Corporate Governance – Statement of Compliance

The Memorandum and Articles of Association of the Company were amended and the composition of the Board of Directors was changed following the Extraordinary General Meeting held on the 16 March 2010. Further details are provided in the last section of this report.
 
All the directors are of the appropriate calibre, with the necessary skills and experience to assist them in providing leadership, integrity and judgement in directing the Company.  The Regulatory regime requires director nominees to undergo a screening process by the Malta Financial Services Authority prior to being appointed or elected directors.
 
Board Committees
 
The activities of the Board and of the Company’s senior management team were monitored and supported by Group Company’s Committees that were structured to assist in specialist activities and governance issues.  The members sitting on the various Group Committees are listed in the Annual Report.
 
Audit Committee
 
The Group Audit Committee’s terms of reference, as approved by the Board of Directors of each respective company, are modelled mainly on the recommendations of the Cadbury Report and its Principles. These include, inter alia, the monitoring of the financial reporting process, the monitoring of the effectiveness of the Company’s internal control, internal audit and risk management systems, the monitoring of the statutory audit of the annual and consolidated accounts, the review and monitoring of the independence of the statutory auditor and audit firm, the reviewing of actuarial reports, the management of financial risks, the arm’s length nature of related party transactions and the audit process.
 
The Group Audit Committee’s composition is also regulated by the Listing Rules. The said Rules were amended in October 2008 and Listing Rule 8.56 stipulates that all members of the Audit Committee must be directors and that at least one member must be an independent non-executive director and must be competent in accounting and/or auditing. Listing Rule 8.56a also requires the identification of the committee member having the required competence. During the year the Group Audit Committee was composed of Mr Lino Spiteri, Mr Roderick E. D. Chalmers, Mr Javier Fernandez-Cid and Mr Joseph F. X. Zahra, who all have the required competence in accounting and/or auditing as required under the said Listing Rule in view of their experience and/or qualifications. The Company was also compliant with the other requirements of Listing Rule 8.56.
 
Mr Joseph F.X. Zahra resigned as a member of the Audit Committee on the 1 January 2010 following his appointment as Chairman of the Company. The Noble Paul Testaferrata Moroni Viani was appointed in his stead following his election on the 16 March 2010.
 
Listing Rule 8.62 was amended in 2008 and requires the Audit Committee to meet at least four times a year. The Middlesea’s Group Audit Committee met twenty three times during 2009. The substantial number of meetings were required, amongst other things, to monitor closely and continuously the position and results at Progress Assicurazioni S.p.A.
 
The external auditors are invited to attend specific meetings of the Group Audit Committee. They are also entitled to convene a meeting of the committee if they consider that it is necessary. The terms and conditions of new contracts negotiated with related parties (regarding banking, reinsurance and local agents) are reviewed by the Group Audit Committee.
 
Internal Audit is an independent appraisal function established within the organisation to examine and evaluate its activities.  The Internal Auditor reports to the Group Audit Committee and attends its meetings. The mission set by the Group Audit Committee for the Internal Auditor is to adopt business process risk-based audits, aimed at ensuring adequate controls and also business process efficiency.
 
In addition, in the case of Progress Assicurazioni S.p.A., a subsidiary company incorporated in Italy, a Collegio Sindacale is appointed, in terms of applicable Italian law. During the year under review, it was presided by Rag. Ferdinando Barbaro whilst Dott Angelo Sillitti and Rag. Salvatore Aricò acted as sindaci effettivi.
 
Remuneration Committee
 
A separate report on the Group Remuneration Committee is included in the Annual Report.  The Board of Directors approves the remuneration of Directors and Senior Management on the recommendation of the Remuneration Committee. The maximum aggregate directors’ emoluments are established and approved by the shareholders during General Meetings as and when required.
 

During the financial year ended 31 December 2009, the Group incurred an additional one time expense in connection with vacation leave that had not been taken by the former Executive Chairman during his employment with the Company. This led to the maximum aggregate for the year being exceeded.  As disclosed in the report of the Remuneration Committee, the shareholders will be requested to note and ratify this excess due to special circumstances at the Annual General Meeting to be held on the 9 June 2010.
 
Risk Management Committee
 
The Group Risk Management Committee is responsible for setting a Risk Management policy for the Group aligned with the direction and risk appetite of the respective Boards of the Group Companies. This allows for the identification of a Risk Management philosophy and responsibilities, thereby creating and monitoring the environment and the structures for risk management to operate effectively. The Committee is charged with devising a risk management plan and setting up adequate structures to implement the policy in respect of each Group company referred to earlier. Risk registers have been compiled in which business risks have been identified and prioritised in order to establish recommendations for the level of resources to be committed to manage these risks. This allows for the provision of a direction for the implementation of adequate systems and procedures to mitigate risks within certain imponderables, and align risk exposure with approved risk appetite.  The Committee ensures the maintenance of up-to-date Risk Registers and related management information. Consideration of urgent and ad hoc issues falls within the ambit of the Committee's functions and, where appropriate, are referred to the Board with risk action plans. Adequate training will be provided to management and staff to enable them to contribute to the risk management process. The ethos of the Committee is to disseminate a Risk Management philosophy and risk awareness amongst all Group officials, and promote a proactive approach to the management of risk within acceptable professional parameters.  During 2009, the Committee met eight times.
 
Risk Management is an internal control function established within the organisation to examine and evaluate risk management as a service to the Group. The Risk Management Officer reports to the Group Risk Management Committee and attends its meetings.
 
Investments Committee
 
The Group Investments Committee, which includes senior executive members, meets on a regular basis and oversees the investment activities of the Group, executes its policies and guidelines, scrutinises and approves material transactions and monitors results. Any investment exceeding €1,164,686 requires the approval of the Board of the respective Company making the investment. The committee held twelve meetings during 2009.
 
The investment strategy review that was commissioned to Towers Watson continued to be monitored and implemented by the Investments Committee during 2009. The revised investment strategy review was aimed to better quantify the Group’s risk appetite in relation to liabilities and determine the optimal allocation to different asset classes.
 
Compliance and Prevention of Money Laundering Committee
 
The Group Compliance and the Prevention of Money Laundering Committee is concerned with establishing procedures to ensure compliance with all applicable laws, directives, rules and regulations, and with the prevention, detection and/or resolution of compliance problems. The Company Secretariat and Compliance Unit is responsible for compliance issues for Group Companies and third party clients and reports to the Group Compliance and Prevention of Money Laundering Committee that met seven times during 2009.
 
The Group Prevention of Money Laundering Reporting Officer and Deputy Prevention of Money Laundering Reporting Officers also report to this Committee.
 
The Committee has in place a document entitled ‘Code of Dealing’ addressed to its directors and senior officers as well as the directors and senior officers of its subsidiaries.  The aim behind this Code is to ensure compliance with the Principles and the dealing rules including those contained in Listing Rules 8.45 to 8.55. The Company has in place a system for recording all advance notices received in connection with permitted dealings by directors and senior officers and acknowledgements of such advance notices. Furthermore, the Company reminds all directors and senior officers of their obligation to conform to the Code of Dealing on a yearly basis. A letter to this effect was sent to all Directors and Senior Officers of the Company in January 2010.
 
The Company did not receive any advance written notice from Directors in connection with transactions in Middlesea Insurance plc shares.
 
The review of procedures adopted by the different companies within the Group that was commissioned during the previous year continued to be updated during 2009. This enabled the Group to check that procedures were all in line with the updated MFSA Listing Rules and other financial services legislation. This process included the drawing up of compliance charts and manuals in order to facilitate adherence by the companies within the Middlesea Group to the obligations found in the Listing Rules, Companies Act and other financial services legislation.
 
The Compliance Officer, as approved by the MFSA, reports to the Group Compliance and Prevention of Money Laundering Committee and attends its meetings.
 
The role of the Board of Directors
 
The activities of the Board of Directors are exercised in a manner designed to ensure that the Board effectively sets policies and supervises the operations of the Company.
 
Management provides the directors with a report in connection with each Board Meeting.  This report sets out the Company's management accounts including key performance indicators since the date of the previous Board meeting, includes a management commentary on the results and on relevant events and decisions, and sets out background information on various subjects including any matter requiring the approval of the Board.
 
Apart from setting the strategy and direction of the Company, the Board was actively involved in monitoring progress against budgets and plans and, in approving material or significant transactions.
 
The Board also monitored closely the key risk management policies and processes employed by the Middlesea Group, which are central to the nature of its operations. These policies and processes deal, inter alia, with issues such as:
 
(a)        the reinsurance programme maintained by the Group Companies, ensuring the right balance between risk and reward and that the level of risk retention, particularly in the event of catastrophe, is consistent with the Group’s resources;
 
(b)        the quality and credit worthiness of the reinsurance counterparties dealt with, to ensure the effectiveness of the reinsurance programme;
 
(c)        the assessment of pricing strategies in relation to the level of risk assumed and to market conditions generally;
 
(d)        the measures employed to manage foreign currency risks both in relation to assets and to liabilities;
 
(e)        the measures taken to ensure a balanced mix of investments and application of the Company's policy which focused on security, liquidity and maximisation of returns;
 
(f)         the internal controls and other disciplines maintained, both within Group companies and within agents and other intermediaries, to ensure the proper conduct in good faith of all operations; and
 
(g)        the level of capital resources supporting each business activity, to ensure adequate solvency both from a regulatory and business perspective.
 
The Board has direct access to the external auditors of the Company, who attend Board meetings as and when required including those at which the Company’s financial statements are approved after they have been reviewed by the Group Audit Committee. Compliance with statutory and regulatory requirements and with continuing listing obligations is also ensured. In addition to the input of the Compliance and Prevention of Money Laundering Committee, the Board is advised directly, as appropriate, by its appointed stockbrokers and legal advisors.
 
Directors are entitled to seek independent professional advice at any time on any aspect of their duties and responsibilities, at the Company's expense.
 
During the period under review, the Board maintained its practice that when a potential conflict of interest may or is perceived to arise in respect of a Director in connection with any transaction or other matter, this interest is declared and the individual concerned refrains from taking part in proceedings or decisions relating to the matter. The Board minutes include a record of such declarations and of the action taken by the individual director concerned. As an exception to this rule, in order that the directors may discharge their responsibilities efficiently and effectively, it was agreed that directors appointed by shareholders need not disclose a conflict of interest or potential conflict of interest where this arises due to a conflict or potential conflict between the Company and the shareholder who appointed such director. In such a case, directors are allowed to participate in the discussions provided that they are required to act honestly and in good faith and always in the best interest of the Company.
 
The Policy and Procedures regarding conflicts of interest were discussed with the help of legal consultants. This manual provides a framework and guidelines as to how officials and members of the Company, including Directors, should go about managing conflicts of interest, including identifying, reporting and resolving such conflicts. The manual will be implemented once it is finalised and approved by the Board of Directors.
 
During the 2009 financial year, the Board of Directors of Middlesea Insurance held fourteen meetings. The Board of Directors of the other subsidiary and associated companies held Board meetings as follows:
 
·         Middlesea Valletta Life Assurance Co Ltd held six meetings;
·         Progress Assicurazioni S.p.A. held eleven meetings;
·         International Insurance Management Services Ltd. held five meetings;
·         Growth Investments Ltd. held six meetings;
·         EuroMed Risk Solutions Ltd. held five meetings;
·         Euro Globe Holdings Ltd. held four meetings; and
·         Church Wharf Properties Ltd. held four meetings.
 
Details of attendance by the members at each respective Board and Committee meeting can be viewed at the Company Secretariat and Compliance Unit.
 
Directors of the Board keep themselves abreast of developments in the financial spheres. An evaluation of the Directors’ competence was carried out towards the end of 2007 and beginning of 2008. Another similar evaluation was carried out in the last quarter of 2009 and a report will be submitted to the Board during 2010.
 
Communications with Shareholders
 
Pursuant to the Company's statutory obligations in terms of the Companies Act and the MFSA Listing Rules, the Annual Report and Financial Statements, the declaration of a dividend, the election of directors, the appointment of the auditors, the authorisation of the directors to set the their fees, and other special business, are proposed and approved at the Company’s Annual General Meeting. The Board of Directors is responsible for developing the agenda for the General Meeting and sending it to the shareholders.
 
The Company communicates with its shareholders by publishing its results on a six-monthly basis during the year, by way of the Annual Report and Financial Statements, and through periodical Company announcements to the market in general. In addition existing Listing Rules require the Company to issue a quarterly company announcement for the first and third quarter announcing material events and/or transactions that have taken place during the said quarters of the financial year that would require disclosure under the applicable Listing Rules.
 
The Annual Report, which is designed to serve as an effective means of communication and information on the Company's business, is amplified further in the presentations given to shareholders in the course of the Annual General Meeting.
 
During the year the Company issued several company announcements to keep the shareholders abreast of the corporate developments, particularly with reference to the investment in  Progress Assicurazino S.p.A.  A company announcement issued on the 11 January 2010 stated that preliminary unaudited data for the fourth quarter 2009 of Progress Assicurazioni S.p.A., had indicated a marked deterioration in claims experience during the period. 
 
Further detailed examination of the said unaudited data as at the 31 December 2009 indicated that it would not be possible for Progress Assicurazioni S.p.A. to continue in business in conformity with Italian regulations without the injection of material further capital support. The Board of Directors of Middlesea Insurance p.l.c. concluded that it was not feasible at this time for Middlesea Insurance p.l.c. to provide further capital to Progress Assicurazioni S.p.A. over and above the €45 million that had been injected over the past year. 
 
Progress Assicurazioni S.p.A informed the Italian Insurance Regulators (ISVAP) that it wished to take the necessary measures to cease writing business in Italy, and to wind up the company in accordance with procedures to be agreed with ISVAP in view of the prevailing situation. On the 9 February 2010, ISVAP informed the company that it had appointed Professor Avv. Andrea Gemma as Provisional Administrator (‘Commissario’) of Progress Assicurazioni S.p.A. with immediate effect. 

Middlesea Insurance p.l.c. issued a company Announcement on the 11 February 2010, in line with the Listing Rule requirements, to make the above mentioned information available to the public domain.  

A company announcement was issued on the 31 March 2010 to notify that on the 30 March 2010, ISVAP announced that it had placed Progress Assicurazioni SpA in Compulsory Administrative Liquidation (“liquidazione coatta amministrativa”), and that it had nominated Professor Avv. Andrea Gemma to act as Liquidator (“commisario liquidatore”) for a period of three years.  On the same date ISVAP also appointed Avv Carlo Alessi, Rag. Luigi Andreoli and Avv. Massimo Liguori to the Supervisory Committee (“comitato di sorveglianza”) for the liquidation for the same period. 

Extraordinary General Meeting – changes to the Company’s corporate structure

The Company convened an Extraordinary General Meeting on the 20 November 2009 in which the Shareholders were invited to approve extraordinary resolutions in connection with a new Rights Issue to Shareholders. The said resolutions that were approved included the following:

(1)   to increase the Authorised Share Capital of the Company;

(2)   to change the Allotment Period of equity securities;

(3)   to delete the shareholding limitation;

(4)   to introduce changes in accordance with the Listing Rules; and

(5)   to authorise the Board of Directors to issue the new shares.

The Board of Directors approved the Rights Issue on the 20 November 2009. The said Rights Issue process was completed and the new shares were available for trading on the Malta Stock Exchange on the 23 December 2009.

The shareholding structure of the Company changed as a consequence of the Rights Issue process and consequently the Board of Directors convened an Extraordinary General Meeting on the 16 March 2010. The Shareholders were invited to approve the amended Memorandum and Articles of Association that was sent to all Shareholders. The proposed changes that were approved included the following:

(1)   to ensure that the constitution of the Board would be more proportionate to the respective shareholding quantum in the Company through a smaller and more manageable Board of Directors; 

(2)   to empower the Board to co-opt one additional Director to enable the Board to add to its ranks those specialist skills that might be considered necessary and desirable from time to time; 

(3)   to provide for the separation of the position of the Chairman of the Board from that of the senior executive positions of the Company, in accordance with current practices of good corporate governance; 

(4)   to increase the Authorised Share Capital of the Company; 

(5)   to incorporate certain modifications required by the Shareholders’ Directive that has been transcribed into Chapter 19 issued by the Listing Authority, and other minor amendments requested by the said Authority; and

(6)   to update other provisions thereof; and renumber the Articles as required. 

The Shareholders also appointed/elected the new Board of Directors during the said Extraordinary General Meeting that now comprises the following directors:-
 
·         Joseph F. X. Zahra
·         Roderick E. D. Chalmers
·         Gaston Debono Grech
·         Tonio Depasquale
·         Javier Fernández-Cid Planiol
·         Andrés Jiménez Hérrandon
·         Michael Sparberg
·         Lino Spiteri
·         Paul Testaferrata Moroni Viani
 
The Board of Directors appointed Mr Joseph F.X. Zahra as Chairman of the Board and co-opted Mr Pedro Lòpez Solanes as Executive Director on the Board of Directors in accordance with the Articles of Association of the Company.   
 
Lino Spiteri                                                                                                           Roderick E.D. Chalmers
Director                                                                                                                  Director
  
27 April 2010