Middlesea Insurance has wound up its Italian subsidiary after the company failed to bounce back to profitability despite a cash injection of €45 million last year.
Company officials yesterday did not quantify the impact of the write-off on Middlesea's financial results for 2009 but assured clients that its Maltese operations were solid and profitable.
The figures will be reflected in the annual accounts normally published in April.
On Wednesday, the subsidiary Progress Assicurazioni SpA was put under the control of a provisional administrator appointed by Italian financial services authority Isvap after Middlesea informed them it wanted to close the company.
Talking to the press after informing the Malta Stock Exchange and company employees of the developments, Middlesea chairman Joseph F. X. Zahra described Pro-gress Assicurazioni as a "big distraction".
In the wake of yesterday's announcement, Middlesea's share price dropped by 5c closing off at 76c.
"The only way to protect the sustainability of Middlesea Insurance was to stop the Italian operation. The decision insulates the Maltese company from the troubles of Progress," Mr Zahra said. Progress had been profitable up to 2007, he added, but went into a downward spiral after that.
"Worrisome data started reaching us in the second half of 2008. It was a combination of factors that led to the negative results," he said.
Mr Zahra blamed the company's ills on the financial and economic crisis, the downward cycle in the motor insurance market in Italy and the deteriorating performance of Progress's 164 agents.
Italy's strict and unorthodox insurance law, which prevents a company from refusing to offer motor insurance, also contributed to the problems.
However, the Italian subsidiary was also saddled with "a number of thousands" of fraudulent insurance claims, Mr Zahra said, especially in the Campania region. Progress's business was mainly in Sicily and the southern regions.
Mr Zahra would not be drawn into saying whether the fraud was in any way linked to organised crime.
"I don't know but the south of Italy is always weaker than other regions. Where we identified fraud we initiated court cases and in those cases where agents were underperforming we simply stopped them," he said.
Between 2008 and 2009, Middlesea cut the number of Italian agents to 34 from 164, initiated a restructuring exercise by drafting in Maltese managers and setting up an anti-fraud unit.
The decisions gave Middlesea the confidence to inject €45 million in Progress last year to enable it to stand on its own two feet. However, financial results for the last quarter of 2009 indicated a deteriorating balance sheet, which led Progress to ask for more funds from its parent company.
"The Middlesea board insisted it was not possible to inject more cash into the company and decided to close the subsidiary and halt the haemorrhage," Mr Zahra said.
The disastrous results of the Italian subsidiary on Middlesea's accounts dented the Maltese company's reputation, with Mr Zahra admitting the company did receive queries from concerned clients.
However, he insisted Middlesea Insurance was strong and profitable and management could now concentrate on its "core insurance business in Malta" without the Italian "distraction".
Mr Zahra also addressed the concerns of Middlesea life policy holders and explained the company had nothing to do with the insurance business.
Middlesea Valletta was a distinct entity with a customer base numbering 80,000, he said, explaining the company had €1 billion in assets, €100 million in shareholder equity and an annual turnover of €100 million.
ksansone@timesofmalta.com