Lancashire seeks to achieve the highest standards of corporate governance. Currently, the Company complies with the Combined Code on Corporate Governance as revised in 2006 (the “Combined Code”) except as stated in this Corporate Governance section of this Annual Report. There are no Bermudian corporate governance standards similar to the Combined Code that apply to Lancashire.
Board and committee administration
The Board has overall responsibility for the leadership and control of Lancashire’s business. The Board has reserved a number of matters for its decision including responsibility for the overall management of the Group and approval of the Group’s long-term objectives and commercial strategy. The Board has delegated certain matters to the committees described below. The committees report to the Board.
The Board has separate appointments for the roles of Chairman and Chief Executive. The day-to-day management of the Company and implementation of Board decisions and strategy are carried out by the executive Directors and senior management. The Board and its committees meet on a quarterly basis and occasionally more frequently as circumstances dictate. At Board meetings, the Directors review all areas and developments in the Group’s business and receive reports from management on finance, underwriting and any other key matters affecting the Company. The Directors are provided with information necessary for it to fulfill its responsibilities including quarterly reports and full board papers. Additional information is provided to the Directors as and when necessary and the Directors have access to independent professional advice as required.
Meeting attendance schedule
The Board and committee attendance record during 2008 of the directors who held office at the end of the year is as follows:
| Board(1) | Audit
committee | Nomination
and corporate
governance
committee | Remuneration
committee |
|---|
| Non-executive directors |
|
|
|
|
|---|
| John Bishop |
3/3(2) |
3/3(2) |
3/3(2) |
– |
|---|
| Jens Juul |
3/4 |
3/3(2) |
3/3(2) |
3/3(2) |
|---|
| Ralf Oelssner |
3/4 |
3/4 |
– |
4/4 |
|---|
| Robert Spass |
4/4 |
3/4 |
– |
– |
|---|
| William Spiegel |
4/4 |
4/4 |
– |
4/4 |
|---|
| Martin Thomas |
4/4 |
– |
4/4 |
4/4 |
|---|
| Barry Volpert |
3/4 |
– |
1/1(2) |
– |
|---|
| Executive directors |
|
|
|
|
|---|
| Richard Brindle |
4/4 |
– |
1/1(2) |
– |
|---|
| Simon Burton |
4/4 |
– |
– |
– |
|---|
| Neil McConachie |
4/4 |
– |
– |
– |
|---|
The directors
John Bishop, Jens Juul, Ralf Oelssner, Martin Thomas and William Spiegel are independent as each is independent in character and judgement and has no relationship or circumstance likely to affect his judgement. Martin Thomas was independent upon his appointment as Chairman on 1 May 2007. Robert Spass and Barry Volpert are not independent under the Combined Code due to their appointment by and affiliation with specific shareholders.
Accordingly, four out of the ten members of the Board are independent non-executive Directors and the Board composition does not currently comply with the Combined Code requirement that independent non-executive Directors, excluding the Chairman, should make up at least half of the Board. The Company is seeking to appoint an additional non-executive director during 2009 and is actively pursuing suitable candidates.
In accordance with the Company’s Bye-laws, the Directors are divided into Class I, II and III, Directors who hold office until the 2009, 2008 and 2010 Annual General Meetings respectively. At these meetings the relevant Directors may be re-elected by the Company’s shareholders for further three year terms. The Class II Directors, Richard Brindle and Barry Volpert, were re-appointed at the 2008 Annual General Meeting held on 30 April 2008 to hold office until 2010. Ralf Oelssner, Robert Spass and William Spiegel are the Class I Directors and will accordingly be submitting themselves for re-election for a further three years by the Company’s shareholders at the Annual General Meeting scheduled to take place on 14 May 2009 as detailed in the notice of Annual General Meeting.
As described in the Directors’ Report above, the Company is proposing to adopt a new Bye-law requiring Directors to retire by rotation. One-third of the Directors shall retire by rotation at each Annual General Meeting. The Directors eligible for re-election will be those who have been longest in office since their last re-lection or appointment. This will replace the existing “Class” system but in practice will not change how the Director rotation operates.
Information and training
On appointment the Directors receive written information regarding their responsibilities as Directors. Information regarding the Company’s AIM and Bermuda law obligations and on the Combined Code is also provided. From the date of the Company’s admission to the Official List and to trading on the Main Market, information regarding the obligations of the Company to comply with the Listing Rules of the Financial Services Authority will also be provided. All the Directors have access to the Company Secretary who is responsible for updating the Board with any legal, regulatory or compliance developments affecting the Company. The Directors also have access to independent legal advice as required.
The new Director induction process includes meeting with senior management, visiting the Company’s operations and the provision of key information.
Board performance evaluation
Evaluation of the Board’s performance was carried out in the second half of 2008, and was conducted by external specialists. The Board as a whole, the committees and the individual Directors were evaluated.
During the evaluation process, all Directors, the Company Secretary and certain other senior executives were given the opportunity to give their views on the effectiveness of the Board and its Committees, particularly by identifying any shortcomings in procedures, working methods or any other areas of weakness requiring attention and improvement. In addition, the performance of the Chief Executive Officer was appraised by the Chairman and the performance of the executive team by the Chief Executive Officer.
The results of the survey were reviewed and evaluated by the Nomination and Corporate Governance Committee, and subsequently by the Board. On the evidence provided, the Board and its Committees are satisfied with the overall effectiveness and balance. As a result of the process, as well as continuing with the search for additional non-executive Directors identified earlier, the Board will be focusing on succession planning in 2009.
Relations with shareholders
Throughout 2008, the Head of Investor Relations and Marketing and management talked with several of the Company’s major shareholders and met with the investor community. Feedback from analysts following presentations was reported to the Board in 2008. Conference calls have been held following announcement of the Company’s financial results. The Company has also commissioned shareholder reports to review the make up of its beneficial shareholder base. The Company’s Chairman and the non-executive directors are also available to meet with major shareholders at the Company’s Annual General Meeting and throughout the year. Shareholders are encouraged to attend the Company’s Annual General Meeting and to vote on shareholder resolutions.
Committees
The Board has established audit, nomination and corporate governance, remuneration, investment and underwriting committees. Each of the committees has detailed terms of reference, which can be viewed on the Company’s website (www.lancashiregroup.com). The committees are generally scheduled to meet quarterly prior to the Board meetings at which they report. The composition of the committees as at 31 December 2008 was as follows:
| Audit
committee | Nomination
and corporate
governance
committee | Remuneration
committee | Investment
committee | Underwriting
committee |
|---|
| Martin Thomas |
|
 (chair) |
|
|
|
|---|
| John Bishop |
|
|
|
|
|
|---|
| Jens Juul |
|
|
|
|
|
|---|
| Ralf Oelssner |
|
|
|
|
|
|---|
| Robert Spass |
(chair) |
|
|
|
|
|---|
| William Spiegel |
|
|
(chair) |
|
|
|---|
| Barry Volpert |
|
|
|
(chair) |
|
|---|
| Richard Brindle |
|
|
|
|
(chair) |
|---|
| Simon Burton |
|
|
|
|
|
|---|
| Neil McConachie |
|
|
|
|
|
|---|
Audit committee
The members of the audit committee are Robert Spass (Chair), John Bishop, Jens Juul, Ralf Oelssner and William Spiegel. The composition of the committee currently does not conform to the Combined Code requirement that the committee should be comprised of independent non-executive Directors. Robert Spass, although a non-executive Director, is not considered independent for the purposes of the Combined Code. All the other members are independent non-executive Directors. However, the Board considers that the audit committee’s current membership is appropriate and that Robert Spass is suitable for the role of audit committee chair because he has recent and relevant financial experience. The audit committee is responsible for the effectiveness of the internal and external audit functions. The audit committee’s responsibilities are contained in their terms of reference. These include reviewing and reporting to the Board on the preparation of the Company’s financial information, announcements relating to the Company’s financial results and monitoring the independence of the Company’s auditors.
Nomination and corporate governance committee
The members of the nomination and corporate governance committee are Martin Thomas (Chair), John Bishop and Jens Juul. The nomination and corporate governance committee’s responsibilities are contained in their terms of reference. These include reviewing the structure, size and composition (including the skills, knowledge and experience) of the Board and making recommendations regarding changes.
Remuneration committee
The members of the remuneration committee are William Spiegel (Chair), Jens Juul, Ralf Oelssner and Martin Thomas. The remuneration committee’s responsibilities are contained in their terms of reference. These include determining remuneration for the Company’s executives and senior management of the Group within a framework agreed with the Board.
Investment committee
The members of the investment committee are Barry Volpert (Chair), Richard Brindle, Neil McConachie, and Robert Spass. The investment committee’s responsibilities are contained in their terms of reference. These include recommending and monitoring investment strategies, recommending appointments of fund managers for the Group’s investments and monitoring the cash flow, liquidity and working capital of the Group.
Underwriting committee
The director members of the underwriting committee are Richard Brindle (Chair), John Bishop, Simon Burton, Jens Juul and Ralf Oelssner. Additional members of the underwriting committee, who are not directors, are Bryan Bumsted, Charles Mathias, Paula Porter and Alex Maloney. The positions and summaries of the experience of these non-director members of the underwriting committee can be found on the Company’s website at www.lancashiregroup.com. The underwriting committee’s responsibilities are contained in its terms of reference. These include reviewing and monitoring compliance with the Group’s underwriting guidelines and policies, formulating underwriting strategy, reviewing aggregate underwriting exposures and reviewing compliance with Probable Maximum Loss limits.
Internal controls
The Board is responsible for maintaining a robust framework of internal control and risk management and for overseeing and ensuring the effectiveness of the Group’s risk and control processes. While retaining overall responsibility for risk management, including establishing the Group’s overall risk profile and risk tolerances, the Board has assigned responsibility to the audit committee for reviewing the Group’s internal control and financial reporting systems (including financial, operational, compliance and risk management). These systems are designed to identify promptly, significant risks facing the Group so that such risks remain within the tolerance levels agreed by the Board. The Board acknowledges that the Group cannot eliminate all risks, but believes that comprehensive assessment and management of the risks facing the Group enable the business to operate within acceptable levels of risk. The audit committee reports, and makes recommendations, to the Board regarding the effectiveness of internal controls and its risk management policies and procedures. During 2008, the audit committee reviewed the effectiveness of the Group’s internal controls and risk management systems, reviewed the Group’s financial reporting and held closed sessions respectively with the Group’s internal and external auditors and with management.
Internal audit
The Internal audit department’s audit plan is designed to cover annually all areas of the Group’s business carrying the highest risk to the achievements of the Group’s objectives. All other areas of the Group’s operations will be audited at least once every three years. The internal audit department reports directly to the audit committee and the audit plan is approved by the audit committee.
In mid 2008, the Company expanded its internal audit team. Findings of the internal audits and implementation of agreed management actions are reviewed by the audit committee at each of its meetings.
In 2008, on the recommendation of the audit committee and to provide additional resources for the work of the internal audit team, the Company also renewed the engagement of PricewaterhouseCoopers, who carried out internal audits and reported on the Group’s internal controls and processes in respect of information technology change management and security compliance and compliance with tax operating guidelines.
External audit and provision of non audit services
The audit committee is responsible for reviewing and monitoring the external auditors’ objectivity and reporting to the Board to ensure that the auditors’ objectivity and independence are safeguarded. The Board is responsible for reviewing the effectiveness of the external audit which is reported on by the audit committee. In 2008, Ernst & Young performed certain non-audit services in relation to: the Company’s application for admission on the Official List of the London Stock Exchange; transfer pricing and taxation advisory. During 2008, the audit committee monitored the provision of these services. The audit committee and the Board are currently satisfied with the objectivity and independence of the auditors.
Enterprise risk management
In November 2008, Steve Sumner assumed the role as Group Chief Risk Officer and, building on the investment made in this area, together with the ongoing support of the internal audit department, the Group has continued to embed and enhance enterprise risk management within its operations and systems.
All key processes within the Group’s businesses have been documented including the associated risks and controls. During 2008, the Group extensively reviewed its risk registers, and risk owners reviewed and formally affirmed the accuracy of risk and controls on a quarterly basis. The Group is satisfied that all of the key business risks, and the controls that mitigate them, have been identified, classified, evaluated and ranked against one another. This has enabled the Group to improve implementation of its existing risk management framework and the effective operation of the Group’s risk management processes. The continuous independent monitoring and evaluation of management’s risk and activities by the Group internal audit team will add additional strength in this area.