News | Wednesday, 05 May 2010

Middlesea divorces its Italian lover

It is a mystery how very little has been written by financial commentators on the spectacular loss suffered by local insurance flagship Middlesea (MSI) last December. Reading the chairman’s report presented by Joe FX Zahra who replaced Mario C Grech, he explains little what went so wrong after acquiring the Italian subsidiary in 2000 through the Spanish shareholder Mapfre Internacional.
This investment went well for a few years and presented MSI with a challenge to deal with the vagaries of insurance market in the south of Italy. Middlesea Insurance‘s senior officers were haling this monumental offshore incursion as a strategic platform upon which to build its business outside Malta particularly when the local market is saturated. The honeymoon was soon over and MSI Group announced a loss of €55.2 million for 2009 compared to a loss of €20.6 million for 2008 This figure includes the impairment charge on Progress to the amount of €63.1 million During 2009, MSI did not sit idly while Progress was haemorrhaging losses. It has provided extensive financial support to Progress and injected €45 million of additional capital into the company. To enable MSI to withstand the Italian losses and to stabilise their balance sheet, a Rights Issue to the amount of € 40.2 million was launched in November 2009.When interviewed on a local newspaper Mario C Grech remarked that he took a hands –on approach of the Italian operations partly blaming the trouble that legislation following the Bersani law had a major effect on operations. During 2007, particularly in the last part of the year, one could observe a certain movement in the Italian insurance market that drew MSI‘s senior managers attention.
This law, which introduced direct settlement of insurance claims in Italy, was originally intended to have a positive effect on consumers enabling them to settle their insurance claims faster.
Previous to this act, during traffic accidents, a person who was not to blame went to the insurance company of the person who had responsability for that traffic accident to open a claim.
However, the Bersani law reversed all that, thus the person who does not have blame for a traffic accident could now claim directly from his or her insurance company, irrespective of the fact that he or she did not have blame for that accident.
Any Italian insurance company would then get reimbursed for that claim by the insurance company of the other driver who blamed for that accident. Since February 2007, when the law was introduced, and the last interim financial results published in June 2009 , the total loss suffered by Progress as a result of the new law in claims that the company could not recover fully was €15 million. No doubt this is a substantial part of the overall loss of euro 63.1 million which had to be written off. Did the Maltese public read about this saga in any detail?….the answer is no, except for bloggers lamenting in the Times of Malta.
Bloggers have expressed their astonishment to the aura of Omerta that has accompanied the publication of the quoted financial statements and the accompanying partly qualified auditor’s report.As a researcher it took me a long time to try to find out what went so badly wrong in a company so admirably run by the same group of directors some of whom are also running financial companies such as Bank of Valletta Plc.
In fact the chairman of this bank is a long standing director on the board amongst other reputable officers. MSI is currently owned by three main shareholders plus a good percentage of 18 % is subscribed by the public. In fact as at 17 Aprul 2010, Bank of Valletta p.l.c. invested 31.08%, wheras HSBC Bank Malta p.l.c. as subcustodian for BNY Brussels as custodian for Mapfre Internacional owned 31.08% and Münchener Rückversicherungs Gesellschaft held 19.90%. Yes the public has a lot to care for in deciphering what went so badly wrong in such a short time and why there has been a sudden change of officers who held helm at the watch.
Quoting P. Micallef -a blogger on TOM - who commented in February this year : “This is ridiculous. The persons at the helm of the MSI should have identified the situation from day 1 not after €45 million in the red. We shareholders demand that those who allowed this to happen are made personally responsible and if necessary criminal charges put against them. And more important. If they are still on the books of the MSI their employment should be terminated immediately. Perhaps knowing what shareholders suffered is important for the financial regulators who try to hone their tools for early detection of what went so badly wrong in the Italian connection of MSI.”
The love affair that went sour in the south of Italy and in Sicily. Some may question why the long standing chairman who run the company so snugly since its inception did offer his resignation at the end of 2009. This caused no ripples in the financial press. What is more interesting is the statement by the auditors that “due to the fact that Progress has now been put into Compulsory Administrative Liquidation, the Group does not have access to the necessary information to enable it to account for its 2009 financial statements.” Does that mean that Middlesea auditors were facing a limitation of scope and were not allowed to carry out an audit of Progress? In fact , the 2009 MSI group audit report signed by Simon Flynn obo PWC states inter alia ….Without qualifying our opinion, we draw attention to note 5.4 to the financial statements, which describes the impact of the adverse results of Progress on Middlesea Insurance p.l.c.’s regulatory solvency margin. The Parent Company and Progress did not meet their regulatory solvency requirements at all times during the year and as at 31 December 2009.
The same note further describes the remedial measures that are being taken by the Parent Company to rectify its position. The fact that the solvency margin was not adhered to is a serious drain in the regulatory requirement for insurance companies operating in Italy.
More bewildering is the statement in the auditors report that “the Group does not have access to the necessary information to enable it to account for its 2009 financial statements. Continuing the auditors put up a red flag saying that as a consequence of the absence of such documentation Progress’ audited financial statements as at that date are not available, we were unable to determine the impact of the early de-recognition of this subsidiary on the Group’s financial statements. Yes the warning signs were there alright but one may say if they were acted upon in time. Did we close the barn after the horse has bolted? One reads how Progress was instantly trimmed of its under performing list of agents. Remedial actions included steps to downsize the portfolio through the termination of premium rate increases, various claims management restructuring measures and the engagement of various specialist consultants. Progress further increased its technical provisions to €160 million.
So the technical provisions of €160 million do underpin a major weakness and one wonders how the subsequent 2009 financials were not consolidated when the forced bankruptcy proceedings instigated by the Italian regulator started after this date. To conclude .with hindsight one can reflect that the media have regaled us by news on the financial woes of companies and EU. States faltering within the PIIGS group namely Portugal, Italy, Ireland Greece and Spain but hardly a word on the debacle that hit our sole embryonic insurance company. The mystery thickens when considering that this iconic company has been chaired by Mario C Grech for so many years with aplomb and not an undue measure of success.

Romy Schmager
Law & Finance Researcher at PKF Malta

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