The negative performance of Middlesea's Italian subsidiary Progress Assicurazioni SpA has caused the group to register a loss before taxation of €17.7 million for the first six months of the year, the company announced yesterday.

The subsidiary was already responsible for making the group register a loss during the 2008 financial year.

"Consolidated Middlesea Group Results for the six months to June 30 have been materially impacted by the negative results registered by the Italian subsidiary Progress Assicurazioni SpA," executive chairman Mario Grech said in his review at the group's general meeting.

The local business operations of Middlesea Insurance plc., Middlesea Valletta Life Assurance and International Insurance Management Services continued to achieve favourable results.

"However, the positive contribution from these domestic operations have been outweighed by the loss registered by Progress Assicurazioni. The severe challenges of the Italian market have persisted during the first six months of 2009. As a consequence, on a consolidated basis, the Group registered a loss before taxation of €17.7 million for the half year ended June 30, 2009," the company said.

Mr Grech 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 €1.53 million. This was a marked improvement from the loss of €0.14 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 €1.28 million, as compared to a loss of €1.54 million as at June 2008.

Middlesea Valletta Life Assurance registered a profit before taxation of €0.5 million. However, the results for the period have been impacted by a disproportionately high taxation charge of €1.1 million, arising from the somewhat anomalous taxation treatment of capital gains and losses, the company said.

"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," Mr Grech said, noting that this improvement mainly impacts the policyholders' funds rather than the emerging profits to shareholders.

The improvement of such performance in favour of policy holders resulted in an increase in the long term technical business provision of €34 million, while the technical provisions for linked liabilities also increased by €1.28. Total shareholders' funds of MSV stood at €90 million at end June 2009, and shareholders have already committed to subscribe to a further capital increase of €2.5 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.

Mr Grech said Progress Assicurazioni SpA contributed a loss of €19.4 million to the Group results for the half year. The further strengthening of technical reserves resulted in an unfavourable movement on prior year's claims of €16.6 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 2009, the whole Italian motor liability market is going through a negative cycle," Mr Grech said, 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, and that these included a 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. Furthermore, the reinsurance programmes of Progress continued to be evaluated, and these have been further strengthened with the purchase of additional cover for losses occurring during 2009.

The chairman remarked 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.

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 €4.9 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, has registered positive results. Fee income increased from €0.77 million last year to €0.98 million this year, and the company contributed €0.24 million to the pre-tax results of the Group compared to the €0.17 million contributed last year. IIMS's international client base now contributes 23 per cent of its revenue. The subsidiary actively pursues insurance/reinsurance companies and captives that favourably consider setting up and operating from Malta.

Mr Grech noted that the improved sentiment in the world capital markets witnessed during the second half of the period under review, together with the cautious implementation of the revised investment strategy had resulted in a net positive investment income for the Group of €2.77 million, a marked improvement from the net loss of €3 million registered in 2008.

The total assets of the Group increased by 2.1 per cent during the period, with total assets now amounting to €322.5 million. The reported Group loss for the period has however, resulted in a decrease in shareholders' funds which reduced by 27 per cent to €45.2 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 remarked that operations of the Italian subsidiary remain the biggest challenge for the Group during the remainder of 2009.

"The remainder of financial year 2009 is expected to continue to present a challenge for the Middlesea Group results, since the companies forming the Group follow the fortunes of the countries in which they operate.

The Italian market is the dominant factor which has outweighed the positive contributions of the other Group companies operating in Malta. The prospect of a return to profitability together with the enhancement of the Group balance sheet, remain the priority tasks of the Board over the immediate future," he said.

The Board of Directors do not propose to pay an interim dividend for the half year ended June 30.

Last year (January - December 2008) Middlesea Group made a loss after tax of €20.6 million, largely due to the poor performance of Progress Assicurazioni as well as the international financial crisis. It was the first time in 27 years that the Group registered a loss.