Directors’ remuneration report
Purpose and overview
The purpose of the Remuneration Committee is to ensure that the levels and structures of the remuneration of executive directors, the Chairman and senior executives are appropriate to attract, retain and incentivise the high calibre talent that the Company and shareholders require in a demanding and complex business, and to reward them fairly. The Committee aims to optimise the alignment of interests between executive management and shareholders. It is also responsible for remuneration policies in the Group generally, in so far as they affect the framework and policy for senior executive remuneration.
In 2005 the Committee conducted a thorough review of the Company’s senior executive remuneration arrangements to ensure that they continued to support and advance the Group’s strategic objectives. As reported last year, the conclusion was that the rationale underpinning the Company’s remuneration arrangements was soundly based but that certain incentive scheme arrangements, particularly long term incentives, required refinement. Consequently three new incentive plans were proposed and approved by shareholders at the 2006 Annual General Meeting. The period since then has been one of implementation.
As illustrated below, a significant proportion of executive directors’ remuneration in 2006, a year of continuing success for the Company, was performance related. This overall picture, given similar success going forward, is unlikely to alter as a result of the changes to future long term incentive schemes currently being implemented.
Split of Executive Directors’ remuneration in 2006
Further details of each element of the above components of 2006 remuneration, and the basis of calculation of the performance related elements, are set out in the ‘Remuneration policies’ and later section of this report.
Status and shareholder approval of report
This report, which is to be proposed to shareholders for approval at the Company’s Annual General Meeting on 24 May 2007, has been prepared in accordance with the Directors’ Remuneration Report Regulations 2002 and the Listing Rules of the Financial Services Authority. As required by those regulations, the sections entitled ‘Remuneration received’, ‘Executive directors’ pensions’, ‘Executive directors’ Performance Share Plan participations’, ‘Executive directors’ Capital Builder Plan participations’ and ‘Executive directors’ share options’ have been audited by Deloitte & Touche LLP. The remainder of this report is unaudited.
Remuneration committee membership and meeting attendance
The members of the Committee throughout 2006 and in 2007 to date, except as stated otherwise, are set out below. The Committee met five times during the year (2005: nine). Attendance by Committee members, all of whom are (or were during their service) independent non-executive directors, was as follows:
Remuneration Committee membership and attendance 2006
| Number of meetings attended | ||
 |
||
|
R W Mylvaganam (Chairman throughout)
|
5 | |
|
N J C Buchanan
|
5 | |
|
Lord Stewartby (until 25 May 2006 – maximum possible meetings 4)
|
3 | |
|
Sir Mark Wrightson Bt (from 25 May 2006 – maximum possible meetings 1)
|
1 | |
|
||
|
Average % attendance
|
93% | |
|
||
Terms of reference and advisers
The Committee’s terms of reference, which are published on the Company’s website and available on request from the Secretary, may be summarised as being to determine the total individual remuneration packages of each executive director of the Company and of the Chairman, the Company Secretary and certain other senior employees (in each case including exit terms), and to recommend to the Board the framework and broad policies of the Group in relation to senior executive remuneration generally. The Committee determines the targets for all performance-related pay schemes operated by the Group and exercises the Board’s powers in relation to all the Company’s share schemes. It acts in accordance with the Principles of Good Governance and Code of Best Practice and its terms of reference reflect the Combined Code on Corporate Governance.
The Committee was advised during the year by New Bridge Street Consultants LLP (NBSC), also utilising an independent review conducted in 2005 by the remuneration consultancy of Daeloitte & Touche LLP (Deloitte). NBSC advises the Committee on the structuring and utilisation of the Group’s performance related incentives and on remuneration policy generally. NBSC also advises executive management from time to time on remuneration matters which may not be within the direct purview of the Committee and advises the Board as a whole on matters relating to the remuneration and terms of appointment of the non-executive directors.
A statement regarding the Company’s other relationships with NBSC and Deloitte is published on the Company’s website and available on request from the Secretary. Deloitte are the Company’s and the Group’s auditors and also provide certain other non-audit services provided to the Group, the details of which in 2006 are included in note 11 to the Accounts. Occasional legal advice on remuneration matters is also given to the Committee by Dechert LLP.
The Committee is assisted by the Group’s head of human resources and by advice and recommendations from the Chief Executive, who is usually invited to attend its meetings other than when items specific to him are being considered. The Chairman of the Company is also invited to attend meetings for most agenda items. The Company Secretary acts as secretary to the Committee and advises it on governance and related matters.
Structure of senior executive remuneration
Implementation of remuneration strategy review conclusions
As mentioned above, three new incentive plans were approved at the 2006 Annual General Meeting (2006 AGM):
- a new long term incentive plan for both underwriting and non-underwriting directors and senior executives, which will replace grants of executive share options from 2007 onwards;
- a long term incentive plan for underwriters, the Capital Builder Plan 2006, to replace the previous Capital Builder Plan, which came to the end of its five year performance period at the end of 2005; and
- an all-employee Share Incentive Plan as an additional means of encouraging staff at all levels to build up an interest in the Company’s equity, under which the first awards are to be made in early 2007.
Fuller details of these Plans are set out in the relevant sections of this report.
The structure of the Group’s senior remuneration, before and after these changes to incentive plans, is illustrated in the charts at the top of this page.
Remuneration policies
Overall remuneration levels and factors specific to the non-life insurance underwriting sector
In determining individuals’ remuneration, the Group has regard to their performance in the role, job evaluation of the role and remuneration statistics for the non-life insurance sector in which the Group operates and, where applicable for certain roles, wider remuneration statistics. Across all categories of staff the Group’s policy is to have regard to market median salaries for the role, with the potential for top quartile remuneration for top quartile performance. This policy aims to encourage and reward superior rather than merely average performance. The annual salary review date is 1 April, but interim adjustments are sometimes made in the light of market or other factors.
Certain aspects of remuneration are influenced by the Lloyd’s sector in which the Group’s UK employees operate. Lloyd’s underwriting businesses tend to relate a significant proportion of the potential rewards of underwriters to the absolute profitability of the relevant underwriting unit. Typically such profit commission schemes operate on an uncapped basis in money terms although they are capped as a percentage of the relevant profit pool which in turn is capped by the overall regulatory capacity and/or capital of the syndicate and the Group. Amlin follows such Lloyd’s market practice for staff for whom such market influenced remuneration structures are appropriate as not to do so would put it at a competitive disadvantage in competing for staff. Similar remuneration structures and policies have been adopted for staff in Amlin Bermuda Ltd, taking account of local conditions and the ex patriot status of its key underwriters who moved from London.
Structure of directors’ and employees’ remuneration, and alignment of interests with shareholders
The remuneration of the executive directors consists of three principal elements: (1) base salary, benefits and pension contributions; (2) shorter term performance rewards; and (3) longer term performance rewards. The elements of performance rewards for senior executives differ between underwriters and non-underwriters, as illustrated in the above charts. Details of directors’ individual participations in each type of remuneration are set out later in this report.
In 2006 an estimated average of around 71% (2005: 78%) of executive directors’ remuneration was performance related (either shorter or longer term). These percentages will vary from year to year according to performance. The Committee believes that the balance between fixed and performance rewards is appropriate, noting that the underwriters’ performance rewards in 2006 remained at high levels owing to the continuing favourable underwriting performance, both in absolute and relative terms. The same remuneration structures are operated for senior executives below main Board level but usually with lower, although still significant, proportions of total remuneration being performance related.
The analysis of performance related remuneration for 2006 includes the theoretical values of share options and the non-underwriters’ Performance Share Plan participations granted during the year, on the basis set out in the section entitled ‘Valuation of options and Performance Share Plan awards granted in 2006’ later in this report. It does not include the actual cash profits, or the value of shares retained, as a result of the exercises of options granted in earlier periods, or the increases in unrealised share option profits during the year. As a result of the strong share price performance in recent years, these profits, set out in the section entitled ‘Executive directors’ share options’ below, have often been substantial.
In connection with the introduction of long term incentive schemes, an objective was set that executive directors would build up shareholdings in the Company to the value of at least 125% of their base salaries. From the shareholdings set out in the ‘Directors’ report’ and the information in this report, it can be seen that by 31 December 2006 this target was comfortably exceeded in all cases, mostly by a substantial margin. The combination of these shareholdings and the structure of performance incentives is ensuring that the interests of management and shareholders in the success of the Company are closely aligned.
Non performance-related rewards: benefits
Non performance-related benefits to which executive directors and other employees are generally entitled are private health insurance, cover for death in service and permanent disability and a choice of other benefits, such as subsidised gym membership, private dental costs, etc. Senior staff, including executive directors, also receive a car allowance.
Non performance-related rewards: employer pension contributions, including changes made in 2006
The Company pays a percentage of base salary into either a Group occupational or personal (usually stakeholder) pension plan. Executive directors serving during the year participate in the relevant group pension plans on the same basis as other senior employees who are not directors. Pensionable salary is base salary only and dependants’ pensions are provided in addition to death in service cover. The Group has both defined contribution (DC) and defined benefit (DB) schemes. As at the year end only 83 out of 622 staff, including two of the four executive directors, were accruing an element of DB pension.
In respect of DC pensions, the Group contributes a percentage of base salary depending on seniority, age and the percentage of salary (if any) that the employee chooses to contribute. The maximum total DC employer contributions for an executive director in 2006 was 16.5% of base salary. In respect of those with defined benefits, the Group contributes at rates which vary according to actuarial advice in order to deliver the promised levels of pension.
In the case of those higher paid employees with DC pensions, including directors, in respect of whom the Group was, until April 2006, unable to contribute a significant proportion of the full operative percentages of base salary into the relevant group pension scheme as a result of the HM Revenue & Customs earnings cap, the Group made extra contributions through a Funded Unapproved Retirement Benefit Scheme set up for each such employee. In cases of less significant constriction, a cash allowance was paid in lieu. As a result of the additional flexibility regarding annual pension contributions under the new pension regime from April 2006, such special employer contribution arrangements ceased from that date.
The Group’s DB schemes have been closed to new entrants since 1998 and, to limit further the uncertainty of future pension costs, the Company implemented benefit changes in April 2006. These allow the remaining active DB members to continue accruing additional years’ service under the schemes, but such accrual will generally be based on March 2006 pensionable salaries, as will DB pensions based on service to that date (in the latter case uprated for inflation, with a 5% cap), with salary increases from that date being pensioned only through the Company’s stakeholder DC arrangements. Exceptionally the pensionable salaries of members restricted in March 2006 by the HM Revenue & Customs earnings cap will continue to grow, calculated as if that cap has continued on the same increasing basis, until such time as the pensionable salary reaches the actual March 2006 salary. The future accrual rate was also rationalised from April 2006 (at 45th’s in the case of directors and others at the most senior levels). Those affected by these changes are receiving partial compensation through the Group passing on the first three years’ estimated saving in on-going DB scheme costs in higher employer contributions to their DC stakeholder pensions over that period. The DB employee contribution rate of 5% of the relevant salary is unchanged. From April 2006 the Group also raised the normal pension age from 60 to 65, with greater flexibility being introduced in certain respects.
Overall there were no additional DC pension costs to the Group from April 2006 other than those resulting from the Group starting to make DC contributions as part of the pension provision for members of the DB schemes as referred to above. By no later than when the three year compensation period for DB members is completed, there is likely to be an on-going saving in the Group’s overall pension costs.
Shorter term performance rewards: annual bonus scheme for non-underwriting directors and employees (Group Bonus Scheme)
The Group’s shorter term performance incentives consist, in the case of those executive directors and other employees who are not directly involved in underwriting or claims settlement, of a cash Group Bonus Scheme. Senior participants are rewarded and incentivised under the scheme against a mixture of business performance, measured by reference to the Group’s return on equity (ROE) compared with target returns set by the Committee each year, and the individual’s performance against agreed stretching personal objectives. The mix of business and individual bonus elements varies by seniority, with 70% of the potential target reward at the most senior level, including participating executive directors, being rewarded on Group business performance and 30% on personal performance. The total on-target and maximum bonus levels also increase with seniority, with 50% of base salary being payable to executive directors for on-target performance and a 100% maximum payment.
Shorter term performance rewards: profit share for underwriting directors and employees (Profit Commission (PC) Scheme)
Shorter term incentives for underwriters and certain other underwriting division staff (whether or not they are executive directors of Amlin plc) consist principally of a cash profit share relating to underwriting profits in respect of each underwriting year. Whilst the precise structure and payment basis of the PC Scheme may vary from year to year, the underlying policy is to reward those involved in underwriting, on an underwriting year basis, according to the underwriting performance of both their own division and the wider Group.
The scheme divides rewards between those related to the performance of the relevant participant’s division and those related to wider Syndicate 2001 underwriting performance. Rewards are also divided between those which are purely calculated as a percentage of underwriting profit and those which are also related to personal underwriting performance relative to external peers and/or other objectives. The maximum percentage of each division’s underwriting profit which may be paid out under the scheme in respect of each underwriting year is 4.5% unless the division has achieved a superior result for its Lloyd’s sector of business in which case a slightly higher percentage may apply. Up to 3% of Amlin Bermuda Ltd’s underwriting profit is also made available to a parallel scheme for those contributing to that subsidiary’s results.
Rewards crystallise at the end of 36 months from the start of an underwriting year but, at the Committee’s discretion, payments on account of up to 30% of the forecast reward may be made a year earlier. Such early payment was agreed by the Committee in each of the last three years. As payments are based on underwriting years, rather than reported IFRS figures, and can be paid at variable times after each year of account starts, they do not necessarily reflect the profitability of the Group in the year in which they are paid or reported.
The longer term development of the PC Scheme was considered as part of the 2005 remuneration review and, having considered possible specific changes in 2006, the Committee has decided to operate the scheme on a broadly unchanged basis for 2007.
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) was introduced 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. The extent to which awards vest depends on the Company’s long term financial performance over the ensuing five years. Awards have been in the form of conditional nil cost share options (expected to be satisfied out of shares purchased in the market by the Group’s Employee Share Ownership Trust (ESOT)), so that the eventual benefit will depend also on share price appreciation over the five years. Awards may be made each year at the discretion of the Committee, with no individual receiving awards over shares having a market value on grant in excess of 100% of annual base salary. At each of the three annual PSP awards to date, which were made in the form of nil cost options, the Committee’s policy was that only the Chief Executive was made an award under the PSP close to 100% of salary, with other participants receiving lesser awards. The third set of grants were made in March 2006 to 15 participants (2005: 19) over an aggregate of 385,120 shares (2005: 558,528). The Committee intends to continue making similar annual awards, although the criteria for inclusion may vary.
The performance condition of the PSP is based on the average annual post tax return on the Group’s ROE over the ensuing five years. The Committee determined that such an ROE measure would most closely align participants’ and shareholders’ interests and would be an absolute, rather than relative, performance measure in common with the Capital Builder Plan but in contrast to executive share options. The average ROE is calculated after five years, with no re-testing, and determines the proportion of awards that vest on a sliding scale. The targets and scales may vary with each grant at the discretion of the Committee. The scale for all of the grants to date, and for the 2007 grants planned to be made soon after publication of the 2006 results, is as follows:
|
Average ROE per annum
|
Percentage of shares awarded that will vest | |
|
||
|
Less than 10%
|
Nil | |
|
10%
|
20% | |
|
Between 10% and 15%
|
Straight line basis between 20% and 80% | |
|
15%
|
80% | |
|
Between 15% and 20%
|
Straight line basis between 80% and 100% | |
|
20% or over
|
100% | |
|
||
Once the vesting level is determined after five years, and provided the relevant participant is still employed by the Group, an award is normally capable of exercise within the following six months. There is provision for the Committee to 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.
Longer term performance rewards: long term incentive plan for underwriting directors and other senior underwriters (the original and new Capital Builder Plans)
The original Amlin Capital Builder Long Term Incentive Plan 2001 (the Plan) rewards senior underwriters if they exceed long term target underwriting returns. Its basis is that participants benefit to the extent that, in their particular class or classes of business, target returns on capital are exceeded over the specified long term performance period (usually 2001 to 2005). Participants share in up to 6% of the relevant underwriting profit (gross premiums less net claims and reinsurance costs) which are in excess of the relevant target return over the duration of the performance period. Up to around a further 4% of such excess profits may be allocated at a divisional or whole syndicate level to the heads of each underwriting division. Rewards are paid in three annual tranches following the end of the performance period (i.e in 2006, 2007 and 2008) but with payments only being made so long as the participant remains in service. Payments may be made in either cash or shares, at the Company’s discretion, but the 2006 payments were made in cash and there is no present intention to settle the remaining payments other than in cash.
The benchmarks for each relevant class of business, set for the measurement period on an aggregated basis and after allowing for estimated expenses and syndicate investment income but before tax, were set on the basis that they corresponded to an estimated overall benchmark return on allocated capital of at least 15% per annum over a full insurance cycle.
The Committee believes that the Plan acted as a significant reward, 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 and therefore decided that, with refinements, it should continue.
Thus at the 2006 AGM shareholders approved the Capital Builder Plan 2006 (New CB Plan), replacing the original Plan for performance periods from 2006 onwards. The New CB Plan is based on the same principles and objectives as the original one but with detailed differences, including:
- Rather than operating over a single five year performance period (i.e. 2001 to 2005), the New CB Plan has rolling five year performance periods, i.e. for 2006 to 2010, 2007 to 2011 etc. The potential reward for each award, as they are made annually rather than five yearly, is commensurably lower than under the previous scheme but, over time, the overall rewards payable under the New CB Plan are designed to be similar to its predecessor’s.
- The number of participants has been extended so that the rewards earned will be shared amongst a wider group of underwriters, not only leading class underwriters but with a number of underwriters below that level. Whereas there were originally 25 participants in the old Plan, there are 54 participants for the awards made in 2006.
- 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 demanding target claims ratios set for each class, rather than being calculated on a return on capital basis. An excess profit percentage is set for each class of business (i.e. the percentage which is to be paid under the Plan of any excess in profit earned as a result of the actual claims ratio of such class being lower (better) than its target claims ratio). The maximum permitted excess profit percentage, although it is usually lower, is 10%. Variations in each business class’s target claims ratio and excess profit percentage depend on the the Committee’s assessment of the risk, historic experience and long term market prospects of the class. The Committee considers that the new basis is more transparent to participants and, taking account of the Group’s Dynamic Financial Analysis tool, targets have been able to be set at broadly equivalent overall levels to those previously set in relation to return on capital. As previously, the Committee’s objective is to incentivise underwriters to contribute to the Company’s objective of achieving an overall average return on equity of at least 15% per annum over the insurance cycle.
- Whereas rewards under the original Plan are uncapped, the New CB Plan has 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.
- At the end of each five year performance period, payments will be made in the following two, rather than three, years. The first payment will be up to 70% of each pool allocated, with the balance paid a year later.
Longer term performance rewards: executive share options (Option Schemes)
Executive share options were granted at the discretion of the Committee under the Approved and Unapproved Amlin Executive Share Option Schemes (Amlin Schemes) each year from 1997 to 2006 to executive directors and other employees (whether underwriters or not) above a certain level of seniority. Grants were made on 21 March 2006 over a total of 2,290,481 new shares at an exercise price of 293p per share (2005: 2,598,264 new shares at 161.77p, as subsequently adjusted for the 2005 rights issue). No further grants will be made.
All grants were subject to performance conditions set by the Committee. From 1999 onwards the primary condition has been related to Total Shareholder Return (TSR) with a secondary condition that the Company has returned a satisfactory overall financial performance. Since the grants made in 2004, to the extent that an individual’s annual grant was over shares valued at over 50% of salary it may only be exercised in full if the Company has been an upper quartile performer over a three year performance period against the group of comparable companies. Options over shares valued at up to 50% of salary are exercisable on above median performance. Since the grants made in 2005 there has been no allowance for any re-testing. The fulfilment of all TSR performance conditions is independently calculated by NBSC, and confirmed by the Committee, at the end of each relevant measurement period. Further details of the status of performance conditions are set out in ‘Executive directors’ share options’ below.
Longer term performance rewards: the Amlin Long Term Incentive Plan 2006 (the New LTIP)
The New LTIP was approved by shareholders at the 2006 AGM to replace grants of executive share options. In common with the Option Schemes its primary performance condition will be a relative 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, will participate in the New LTIP, although participation will be restricted to somewhat more senior levels than used to apply to the Option Schemes. The first grants under the New LTIP are planned to be made soon after the announcement of the 2006 results in March 2007.
Awards will be subject to performance conditions set by the Committee each year. For the awards to be made in 2007, 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, as follows:
|
The Company’s TSR compared with the comparator group index
|
Vesting percentage | |
|
||
|
Below index
|
Nil | |
|
Equal to the index
|
25% | |
|
Between index and index plus 25%
|
25% to 100% on a straight line basis | |
|
Index plus 25%
|
100% | |
|
||
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 will be in the form of nil cost share options and are expected to be satisfied out of shares purchased in the market by the ESOT. Awards 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 normally capable of exercise within the following six months. The New LTIP contains similar provisions on such matters as variations in capital as apply to the PSP referred to above.
All-employee share plans
A Sharesave option scheme has operated since 1998. This is a UK Revenue and Customs approved scheme and five offers and grants of options have been made to date, in each case entirely over new shares. No grant was made in 2006 but an offer is intended to be made to staff following the results in March 2007. This scheme is open to all Group employees, including executive directors, who have been employed for more than a number of months which is specified at each grant. Exercises are not subject to any performance condition. The Board considers that the Sharesave scheme has proved successful in providing a tax effective mechanism for directors and staff to build up interests, and subsequently shareholdings, in the Company.
At the 2006 AGM shareholders approved a second all-employee plan, the Amlin Share Incentive Plan 2006 (SIP). This was recommended as an additional means of assisting employees to build up shareholdings in the Company, particularly as some of the staff who have previously been granted executive share options each year will not be participating in the replacement New LTIP. The SIP rules allow offers of Partnership Shares, whereby employees may buy shares, and Matching Shares, whereby the Company can allocate shares proportionately to Partnership Shares, but at present the Committee only intends to offer Free Shares, on an equal basis to all executive directors and staff (subject to a pro rata adjustment for part time employees and to a qualification period of approximiately nine months). The Committee intends to consider making awards of SIP Free Shares after the announcement of the results each year, with the quantum, between nil and the annual maximum level of £3,000 worth of shares per employee, being decided in the light of the ROE achieved in the previous year. The first awards are expected to be made shortly after the 2006 results are announced.
Service agreements and their termination
The Group does not offer service agreements with notice periods in excess of six months, except in the case of executive directors of the Company and the most senior level of management when up to a 12 month notice period may apply. All of the current executive directors of the Company have contracts requiring 12 months’ notice of termination on either side. The Company is mindful of the need to balance the contractual advantages to the Group in some circumstances of longer periods of notice against the potential cost arising from such contracts in the event of termination of employment at the Group’s initiative.
In cases of early termination by the Group, the Company seeks to observe the guidance on best practice issued in December 2002 by the Association of British Insurers and the National Association of Pension Funds. In such circumstances, the Group seeks to reduce, where practicable, the compensation payable by taking account of the duty of the employee to mitigate his or her loss. In particular, consideration is given to structuring a proportion of termination payments on a phased payment basis pending the executive finding new employment. The need to take a robust view in settling cases involving poor performance is also recognised.
Details of each executive director’s service contract applicable during the year are set out in the section entitled ‘Executive directors’ service contracts’ below.
Outside appointments
The Company’s policy is to allow executive directors and other appropriate senior employees to accept a maximum of one substantive non-Amlin related outside non-executive appointment, subject to permission being obtained in each case and to acceptable procedures for managing any potential conflicts of interest, although there are no such appointments at present. Suitable outside appointments, including limited term secondments, relating to Amlin’s business, such as to Lloyd’s bodies, are encouraged on the basis that such appointments are often directly in the Company’s interest. Fees from outside appointments are generally payable to the Group rather than retained by the employee concerned.
Directors’ remuneration received
| Executive directors’ salaries | Non-Executive directors’ fees | Annual bonuses and/or profit commission | Benefits in kind/ allowances | Total year to 31 Dec 2006 | Total year to 31 Dec 2005 | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
|
||||||
N J C Buchanan
|
– | 59.8 | – | – | 59.8 | 45.7 |
|
B D Carpenter
|
270.0 | – | 989.7 | 14.4 | 1,274.1 | 1,313.4 |
|
R H Davey*
|
– | 45.0 | – | – | 45.0 | 1.8 |
|
R A Hextall
|
296.3 | – | 300.0 | 17.8 | 614.1 | 570.2 |
|
A W Holt
|
312.0 | – | 826.1 | 14.5 | 1,152.6 | 1,275.2 |
|
K T Kemp
|
– | 45.0 | – | – | 45.0 | 38.0 |
|
R S Joslin
|
– | 45.0 | – | – | 45.0 | 38.0 |
|
R W Mylvaganam
|
– | 70.4 | – | – | 70.4 | 67.8 |
|
C E L Philipps
|
466.5 | – | 472.5 | 14.9 | 953.9 | 852.5 |
|
Lord Stewartby**
|
– | 26.2 | – | – | 26.2 | 59.6 |
|
R J Taylor
|
– | 167.5 | – | – | 167.5 | 142.5 |
|
Sir Mark Wrightson Bt***
|
– | 37.0 | – | – | 37.0 | n/a |
|
||||||
| 1,344.8 | 495.9 | 2,588.3 | 61.6 | 4,490.6 | 4,404.7 | |
|
||||||
* Joined the Board on 15 Dec 2005 ** Left the Board on 25 May 2006 *** Joined the Board on 15 Mar 2006
Executive directors’ service contracts
The dates of the current service or employment contracts with the Company (and/or a wholly owned subsidiary) of each current executive director, all of whom served throughout the year, are as follows:
| Date of current service or employment contract | ||||||
|
||||||
B D Carpenter |
17 February 1997 | |||||
R A Hextall |
26 November 1999 | |||||
A W Holt |
11 December 2001 | |||||
C E L Philipps |
20 February 1997 | |||||
|
||||||
In each case salaries have been periodically increased since the original contract date. All of the executive directors’ contracts are on a full time basis, provide for 12 months’ notice of termination on either side and automatically terminate on the director’s contractual retirement date. In the cases of Messrs Hextall, Holt and Philipps, the latter was agreed in 2006 to be amended to each of their sixty-fifth birthdays (previously sixtieth birthdays) in line with a choice given to employees generally. Mr Carpenter has to date retained his sixtieth birthday retirement date. There are no special provisions for compensation on termination of any director’s contract other than that the Company has the right to pay salary (and in the case of Mr Holt also an amount equal to other contractual benefits) in lieu of any required period of notice.
Executive directors’ service or employment contracts are available for inspection at the Company’s registered office.
Remuneration received
The remuneration received in respect of the year ended 31 December 2006 by each of the directors in respect of their periods of service as directors, excluding pension contributions and long term incentive plan payments, is shown in the above table.
The amounts paid to non-executive directors in 2005 and 2006 include fees paid on behalf of the Company’s subsidiary, Amlin Underwriting Limited. All of the independent non-executive directors became non-executive directors of that subsidiary, if they were not already, during 2006.
The 2006 salaries of each executive director shown above are between 14.0% and 21.6% higher than in 2005. These increases partly reflect previously reported special mid-year adjustments for Messrs Hextall and Philipps in 2005, as a result of their salaries having unjustifiably fallen well behind relevant market comparators, and partly the results of the annual salary review as at April 2006. By the latter review date, the highly competitive nature of the industry, including the development of the Bermudian market, had seen even greater pressure build on the packages being offered to senior Lloyd’s directors and underwriters and the Committee concluded that the strong performance of the Company, and the desire to ensure that the highly successful management team remains in place, required a further realignment of salary levels. The personal performance of the individuals and the performance of the Company, as well as market levels, were significant contributing factors in the reviews. As a result of the pension changes described above, the salary increases in April 2006 do not generally affect the ultimate DB pension entitlements of the two directors in the DB scheme.
The annual bonuses and/or profit commission amounts are those paid or payable in respect of the year. Messrs Hextall and Philipps received performance bonuses under the Group Bonus Scheme (described above). For 2006 the scheme’s business performance target ROE was 19% (2005: 16%), the ‘stretch’ target was 24% (2005: 19%) and the level at which the maximum business performance related payment was payable was 30% (2005: 24%). The increased targets in 2006 reflected the higher expectations that the Committee had of market conditions at the start of 2006 than a year previously. The 2006 ROE as calculated under the rules of the scheme, and reflected in Messrs Hextall’s and Philipps’s payments above, was 34%, resulting in maximum business performance payments (2005: 29.5%, also above that year’s maximum payment level).
Mr Carpenter’s and Mr Holt’s bonuses and/or profit commission (PC) were made up as follows:
| B D Carpenter £000 |
A W Holt £000 |
|||||
|
||||||
| First instalment of | ||||||
|---|---|---|---|---|---|---|
|
2005 year of account PC:
|
124.5 | 58.2 | ||||
|
Second instalment of
|
||||||
|
2004 year of account PC:
|
665.7 | 455.6 | ||||
|
Performance uplift and adjustment
|
||||||
|
for 2003 year of account PC:
|
198.5 | 203.1 | ||||
|
2006 Amlin Bermuda award:
|
– | 109.2 | ||||
|
Long service award payable to
|
||||||
|
the value of:
|
1.0 | – | ||||
|
Totals
|
989.7 | 826.1 | ||||
|
||||||
In both cases their PC payments related to both their own underwriting divisions and the managed syndicate as a whole. The first instalment for 2005, payable in March 2007, is 30% of the estimated final payment for the year of account. The second instalment for 2004 is the balance other than any performance uplift, after the first instalment paid in the previous year, of the total PC for that year of account, also payable in March 2007. The performance uplift in respect of 2003 was paid during 2006 and is an additional amount to that reported in the 2005 Directors’ remuneration report as the relevant relative performance data was not available early enough in the year to be included in that report (as is the case this year in respect of 2004). Long service awards are paid on a staff-wide basis and Mr Carpenter qualified for a 15 year service award during the year.
Benefits in kind/allowances principally comprised cash car allowances, private medical and permanent health insurance and, where applicable, cash in lieu of pensions contributions.
No payments were made during the year in respect of any director leaving the Board or ceasing to be employed by the Group.
Executive directors’ pensions
The pension details, as applicable for each executive director (non-executives not being eligible), all of whom served as executive directors throughout the year, are shown in the table at the top of this page. This should be read in conjunction with the description earlier in this report of pension changes made in April 2006, which particularly affect Messrs Carpenter and Holt. Increases in accrued pensions during the year exclude those due to inflation. The transfer values of increases during the year, and changes in total transfer values during the year, are shown before the effects of inflation and after deduction of the directors’ own contributions during the year. Transfer values as at 31 December 2005 and 2006 are calculated in accordance with guidance published by the Institute of Actuaries and the Faculty of Actuaries dated 4 August 2003.
Executive directors’ Performance Share Plan participations
An outline of the Performance Share Plan, and of the basis of the participations granted, is set out in the ‘Remuneration policies’ section earlier in this report. The options granted to the directors of the Company participating in this Plan are shown in the table below.
Directors’ Performance Share Plan options held
Executive directors’ Capital Builder Plan participations
Further to the descriptions of both the original and new Capital Builder Plans earlier in this report, the applicable classes and wider categories of underwriting business which will determine the rewards payable to each of the directors of the Company participating in both these Plans are as follows:
Original Plan to 2005 Class of business/division/syndicate |
New Plan from 2006 Class of business/Group |
||||||||
|
|||||||||
B D Carpenter |
Fleet |
Fleet |
|||||||
AIS division |
Other Motor |
||||||||
Whole of Syndicate 2001 |
Package |
||||||||
AIS liability classes (lesser participations |
|||||||||
than in above classes) |
|||||||||
Group |
|||||||||
|
|||||||||
|
A W Holt
|
Catastrophe |
Catastrophe |
|||||||
Risk Excess of Loss |
Risk Excess of Loss |
||||||||
Marine Excess of Loss |
Marine Excess of Loss |
||||||||
Total of Excess of Loss accounts |
Aviation Excess of Loss |
||||||||
Non-marine division |
Other Non-marine classes (generally |
||||||||
Whole of Syndicate 2001 |
lesser participations than in above |
||||||||
classes) |
|||||||||
Group |
|||||||||
|
|||||||||
In the new Plan Amlin Bermuda Ltd’s underwriting is included, with different applicable percentage participations, in the results of those classes written in both the UK and Bermuda.
On the basis of the relevant estimated returns in respect of the 2001 to 2005 Lloyd’s years of account, the rewards of each of the directors in respect of the original Plan are currently estimated as shown in the table below. 50% of the total estimated reward was paid to participants in 2006 based on 31 December 2005 reserving. 50% of the balance, based on 31 December 2006 reserving, is payable in 2007 and the final balance, based on 31 December 2007 reserving, in 2008. It is emphasised that the estimated payments in 2007 and the estimated balance payments given in the table could be reduced, or increased, both as a result of further detailed audit and by changes in the performance of relevant years of account resulting from reserving run-off development up to 31 December 2007.
Directors’ estimated Capital Builder Plan rewards for the 2001 to 2005 year of account performance period
Class/division |
Estimated reward for 2001 to 2005 as at 31 December 2006 £000 |
Estimated reward for 2001 to 2005 as at 31 December 2005, as reported in 2005 Directors’ remuneration report £000 |
|
|
|||
B D Carpenter |
Class |
1,173.4 | 1,061.3 |
AIS division |
1,048.4 | 934.9 | |
Syndicate |
200.6 | 186.5 | |
|
|||
Total |
2,422.4 | 2,182.7 | |
|
|||
50% paid (estimated payable) in 2006 |
1,039.0 | 1,091.3 | |
|
|||
Presently estimated balance
|
1,383.4 | ||
|
|||
Estimated payable in 2007
|
691.7 | ||
|
|||
A W Holt |
Classes
|
887.3 | 1,010.7 |
Non-marine division
|
1,170.2 | 1,091.4 | |
Syndicate 2001
|
501.5 | 466.2 | |
|
|||
Total
|
2,559.0 | 2,568.3 | |
|
|||
50% paid (estimated payable) in 2006 |
1,207.0 | 1,284.1 | |
|
|||
Presently estimated payment
|
1,352.0 | ||
|
|||
Estimated payable in 2007
|
676.0 | ||
|
|||
In 2006 the first awards were made under the New CB Plan, in which the executive directors’ estimated rewards from the first year, based on reserving at 31 December 2006, were as follows:
Directors’ estimated Capital Builder Plan rewards for the first year of 2006 to 2010 performance period
| Estimated reward for 2006 as at 31 December 2006 Class/division £000 |
||
|
||
B D Carpenter |
Classes |
118.8 |
Group |
16.1 | |
|
||
Total |
134.9 | |
|
||
A W Holt |
Classes |
180.7 |
Group |
24.1 | |
|
||
Total |
204.8 | |
|
||
It is emphasised that the above are just the presently estimated rewards for the first underwriting year (2006) of a five year period (2006 to 2010). They reflect the accrual in the Group accounts but, in view of the eventual rewards being over a five year performance period, as well as the early stage of the development of the 2006 underwriting year the estimates are speculative and should not be taken as indicative of the rewards likely eventually to be attributable to 2006.
Executive directors’ share options
Share options held over shares in the Company as at 31 December 2006 by executive directors serving at the year end (non-executive directors not being eligible), all of whom were directors throughout the year, and the changes during the year, are set out in the following two tables:
Options held
Options exercised during 2006
The calculations in the table on the previous two pages of potential profit on exercise as at 31 December 2006 are based on a year end share price of 325.25p (2005: 248.5p). The high and low during the year were 220p and 331.5p respectively. These calculations are before tax and are theoretical as in many cases the relevant options were not exercisable at the year end. Where indicated T1 and T2 indicate tranches of Amlin Scheme options with median and upper quartile relative TSR conditions respectively. Other than grants of options, the only changes in directors’ options during the year resulted from the exercises set out above.
As well as options under the Amlin Schemes and the Sharesave Scheme, as described above, one director has an outstanding option under The Murray Lawrence Discretionary Share Option Scheme 1998 (ML 1998). This is not an HM Revenue & Customs approved scheme. Options were granted to selected employees and directors of the Murray Lawrence group in 1998, with a ten year life, prior to the merger of the Company with ML (Bermuda) Limited that year. The options became options over the Company’s shares following the merger.
The performance conditions of all of the options granted up to 2003, including the ML 1998 options, had been fully satisfied as at the start of 2006. Those applying to the 2004 to 2006 grants are summarised in ‘Remuneration policies’ above. In respect of the grants made in 2006 the comparator group, in addition to Amlin, was: Atrium Underwriting, Beazley Group, BRIT Insurance Holdings, Catlin Group, Chaucer Holdings, Domestic & General Group, Hardy Underwriting Group, Highway Insurance Holdings, Hiscox, Kiln, Royal & Sun Alliance Insurance Group, SVB Holdings (now Novae) and Wellington Underwriting.
The performance against the primary conditions of those grants which had not vested by the start of 2006, which involve ranking the Company’s TSR against that of a comparator group of Lloyd’s companies, in each case over the three year measurement period since grant, was as follows:
Grant |
First normal exercise date (third anniversary of grant) |
Total shareholder return after three years |
Ranking against return performance |
|||
|
||||||
2003 grants |
23 April 2006 |
152% |
1st out of 15 |
|||
2004 grants |
29 March 2007 |
192% |
1st out of 15 |
|||
|
||||||
Accordingly, the Committee has confirmed that the primary conditions of the above grants of options, including those granted in 2004 which required top quartile performance, have been satisfied.
The Committee concluded during 2006 and in early 2007 that the secondary condition in respect of the 2003 and 2004 grants respectively, measured over the respective three year period, had been satisfied on first testing. In reaching these conclusions the Committee had regard, amongst other factors, to the underlying earnings, returns on equity, and increases in net tangible assets per share, over the relevant periods.
Limits on potential issues of new shares
The rules of the Amlin and Sharesave Scheme each include limits on the overall number of unissued shares over which options may be granted. These are the Company’s only employee schemes under which new shares are committed to be issued but, in the event that new shares were ever issued under any of the long term incentive plans described above (not the present intention), or under the new SIP (to be decided), such share issues would also be subject to the same limits. Grants over new shares under the executive schemes and any selective long term incentive plan, after deducting any such options which have lapsed, are limited to 5% of the issued share capital in any 10 year period. Grants over new shares under any scheme are also limited to 5% over five years and to 10% over 10 years. At 31 December 2006, the numbers of shares, and percentages of the year end shares in issue, together with the equivalent percentage a year earlier, relating to each of these limits were as follows:
| Number of shares utilised 31 Dec 2006 |
Percentage of shares then in issue 31 Dec 2006 |
Percentage of shares then in issue 31 Dec 2005 |
|
|
|||
|
Executive 5% limit over 10 years
|
20,523,043 | 3.84% | 3.55% |
|
All schemes 5% limit over 5 years
|
15,223,785 | 2.85% | 2.87% |
|
All schemes 10% limit over 10 years
|
23,626,764 | 4.42% | 4.15% |
|
|||
None of the schemes with any options currently outstanding require the payment of any consideration for the grant of options. Adjustments to both numbers of shares under option and exercise prices were made in 2002 and 2005 to take account of the three share issues (rights and open offers) made in those years.
Total shareholder return performance
The graphs below illustrate the total shareholder return performance of the Company’s ordinary shares relative to two indices of which Amlin’s shares are a constituent, the FTSE 350 index and the FTSE All Share Insurance index, over the five years to 31 December 2006. Comparisons are shown with both these indices (as they were in previous years’ reports) as the performance of Amlin’s shares is affected both by the general UK stock market in companies of its size and by its insurance sector.
The graphs show the values, at each year end from 2002 to 2006 inclusive, of £100 invested in the Company’s shares on 31 December 2001 compared with the values of £100 invested in the relevant index on the same date. To produce a ‘fair value’, each point on the graphs is the average of the relevant return Index over the 30 days preceding the relevant year end.
Valuation of options and Performance Share Plan awards granted in 2006
The unrealised profits and the profits on exercise shown on pages 66 to 68 are heavily dependent on share price performance and on the director’s decisions on when to exercise. In terms of the make-up of each director’s remuneration decided upon by the Committee during the year, the relevant measure relating to options is the value, at the date of grant, of the executive options granted during the year. Using the same Black Scholes valuation method as used in the Company’s financial statements (as summarised in note 21 to the Accounts) and assuming continuing employment, the theoretical values of the executive options granted are estimated as follows:
Theoretical values of executive options granted in 2006
| Number of shares over which executive options granted in 2006 | Exercise price per share |
Theoretical value on date of grant in 2006 £000 |
Theoretical value of 2005 grants on their date of grant £000 |
|
|
||||
B D Carpenter |
46,075 | 293.00p | 15.8 | 13.1 |
|
R A Hextall
|
58,362 | 293.00p | 20.0 | 13.9 |
|
A W Holt
|
55,904 | 293.00p | 19.2 | 16.2 |
|
C E L Philipps
|
92,150 | 293.00p | 31.6 | 18.9 |
|
||||
Theoretical values at the date of the awards of the two participating directors’ Performance Share Plan awards, also calculated on the same basis as used in the Company’s financial statements which in this case includes assumptions of continuing employment and that a 15% average ROE is achieved over the five year performance period, are as follows:
Theoretical values of PSP awards made in 2006
| Number of shares over which PSP options granted in 2006 | Share price on grant |
Theoretical value on date of grant in 2006 £000 |
Theoretical value of 2005 grants on their date of grant £000 |
|
|
||||
R A Hextall |
77,816 | 293.00p | 146.0 | 97.0 |
C E L Philipps |
153,584 | 293.00p | 288.2 | 189.4 |
|
||||
Non-executive directors’ fees, appointment and removal
In line with the recommendations of the Combined Code, the fees paid to non-executive directors of the Company, other than the Chairman, are determined by the full Board. The Board receives recommendations in this respect from a special committee chaired by the Chairman, with the Chief Executive and two other directors (one executive and one non-executive, each of which usually changes each year) as the other members. Recommendations and decisions are made taking account of professional advice and other information on the level of such fees paid by comparable companies for comparable services.
The Chairman’s remuneration is determined by similar criteria, but by the Remuneration Committee. The minimum time commitments given by each director, as detailed in the Board corporate governance statement, are also taken into account. The Board’s policy is that non-executive fees should be set by reference to the upper quartile of such fees paid by companies of similar size, on account of the above average complexity and regulatory responsibilities involved.
Each non-executive director is paid a basic fee and may be paid further for additional services, such as additional committee or subsidiary Board responsibilities. Non-executive directors have contracts for services rather than employment contracts. Their terms of appointment are formalised in letters of appointment, copies of which are available for inspection at the Company’s registered office and which are updated from time to time. They are appointed on the recommendation of the Nomination Committee, usually for a three year term, and may be removed, or not nominated for re-election at the end of their term, in each case in accordance with the Articles of Association of the Company. The commencement and expected year of expiry of each of the non-executive directors’ current terms are as follows:
| Current term commenced | Date of most recently amended letter of appointment | Expected date of expiry of ocurrent term |
|
|
|||
|
N J C Buchanan
|
25 May 2006 | 18 July 2006 | AGM in 2009 |
|
R H Davey
|
25 May 2006 | 18 July 2006 | AGM in 2009 |
|
R S Joslin
|
18 May 2005 | 18 July 2006 | AGM in 2008 |
|
K T Kemp
|
18 May 2005 | 18 July 2006 | AGM in 2008 |
|
R W Mylvaganam
|
18 May 2005 | 18 July 2006 | AGM in 2008 |
|
R J Taylor
|
18 May 2005 | 7 August 2006 | AGM in 2008 |
|
Sir Mark Wrightson Bt
|
25 May 2006 | 18 July 2006 | AGM in 2009 |
|
|||
If a non-executive director is not nominated or re-elected at the end of a term of office, the director is not entitled to any extra payment on termination. In other circumstances three months’ notice of termination may be given by either side.
By Order of the Board, on the recommendation of its Remuneration Committee
C C T Pender Secretary
2 March 2007
Top