“The operations at Progress Assicurazioni SpA have become unsustainable due to the confluence of a number of adverse factors – any one of which would have posed a severe challenge to the company in its own right, but the combination of which has proved to be overwhelming, notwithstanding the extraordinary efforts made by all concerned,” said Joseph Zahra, recently appointed chairman of Middlesea Insurance, following an announcement that Progress, the Italian subsidiary of Middlesea Insurance, had applied to the regulatory authorities to cease writing business, and to put in train processes for the winding up of the company.

On 10 February, ISVAP informed the company that it had appointed Professor Avv. Andrea Gemma as Provisional Administrator (“Commissario”) of Progress Assicurazioni SpA with immediate effect.

Apart from the unprecedented disruption witnessed in the international financial markets in 2008 and 2009, and the consequent serious knock-on effect into the global economy, Mr Zahra explained that the combination of adverse factors included the down cycle in the RCA (motor car insurance) sector currently being experienced by the entire Italian insurance industry, a marked deterioration in the performance of Agents, a high incidence of late reported claims coupled with a high RCA content in the overall portfolio of Progress, which business had a geographic concentration in Sicily and the southern regions of Italy.

In addition, the company was also impacted negatively by the enactment of the Bersani Law and the CARD system reforms introduced in the market in 2007.

Referring to the opinions of market commentators, Mr Zahra explained that the new claims settlement system had caused some market dislocation, and that Progress itself had experienced material losses as a result thereof.

The chairman said that Progress had experienced a marked increase in the frequency of claims, in particular late reported claims, including a sharp deterioration in the quality of business from a number of agents from the Campania region.

This was also coupled with a significant and inexplicable spike in claims being experienced following the termination of poorly performing agents. The acknowledged presence of difficult and questionable claims in the region – a phenomenon which is also associated with the severe economic downturn – the obligatory cost of compensation to terminated agents, and the ‘tail” nature of the insurance business, whereby the impact of any remedial measures cannot be expected to be immediate, and can in fact be deferred by more than 12 months, were all contributory factors, said Mr Zahra.

The chairman stated that in view of the very serious adverse developments affecting the Progress operations, the Progress and Middlesea Insurance boards of directors moved to take various corrective actions during 2008 and 2009, with a series of radical remedial measures.

The MFSA and the Italian regulator, ISVAP, were alerted to the problems being encountered by the company, and were kept abreast with developments on a regular basis.

Remedial actions included steps to downsize the portfolio through the termination of non-performing agencies (which were reduced from 164 to the existing 34 at substantial cost), premium rate increases, various claims management restructuring measures and the engagement of various specialist consultants.

In addition further specialised re-insurance cover was acquired to protect against any further deterioration in claims experience.

Mr Zahra explained that in order to ensure that Progress was able to withstand the substantial losses that were being incurred, the board of directors also sought financial support from the parent company, and that over the past year Middlesea Insurance has provided substantial financial support to Progress and injected additional capital into the company in excess of EUR45m.

In turn, in order to stabilise the balance sheet of Middlesea Insurance to enable it to withstand the Progress losses, a Rights Issue amounting to EUR40.2m was launched in November 2009.

The chairman went on to say, that, regrettably, and notwithstanding the extent of intense measures taken to support Progress, the financial results of the company continued to deteriorate in the last quarter of 2009, with a further extraordinary high level of claims incidence being experienced, thus exacerbating the losses of the company well beyond the estimates that had been prepared on anticipation of the Rights Issue.

The position was reached in January whereby the company had exhausted its shareholders’ equity base, and in the absence of a reasonable expectation of further financial support from the parent company, could not continue in operation in conformity with the requirements of Italian law.

“In the circumstance, the Progress board asked the board of directors of Middlesea Insurance whether it was able to commit to providing further financial support to Progress so as to enable the company to continue in business,” said Mr Zahra, continuing that “the MSI board informed the Progress board that, having injected more than EUR45m of additional capital into Progress over the last year, MSI was not in a position to commit to inject further capital into Progress at this time without putting at risk its own viability”.

Accordingly, commented Mr Zahra, “in the circumstances, and with great regret, MSI was not able to commit to Progress that it would be able to provide further capital to the company at this time so as to enable it to continue in operation”.

Mr Zahra said that in the above situation, and absent the reasonable expectation of further financial support from the parent company, there was not a reasonable prospect that Progress would be able to continue operating in the business of insurance in conformity with the requirements of the Italian law and regulations, and the board of directors concluded that they had no alternative other than to formally inform ISVAP and the MFSA (who had been kept fully informed of all developments throughout) that the company should move to cease writing new business forthwith, and to initiate the necessary early steps and procedures to secure the winding up of the company.

“The board was left with no option but to act in this manner in the interest of all stakeholders,” said the chairman.

The chairman stated that these decisions were taken with the greatest possible sadness and regret.

“After acquiring Progress in 2000 and a number of years of positive and encouraging results, Middlesea Insurance was looking to Progress Assicurazioni as the strategic platform upon which to build its business outside Malta. Alas, it was not to be,” said Mr Zahra.

The chairman, on being asked why Middlesea had not withheld its financial support from Progress at an earlier stage remarked that “very substantial support had been extended to Progress – indeed, at an amount and level that could be regarded as extraordinary”, said the chairman explaining that, “very unfortunately, the most extreme scenario at Progress has come to pass – and further support could only have been extended on a basis that would have risked the viability of Middlesea Insurance.

“Accordingly,” said the chairman, “the view had to be taken “thus far, but no further” – MSI had already made extraordinary and substantial efforts in its support for the reasons explained – however, it could go no further.

Looking forward, Mr Zahra said that the events of the past two years have been a huge strain and a debilitating distraction on the management and staff of Middlesea Insurance plc and its subsidiary companies.

He believed that it was now time to return to business and to rebuild the morale and motivation of the talented and committed individuals that work within MSI, and the agents and intermediaries that support it.

He explained that, going forward, the short term strategy would be to:

• Work closely with ISVAP and the MFSA as appropriate to secure the orderly winding up of the Progress operations without unnecessary delays.

• Enter into a period of consolidation and reorganisation for MSI, returning the company to what it does best – that is to the role of a customer-centric, profitable and progressive domestic insurer.

• Transit IIMS to an important third party service provider to the insurance industry, and to play a vital and creative role in the development of Malta as a respected and reputable financial services centre for the international insurance industry.

The chairman said that with regard to the reorganisation of MSI, he was greatly encouraged to note that both Mapfre and Munich Re have committed to providing MSI with strong professional, technical and technology support. “Product innovation and development will follow shortly, as will the further enhancement of the strong technical and professional management skills that already reside within MSI,” commented the chairman. Mr Zahra emphasised that he was “very optimistic” as to the prospects of MSI and IIMS which generated positive profits from their local operations.

Asked about Middlesea Valletta Life Assurance, Mr Zahra stressed that MSV was “completely unaffected” by the events at Progress.

“MSV is a completely separate and independent company in which MSI has a 50 per cent shareholding, with the balance of 50 per cent being held directly by the Bank of Valletta,” said the chairman, “the company and its policyholders are completely unaffected by the losses registered by Progress and MSI, since MSV is a completely independent and separately capitalised company, which does not hold any shareholding in, or other connection with, Progress Assicurazioni SpA.”

He explained that MSV is required by the MFSA to meet very rigorous solvency requirements and capital tests, and has, and will always continue to, maintain solvency and capital ratios that are well above those required at law.

“With over 80,000 customers, shareholders’ equity at close to EUR100m, annual revenues of over EUR100m, and total assets approaching the EUR1bn mark, Middlesea Valletta Life has grown to become Malta’s leading provider of life insurance, long term savings and retirement planning,” said Mr Zahra, adding that MSV will be announcing its FY 2009 results shortly, and that these will show a very satisfactory financial performance for the year.