05 July 2006

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Business Today

Prudence, growth and change

The one word that constantly comes up when talking to Mario C. Grech is prudence. He heads Malta’s largest insurance company that has developed from a State-run company founded in 1981 into a fully-fledged private investor-run business operator.
Sitting in as chairman and chief executive officer, Grech says that Middlesea has consistently sought growth overseas with focus on the Euro-Mediterranean region. The company already has a market presence in Gibraltar and southern Italy but in a very prudent tone Grech establishes the whole of the southern European rim including Morocco as a potential market for growth.
And Grech has good reason to champion growth overseas. Today, from a gross premium in general business of Lm34 million, 63.5 per cent is derived from overseas.
The company’s fundamentals are also sound with shareholders’ funds at Lm31 million in 2005 up from Lm2.5 million in December 1982.
Group investments also increased to Lm81 million. During the period since establishment Middlesea has declared a dividend for 22 consecutive years.

What would you say is the main ingredient for Middlesea being what it is today, one of the foremost insurance companies in Malta?
There are a number of factors that have made the company what it is today but a fundamental aspect is our emphasis on the development of human resources through education, training and continued professional development. Our ability to respond to change, seeking opportunities in the challenges emanating from such change and a clear policy and strategic direction to establish ourselves as the leading insurer in Malta seeking growth overseas with focus on the Euro-Mediterranean region are also fundamental to the company’s success.
Establishing Middlesea as a brand internationally and ensuring adequacy of capital to achieve the adopted strategy, both domestically and overseas, giving importance to a positive cash flow and applying equitable pricing for our products are another set of ingredients that made the company what it is today.
It has to be appreciated that between 1981 and 1995, Middlesea’s main operation was that of a re-insurer being the recipient of the obligatory re-insurance cession in Malta. The company had also been involved in the international re-insurance market through an FSA-approved London branch office, writing a short tail property account worldwide, excluding the US and Canada. Very few appreciate that we started to focus on insurance as opposed to re-insurance in 1996.
Middlesea started as a government company with the initial shareholders predominantly being parastatal companies and the general public who for the first time was offered a 20 per cent stake. The shareholding structure was changed especially to meet our strategy over the 25-year period and today we find a shareholding structure made up of international and local financial institutions such as Bank of Valletta plc, Corporacion Mapfre, Munich Re and Assicurazioni Generali, besides the general public.
But the same factors that have contributed to us achieving our main objectives are still fundamental to future success.

What importance does the company attach to its human resources?
The success or otherwise of any venture, including in the financial services industry, is directly attributable to the quality of the human resource working within the environment. This fundamental criterion was identified and to fill in a void in 1981 we set up the Malta International Training Centre (MITC) that has a very close liaison with the Chartered Insurance Institute. Since its inception this centre has been essential in establishing insurance as a profession, providing courses on all aspects and at all levels of insurance education.
The professional level of practitioners in the local insurance sector is positively benchmarked on a European level. Today, the MTIC is financially and administratively supported by Middlesea, the MFSA, the Malta Stock Exchange, the Malta Arbitration Centre and the Malta Insurance Association. This centre continues to support the level of education, training and continued professional development thereby fitting into the national strategy of having Malta as a financial centre of high repute.

What has Malta’s membership of the European Union meant for Middlesea?
The decision to join the European Union brought about with it a wave of deregulation and liberalisation of the financial sector in Malta. A decision was taken, in part instigated by this wave, to revisit the company’s strategy. The view was to turn Middlesea from an international re-insurer into a direct insurer in Malta and to develop a strategy to expand in overseas primary markets. We implemented our strategy and today from a gross premium in general business of Lm34 million, 63.5 per cent is derived from overseas.
The contribution of long term business (life) to Malta’s GDP has increased to 3.5 per cent. Our associate, Middlesea Valletta Life (MSV), is the leading specialist life assurer in Malta with business written, including investment contracts without a discretionary participation feature, increasing to Lm39 million in 2005. MSV will also seek growth overseas with its initial focus on Southern Italy and Sicily.

What financial portfolio does Middlesea manage today on behalf of its shareholders and clients?
Primarily, Middlesea is a group of companies with Middlesea Insurance plc, the holding company, listed on the Malta Stock Exchange specialising in primary general insurance domestically and overseas and maintaining a composite status by writing general and group life business. Shareholders’ funds in December 1982 were Lm2.5 million, which increased to Lm31 million in 2005.
Group investments also increased to Lm81 million. During the period since establishment Middlesea has declared a dividend for 22 consecutive years applying a policy of sustainability and enhancement of the balance sheet.
Long-term business was concentrated in Middlesea Valletta Life, a pioneering bancassurance operation born of the partnership between Middlesea, Bank of Valletta plc and Munich Reinsurance Company. It’s here that we have funds under management amounting to Lm224 million whereas shareholders’ funds increased to Lm29 million in 2005.
Holistically, the Group today has a total of investment funds amounting to Lm305.7 million, including funds under management.
To ensure application of our investment policy based on security, liquidity and maximisation of return, the Group has an investment committee that meets regularly to implement policies and guidelines approved by the board, scrutinise, approve material transactions and monitor results.
The underlying investments are mainly made up of local and foreign equities, up to a maximum of 25 per cent, fixed income securities ranging from short to medium and long term up to a maximum of 50 per cent and cash, up to a maximum of 15 per cent.

Which are the growth areas the company is targeting for the next five years?
Today, we are awaiting the introduction of the Solvency II directive which will focus more on risk capital. Every company in our organisation is presently adequately capitalised to meet the requisite solvency requirements both in Malta and overseas. Capital management is not a static issue and is regularly monitored by the board and management.
Whereas we retain a leading position in Malta, we are using Malta as a financial base to continue to generate business from identified overseas markets. In this area, we actively seek opportunities and consider those that present themselves.
Our policy is to seek entry into foreign markets either through a branch operation, setting up of companies, acquisition or seeking partnerships within the identified territory with indigenous partners who offer synergy. We believe that Solvency II is going to create such opportunities in that excluding the leading insurance multi-nationals in overseas territories, there are thousands of small and medium sized companies within the Euro-Mediterranean region.
In the late 1990s Middlesea featured in the top 200 insurers list in Europe. We ranked 87 by underwriting results and 178 by pre-tax results. We are also the only indigenous insurance company rated by Standards & Poors at BBB, based on public information. This rating has been maintained for the last 15 years.

How successful have Middlesea’s overseas operations been and what do they represent in terms of turnover and profits for the company?
Establishing overseas is a very challenging task in itself. We are conscious of our size and therefore apply a strong dose of prudence. Middlesea is a large company by Maltese standards but when viewed within the context of much larger markets abroad we are a small company. All we need is a drop from the splash to be successful abroad.
Middlesea is presently in the Gibraltarian and Italian markets. Between them, these operations contribute 63.45 per cent of the Group’s total turnover and 17.5 per cent of the profit after tax.

Does the company plan to issue more shares to the public?
The company is presently undertaking a study that is tied with Solvency II and looking at expected growth patterns over the next five years to ensure adequacy of capital. If we determine that we need to increase our capital, we will seek the least costly alternative to finance such capital. This does not exclude any type of financial instruments to achieve this including going to the shareholders and the financial markets.

Given Middlesea’s overseas operations do you plan listing on foreign stock markets?
The timing is too early to determine such a path. We will not exclude any opportunity which supports our objective of creating wealth for all stakeholders including our shareholders.

How does the company plan to diversify its business portfolio in the years to come?
Our future direction remains embedded in our consistent strategy of attaining a balanced business mix from a geographical spread through varied distribution. We are encouraged by the 2005 result, which was achieved through the concurrent contribution from various segments of our operation. Of course, it must be borne in mind that future expectations need to be based on a prudent analytical appreciation. Hence, it remains fundamental to approach the future imponderables with prudence but with an absolute resolve to succeed. With the strength of its balance sheet, Middlesea is in a strong position to continue on its path of growth and development both domestically and overseas with emphasis on insurance in long term and general business and management services to international companies.

The financial sector is waiting for government to announce its final plans on pension reform. What is Middlesea expecting from the reform?
The pensions white paper provided good grounds for discussion with all stakeholders. We have referred to the subject of pensions on various occasions. Our first foray was on 22 April 1993 when the Middlesea Group held an innovative seminar on welfare gap problems entitled ‘The Demographic Time Bomb’. The main issue to be addressed, as far as the pension challenge is concerned, is not only one of adequacy but one of sustainability and this is directly related to economic activity. It appears that there is consensus on this fundamental issue.
Primarily, distinction needs to be made between the social aspect arising from solidarity in pensions as opposed to the quasi-contractual relationship currently existing between the State and the citizens both contributors and pensioners. Non-contributory pensions and related benefits are the main areas within the pensions concept where the principle of solidarity applies. Indeed, this requires to be actuarially evaluated separately with the objective to ensure the redistribution of wealth to avoid anyone falling below the poverty line.
A distinction must also be made between pensions and annuities. Pensions do not fall solely into the domain of the insurance sector but are normally offered by licensed financial institutions, whilst annuities are offered by licensed insurance providers. Advances in the medical field have assisted in increasing longevity. Thus we need to manage our wealth according to our circumstances and to ensure sustainability of a level directly impinging on the standard of living throughout this new span of life.
This has implications on the economy as a whole. Creating real economic wealth is the key to a workable and sustainable national pensions system. This is an issue that will effect us in the long term and we are still of the opinion that consensual approach is important. From the highest level of parliament to the various structures of society should take a direct interest in this important dialogue.
It is encouraging to note that the White Paper gave utmost importance to the introduction of adequate statutory and regulatory considerations which remains sine qua non.
Whatever alternative the authorities may decide to embark upon, it must be borne in mind that any changes to our pension structure can only be operated and implemented on the basis of both a political and social consensus. Achieving this may not be easy. There is no doubt however that there are merits in taking appropriate action now, as this would become necessary at a later date. Society as a whole must continue to support those in ‘real’ need through the fundamental social value of active solidarity. Beyond that, we require strong leadership and direction by our policymakers to create the required culture change in an effective manner. The social, political and economic dimensions, which will affect today’s and tomorrow’s pensioners, must be seriously addressed concurrently.
We believe that the three tier system is suitable for consideration. The first tier ensures the attainment of a revised and sustainable national pension; the second tier is a tax incentivised funded occupational pension; the third tier would be for personal retirement enhancement plans through life savings and investment planning.
However, in our opinion the second tier should be optional in the initial years to give the opportunity for collective bargaining between employers and employees. After this period, the government can revisit the situation to see if it would be opportune to consider making this tier mandatory. This more so when the prevailing economic conditions could be passing through various challenges which would not allow such mandatory approach as it would impinge on the purchasing power of individuals.

The MFSA’s guidelines for good corporate governance suggest that the posts of chairman and CEO be occupied by two different people. You occupy both posts concurrently at Middlesea. Why?
Knowledge does not grow on trees. In these last two decades we have seen a lot of good people operate in the financial sector and one could be in a better position today to start applying the ideal corporate governance structures. Middlesea believes in corporate governance and has been applying it for decades.
This organisation did not always have one person occupying both the role of chairman and CEO. Between 1986 and 1994 I was only CEO. It was in September 1994 that the board also asked me to be chairman. It was always intended to have an ideal situation with both roles separated.
I personally think that moving along those lines would be a step in the right direction even if it does not necessarily mean achieving total perfection. Middlesea agrees with the MFSA guidelines but at this stage we don’t agree that these should be made mandatory. The guidelines, however, should be applied on a comply-or-explain basis so that shareholders would be informed as to why the company is adopting a system that is not compliant with the guidelines. The European model currently operates on these lines with guidelines rather than mandatory rules.
At Middlesea we make it known to our shareholders that we are not complying with the guidelines but we have also taken steps to ensure accountability. I have to report to a number of internal committees. As CEO I am answerable to the internal audit committee, the remunerations committee and other structures. These committees are made up of independent persons, mainly directors acting in a non-executive role and the board is happy and satisfied with accountability in this important area.
But it is all about integrity and integrity is not learnt at university but is part of a person’s upbringing at home. Corporate governance is an important tool but unfortunately it cannot create integrity.

Mario C. Grech was interviewed by Kurt Sansone

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