Middlesea Insurance plc's books this year are projected to be hit by the €21 million cost of right-sizing the loss-making Italian subsidiary. But executive chairman Mario C. Grech has reiterated his confidence that Malta's largest insurance group is on the right track to enhance its balance sheet.

Over €40 million in re-insurance has been acquired at a cost of €14 million to cover claims between 2001 and 2008 to mitigate Progress Assicurazioni SpA's effect on MSI's bottom line, Mr Grech told The Times Business. Over €7 million in indemnity was payable to agencies whose contract has been terminated during this year.

Stop-loss reinsurance protection has been acquired to cover 2009 claims if the loss ratio to incurred claims is between 105 per cent to 130 per cent. This end quarter was a result which carries a subjective element in the forecast explained in the prospectus to shareholders.

With all its other operations running at a healthy profit - subsidiaries Middlesea Insurance, International Insurance Management Services Ltd and Growth Investments, and associate company Middlesea Valletta Life Assurance - Middlesea Insurance plc could make a much reduced loss by the end of 2010 compared to the immediate previous years.

"The remedies are costly," Mr Grech said this week. "The indemnification and the regulatory requirements come at a price. However, we have come a long way this year to rectify the situation we found ourselves in. Progress now has 39 agents from the 165 we started off with this year. We sent out 30-day letters of notice of termination to non-performing agencies, took logistical action, and cut off agencies' online underwriting facilities."

The chairman said it was highly unlikely that shareholders would receive a dividend next year but Middlesea Insurance was committed to creating wealth to all its stakeholders.

"We have paid out €40 million in dividends over the last 18 consecutive years," he pointed out. "It is matter of being realistic at this time. We trust that by the end of 2010 we would have managed a considerably better performance. We believe we are on the right track."

Progress Assicurazioni currently provides insurance cover to 100,000 vehicle owners besides other insurance business, in a market where policy holders are allowed by law to choose their insurance provider quarterly or half-yearly. Under the Bersani Laws introduced in 2007, the highest bonus on one policy (normally enjoyed by parents) could be enjoyed by an entire family of policy holders. CARD, the mandatory direct settlement system introduced by that legislation, and the financial crisis, together with the subsequent recession, contributed to the acceleration of the downcycle in the Italian insurance market.

Progess Assicurazioni is still selling motor insurance insurance policies through its remaining agents but is adhering to strict newly introduced underwriting guidelines. Premiums have been increased by 15 per cent this year and a further increase of 17 per cent will be implemented next year subject to approval by Italian regulators.

Mr Grech said remedial action taken at Progress had been based on 24 months of information since the introduction of the new legislation in February 2007. Discussions have been held with Italian and Maltese regulators and a three-year plan has been submitted to MFSA in Malta and ISVA in Italy.

Progress projects to write a €15 million book of business, scaled down from €85 million, and Mr Grech said this figure will continue to be corrected through Progress' strategy of right-sizing the portfolio.

"This is the first stage," Mr Grech emphasised. "There is likely to be potential interested investors in Progress eventually. Two have already expressed interest but we are in no position at this stage to consider their investment interest. Our objective to date is to right-size the portfolio, stop the loss haemorrhage experienced in 2008 and 2009 with the ultimate objective to clean Progress' current balance sheet, and to meet regulatory and statutory requirements."

Middlesea Insurance plc launches a €40.2 million rights issue to boost its capitalisation on Monday. The offer to shareholders closes on December 14.