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SECURITIES AND EXCHANGE COMMISSION

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SCHEDULE 14A

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HCC INSURANCE HOLDINGS, INC.

13403 Northwest Freeway

Houston, Texas 77040-6094

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

To Be Held May 14, 2008, at 9:00 a.m. Houston time

 

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of HCC Insurance Holdings, Inc. will be held on Wednesday, May 14, 2008, at 9:00 a.m. Houston time, at the Hotel Granduca, 1080 Uptown Park Boulevard, Houston, TX 77056 for the following purposes:

 

1. To elect twelve directors for a one-year term, each to serve until the Annual Meeting of Shareholders in 2009 and until his successor is duly elected and qualified.

 

2. To vote on the 2008 Flexible Incentive Plan.

 

3. To ratify the appointment of PricewaterhouseCoopers LLP as auditors for 2008.

 

4. To vote on any shareholder proposals properly brought before the meeting.

 

5. To transact such other business as may properly come before the meeting or any postponement or adjournment thereof.

 

Our Board of Directors has fixed the close of business on April 2, 2008 as the record date for determining those shareholders who are entitled to notice of, and to vote at, the Annual Meeting of Shareholders. A list of such shareholders will be open to examination by any shareholder at the annual meeting and for a period of ten days prior to the date of the annual meeting during ordinary business hours at 13403 Northwest Freeway, Houston, Texas. A copy of the Annual Report of HCC Insurance Holdings, Inc. for the year ended December 31, 2007 is enclosed.

 

By Order of the Board of Directors,

 

James L. Simmons,

Vice President and Secretary

 

Houston, Texas

April 11, 2008

 

 

HCC INSURANCE HOLDINGS, INC.

13403 Northwest Freeway

Houston, Texas 77040-6094

 

 

 

 

PROXY STATEMENT

 

 

 

 

ANNUAL MEETING OF SHAREHOLDERS

May 14, 2008

 

 

 

 

INFORMATION CONCERNING SOLICITATION AND VOTING

 

This Proxy Statement is first being mailed on or about April 11, 2008 to shareholders of HCC Insurance Holdings, Inc., which is sometimes referred to in this Proxy Statement as “HCC,” or as “we,” “us,” or “our,” in connection with the solicitation by our Board of Directors of proxies to be voted at the Annual Meeting of Shareholders to be held on Wednesday, May 14, 2008, at 9:00 a.m. Houston time, at Hotel Granduca, 1080 Uptown Park Boulevard, Houston, TX 77056, or any postponement or adjournment thereof. A shareholder giving a proxy has the power to revoke the proxy at any time before it is exercised. Such right of revocation is not limited by or subject to compliance with any formal procedure.

 

This solicitation is made by HCC, and the cost of soliciting proxies will be borne by HCC. Copies of solicitation material may be furnished to brokers, custodians, nominees and other fiduciaries for forwarding to beneficial owners of shares of our common stock, and normal handling charges may be paid for such forwarding service. Solicitation of proxies may be made by mail, personal interview, telephone and facsimile by our officers and other management employees, who will receive no additional compensation for their services. We have retained Georgeson Shareholder Communications, Inc., 199 Water Street, 26th Floor, New York, NY 10038, at an anticipated cost of $7,000 plus reimbursement of out-of-pocket expenses, to provide services in connection with our annual meeting, including the solicitation of proxies.

 

Only shareholders of record on our record date of April 2, 2008 will be entitled to vote at the annual meeting, and each share will have one vote. At the close of business on such record date, there were 115,288,363 shares of our common stock outstanding and entitled to vote at the annual meeting.

 

Quorum and required vote are set forth in the Delaware General Corporation Law and our charter documents. A majority of the outstanding shares of our common stock, represented in person or by proxy, will constitute a quorum at our annual meeting. The election of directors will be determined by a plurality of the votes cast if a quorum is present. The affirmative vote of the holders of a majority of the shares of our common stock present in person or represented by proxy at the annual meeting and entitled to vote on the matter is required for the approval of the 2008 Flexible Incentive Plan, the ratification of our independent registered public accounting firm and approval of any shareholder proposals properly brought before the meeting. Our Board of Directors does not anticipate calling for a vote on any matter other than those described herein.

 

In the absence of any direction in the proxy, it is intended that such shares will be voted FOR the election of directors, approval of the 2008 Flexible Incentive Plan and ratification of the appointment of PricewaterhouseCoopers LLP and AGAINST the shareholder proposals described in this proxy statement.

 

Abstentions and broker non-votes are each included in the determination of the number of shares present and voting for purposes of determining the presence of a quorum. However, each is tabulated separately and treated differently. For instance, a proxy submitted by a shareholder may indicate that all or a portion of the shares represented by such proxy are not being voted by such shareholder with respect to a particular matter. This may occur, for example, when the shareholder does not give instructions on a particular matter and a broker is not permitted to vote stock held in street name on such a matter in the absence of instructions from the beneficial owner of the stock. The shares subject to such a proxy that are not being voted with respect to a particular matter, which are referred to in this proxy statement as non-voted shares, will be treated as shares not present and entitled to vote on such matter, although such shares may be considered present and entitled to vote for other matters and will count for purposes of determining the presence of a quorum. Conversely, shares voted to abstain as to a particular matter will not be considered non-voted shares. The election of directors requires a plurality of the shares. Thus, abstentions and non-voted shares will not affect the outcome of the election of directors.

 

STOCK OWNERSHIP OF CERTAIN PRINCIPAL SHAREHOLDERS AND MANAGEMENT

 

The following table sets forth certain information regarding the beneficial ownership of our common stock as of the record date by (a) each person known by us to be the beneficial owner of more than 5% of our common stock, (b) each of our current and former executive officers named in the Summary Compensation Table whom we refer to as “Named Executive Officers”, (c) each of our directors and (d) all of our directors and Named Executive Officers as a group.

 

 

 

 

 

PROPOSAL NUMBER 1 — ELECTION OF DIRECTORS

 

Each director elected at our annual meeting will continue to serve until his successor is duly elected and qualified at the next annual meeting of shareholders in 2009 or until his earlier death, resignation or removal. Each of the nominees is currently a director of HCC except for Scott W. Wise. Our Board of Directors has determined that each of Messrs. Collins, Dickerson, Duer, Flagg, Fulkerson, Oesterreicher, Roberts, Williams and Wise are “independent” directors, as that term is defined by the New York Stock Exchange and the SEC. Such directors are collectively referenced in this Proxy Statement as the “Independent Directors.”

 

Our management notes that each of the proposed nominees, with the exception of Mr. Wise, is standing for re-election to our Board of Directors and that each has served our shareholders’ interests well during his tenure as a director. The Board believes that the addition of Mr. Wise will serve our shareholders in particular through the addition of Mr. Wise’s investment management expertise. Our management believes that HCC and its shareholders benefit from the wide variety of industry and professional experience that characterizes the Independent Director members of our Board of Directors.

 

The following table presents information concerning persons nominated for election as directors of HCC, including current membership on committees of our Board of Directors, principal occupation or affiliations during the last five years, and certain directorships held. Although our Board of Directors does not contemplate that any of the nominees will be unable to serve, if such a situation arises prior to the annual meeting, the persons named in the enclosed form of Proxy will vote in accordance with their best judgment for a substitute nominee.

 

Information Regarding Nominees for Director

 

 

Our Board of Directors recommends that our shareholders vote “FOR” each of the proposed nominees. Your Proxy will be so voted unless you specify otherwise.

 

Information Regarding Executive Officers Who Are Not Nominees for Director

 

 

Executive Sessions of the Board of Directors

 

Independent Directors meet regularly in executive session prior to each regularly scheduled meeting of our Board of Directors. J. Robert Dickerson, as the designated “Lead Independent Director,” serves as the presiding director at each such executive session.

 

Communications with Directors

 

Our Board of Directors has adopted corporate governance guidelines that provide that our shareholders and other interested parties may communicate with one or more of our directors by mail in care of: James L. Simmons, Secretary, HCC Insurance Holdings, Inc., 13403 Northwest Freeway, Houston, Texas 77040-6094. Such communications should specify the intended recipient or recipients. All such communications, other than unsolicited commercial solicitations, will be forwarded to the appropriate director, or directors, for review.

Board Attendance at the Annual Meeting

 

Our policy is to have our directors attend our annual meeting. Last year all of our then-serving directors attended the annual meeting.

 

Code of Business Conduct and Ethics

 

We have adopted a Code of Business Conduct and Ethics that is applicable to all of our directors, officers and other employees. The Code is posted under the Corporate Governance portion of the Investor Relations section on our website at www.hcc.com and is available to any shareholder upon request. If there are any changes or waivers of the Code of Business Conduct and Ethics that apply to the Chief Executive Officer and Senior Financial Officers, we will disclose them on our website in the same location.

 

Director Independence

 

Our Board of Directors has established criteria for determining director “independence” as set forth in our Corporate Governance Guidelines. In particular, no director shall be deemed to be “independent” unless the Board, as a whole, shall have affirmatively determined that no material relationship exists between such director and HCC other than the director’s service as a member of our Board of Directors. In addition, the following criteria apply to determine independence:

 

 

In addition, members of our Audit Committee must meet the following additional independence requirements:

 

 

In addition to the independence standards above, unless otherwise prohibited by NYSE rules, the Board has determined that any commercial or charitable relationship that is not required to be reported in a proxy statement will not be considered a material relationship that would impair a director’s independence.

In the course of the Board’s determination regarding the independence of each non-management Director, it considered any transactions, relationships and arrangements between the director and our company as required by the independence requirements set forth above. In particular, the Board evaluated the relationship between our company and Mr. Fulkerson disclosed in “Certain Relationships and Related Transactions,” below. The Corporate Governance and Nominating Committee recommended and the Board of Directors determined that due to the immaterial nature of Mr. Fulkerson’s interest, this relationship does not impair Mr. Fulkerson’s independence and that Mr. Fulkerson is “independent” within the meaning of the rules of the NYSE.

 

Our Board of Directors has affirmatively determined that each of Messrs. Collins, Dickerson, Duer, Flagg, Fulkerson, Oesterreicher, Roberts, Williams and Wise meets the general criteria for independence set forth above and that all members of the Audit Committee meet the further requirements for independence set forth above. In addition, the Board had affirmatively determined that James R. Crane, who resigned from the Board in November 2007, also met the criteria for independence set forth above.

 

Meetings and Committees of the Board of Directors

 

During 2007, our Board of Directors met four times in person, six times telephonically and acted by written consent on various other occasions. Each person nominated to be a director (excepting Mr. Wise, who is a new director nominee) attended, or participated via teleconference, in 75% or more of the meetings of the Board of Directors and the meetings of any committee on which he served. Our Board of Directors has standing Audit, Compensation, Investment and Finance, and Nominating and Corporate Governance Committees, each of which has a written charter. Copies of the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee Charters, as well as our Corporate Governance Guidelines, are available under the Corporate Governance portion of the Investor Relations section of our website at www.hcc.com. In addition, a printed copy of any of these documents will be provided to any shareholder who requests it.

 

Audit Committee

 

Our Audit Committee consists of three Independent Directors. The members of the Audit Committee during 2007 and currently are Patrick B. Collins, Walter M. Duer and James C. Flagg (Chairman). The Audit Committee held six in-person meetings and two teleconference meetings in 2007. The Audit Committee’s primary purpose is to assist our Board of Directors’ oversight of (a) the integrity of our consolidated financial statements and disclosures; (b) our compliance with legal and regulatory requirements; (c) our independent registered public accounting firm’s qualifications, independence and fees; and (d) the performance of our independent registered public accounting firm and our internal audit function. The Audit Committee has the sole authority to appoint and terminate our independent registered public accounting firm. Our Board of Directors has determined that each of Messrs. Collins, Duer and Flagg is an “audit committee financial expert” as described in Item 407(d)(5)(ii) of the SEC’s Regulation S-K. In addition, our Board of Directors has determined that each member of the Audit Committee is independent, as independence for audit committee members is defined in the listing standards of the NYSE. The Audit Committee is established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934.

 

Compensation Committee

 

Our Compensation Committee consists of four Independent Directors. The members of the Compensation Committee at December 31, 2007 were J. Robert Dickerson (Chairman), Allan W. Fulkerson and Michael A. F. Roberts. James E. Oesterreicher joined our Compensation Committee in April 2008. Mr. Fulkerson replaced James R. Crane, who resigned from the Board of Directors, in November 2007. The Compensation Committee held four in-person and three telephonic meetings during 2007. The Compensation Committee has the responsibility for assuring that our senior executives are compensated in a manner consistent with the compensation philosophy and strategy of our Board of Directors and in compliance with the requirements of the regulatory bodies that oversee our operations. Generally, the Compensation Committee is charged with the authority to review and approve our compensation philosophy and our executive compensation programs, levels, plans and awards. The Compensation Committee also administers our incentive plans and our stock-based plans and reviews and approves general employee benefit plans on an as-needed basis. The Compensation Committee also has the authority to retain, approve fees and other terms for, and terminate any compensation consultant, outside counsel, accountant or other

advisor hired to assist the Compensation Committee in the discharge of its responsibilities. The Chief Executive Officer makes recommendations to the Compensation Committee with respect to the form and amount of executive compensation. In addition, under our Compensation Committee Charter and under both our 2001 Flexible Incentive Plan and our 2004 Flexible Incentive Plan, as Amended and Restated, the Compensation Committee may delegate its authority under such plans to management; however, under our currently existing internal controls with respect to our stock option granting practices, such authority may not be delegated with respect to the granting of options. The Compensation Committee charter allows delegation of Committee authority to subcommittees. See the “Compensation Discussion and Analysis” below for information on our process and procedures for determining 2007 executive officer compensation. Our Board of Directors has determined that each member of the Compensation Committee is independent, as independence for compensation committee members is defined in the listing standards of the NYSE.

 

Compensation Committee Interlocks and Insider Participation

 

No member of the Compensation Committee is or has been an officer or employee of us or any of our subsidiaries. No executive officer of ours served as a member of the Board of Directors or compensation committee (or other Board committee performing similar functions or, in the absence of any such committee, the entire Board of Directors) of another corporation, one of whose executive officers served on our Compensation Committee or as our director.

 

Mr. Fulkerson had a relationship with us requiring disclosure in “Certain Relationships and Related Transactions,” below. During 2007, we had strategic investments in a limited liability company and a related entity for which Mr. Fulkerson served as a director and in management roles through 2004. We sold this investment on December 31, 2007 for $3.7 million, plus an indeterminate amount, which may be zero, based on post-closing performance. Income and realized gains (losses) from these investments totaled $0.2 million in 2007. The limited liability company’s sole investment, which was also sold in 2007, was in an entity that serves as an investment manager for certain of our fixed income securities valued at $774.3 million at December 31, 2007. During 2007, we paid $0.6 million in investment management fees to this entity. Mr. Fulkerson served as a director of the investment manager in 2007. His indirect ownership interest in the investment manager in 2007 was less than one-tenth of one percent. Given the immaterial and indirect nature of Mr. Fulkerson’s interest, the Board has determined that Mr. Fulkerson is an independent director. See also, “Director Independence,” above.

 

Investment and Finance Committee

 

Our Investment and Finance Committee consists of five directors. The members of the Investment and Finance Committee at December 31, 2007 and currently are Frank J. Bramanti, Edward H. Ellis, Jr., Allan W. Fulkerson (Chairman), John N. Molbeck, Jr. and Michael A. F. Roberts. The Investment and Finance Committee met four times in 2007. The Investment and Finance Committee is charged with establishing investment policies for us and our subsidiaries and directing the investment of our funds, and those of our subsidiaries, in accordance with those policies. In this regard, the Investment and Finance Committee oversees the investment management activities of our third-party investment managers and oversees our corporate financing activities.

 

Nominating and Corporate Governance Committee

 

Our Nominating and Corporate Governance Committee consists of four Independent Directors. The members of the Nominating and Corporate Governance Committee at December 31, 2007 were Patrick B. Collins, J. Robert Dickerson and Michael A. F. Roberts (Chairman). Christopher J. B. Williams joined the Nominating and Corporate Governance Committee in April 2008. Mr. Collins replaced Mr. Crane, who resigned from the Board of Directors in November 2007. The Nominating and Corporate Governance Committee held four in-person and one telephonic meeting in 2007. The Nominating and Corporate Governance Committee is charged with identifying and making recommendations to our Board of Directors of individuals suitable to become members of the Board of Directors and overseeing the administration of our various policies related to corporate governance matters. Our Board of Directors has determined that each member of the Nominating and Corporate Governance Committee is independent, as independence for nominating committee members is defined in the listing standards of the NYSE.

Director Nominations

 

The Nominating and Corporate Governance Committee has established certain criteria it considers as guidelines in considering nominations for the Board of Directors. The criteria include:

 

 

These criteria are not exhaustive, and the Nominating and Corporate Governance Committee and the Board of Directors may consider other qualifications and attributes that they believe are appropriate in evaluating the ability of an individual to serve as a member of the Board of Directors. The Nominating and Corporate Governance Committee’s goal is to assemble a Board of Directors that brings to us a variety of perspectives and skills derived from high quality business and professional experience. In order to ensure that the Board consists of members with a variety of perspectives and skills, the Nominating and Corporate Governance Committee has not set any minimum qualifications and also considers candidates with appropriate non-business backgrounds. Other than ensuring that at least one independent member of the Board is a financial expert and a majority of the Board members meet all applicable independence requirements, the Nominating and Corporate Governance Committee does not have any specific skills that it believes are necessary for any individual director to possess. Instead, the Committee evaluates potential nominees based on the contribution such nominee’s background and skills could have upon the overall functioning of the Board.

 

The Board of Directors believes that, based on the Nominating and Corporate Governance Committee’s knowledge of the company’s Corporate Governance Principles and the needs and qualifications of the Board at any given time, the Nominating and Corporate Governance Committee is best equipped to select nominees that will result in a well-qualified and well-rounded Board of Directors. In making its nominations, the Nominating and Corporate Governance Committee identifies nominees by first evaluating the current members of the Board willing to continue their service. Current members with qualifications and skills that are consistent with the Nominating and Corporate Governance Committee’s criteria for Board service are re-nominated. When identifying new candidates to serve on our Board, the Nominating and Corporate Governance Committee undertakes a process that will entail the solicitation of recommendations from any of our incumbent directors, our management or our shareholders. Following a review of the qualifications, experience and backgrounds of these candidates, the Nominating and Corporate Governance Committee will make its recommendation to the Board of Directors. In addition, the committee has the authority under its charter to retain a search firm for this purpose. In 2007, the committee retained Korn/Ferry International to assist in identifying candidates to serve on our Board.

 

Shareholder Nominations

 

The Charter of the Nominating and Corporate Governance Committee provides that the committee will consider proposals for nominees for director from shareholders. Shareholder nominations for director should be made in writing to James L. Simmons, Secretary, HCC Insurance Holdings, Inc., 13403 Northwest Freeway, Houston, Texas 77040-6094. The Nominating and Corporate Governance Committee will consider candidates nominated by shareholders based on the criteria described above. Although the Nominating and Corporate Governance Committee will consider candidates to the Board, the Board may determine not to nominate those candidates.

 

In order to nominate a director at an annual meeting of shareholders, we require that a shareholder follow the procedures set forth in this section. In order to recommend a nominee for a director position, a shareholder must be a shareholder of record at the time such shareholder gives notice of recommendation and must be entitled to vote for

the election of directors at the meeting at which such nominee will be considered. Shareholder recommendations must be made pursuant to written notice delivered to our Secretary at the principal executive offices of HCC:

 

 

In the event that the date of the annual meeting is changed by more than 30 days from the anniversary date of the preceding year’s annual meeting, the shareholder notice described above will be deemed timely if it is received not later than the close of business on the later of the 90th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made.

 

The shareholder notice must set forth the following:

 

 

In addition to complying with the foregoing procedures, any shareholder nominating a director must also comply with all applicable requirements of the Exchange Act, including the rules and regulations under such Act.

 

Special Litigation Committee

 

In May 2007, our Board of Directors formed a Special Litigation Committee of independent, disinterested directors to undertake a review of the derivative and class action litigation that arose from our disclosures with regard to our past stock option granting practices. The Special Litigation Committee was composed of two independent, disinterested directors. The members were James E. Oesterreicher and Christopher J.B. Williams. The Special Litigation Committee held thirteen in-person and telephonic meetings during 2007. The Special Litigation Committee completed its duties and disbanded on April 1, 2008.

 

Certain Relationships and Related Transactions

 

During 2007, we had strategic investments in a limited liability company and a related entity for which Mr. Fulkerson served as a director and in management roles through 2004. We sold this investment on December 31, 2007 for $3.7 million, plus an indeterminate amount, which may be zero, based on post-closing performance. Income and realized gains (losses) from these investments totaled $0.2 million in 2007. The limited liability company’s sole investment, which was also sold in 2007, was in an entity that serves as an investment manager for certain of our fixed income securities valued at $774.3 million at December 31, 2007. During 2007, we paid $0.6 million in investment management fees to this entity. Mr. Fulkerson served as a director of the investment manager in 2007. His indirect ownership interest in the investment manager in 2007 was less than one-tenth of one percent. Due to the indirect and immaterial nature of Mr. Fulkerson’s interest, our Board of directors has determined that Mr. Fulkerson is an independent director.

 

There are no family relationships among the executive officers and directors, and there are no arrangements or understandings between any Independent Director or any other person pursuant to which that Independent Director was selected as a director.

Board Ratification of Related Transactions

 

Not less than annually, our Board of Directors undertakes the review and approval of all related-party transactions. This policy covers any transaction valued at greater than $120,000 between us or our subsidiaries and any of our executive officers, directors, nominees for director, holders of greater than five percent of our shares, and any of such parties’ immediate family members. Under our policy, covered transactions are to be reviewed by the disinterested members of our Board of Directors, who shall satisfy themselves that (i) all material facts with respect to the transaction have been disclosed to the Board of Directors for its consideration and (ii) that the transaction is fair to HCC. As a result of this review, approval of a transaction may be denied if the transaction is not fair to HCC or is otherwise a violation of our Code of Business Conduct and Ethics. Our policy is in writing and can be found in our Corporate Governance Guidelines. Our current intention is that all future transactions will be approved by our Board prior to consummation.

 

Advances of Defense Costs for Certain Litigation Matters

 

Members of our current Board of Directors, directors who served during 2007 and certain current and former officers and directors have been named as defendants in lawsuits arising out of the issues related to our past practices related to granting stock options. The current and former directors and officers who have been named as defendants in these actions have a legal right under Delaware corporate law, indemnification agreements with us and our bylaws to advancement of their costs of defense. Accordingly, in 2007, we advanced defense costs of approximately $1.1 million on behalf of our Named Executive Officers and directors. We expect to recover a portion of these monies advanced from our directors’ and officers’ liability insurance.

 

Legal Proceedings

 

The following lawsuits related to the outcome of our stock option investigation have been filed:

 

Civil Action No. 07-456 (Consolidated); Bacas and Halgren, derivatively on behalf of HCC Insurance Holdings, Inc. v. Way et al.; In the United States District Court for the Southern District of Texas, Houston Division. This action consolidates all pending derivative suits into one action (Bacas suits). The Bacas action was filed on February 1, 2007, and the Halgren action was filed on February 28, 2007. On February 1, 2008, the parties appeared before the Court to seek approval of a proposed settlement in the case. On April 1, 2008, the Court gave final approval of the settlement. Under the terms of the settlement, we have or will implement certain corporate governance reforms. We and our directors’ and officers’ liability insurers have agreed to pay $3.0 million to plaintiff’s counsel for their attorneys’ fees. The Court’s order dismisses all claims in the shareholder derivative litigation with prejudice.

 

Civil Action No. 07-0801; In re HCC Insurance Holdings, Inc. Securities Litigation; In the United States District Court for the Southern District of Texas, Houston Division (formerly referred to as Bristol County Retirement System, individually and on behalf of all others similarly situated v. HCC Insurance Holdings, Inc. et al.). This action was filed on March 8, 2007. We are named as a defendant in this putative class action along with certain current and former officers and directors. On February 7, 2008, the parties reached an agreement to settle the case and will propose the settlement to the Court for preliminary approval on April 17, 2008. The terms of the settlement, which includes no admission of liability or wrongdoing by HCC or any other defendants, provide for a full and complete release of all claims in the litigation and payment of $10.0 million to be paid into a settlement fund, pending approval by the Court of a plan of distribution. The $10.0 million will be paid by our directors’ and officers’ liability insurers.

 

In each of these lawsuits, certain of our current and former officers and directors have requested that they be indemnified for any losses and that their legal fees be advanced. Pursuant to our bylaws, our charter, applicable law and certain agreements entered into with some of the defendants, we are currently advancing legal fees.

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our directors and executive officers, as defined under the Exchange Act, and persons who own more than 10% of a registered class of our equity securities to file initial reports of ownership and changes in ownership with the SEC. Such executive officers, directors and shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Mr. Williams’ initial grant of 2,500 common shares upon his joining our Board on May 10, 2007 was not timely filed on Form 4, as required under Section 16(a), but such grant has been subsequently reported on Form 4. This failure to timely file resulted from not obtaining an Edgar-filer identification code for Mr. Williams in time to meet the two-day Form 4 filing deadline. Otherwise, based solely upon a review of the copies of such forms furnished to us and written representations from our directors and executive officers, all persons subject to the reporting requirements of Section 16(a) filed all required reports on a timely basis in 2007.

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

This Compensation Discussion and Analysis explains the philosophy underlying our compensation strategy and the fundamental elements of compensation paid to our Chief Executive Officer, Chief Financial Officer, and other individuals, whom we refer to as “Named Executive Officers” or “executive officers,” included in the Summary Compensation Table for the 2007 calendar year. Specifically, this Compensation Discussion and Analysis addresses the following:

 

 

Objectives of Our Compensation Programs

 

Our business plan is shaped by our underlying business philosophy, which is to maximize underwriting profit and net earnings while preserving and achieving long-term growth of shareholders’ equity. As a result, our primary objective is to increase net earnings rather than market share or gross written premium.

 

In our ongoing operations, we will continue to:

 

 

With the goal of assisting in achieving the foregoing business strategy, our Compensation Committee designs our compensation programs to:

 

 

What Our Compensation Programs Are Designed to Reward

 

Our compensation programs are designed to reward executive officers who are capable of leading us in achieving our business strategy on both a short-term and long-term basis. In addition, we reward qualities that we believe help achieve our strategy such as:

 

 

 

Elements of Compensation Provided to the Named Executive Officers

 

We have determined that our company’s and our shareholders’ interests are best served by entering into multi-year employment agreements with the Named Executive Officers. Such agreements are the result of arms’ length negotiations between the Named Executive Officer and the Compensation Committee. We believe that such multi-year employment arrangements benefit us and our shareholders by permitting us to attract and retain executive officers with demonstrated leadership abilities and to secure the services of such executive officers over an extended period of time. In addition, multi-year employment agreements align executive interests with the long-term interests of the company and serve our recruitment and retention goals by providing executive officers with security based on the knowledge of how they will be compensated over the term of the agreement. A summary of the principal terms of these employment agreements is included below under the caption “Employment Agreements and Potential Payments Upon Termination or Change in Control.”

 

The elements of compensation we used during 2007 to compensate the Named Executive Officers included:

 

 

 

How We Determine Each Element of Compensation and Why We Pay Each Element

 

General.  In the following section, we discuss each element of compensation listed above, why we elect to pay each element of compensation and how each element of compensation was determined by the Compensation Committee. In determining the amounts of each element and the aggregate compensation for our Named Executive Officers, we do not use any specific formulae or attempt to satisfy any specific ratio for compensation among our executive officers. We also do not generally target any particular allocation for base salary, annual incentive, or long-term equity awards as a percent of total compensation. The Compensation Committee has not engaged a compensation consultant to assist it in determining appropriate compensation levels, and has not engaged in any formal benchmarking processes. The Compensation Committee has instead relied on the general knowledge, experience and good judgment of its members, both with regard to competitive compensation levels and the relative success that our company has achieved.

 

Pay decisions for our Named Executive Officers are based on a reasoned subjective assessment of factors including:

 

 

 

Because of the significant incentive opportunities available to managers of our subsidiaries based on the subsidiary’s performance, the Compensation Committee also evaluates total compensation to our Named Executive Officers to ensure overall fairness between the compensation opportunities available at both the subsidiary and the corporate level. The differences in the aggregate compensation between our Chief Executive Officer, our President and Chief Operating Officer and our other Named Executive Officers reflect the greater relative responsibilities with respect to the respective positions.

 

Base Salary.  Base salary provides a fixed base level of compensation for our executives for the services they render during the year. The purpose of base salary is to compensate our Named Executive Officers in light of their respective roles and responsibilities over time. Base salary is essential to allow us to compete in the employment marketplace for talent and is an important component of total compensation for the Named Executive Officers. It is vital to our goal of recruiting and retaining executive officers with proven abilities. The level of base salary for each Named Executive Officer was established in the executive officer’s employment agreement upon the date of hire or the date of renewal of an existing employment agreement. Base salary was initially determined for each executive officer based on the abilities, qualifications, accomplishments, and prior work experience of the executive officer. Base salary in a renewal agreement was determined based on the same criteria, but also on how the executive officer performed under his or her previously existing agreement and on the length of the executive officer’s tenure with our company.

 

Upward adjustments of base salary are generally specified in the executive officer’s employment agreement. In addition, upward adjustments in base salary may be considered on a discretionary basis annually. In deciding whether to make a discretionary increase to a Named Executive Officer’s compensation, we consider the consistency and the executive officer’s individual performance over the prior year, changes in the executive officer’s responsibilities, the executive officer’s future potential and internal equity. We also consider data available from objective, professionally-conducted market studies obtained from a range of industry and general market sources.

 

In 2007, Mr. Bramanti entered into an employment agreement relating to his assumption of the position of Chief Executive Officer in November 2006. Each of Messrs. Ellis, Molbeck and Kelbel agreed to amend his respective employment agreement during 2007 in order to alleviate the potential adverse effects of Internal Revenue Code Section 409A and to harmonize employment terms among our executive officers. Mr. Schell entered into a new employment agreement to replace his former agreement with us, which expired in June 2007. See “Employment Agreements and Potential Payments Upon Termination or Change in Control,” below, for further discussion of the terms of the employment contracts of our Named Executive Officers.

 

Base salary for 2007 and increases, if any, for 2008 were set in accordance with the terms of the respective employment agreements of our Named Executive Officers. Our Board did not award any discretionary salary increases under existing employment agreements in 2007 or for 2008; however, each of Messrs. Ellis, Molbeck, Schell and Kelbel received base salary increases in connection with their entering into new employment agreements. Our Compensation Committee deemed these raises necessary to serve our retention goals with respect to these executives and for the purposes of achieving equity, both among similarly situated Named Executive Officers and among our executives at the corporate level and at the subsidiary level. Based upon their reasoned subjective assessment of the market as well as data available from objective, professionally-conducted market studies obtained from a range of industry and general market sources, the members of the Committee deemed the increases to be reasonable.

Annual Incentives.  Annual incentive compensation is intended to motivate and reward our Named Executive Officers for performance in achieving our business objectives.

 

2007 Incentive Compensation Plan.  In 2007, our Board adopted and our shareholders approved the HCC Insurance Holdings, Inc. 2007 Incentive Compensation Plan. The 2007 Plan is intended to advance our interests and those of our shareholders

 

 

Under the 2007 Plan, we grant awards of incentive compensation that may be paid to a participant upon our satisfaction of corporate performance goals. Participation in the 2007 Plan is limited to our Chief Executive Officer and any other employee of ours whose compensation is potentially subject to the deductibility limitations of Section 162(m) of the Internal Revenue Code. Participants are designated by our Compensation Committee. For 2007, Messrs. Bramanti, Ellis, Molbeck, Schell and Kelbel participated in the 2007 Plan. Mr. Cook did not participate in the 2007 Plan because, as a foreign employee, he is not subject to Section 162(m). Our Compensation Committee established maximum bonus amounts for each of these executives, expressed as a percentage of pre-tax income for HCC. Those maximum targets were as follows: Mr. Bramanti — 1.0%, Mr. Ellis — 0.25%, Mr. Molbeck — 0.5%, Mr. Schell — 0.1% and Mr. Kelbel — 0.1%. For 2007, our pre-tax income was $585.9 million. After the conclusion of the calendar year, the Compensation Committee calculates the maximum bonus amount based on the compensation targets established for each executive officer and then determines the actual bonus payment amounts based on a reasoned, subjective assessment of objective and subjective factors (including the achievement of operating results, the achievement of personal objectives, individual performance and equitable considerations among similarly situated executives) to arrive at the actual bonus amount for a particular executive officer, which in each case is equal to or less than the maximum bonus amount under the plan.

 

Our Compensation Committee uses “negative discretion” in determining the actual annual incentive awards for the participants in the 2007 Plan as allowed under Section 162(m). For purpose of Section 162(m), the maximum annual incentive award is determined to the extent we achieve our performance goal of pre-tax income. The Compensation Committee then exercises its negative discretion to reduce the actual annual incentive awards to reflect actual corporate, business unit and individual performance. By setting a high amount that can then be reduced, we believe our annual incentive payments qualify for full deductibility under Section 162(m). This reduction is not a negative reflection on the performance of our company or our Named Executive Officers, but rather is done to ensure maximum flexibility with respect to the payment of performance-based bonuses. If the Compensation Committee were to have instead funded the incentive pool at a minimum threshold and used discretion to increase the amounts to reflect company and individual performance, actual payouts would not qualify for the Section 162(m) tax deduction. For further information on Section 162(m), see the description of Section 162(m) on page 21 of this proxy statement.

 

Discretionary Annual Incentive.  Named Executive Officers who are not participants in the 2007 Plan are eligible for a discretionary annual incentive award. Discretionary annual incentives are designed to advance our interests and those of our shareholders and to achieve the same goals as those set forth in the discussion of the 2007 Plan, above, in that they reward, motivate, attract and retain key executives and foster accountability and teamwork. Mr. Cook’s annual incentive compensation for 2007 was subject to the discretion of the CEO and the Compensation Committee.

 

For 2007, we determined the actual payouts under our 2007 Plan and the discretionary amount of incentive compensation based on individual performance and company performance, including the following factors:

 

 

 

No particular allocation was applied to these measures in arriving at the actual bonus amounts.

 

Taking these factors into account and utilizing reasoned, subjective judgment, the Compensation Committee approved payments of incentive compensation as follows: Mr. Bramanti — $1,950,000; Mr. Ellis — $500,000; Mr. Molbeck — $2,500,000; Mr. Schell — $367,200; Mr. Kelbel — $367,200; and Mr. Cook — $446,468. In reaching final bonus determinations for Messrs. Bramanti and Molbeck, the Committee also considered their performance in completing our transition to new management, their ongoing efforts in resolving outstanding issues regarding our historical stock option granting practices, and their agreement to use at least one-third of the final bonus amount to purchase HCC shares to be held through at least December 11, 2010. The Committee believed that the use of the bonus to purchase HCC stock serves the goals of our compensation program of aligning the executives’ interests with those of our shareholders and providing executives with the opportunity to obtain a significant stake in our company. In each case, for participants in the 2007 Plan, the actual bonus paid was less than the target amount established under the Plan.

 

Long-Term Equity Awards.  We have historically granted stock options, as we believe this element of compensation aligns the employees’ and the executive officers’ interests with the long-term interests of shareholders. We believe that stock options provide incentive for increased shareholder value and serve as a good retention vehicle for the Named Executive Officers. These awards also serve the goal of allowing our executives to obtain a significant stake in our company.

 

In 2007, we granted options to Messrs. Bramanti, Ellis, Molbeck, Schell, Kelbel and Cook in the respective amounts of 550,000, 50,000, 150,000, 100,000, 100,000 and 50,000 shares. For all except Mr. Cook, each grant was in connection with the executive’s execution of a new or amended employment agreement with us. In determining the amount of these grants, the Compensation Committee considered prior grants made to these Named Executive Officers, or to similarly situated executives, the potential value of the awards, the cost of the awards to us and general market conditions and then utilized reasoned, subjective judgment to arrive at a final award. The exercise price of each grant was set at the closing price of our common stock on the date of the Compensation Committee meeting at which such grant was approved.

 

All of the Named Executive Officers had stock options outstanding during 2007 that vest based on the executive officer’s continued employment. We have granted each executive officer an equity award in connection with his entering a new employment agreement or amending a prior employment agreement with us. Additional grants of equity awards, in particular stock options, may be made at one of our regularly scheduled Compensation Committee meetings during the year. The Compensation Committee’s policy is to set the exercise price of stock option grants at the closing price of our stock on the date of the Compensation Committee meeting at which such options are granted. We do not coordinate the grant of awards with the release of earnings for any purpose, including the purpose of affecting the value of executive compensation.

 

Non-qualified Deferred Compensation.  Each of Messrs. Bramanti and Molbeck are entitled to the payment of deferred compensation under the terms of their employment agreements with us. We believe the tax benefit

bestowed on these executives by our deferring payment of a portion of their compensation is valuable to the executives and assists us in meeting our retention goals. Our paying a portion of base compensation as deferred compensation also ensures these executives’ compensation will be fully tax deductible. Consequently, we have adopted non-qualified deferred compensation plans for each of Mr. Bramanti and Mr. Molbeck. The plans are substantially identical and are discussed in more detail under the caption “Non-qualified Deferred Compensation Plans” below.

 

Perquisites.  While in the past perquisites might have represented a material component of compensation for some of our Named Executive Officers, our current policy is that the costs of these benefits will constitute only a small percentage of each Named Executive Officer’s total compensation. In general, the perquisites that an executive officer is eligible to receive are contained in such executive’s employment agreement. In some instances, our Named Executive Officers were provided perquisites by their previous employers, and we offered perquisites in order to attract the Named Executive Officers. Perquisites may include: extended medical benefits; a corporate apartment; an automobile allowance; personal travel on the corporate aircraft; payment of club dues; payment of life and disability insurance premiums; physical exams and payment for estate planning. These benefits are reflected in the All Other Compensation Column of the Summary Compensation Table, below.

 

Employee Benefits.  Our Named Executive Officers, except for Mr. Cook, have the opportunity to participate in a number of benefit programs that are generally available to all of our U.S. employees. The Named Executive Officers are eligible to participate in company-sponsored benefit programs on the same terms and conditions as those generally provided to other salaried employees; however, in some instances described below, the executives are entitled to additional benefits. These benefits include:

 

Health and Insurance Plans.  Basic health benefits, dental benefits, disability protection, life insurance, and similar programs are provided to make certain that access to healthcare and income protection is available to our employees and the employees’ family members. The cost of company-sponsored benefit programs is negotiated by us with the providers of such benefits. In general, the Named Executive Officers contribute to the cost of the benefits; however, medical benefits are provided to Messrs. Bramanti and Molbeck at no cost to them.

 

In addition, under the terms of their respective employment agreements, each of Messrs. Bramanti, Ellis, Molbeck, Schell and Kelbel and their respective qualified beneficiaries, where applicable, is entitled to extended medical benefits under our medical plan after termination of their respective employment with us. In the case of Messrs. Ellis, Schell and Kelbel, such benefits are at no cost to them and extend until they or their respective spouses become eligible for Medicare or the date their respective children would have ceased to be covered under our benefit plans had the executive remained an employee. For each of Messrs. Bramanti and Molbeck, such benefits are at no cost and extend until the later to occur of his death, the death of his spouse (if he is married on the date of his death) or the date their respective children would have ceased to be covered under our benefit plans had the executive remained an employee. We agreed to provide such extended medical benefits to Mr. Bramanti and Mr. Molbeck during each of their previous employment with us.

 

Retirement Benefits.  The Named Executive Officers, except for Mr. Cook, are eligible to participate in our 401(k) Plan, which is a company-wide, tax-qualified retirement plan. The intent of this plan is to provide all employees with a tax-advantaged savings opportunity for retirement. We sponsor this plan to help employees at all levels save and accumulate assets for use during their retirement. As required, eligible pay under this plan is capped at Internal Revenue Code annual limits.

 

Under Mr. Cook’s employment agreement, we are obligated to make a $115,089 annual contribution to the HCC Service Company Limited Retirement and Death Benefit Scheme unless Mr. Cook elects to receive this benefit in base salary. Mr. Cook receives this retirement benefit because he is located in the United Kingdom and is not eligible to participate in our 401(k) Plan.

 

How We Determine Executive Officer Compensation

 

Role of the Compensation Committee.  The Compensation Committee is composed of independent, outside members of the Board of Directors in accordance with NYSE rules, current SEC regulations, and Section 162(m) of

the Internal Revenue Code and is responsible for establishing, reviewing, approving, and monitoring the compensation paid to the Named Executive Officers.

 

Under our current policy, the Compensation Committee negotiates the terms of each Named Executive Officer’s employment agreement and any necessary modifications that are needed over time.

 

The Chief Executive Officer recommends to the Compensation Committee annual pay increases, discretionary annual incentives, and long-term incentive grants for the other Named Executive Officers. The Compensation Committee then evaluates each executive officer, determines whether the CEO will receive any annual pay increase, sets performance criteria for discretionary annual incentive grants, and makes long-term incentive grants, if any. As part of its evaluation process, the Compensation Committee considers our performance, internal equity and consistency, the executive officer’s individual performance over the prior year, changes in responsibilities, and future potential as well as data available from objective, professionally-conducted market studies obtained from a range of industry and general market sources.

 

In addition, the Compensation Committee views the various components of compensation as related but distinct. As a result, the Compensation Committee has not adopted any policy or guidelines for allocating compensation between long-term and currently paid compensation, between cash and non-cash compensation, or among different forms of non-cash compensation.

 

Benchmarking.  The Compensation Committee did not use benchmarking to set executive compensation in 2007.

 

Compensation Consultant.  The Compensation Committee may retain and engage, at its sole discretion, to the extent deemed necessary and appropriate, any compensation consultants, outside counsel or other advisors, having the sole authority to approve the firm’s or advisor’s fees and other retention. In early 2007, in conjunction with formulating Mr. Bramanti’s employment agreement, the Compensation Committee engaged Hewitt Associates to perform market analyses of executive compensation practices from which it presented data to the Compensation Committee as to the form and amount of executive compensation for our Chief Executive Officer. Hewitt Associates is independent of us, reports directly to the Compensation Committee and has no other business relationship with us other than assisting the Compensation Committee with its executive compensation practices.

 

Other Important Compensation Policies Affecting the Named Executive Officers

 

Financial Restatement.  The Compensation Committee does not have a policy in place governing retroactive modifications to any cash or equity based incentive compensation paid to the Named Executive Officers where the payment of such compensation was predicated upon the achievement of specified financial results that were subsequently the subject of a restatement. However, if the Compensation Committee deems it appropriate, it will seek to recoup amounts, to the extent permitted by governing law, determined pursuant to a financial restatement to have been inappropriately paid to an executive officer.

 

Stock Ownership Requirements.  The Compensation Committee does not maintain a policy relating to stock ownership guidelines or requirements for its Named Executive Officers. The Compensation Committee is reviewing whether such a policy is appropriate for its Named Executive Officers. However, in connection with the payment of their incentive bonuses under the 2007 Incentive Compensation Plan, each of Messrs. Bramanti and Molbeck agreed to purchase, and did purchase on March 14, 2008, $652,187 and $836,299, respectively, of our common stock, representing 29,490 and 37,500 shares, respectively. These shares are subject to a restriction on transfer through December 11, 2010.

 

Trading in Our Stock Derivatives.  Our Insider Trading Policy prohibits executive officers from purchasing or selling options on our common stock, engaging in short sales with respect to our common stock, or trading in puts, calls, straddles, equity swaps or other derivative securities that are directly linked to our common stock.

 

Tax Deductibility of the Named Executive Officers’ Incentive and Equity Compensation.  Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public companies for compensation over $1.0 million paid to a corporation’s chief executive officer and the four other most highly compensated executive officers, excluding the chief financial officer.

Section 162(m) further provides that qualifying performance-based compensation will not be subject to the deduction limit if certain requirements are met. We currently structure our discretionary annual incentive compensation for executive officers to comply with Section 162(m) through the 2007 Incentive Compensation Plan. Our current annual incentives satisfy Section 162(m)’s requirement that they be “payable solely on account of the attainment of one or more performance goals.” Although we intend to structure grants under future stock award plans and cash incentive plans in a manner that complies with this section, we may forego all or some portion of a deduction to conform to our compensation goals.

 

In connection with the compensation of our executive officers, the Compensation Committee is aware of Section 162(m) as it relates to deductibility of qualifying compensation paid to executive officers. In addition, we are aware of the recently adopted Section 409A of the Internal Revenue Code and believe we should structure our compensation plans in ways to minimize the likelihood our employees, including Named Executive Officers, have to pay the excise taxes set forth under Section 409A. If any provision of an employment agreement we have entered into would cause the Named Executive Officer to incur any additional tax under Section 409A or any regulations or Treasury guidance, we will attempt to reform such provision in a manner that maintains, to the extent possible, the original intent of the provision without violating Section 409A. In addition, the employment agreements of Messrs. Molbeck, Ellis, Kelbel and Schell require us to reimburse the executives for any 409A excise taxes incurred by the executives in the event their employment agreements are not fully 409A-compliant.

 

In addition, the future exercise of certain options held by Named Executive Officers, which were issued at a grant date price that was less than the measurement date price, may have resulted in compensation to our Named Executive Officers that exceeds the deductibility limitations under Section 162(m). In connection with our stock option review in 2006, we repriced these options before December 31, 2006 so that the grant date price equals the measurement date price. However, notwithstanding such repricing, these options no longer qualify as “qualified performance-based compensation” under Section 162(m). Therefore, to the extent a Named Executive Officer were to exercise such options during a given year, any gain realized on such exercise would be included in the calculation of non-excluded compensation, and we would not be able to deduct any such compensation that exceeds the deductibility limits. Thus, future option exercise activity that is beyond our control or the Compensation Committee’s control could cause non-deductible compensation expense under Section 162(m). This risk will remain until all such repriced options are exercised, terminated or expire.

 

Change in Control Agreements.  Most of the executive officers’ employment agreements provide for severance in the event of change in control. This is discussed in more detail under the caption “Employment Agreements and Potential Payments Upon Termination or Change in Control” below.

 

Mr. Molbeck is the only Named Executive Officer who currently will be entitled to a payment sufficient to reimburse him fully on an after-tax basis for any tax under Section 4999 of the Internal Revenue Code, as well as any costs associated with resolving the application of such tax to him.

 

REPORT OF THE COMPENSATION COMMITTEE

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based upon such review, the related discussions and such other matters deemed relevant and appropriate to the Compensation Committee, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement to be delivered to shareholders.

 

Submitted by the Compensation Committee:

 

J. Robert Dickerson, Chairman
Allan W. Fulkerson
James E. Oesterreicher
Michael A. F. Roberts

Summary of Cash and Certain Other Compensation

 

The following table provides certain information concerning compensation we paid to or accrued on behalf of our Principal Executive Officer, Principal Financial Officer and the other four most highly compensated executive officers serving at December 31, 2007, who are sometimes referred to in this Proxy Statement collectively as the “Named Executive Officers.”

 

2007 Summary Compensation Table

 

 

 

 

 

 

All Other Compensation

 

The following table describes each component of the All Other Compensation column in the Summary Compensation Table.

 

 

 

 

 

2007 Grants of Plan Based Awards

 

The following table provides details regarding plan based awards granted to the Named Executive Officers during 2007.

 

 

 

 

2007 Outstanding Equity Awards at Fiscal Year End

 

The following table contains information with respect to outstanding option awards at December 31, 2007. We have not granted any stock awards.

 

 

 

 

 

2007 Option Exercises and Stock Vested Table

 

The following table contains information with respect to the options exercised by the Named Executive Officers during 2007. No stock awards to our named Executive Officers vested in 2007.

 

 

 

 

2007 Non-qualified Deferred Compensation Plans

 

The following table contains information with respect to the non-qualified deferred compensation plans by the Named Executive Officers during 2007.

 

 

 

 

Deferred Compensation Plans

 

Each of Mr. Bramanti and Mr. Molbeck receives deferred compensation under his respective employment agreement. We have implemented the HCC Insurance Holdings, Inc. Nonqualified Deferred Compensation Plan for Frank J. Bramanti and the HCC Insurance Holdings, Inc. Nonqualified Deferred Compensation Plan for John N. Molbeck, Jr. under which this deferred compensation is paid. The terms of the plans, which are substantially identical except as noted below, are as follows. The eligible participant under each plan is the individual executive named in the plan, but only for so long as he remains an employee of HCC. Monthly contributions are credited to the

participant’s account in an amount equal to one-twelfth of the annual deferred compensation under the executive’s employment agreement, and the Compensation Committee may also permit additional discretionary contributions. The amount credited to the executive’s account will accrue earnings, which shall compound monthly, at the executive’s election at one of the following rates: the prime rate, the rate of return on HCC common stock, or the rate of return on the S&P 500. Payment of the executive’s account balance will occur within 30 days of the executive’s separation from service with HCC and will be payable to the executive (or in the event of the executive’s death, to the executive’s beneficiary) in a single lump sum. Each plan is administered by our Compensation Committee. No separate trust or fund shall be created, and all benefits payable under the plans will be paid from HCC’s general assets.

 

Employment Agreements and Potential Payments Upon Termination or Change in Control

 

We have entered into employment agreements with our Chief Executive Officer, Principal Financial Officer and the other Named Executive Officers listed below. The employment agreements set forth the general terms and conditions of each executive officer’s employment. Each of the executives has the right to voluntarily terminate his employment at any time.

 

We do not maintain a separate severance plan for our Named Executive Officers. Severance benefits for our Named Executive Officers are limited to those as set forth in the respective Named Executive Officer’s employment agreement.

 

The following summarizes the terms of each of these agreements:

 

Frank J. Bramanti

 

General.  According to the terms of the Employment Agreement entered into on April 12, 2007, which is effective as of January 1, 2007, Mr. Bramanti serves as our Chief Executive Officer. Mr. Bramanti’s employment agreement expires on December 31, 2010. Mr. Bramanti will receive an annual salary of $1,950,000 (consisting of a base salary of $950,000 and deferred compensation of $1,000,000). In addition, Mr. Bramanti will be eligible to receive bonus compensation under the 2007 Incentive Compensation Plan. Mr. Bramanti and his qualified beneficiaries are entitled to extended medical coverage. These extended medical benefits are to be provided at company expense. The benefits are to last until, in general, the later of Mr. Bramanti or his spouse dies or, in the case of Mr. Bramanti’s qualified beneficiaries, the date such person would cease to be eligible for coverage under our group health plan had Mr. Bramanti remained an employee through the date the coverage lapses. He is also entitled to supplementary term life insurance of $5,000,000 at the company’s expense. Mr. Bramanti’s employment agreement also contains a provision under which he agrees to provide consulting services for six months after the termination of the agreement on December 31, 2010 for the sum of $300,000. If the agreement is terminated, Mr. Bramanti has agreed to certain provisions relating to non-competition, confidentiality and non-solicitation of customers and employees.

 

Benefits Upon the Occurrence of Certain Termination Events.  In the event Mr. Bramanti’s employment is terminated as a result of his death or disability, he or his estate, as the case may be, will receive his accrued salary and unreimbursed expenses through the date of termination and monthly payments in an aggregate amount equal to base salary and deferred compensation for the lesser of 18 months or the remainder of the term. In the event Mr. Bramanti’s employment is terminated by us without “Cause,” or by Mr. Bramanti for “Good Reason” or for any reason other than “Cause” after a “Change in Control,” in each such case as set forth in the employment agreement, Mr. Bramanti is entitled to payment of a lump sum equal to his base salary and deferred compensation for the remainder of the term and the Consulting Period, as well as benefits for the remainder of the term and all accrued compensation and benefits through the termination date. If his employment is terminated by us for “Cause” or by Mr. Bramanti without “Good Reason,” he is entitled to all accrued compensation and benefits through the date of termination. Mr. Bramanti’s medical coverage at company expense continues for the period specified above under any termination event.

Edward H. Ellis, Jr.

 

General.  According to the terms of his Employment Agreement effective as of March 1, 2007, Mr. Ellis serves as Executive Vice President and Chief Financial Officer of HCC. Mr. Ellis’s employment agreement expires on December 31, 2009. He will receive a salary of $525,000 in 2008 and $550,000 in 2009. Mr. Ellis will be eligible to receive bonus compensation under the 2007 Incentive Compensation Plan. Mr. Ellis and his qualified beneficiaries are entitled to extended medical coverage after termination of Mr. Ellis’s employment. These extended medical benefits are to be provided at company expense. The benefits are to last, in general, in the case of Mr. Ellis and his spouse, until Mr. Ellis or his spouse becomes eligible for Medicare, or, in the case of Mr. Ellis’s qualified beneficiaries, until the date such person would have ceased to be eligible for coverage under our group health plan had Mr. Ellis remained an employee through the date such coverage lapses. If the agreement is terminated, Mr. Ellis has agreed to certain provisions relating to non-competition, confidentiality and non-solicitation of customers and employees.

 

Benefits upon the Occurrence of Certain Termination Events.  In the event Mr. Ellis’s employment is terminated as a result of his death or disability, he or his estate, as the case may be, will receive his accrued salary and unreimbursed expenses through the date of termination, a discounted lump sum cash payment equal to Mr. Ellis’s base salary for the lesser of 18 months or the remainder of the term, a discounted lump sum cash payment in lieu of benefits other than medical equal to $1,350 times the lesser 18 months or the remainder of the term, consideration for a bonus payment and continuing medical benefits as described above. In the event Mr. Ellis’s employment is terminated by HCC without “Cause,” by Mr. Ellis for “Good Reason” or by Mr. Ellis after a “Change in Control,” in each such case as set forth in the agreement, Mr. Ellis will be entitled to receive his accrued salary and unreimbursed expenses through the date of termination, a discounted lump sum cash payment equal to the amount of base salary that would have been payable for the remainder of the term, a discounted lump sum cash payment in lieu of benefits other than medical equal to $1,350 times the months remaining in the term and continuing medical benefits as described above. Mr. Ellis may terminate on a Change of Control if within 12 months of a Change in Control of HCC, there is a material change in the nature or status of Mr. Ellis’s duties or responsibilities. In the event Mr. Ellis’s employment is terminated for “Cause” or by Mr. Ellis without “Good Reason,” Mr. Ellis will be entitled to receive his accrued salary and unreimbursed expenses through the date of termination.

 

John N. Molbeck, Jr.

 

General.  According to the terms of his Employment Agreement effective as of March 1, 2007, Mr. Molbeck serves as President and Chief Operating Officer of HCC. Mr. Molbeck’s employment agreement expires on December 31, 2010. He will receive an annual salary of $1,350,000 (consisting of a base salary of $1,000,000 and deferred compensation of $350,000). If Mr. Molbeck is not a participant under our 2007 Incentive Compensation Plan, he is eligible for a discretionary bonus to be determined by our Compensation Committee. Mr. Molbeck and his qualified beneficiaries are entitled to extended medical coverage after termination of Mr. Molbeck’s employment. These extended medical benefits are to be provided at company expense. The benefits are to last until, in general, the later of the date Mr. Molbeck or his spouse dies or, in the case of Mr. Molbeck’s qualified beneficiaries, the date such person would cease to be eligible for coverage under our group health plan had Mr. Molbeck remained an employee through the date such coverage lapses. Mr. Molbeck is also entitled to certain other perquisites, including a car allowance, reimbursement for estate planning expenses, supplementary term life insurance of $1,000,000 at Company expense and personal travel on the corporate aircraft. The agreement provides that upon termination for any reason, Mr. Molbeck will serve HCC as a consultant for a period of six years and nine months and receive an annual consulting fee of $256,200. Mr. Molbeck’s right to receive the annual consulting fees were vested at the inception of his employment agreement, and such fees remain payable in the event of Mr. Molbeck’s death or disability. We agreed to this consulting arrangement during Mr. Molbeck’s previous employment agreement with us and continued to be obligated by it; therefore, we included the provision in his new employment agreement. If the agreement is terminated, Mr. Molbeck has agreed to certain provisions relating to non-competition, confidentiality and non-solicitation of customers and employees.

 

Benefits upon the Occurrence of Certain Termination Events.  In the event Mr. Molbeck’s employment is terminated as a result of his death or disability, he or his estate, as the case may be, will receive his accrued salary and unreimbursed expenses through the date of termination, a discounted lump sum cash payment equal to

Mr. Molbeck’s base salary and deferred compensation for the lesser of 18 months or the remainder of the term, a discounted amount equal to the consulting fees that would have been paid to Mr. Molbeck had he retired on the expiration date and provided the consulting services under the agreement, continuing medical benefits as described above, consideration for a bonus payment, and a discounted lump sum cash payment in lieu of benefits other than medical equal to $4,650 times: in the event of disability, the number of months remaining in the term; and, in the event of death, the lesser of 18 months or the number of months remaining in the term. In the event his employment agreement is terminated by HCC without “Cause,” by Mr. Molbeck for “Good Reason” or by Mr. Molbeck after a “Change in Control,” in each such case as set forth in the employment agreement, Mr. Molbeck will be entitled to receive his accrued salary and unreimbursed expenses through the date of termination, a discounted lump sum cash payment equal to his base salary and deferred compensation for the greater of 12 months or the remainder of the term, a discounted lump sum cash payment in lieu of benefits other than medical equal to $4,650 times the remaining number of months in the term, continuing medical benefits as described above, consideration for a bonus payment under our 2007 Incentive Compensation Plan if he is a participant in that plan or a discretionary bonus if he is not a participant, and, if applicable after a Change in Control, reimbursement for any excise tax under Section 4999 of the Internal Revenue Code. Mr. Molbeck may terminate his employment for any reason within 180 days of a Change of Control. In the event Mr. Molbeck’s employment is terminated for “Cause” or by Mr. Molbeck without “Good Reason,” Mr. Molbeck will be entitled to receive his accrued salary and unreimbursed expenses through the date of termination and continuing medical benefits.

 

Michael J. Schell

 

General.  According to the terms of his Employment Agreement effective as of June 1, 2007, Mr. Schell serves as Executive Vice President of HCC and President and Chief Executive Officer of Houston Casualty Company. Mr. Schell oversees our domestic property and casualty operations. His employment agreement expires on June 30, 2011. Mr. Schell receives a salary of $612,000 each year during the term of the agreement. If Mr. Schell is not a participant under our 2007 Incentive Compensation Plan, he is eligible for a discretionary bonus to be determined by our Compensation Committee. Mr. Schell and his qualified beneficiaries are entitled to extended medical coverage after termination of Mr. Schell’s employment. These extended medical benefits are to be provided at company expense. The benefits are to last, in general, in the case of Mr. Schell and his spouse, until Mr. Schell or his spouse becomes eligible for Medicare, or, in the case of Mr. Schell’s qualified beneficiaries, until the date such person would have ceased to be eligible for coverage under our group health plan had Mr. Schell remained an employee through the date such coverage lapses. We have also agreed to provide life and accidental death insurance policies at company expense. If the agreement is terminated, Mr. Schell has agreed to certain provisions relating to non-competition, confidentiality and non-solicitation of customers and employees.

 

Benefits upon the Occurrence of Certain Termination Events.  Mr. Schell’s rights upon termination of his employment are similar to those provided to Mr. Ellis, except that his monthly cash payment in lieu of benefits other than medical is $1,600.

 

Craig J. Kelbel

 

General.  According to the terms of his Employment Agreement effective as of March 1, 2007, Mr. Kelbel acts as Executive Vice President of HCC and President and Chief Executive Officer of HCC Life Insurance Company. Mr. Kelbel oversees our domestic life, accident and health operations. His employment agreement expires on February 28, 2011. Mr. Kelbel receives a salary of $612,000 each year during the term of the agreement. If Mr. Kelbel is not a participant under our 2007 Incentive Compensation Plan, he is eligible for a discretionary bonus to be determined by our Compensation Committee. Mr. Kelbel and his qualified beneficiaries are entitled to extended medical coverage after termination of Mr. Kelbel’s employment. These extended medical benefits are to be provided at company expense. The benefits are to last, in general, in the case of Mr. Kelbel and his spouse, until Mr. Kelbel or his spouse becomes eligible for Medicare, or, in the case of Mr. Kelbel’s qualified beneficiaries, until the date such person would have ceased to be eligible for coverage under our group health plan had Mr. Kelbel remained an employee through the date such coverage lapses. Mr. Kelbel is also entitled to certain other perquisites, including country club dues and a company-provided apartment. The agreement provides that upon Mr. Kelbel’s retirement after January 1, 2010 or upon termination for any reason other than “Cause,” Mr. Kelbel will serve HCC

as a consultant for a period equal to the number of whole years after January 1, 2002 in which Mr. Kelbel was a full-time employee of HCC and will receive an annual consulting fee of $75,000. If the employment agreement is terminated, Mr. Kelbel has agreed to certain provisions relating to non-competition, confidentiality and non-solicitation of customers and employees.

 

Benefits upon the Occurrence of Certain Termination Events.  Mr. Kelbel’s rights upon termination of his employment upon death or disability are similar to those provided to Mr. Ellis, except that his monthly cash payment in lieu of benefits other than medical is $2,200. Mr. Kelbel’s rights upon termination of his employment by HCC without “Cause,” by Mr. Kelbel for “Good Reason” or by Mr. Kelbel after a “Change in Control,” are similar to those provided to Mr. Ellis, except that his monthly cash payment in lieu of benefits other than medical is $2,200 and except that in addition to other benefits, Mr. Kelbel is entitled to a discounted lump sum cash payment in an amount equal to the total consulting fees that would have been payable had Mr. Kelbel retired on the expiration date of the agreement and provided consulting services as set forth in the employment agreement.

 

Barry J. Cook

 

According to the terms of his Service Agreement effective as of January 1, 2006, Mr. Cook serves as an Executive Vice President of HCC and Chief Executive Officer of HCC Insurance Holdings (International) Limited and oversees our international operations. Mr. Cook’s employment agreement expires on December 31, 2008. Either party may terminate the agreement without cause on six month’s notice; provided, however, that in the event we terminate the agreement without cause, we must pay Mr. Cook salary and benefits through the end of the term. Mr. Cook received a salary of $859,202 in 2007 (which amount includes $115,089 he elected to receive as salary rather than as a contribution to a defined contribution retirement plan) and will receive $793,720 in 2008. In addition, Mr. Cook is eligible for a discretionary bonus. Additional compensation under the agreement includes an annual contribution in the amount of $115,089 into a defined contribution retirement plan (which at Mr. Cook’s election may be received as salary instead), car allowance in the amount of $35,717, supplemental medical, and company-provided life insurance. If the agreement is terminated, Mr. Cook has agreed to certain provisions relating to non-competition, confidentiality and non-solicitation of customers and employees. All compensation totals for Mr. Cook have been converted to U.S. dollars from British pounds sterling at the rate of 1.9843, the Federal Reserve Bank of New York noon buying rate on December 31, 2007, the last trading day of the year. For forward-looking amounts, such exchange rate is subject to fluctuation.

 

Potential Payments on Termination Following Certain Termination Events

 

The following sets forth the incremental compensation that would be payable by us to each of our Named Executive Officers in the event of the Named Executive Officer’s termination of employment with us under various scenarios, which we refer to as “termination events,” including the Named Executive Officer’s voluntary resignation, involuntary termination for “Cause,” involuntary termination without “Cause,” termination by the executive for “Good Reason,” termination in connection with a “Change in Control,” termination in the event of “Disability,” termination in the event of death, and termination in the event of retirement, where each of these defined terms has the meaning ascribed to it in the respective executive’s employment agreement. In accordance with applicable SEC rules, the following discussion assumes:

 

 

The analysis contained in this section does not consider or include payments made to a Named Executive Officer with respect to contracts, agreements, plans or arrangements to the extent they do not discriminate in scope, terms or operation, in favor of our executive officers and that are available generally to all salaried employees, such as our 401(k) plan. The actual amounts that would be paid upon a Named Executive Officer’s termination of employment can only be determined at the time of such executive officer’s termination. Due to the number of factors that affect the nature and amount of any compensation or benefits provided upon the termination events, any actual amounts paid or distributed may be higher or lower than reported below. Factors that could affect these

amounts include the timing during the year of any such event, our stock price at such time, the 90-day Treasury bill rate used to discount payments and the executive officer’s age and service.

 

Each Named Executive Officer is party to an employment agreement with us and to equity award agreements relating to options granted under our 2001 Flexible Incentive Plan and our 2004 Flexible Incentive Plan. These agreements and plans may provide that a Named Executive Officer is entitled to additional consideration in the event of a termination event. All of the Named Executive Officers’ employment agreements provide for a cash payment in the event of termination without Cause or for Good Reason.

 

Following is a discussion and related disclosure on potential payments on a Change in Control for each of our Named Executive Officers.

 

Each table below indicates the amount of compensation payable by us to the applicable Named Executive Officer including: cash severance, consulting fee payments, bonus payments, continuation of health coverage, stock option awards, and excise tax gross-up for amounts due under Section 280G and 4999 of the Internal Revenue Code (“Gross-Up”), upon different termination events.

 

Frank J. Bramanti.  In addition to the amounts listed below, Mr. Bramanti is entitled to all accrued compensation, unreimbursed expenses and other benefits through the date of termination in the event of his termination.

 

 

 

 

Edward H. Ellis, Jr. In addition to the amounts listed below, Mr. Ellis is entitled to all accrued compensation, unreimbursed expenses and other benefits through the date of termination in the event of his termination.

 

 

 

 

John N. Molbeck, Jr. In addition to the amounts listed below, Mr. Molbeck is entitled to all accrued compensation, unreimbursed expenses and other benefits through the date of termination in the event of his termination.

 

 

 

 

Michael J. Schell In addition to the amounts listed below, Mr. Schell is entitled to all accrued compensation, unreimbursed expenses and other benefits through the date of termination in the event of his termination.