Annual Report 2008

Longer term performance rewards: long term incentive plan for non-underwriting directors and other senior management (Performance Share Plan)

The Amlin Performance Share Plan 2004 (PSP) is intended as an aid to the recruitment, retention, motivation and reward of a small number of key senior executives who are not underwriters, including relevant executive directors. Awards have been made each year since 2004 in the form of conditional nil cost share options. No individual may receive an annual award over shares valued on grant at more than 100% of base salary. In March 2008 awards were made to 18 participants (2007: 13) over an aggregate of 498,261 shares (2007: 359,581). The Committee intends to continue making similar discretionary annual awards, although the criteria for inclusion may vary.

The extent to which awards vest depends on a sliding scale of the Group’s average annual post tax return on net tangible assets (Return on NTA) over the ensuing five years. The Committee believes that such a Return on NTA measure most appropriately aligns participants’ and shareholders’ interests. This absolute performance measure balances the relative measures that apply to the Group’s Long Term Incentive Plan. The average return is calculated after five years, with no re-testing. The targets and scales may vary with each grant at the discretion of the Committee but the scale for all of the grants to date has been as follows:

Once the vesting level is determined after five years, and provided the relevant participant is still employed by the Group, an award can be exercised within the following six months. In certain restricted or exceptional circumstances, including redundancy and early retirement with the agreement of the Committee, an early leaver may be able to exercise early on a pro rata, but still performance condition related, basis. The Committee can make adjustments to take account of variations in capital and similar matters. In the event of the Company being subject to a takeover or similar event before the normal vesting date, vesting will take place early to the extent that the Committee is satisfied that the performance condition has been satisfied up to that date, with the proportion of the award which vests also depending on the time that has elapsed since the award was made.

The adoption of the PSP in 2004 pre-dated the establishment of any Amlin overseas offices and did not authorise amendments to the plan, or the adoption of similar parallel plans, to take account of overseas tax regimes or regulatory requirements. A resolution is being proposed to the 2009 AGM, details of which are contained in the separate circular to shareholders containing the Notice of AGM, to remedy this omission.

Longer term performance rewards: long term incentive plan for underwriting directors and other senior underwriters (the Capital Builder Plans)

In 2001 the Company first introduced a long term incentive plan for underwriters, the Amlin Capital Builder Long Term Incentive Plan 2001 (the 2001 Plan) to reward senior underwriters if they exceeded long term target underwriting returns. This plan operated over a five year performance period from 2001 to 2005 inclusive, with the final payments having been made in mid-2008 (as under ‘Executive directors’ Capital Builder Plan participations’ below. Total payments under this Plan (made over three years between 2006 and 2008) were £22.3 million. The Committee decided in 2005 that the 2001 Plan had acted as a significant retention and recruitment tool for those underwriters who were likely to be most significant in determining the Group’s underwriting profitability and development over the performance period, but that some aspects should be amended. Accordingly in 2006 shareholders agreed to replace the 2001 Plan with the Amlin Capital Builder Plan 2006 (the 2006 Plan). Awards have been made under the 2006 Plan to around 50 participants in 2006, 2007 and 2008 and are intended to be made on a similar basis in 2009.

The basis of the Capital Builder Plans is that participants benefit to the extent that, in the class or classes of business that they write or influence, demanding underwriting return targets, consistent with the Company achieving an overall average return on equity of at least 15% per annum over the insurance cycle, are exceeded over a five year performance period. Under the 2001 Plan this was targeted by participants sharing in up to 6% of the relevant underwriting profit (gross premiums less net claims and reinsurance costs) which is in excess of the relevant target. Up to around a further 4% of such excess profits were allocated at a divisional or whole syndicate level to the heads of each underwriting division. Payments under the Plans may be made at the Company’s discretion in either cash or shares, but all payments under the 2001 Plan were made in cash.

For the 2006 Plan:

• The excess returns are defined as those resulting from the achievement of underwriting loss ratios (i.e. the level of claims, net of reinsurance recoveries, as a percentage of premiums) below (i.e. better than) demanding target claims ratios set for each class.
• The maximum permitted excess profit percentage, although usually lower, is 10%. Variations in each business class’s target claims ratio and excess profit percentage depend on the Committee’s assessment of the risk, historic experience and long term market prospects of the class.
• There are rolling five year performance periods, starting with commensurably lower rewards payable for each performance period than under the original 2001 Plan which only had one nonoverlapping performance period.
• The rewards have a cap of £1 million on the total amount that may be paid to a participant in respect of each rolling five year performance period.
• Payments will be made over the two years after the end of each performance period. The first payment (payable for the 2006 awards in 2011) will be up to 70% of each pool allocated, with the balance of each award paid a year later.

Longer term performance rewards: the Amlin Long Term Incentive Plan 2006 (the LTIP)

The LTIP was approved by shareholders at the 2006 AGM to replace grants of executive share options. Awards were made in March 2008 to 46 participants (2007: 48), over a total of 1,026,289 shares (2007: 590,630). Its primary performance condition is a relative Total Shareholder Return (TSR) measure, providing a balance to the absolute performance measures used in the Capital Builder Plans for underwriters and the PSP for non-underwriters. Both senior underwriters and senior non-underwriters, including executive directors, participate in the LTIP. Following the acquisition of AFU in November 2008, the Committee, as permitted by the original shareholder approval, adopted a French schedule to the LTIP and on 1 December 2008 made awards over a total of 54,608 shares to the new subsidiary’s three most senior executives in a more tax effective manner, for both the Company and the participants, than would otherwise have been the case.

Awards are made subject to performance conditions set by the Committee at each award.

For the awards made in 2007 and 2008 (including under the French schedule), the extent to which awards vest will depend on the Company’s TSR over the ensuing three years relative to an unweighted index of TSRs for a comparator group of Lloyd’s insurers, on the following scale:

The constituents of the index for the 2008 awards were: Beazley Group, BRIT Insurance, Catlin Group, Chaucer Holdings, Hiscox and Lancashire Holdings. Irrespective of relative TSR, no award will vest unless the Committee is satisfied that the Company’s financial performance over the performance period has been satisfactory. The performance period will always be a single three year period with no provision for re-testing the performance conditions.

As with the PSP, awards are usually made in the form of nil cost share options and may be made each year at the discretion of the Committee, based on seniority and with no individual receiving awards over shares having a market value on grant in excess of 100% of annual base salary (or, exceptionally, 200% for a senior new recruit). Once the vesting level is determined after three years, and provided the relevant participant is still employed by the Group, an award is capable of exercise within the following six months. The LTIP contains broadly similar provisions to the PSP, as referred to above, on such matters as early leavers and variations in capital. Minor variations in some of these provisions, purely to comply with specific local requirements, apply to awards made under the French schedule.

Longer term performance rewards: executive share options (Executive Option Schemes)

Executive share option were granted at the discretion of the Committee under the Approved and Unapproved Amlin Executive Share Option Schemes each year from 1997 to 2006 to executive directors and other staff (whether underwriters or not) above a certain level of seniority. Grants were subject to performance conditions which are summarised in respect of directors’ outstanding options in the notes to the table ‘Directors’ PSP, LTIP and share options held’ later in this report. Grants under the Executive Option Schemes were replaced from 2007 with LTIP awards and no further grants can be made.

All-employee share plans

The Company operates two shareholder and HM Revenue and Customs approved Sharesave option plans, one adopted in 1998 and one in 2008, each with a ten year life for new grants. Several offers were made under the 1998 plan between 1999 and 2007. The first offer under the 2008 plan was made in September 2008. Sharesave offers are open to all Group employees, including executive directors, who have been employed for more than a specified number of months at each grant. Exercises are not subject to any performance condition. The Committee considers that the plans have been successful in encouraging staff at all levels to build up interests, and subsequently shareholdings, in the Company at an acceptable accounting and administrative cost to the Company.

In 2006 shareholders approved an HM Revenue and Customs approved all employee Share Incentive Plan (SIP) allowing offers of Free Shares at no cost to employees. In 2006 the Committee adopted a policy of making an award of Free Shares each year, on an equal basis to all executive directors and staff (subject to a pro rata adjustment for part time employees and to an employment qualification period of approximately nine months), subject to the annual results. The quantum, between nil and the annual maximum level of £3,000 worth of shares per employee, is decided in the light of the ROE achieved in the previous year. The Committee made offers in both March 2007 and 2008 at the maximum level of £3,000. 2008 take-up was 97% of eligible employees (2007: 97%). With a materially lower ROE in 2008, the Committee has decided to make an offer of £1,000 worth of Free Shares in March 2009.

The SIP also allows offers of Partnership Shares whereby employees may buy shares on a tax deductable basis. A special one-off offer of just £250 worth of Partnership Shares was made in December 2007, closing in early 2008, in order to enable staff to reinvest the B Share dividend paid out on their SIP Free Shares in January 2008.

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