Malta's largest insurance provider has moved to assure clients that their policies are fully secured, even though the group's investment in an Italian firm has put it severely in the red.

Middlesea Insurance plc's Italian subsidiary contributed to a record loss of €29 million up to the third quarter of the year, completely wiping out the €6 million profit made from local operations. This meant a net loss to the group of €22 million.

But MSI executive chairman Mario Grech told The Sunday Times: "The haemorrhage of our Italian subsidiary is over..."

Bar any catastrophic event in Malta and depending on whether the recession will persist next year, Mr Grech said he expected "considerable changes" in figures in 2010. More importantly, he insisted the losses would not impact in any way local policy holders.

He said once Progress Assicurazioni Spa was taken out of the equation, all local operations - Middlesea Insurance, Middlesea Valletta Life, International Insurance Management Services and Growth Investments - were making a profit.

Middlesea started as a reinsurance company in 1981, and in 1994 set up a specialist life company - Middlesea Valletta Life Assurance Company Ltd, which now boasts €1 billion in assets.

In 2000, it acquired 51 per cent of Progress Assicurazioni Spa in view of the liberalisation of the motor insurance sector in Italy. The Italian venture was initially worthwhile but in February 2007 the so-called Bersani Laws came into effect in Italy, introducing direct settlement of motor accident claims.

According to Mr Grech, its implementation was flawed, since the driver who was not at fault had to resort to his own insurance, which would then be able to recover just part of the damages. This change in the law alone impacted Progress Assicurazioni to the tune of €16 million.

With the benefit of hindsight, should Middlesea have divested its share in Progress Assicurazioni back in 2007?

"Nobody saw the real effect of these new laws coming. They were sold to everyone on grounds that the claims would have been balanced out," Mr Grech said.

The impact of the Bersani Laws was compounded by the international financial crisis and the subsequent recession.

"You know what the recession means to insurance? Higher moral hazards... fraudulent claims. And we've seen higher frequency of claims and severity since then." Progress Assicurazioni operates mainly south of Rome, known for more fraudulent practices.

In 2007, the Progress premium income was around €70 million and in 2008 it totalled €85 million. Business for 2010 is expected to be "right-sized" to €15 million.

The group incurred a €21 million cost to carry out the necessary remedies to get Progress Assicurazioni back on its feet. This year the group embarked on an exercise to modify the portfolio and terminated the contract of 115 agents who were writing business for Progress.

Premium rates in Italy were increased and specialist claims management was appointed to help monitor the settlement of claims.

The management, which Mr Grech said was not well prepared for the changes, has since been replaced.

The good news is that Middlesea has already been approached by investors to sell off its share in Progress Assicurazioni, even though it is currently not marketing to sell.

"Insurance is not a switch. You see something, you correct it, but the effects aren't seen immediately. There is a tail of at least 24 months to see the changes made," Mr Grech said.

Middlesea has just launched a rights issue to increase its authorised and issued share capital. Backed by major local and international investors, it is a share issue offered to existing shareholders in proportion to their current shareholding.

"Until this time, Middlesea never went to the shareholders for any capital increase. We did it all from re-tained profits," Mr Grech pointed out.

"And we are doing it to enhance the balance sheet to its previous financial strength," he said, well aware that in the past two years the group balance sheet has been impacted adversely by some 50 per cent compared with its 2007 levels.

hgrech@timesofmalta.com

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