages, including bonuses?

Mr Grech explained that salaries and bonuses were the remit of a remuneration committee, made up of non-executive directors reporting to the board of directors.

The model used for the chief executive officers, management and staff, is based on the attainment of budgets, including the three pillars of profits, which has the highest weighting, revenue and containment of costs.

"My own remuneration package, which is renewable by mutual agreement every five years, is decided by the remuneration committee in liaison with representatives from non-executive directors appointed by institutional and public shareholders, and finally approved by the board," Mr Grech said.

"Any bonus payment is at the discretion of the board."