Last week Middlesea Insurance plc convened an extraordinary general meeting for its shareholders to approve a number of changes to the company's memorandum and articles of association including an increase in the authorised share capital paving the way for the aggressive capital raising exercise as a result of the significant losses incurred in Italy. Following the EGM, the board formally approved a rights issue of 67,000,000 shares at a price of €0.60 per share, a discount of 51.6 per cent to the share price on the day of the announcement.
Middlesea's current issued share capital of 25,000,000 shares implies that shareholders are entitled to subscribe to 2.68 shares for every one held (rounded up or down to the nearest share). The three largest shareholders (BoV, Mapfre Internacional and Munich Re) will be subscribing to their entitlement which amounts to 62.5 per cent of the new share issue.
This is equivalent to €25.1 million, leaving the other shareholders being requested to advance a further €15.1 million. In addition, BoV and Mapfre have also agreed to underwrite the rights issue by taking up any shares not subscribed for by existing shareholders. The underwriting agreement ensures that Middlesea will manage to raise the required additional capital amounting to €40.2 million. Eligible shareholders may participate in this offer during the subscription period between November 30 and December 14, 2009.
Effectively BoV and Mapfre are giving a new lease of life to Middlesea which has been engulfed by the sizable losses incurred by its Italian subsidiary and which wiped out a large part of the reserves accumulated over the years. The sudden deterioration of Progress Assicurazioni in Italy (92 per cent owned by Middlesea Insurance plc) came about through a change in regulation of the procedure for claims handling in the motor vehicle sector. Effectively this new system came into force in February 2007 and what is surprising is that despite that the change "created significant imponderables" in the words of CEO Stephen Gauci detailed in the 2007 annual report, Progress maintained an aggressive expansion programme in different parts of Italy which exacerbated the adverse effects of this new legislation and compounded the losses incurred by this company in recent months.
Naturally, most shareholders will be questioning whether it would be advisable to inject further funds into the Middlesea Group following the massive dilution in value over the years as can be seen from the share price graph. It may be comforting to note that BoV and the Spanish insurance giant Mapfre committed themselves to acquire any amount of shares not taken up by the smaller institutional shareholders and all other investors.
This commitment was surely undertaken after significant insight into the Middlesea Group's financial situation and its potential to start delivering profitable performances in the short-term. The prospectus also indicates that this commitment was only forthcoming after the Group ensures that it has taken up the necessary re-insurance cover to protect itself against any further claims within Progress prior to December 31, 2008.
It is interesting to note that a further condition necessary for the underwriting was the approval from the Malta Financial Services Authority that BoV and Mapfre will not be required to make a mandatory bid should their joint-ownership result in a shareholding exceed the 50 per cent level. With a current combined holding of 42.6 per cent, these two institutions could easily surpass that figure if a number of shareholders are unable or unwilling to inject further capital into Middlesea.
On the other hand, shareholders would be interested to know whether BoV and Mapfre will seek to take on a more active role in the management and strategic direction of the Middlesea Group going forward. Actually, this may be the opportune moment to amend the Group structure including the creation of a holding company separated from the various operating subsidiaries. Moreover, a separate MSE listing of Middlesea's main asset, Middlesea Valletta Life Assurance, could also go a long way to restore shareholder confidence in the Middlesea Group and realise a part of the substantial value created over the years by this life company.
During a meeting held for stockbrokers on the eve of the extraordinary general meeting, MSI executive chairman Mario Grech was quick to point out that the severe losses in Italy are the sole reason for the problems within the Middlesea Group. On various occasions Mr Grech assured those present that the other insurance activities of the group (Middlesea in Malta, the life assurance business as well as the insurance management company IIMS) are performing positively and in fact these local operations have reportedly generated a profit of €6 million during the nine months to 30 September 2009.
The €40 million capital injection by Middlesea will be mainly used to finance the purchase of reinsurance cover at Progress at a cost of circa €21 million to protect it from further claims arising with respect to business prior to December 31, 2008 and stop losses entered into during 2009. Moreover Progress will require an additional €5 million by way of new capital. Meanwhile the remaining €14 million will represent additional share capital for both Middlesea (€10 million) and Middlesea Valletta Life (€4 million). Apart from the €5 million share capital injection, Progress also requires additional funds amounting to €8.5 million which are being sought through a subordinated loan from a number of banks.
Failure to do so will place the Italian company in a position where it will not satisfy its statutory and regulatory capital requirements and Progress may then need to resort to the sale of some of its assets to raise the required funds.
During the recent meeting MSI's executive chairman also indicated that discussions are currently taking place with a number of institutions for the outright sale of Progress Assicurazioni. If this were to materialise, the Middlesea Group would effectively be refocusing its efforts on business in Malta which, according to the prospectus, "has potential space for substantial growth".
The Middlesea share price has been on a steep downward trend in recent years after peaking at €6.29 in May 2006. The preliminary details of the rights issue were issued on November 17. Middlesea's equity had traded the previous day at €1.24 and following this announcement the share price dropped to €1.20 as the only bid within the permissible trade range was satisfied. However, the imposition of the trade range despite the release of this major corporate action inhibited further trades to take place on the day despite some buyers entering the market at the €1.00 level.
The insistence of the Malta Stock Exchange to maintain such trade ranges in the light of last week's developments is incomprehensible. There was a clear situation where the market price needed to adjust to reflect the rights issue and this was not possible. Unfortunately it was only on November 19 that the trade range was removed and this only after some offers entered the market below the "limit down" price. Rather than waiting for market participants to input sale orders clearly showing the need to remove the trade ranges to execute some transactions, the Malta Stock Exchange should have immediately lifted the trade range after the announcement on November 17 to allow the share price to readjust accordingly. In fact this price readjustment took place last Friday when a 100-share deal was effected at €0.70. The share price traded 7.1 per cent higher to €0.75 on Monday but fell 13.3 per cent to a new all-time low of €0.65 on Tuesday.
While Middlesea's equity normally tends to be fairly illiquid with only a few thousand shares changing hands occasionally, a considerable number of shares traded between May and September 2008 at prices ranging between €3.00 and €3.43. In total, just under 290,000 shares were exchanged indicating the presence of some institutional investors acquiring a sizable shareholding in the company.
This voluminous activity continued earlier this year when a further 195,000 shares traded on January 29, 2009 at a price of €2.58 per share.
It was only on March 3, 2009 that the first official company announcement confirmed that business conditions in Italy were indeed difficult and would have a material adverse effect on business during the last quarter on 2008. In view of the potential (at the time) materiality of these adverse conditions, market participants would have expected an increased flow of information in this regard enabling a more orderly market.
Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.
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