UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

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HCC Insurance Holdings, Inc.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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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 27, 2010, 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 Thursday, May 27, 2010, 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 the ten directors named in the proxy statement for a one-year term, each to serve until the Annual Meeting of Shareholders in 2011 and until his or her successor is duly elected and qualified.

 

2. To ratify the appointment of PricewaterhouseCoopers LLP as auditors for 2010.

 

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

 

Our Board of Directors has fixed the close of business on April 5, 2010 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, 2009 is enclosed.

 

By Order of the Board of Directors,

 

 

Randy D. Rinicella,
Senior Vice President, General Counsel and Secretary

 

Houston, Texas

April 9, 2010

 

 

 

Important Notice Regarding the Availability of Proxy Materials for the Stockholders’ Meeting to Be Held on May 27, 2010:

 

Our proxy material relating to our 2010 Annual Meeting (notice, proxy statement, proxy and 2009 Annual Report) is available at “Investor Relations” on our website at http://ir.hcc.com/phoenix.zhtml?c=90423&p=proxy . The proxy card included in these materials contains instructions on how to vote by internet, vote by phone or vote by mail. Specifically, to vote by internet, visit www.proxyvote.com to use the internet to transmit your voting instructions up until 11:59 P.M. Eastern time the day before the cut-off date or meeting date. To vote by phone, use any touch-tone telephone to call 1-800-690-6903 to transmit your voting instructions up until 11:59 P.M. Eastern time the day before the cut-off date or meeting date. To vote by mail, mark, sign and date your proxy card and return it in the postage paid envelope provided or return to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717.

HCC INSURANCE HOLDINGS, INC.

13403 Northwest Freeway

Houston, Texas 77040-6094

 

 

PROXY STATEMENT

 

 

ANNUAL MEETING OF SHAREHOLDERS
May 27, 2010

 

 

INFORMATION CONCERNING SOLICITATION AND VOTING

 

This Proxy Statement is first being mailed on or about April 9, 2010 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 Thursday May 27, 2010, at 9:00 A.M. Houston time, at the Hotel Granduca, 1080 Uptown Park Boulevard, Houston, TX 77056, and any postponement or adjournment thereof. A shareholder giving a proxy has the power to revoke the proxy at any time until 11:59 P.M. Eastern time May 26, 2010. 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.

 

Only shareholders of record on our record date of April 5, 2010 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 114,977,844 shares of our common stock outstanding and entitled to vote at the annual meeting.

 

Quorum and voting requirements are set forth in the Delaware General Corporation Law and our governing documents. A majority of the outstanding shares of our common stock, entitled to vote and represented in person or by proxy, will constitute a quorum at our annual meeting. Abstentions, withhold votes and broker non-votes (described below) are each included in the determination of the number of shares present for purposes of determining the presence of a quorum. The election of directors will be determined by a plurality of the votes cast, which means that the 10 nominees who receive the highest votes will be elected. Withhold votes will not impact the outcome of the election of directors. 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 ratification of our independent registered public accounting firm. Abstentions have the effect of an against vote. If you hold your shares in “street name” through a broker or other nominee, your broker or nominee may not be permitted to exercise voting discretion on some of the items to be acted upon, including the election of our directors. Thus, if you do not give your broker or nominee specific instructions, your shares may not be voted on those items (broker non-votes) and will not be counted in determining the number of shares necessary for approval for each item. Our Board of Directors does not anticipate calling for a vote on any matter other than those described herein.

 

If you return your signed proxy card but do not mark the boxes indicating how you wish to vote, your shares will be voted FOR the election of each of the director nominees named herein and FOR ratification of the appointment of PricewaterhouseCoopers LLP.

 

STOCK OWNERSHIP OF MANAGEMENT

 

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

 

 

 

 

 

PROPOSAL NUMBER 1 — ELECTION OF DIRECTORS

 

Each director elected at our annual meeting will continue to serve until his or her successor is duly elected and qualified at the next annual meeting of shareholders in 2011 or until his or her earlier death, resignation or removal. Each of the nominees is currently a director of HCC. Our Board of Directors has affirmatively determined that each of Ms. Bozeman, Mr. Duer, Dr. Flagg, Mr. Hamilton, Mr. Oesterreicher, Mr. Rosholt, Mr. Williams and Mr. Wise are “independent” directors, as that term is defined by the New York Stock Exchange (NYSE). Such directors are collectively referenced in this Proxy Statement as the “Independent Directors.”

 

Each of the proposed nominees is standing for re-election to our Board of Directors and we believe that each has served our shareholders’ interests well during his or her tenure as a director. We believe that HCC and its shareholders benefit from the wide variety of industry and professional experience that characterizes the 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 during the last five years. 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 Board may reduce the size of the Board accordingly, or the persons named in the enclosed form of Proxy will vote in accordance with their best judgment for any substitute nominee.

 

When considering whether the Board’s directors and nominees have the experience, qualifications, attributes and skills, taken as a whole, to enable the Board to satisfy its oversight responsibilities effectively in light of Company’s business and structure, the Board focused primarily on the information discussed in each of the Board members’ biographical information set forth below.

 

In particular, with regard to Ms. Bozeman, the Board considered her more than thirty years experience in financial management and analysis. Similarly, with regard to Mr. Bramanti, the Board considered his twenty years in the insurance industry, including his experience as an executive at HCC. As for Mr. Duer, the Board considered his more than forty years of experience as a Certified Public Accountant focusing on the insurance sector. With regard to Dr. Flagg, the Board considered his expertise in economics and his experience as a Certified Public Accountant. With regard to Mr. Hamilton, the Board considered his significant management experience and business background, including international experience, as well as his leadership skills and expertise in corporate governance. As for Mr. Molbeck, the Board considered his extensive experience in the insurance industry, including his services at HCC as President and Chief Executive Officer and, prior to that, as HCC’s Chief Operating Officer. With regard to Mr. Oesterreicher, the Board considered his extensive executive management experience as well as his leadership skills. As for Mr. Rosholt, the Board considered his extensive knowledge in finance and experience in the insurance and financial services industries, as well as his significant knowledge of risk management practices. With regards to Mr. Williams, the Board considered his thirty years of industry experience and his distinguished career in the life, accident and health insurance sector as well as his international experience. As for Mr. Wise, the Board considered his extensive knowledge of investment management and finance.

Information Regarding Nominees for Director

 

 

Our Board of Directors recommends that our shareholders vote “FOR” each of the proposed nominees.

 

Information Regarding Executive Officers Who Are Not Nominees for Director

 

 

Executive Sessions of the Board of Directors

 

Independent Directors meet regularly in executive session at each regularly scheduled meeting of our Board of Directors. Christopher J.B. Williams, as the independent Chairman of the Board, serves as the presiding director at each executive session. Our Independent Directors met in executive session five times in 2009.

 

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: Randy D. Rinicella, 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.

 

Director Independence

 

Our Board of Directors has established criteria for determining director “independence” as set forth in our Corporate Governance Guidelines For the Board of Directors. In particular, no director shall be deemed to be “independent” unless the Board 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 or any Board committee. In addition, the following criteria apply to determine independence:

 

 

 

 

 

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

 

 

Our Board of Directors has affirmatively determined that each of Ms. Bozeman, Mr. Duer, Dr. Flagg, Mr. Hamilton, Mr. Oesterreicher, Mr. Rosholt, Mr. Williams and Mr. Wise meets the criteria for independence set

forth above and that all members of the Audit Committee meet the further requirements for independence set forth above.

 

In 2008, the Board determined that Patrick B. Collins, J. Robert Dickerson, Allan W. Fulkerson, and Michael A.F. Roberts, who did not stand for election at the 2009 Annual Meeting, also were independent.

 

Meetings and Committees of the Board of Directors

 

During 2009, our Board of Directors met 12 times and acted by written consent on two other occasions. Each person nominated to be a director 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 or she served. Our Board of Directors has standing Audit, Compensation, Enterprise Risk Oversight, Investment and Finance, and Nominating and Corporate Governance Committees, each of which has a written charter. Copies of the Charter of the Audit Committee of the Board of Directors, the Charter of the Compensation Committee of the Board of Directors, and the Charter of the Nominating and Corporate Governance Committee of the Board of Directors, as well as our Corporate Governance Guidelines For the Board of Directors, 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 are Walter M. Duer, James C. Flagg (Chairman) and Robert A. Rosholt. In addition, Christopher J.B. Williams serves as an ex officio member and Patrick B. Collins serves as an ex officio advisory member of the Audit Committee. The Audit Committee met nine times in 2009.

 

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, performance, independence and fees; and (d) 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. Duer, Flagg and Rosholt 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 and in accordance with the standards outlined in our Corporate Governance Guidelines For the Board of Directors as described above. The Audit Committee is established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934.

 

The Audit Committee also assists the Board with oversight of risk management by reviewing the Company’s consolidated financial statements and meeting with the Vice President of Internal Controls and Vice President of Internal Audit at regularly scheduled meetings of the Audit Committee to review their reports on the adequacy and effectiveness of our internal audit and internal control systems and discusses with management the Company’s major financial risks and exposures and the steps management has taken to monitor and control such risks and exposures.

 

Compensation Committee

 

Our Compensation Committee consists of three Independent Directors. The members of the Compensation Committee are Judy C. Bozeman, Thomas H. Hamilton and James E. Oesterreicher (Chairman). In addition, Christopher J.B. Williams serves as an ex officio member of the Compensation Committee. The Compensation Committee met 14 times in 2009.

 

The Compensation Committee has the responsibility for assuring that our senior executives are compensated in a manner that is consistent with the compensation philosophy and strategy of our Board of Directors and that is 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 compensation 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 our 2008 Flexible Incentive Plan, the Compensation Committee may delegate the authority to management to perform specified functions under such plan; 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 2009 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. No executive officer or director had a relationship with us requiring disclosure under Regulation S-K Item 404.

 

Compensation Committee Risk Assessment

 

In March 2010, management conducted an assessment of the current risk profile of our compensation programs. Management then reviewed the risk assessment with the Compensation Committee. The risk assessment included a review of the primary design features of our compensation programs and the process for determining executive and employee compensation. The risk assessment identified numerous ways in which our compensation programs potentially mitigate risk, including:

 

 

Enterprise Risk Oversight Committee

 

Our Enterprise Risk Oversight Committee consists of four directors, a majority of which are independent directors, and a member of management participating on an ex-officio non-voting basis. Moreover, both the President and Chief Executive Officer and the independent Chairman of the Board of Directors serve on the Enterprise Risk Oversight Committee. The members of the Enterprise Risk Oversight Committee are Frank J. Bramanti, Robert A. Rosholt (Chairman), Christopher J.B. Williams and Scott W. Wise. In addition, John N. Molbeck, Jr. serves as an ex officio member of the Enterprise Risk Oversight Committee. The Enterprise Risk Oversight Committee met four times in 2009.

 

The Enterprise Risk Oversight Committee is charged with assisting the Board of Directors with oversight of risk generally, and specifically with oversight of management’s responsibility to identify, assess, prioritize and manage all material risks to HCC’s business objectives. In this regard, the Board of Directors employs the Enterprise Risk Oversight Committee as the primary means of administering its enterprise risk oversight function through the Committee’s review of management’s assessment of risks and mitigation strategies with respect to our business. The Committee receives regular reports from our Corporate Vice President of Enterprise Risk

Management, which includes information relating to specific risks evaluated and managed by our internal risk committee that is comprised of senior operating management, and the administration of our annual risk assessment process. The Enterprise Risk Oversight Committee also presents a quarterly report to the Board of Directors regarding risk oversight issues raised as result of its oversight process and the Board discusses these findings pursuant to the Board’s responsibility for overseeing risk management at the Company.

 

Similarly, as described above at “Compensation Committee — Compensation Committee Risk Assessment”, the Enterprise Risk Oversight Committee also conducts a review and evaluation of the compensation policies and practices.

 

Investment and Finance Committee

 

Our Investment and Finance Committee consists of five directors. The members of the Investment and Finance Committee are Judy C. Bozeman, Frank J. Bramanti, Walter M. Duer, John N. Molbeck, Jr. and Scott W. Wise (Chairman). In addition, Christopher J.B. Williams serves as an ex officio member of the Investment and Finance Committee. The Investment and Finance Committee met five times in 2009.

 

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 three Independent Directors. The members of the Nominating and Corporate Governance Committee are James C. Flagg, Thomas M. Hamilton (Chairman) and James E. Oesterreicher. In addition, Christopher J.B. Williams serves as an ex officio member of the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee met five times in 2009.

 

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 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, nor does it have any written policy relating to the diversity of backgrounds, experiences and perspectives required for any individual to possess. Instead, the Committee evaluates potential nominees based on the contribution such nominee’s background, experiences, perspectives and skills could have upon the overall functioning of the Board in order to ensure that the Board as a whole reflects these diverse backgrounds, experiences, perspectives and skills. While neither the Board nor the Nominating and Corporate Governance Committee has a formal diversity policy, one of many factors that the Board and the Nominating and Governance Committee carefully considers is “diversity in personal background, race, gender, age and nationality” as described in the Corporate Governance Guidelines For the Board of Directors. In addition, the Board conducts an annual self-assessment to evaluate director performance which also serves to gauge the Board’s effectiveness in achieving diversity of backgrounds, experiences and perspectives.

 

The Board of Directors believes that, based on the Nominating and Corporate Governance Committee’s knowledge of our Corporate Governance Guidelines For the Board of Directors 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. 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.

 

Shareholder Recommendations

 

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 Randy D. Rinicella, Secretary, HCC Insurance Holdings, Inc., 13403 Northwest Freeway, Houston, Texas 77040-6094. The Nominating and Corporate Governance Committee will consider candidates recommended 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 recommend a director to be nominated at a 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 no 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 recommending a director candidate must also comply with all applicable requirements of the Exchange Act, including the rules and regulations under such Act.

 

Board Leadership Structure

 

Currently HCC has an individual who serves in the position of Chairman of the Board and a separate individual who serves in the position of President and Chief Executive Officer of the Company. We believe that this structure is appropriate for HCC because Mr. Williams and Mr. Molbeck, respectively, provide unique experiences, perspectives and skills, all of which are valuable for the management and leadership of HCC. Furthermore, Mr. Williams has been determined to be an independent director by the Board.

 

Certain Relationships and Related Transactions

 

We are not a party to any transaction with executive officers or directors that is required to be disclosed under Item 404(a) of Regulation S-K.

 

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 For the Board of Directors.

 

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. There were two transactions relating to reporting for deferred stock dividend reinvestments on April 20, 2009 and July 15, 2009 with respect to shares granted to Mr. Hamilton as part of the annual grant to our directors, the receipt of which were deferred by Mr. Hamilton under our Non-Employee Directors Deferred Compensation Plan, that were not timely filed, but that were subsequently reported on their respective Form 4. There was also one transaction for each of Mr. Bramanti and Mr. Molbeck relating to their respective February 17, 2009 bonus grants that was not timely filed, but was subsequently reported on Form 4 one day after the initial 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 2009.

 

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 Officers, Chief Financial Officers, and other individuals, whom we refer to as “Named Executive Officers” or “executive officers,” included in the Summary Compensation Table for the 2009 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 HCC 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 of Control.”

 

The elements of compensation we used during 2009 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 in any formal benchmarking processes with respect to compensation of Named Executive Officers. 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 objective and subjective factors that are weighted as follows:

 

 

For the two-thirds based on our budgeted performance goals, the Compensation Committee considers each of four factors. The Compensation Committee believes these factors are appropriate measures in determining whether the objectives of our compensation programs are being met. In particular, the Compensation Committee considers:

 

 

For the one-third based on an assessment of individual factors, the Compensation Committee considers:

 

 

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 President and Chief Executive Officer, our Executive Vice President and Chief Financial Officer, and our other Named Executive Officers reflect the greater relative responsibilities with respect to their 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 previously existing agreement and on the length of the executive officer’s tenure with HCC.

While upward adjustments of base salary are generally specified in the executive officer’s employment agreement, adjustments may also 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 of 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.

 

Base salary for 2008 and increases, if any, for 2009 were set in accordance with the terms of the respective employment agreements of our Named Executive Officers. These increases are shown in the Summary Compensation Table, below. Our Board did not award any discretionary salary increases under existing employment agreements in 2009 or for 2010.

 

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

 

2008 Flexible Incentive Plan.  In 2008, our Board adopted and our shareholders approved the HCC Insurance Holdings, Inc. 2008 Flexible Incentive Plan. Under the 2008 Plan, we pay performance awards in the form of annual cash incentive compensation payments. The 2008 Plan is intended to advance our interests and those of our shareholders,

 

 

Under the 2008 Plan, we grant awards of incentive compensation that may be paid to a participant upon our satisfaction of corporate performance goals. We limit cash performance awards under the 2008 Plan to our Chief Executive Officer, Chief Financial Officer and any of our other employees 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 2009, Messrs. Bramanti, Ellis, Molbeck, Kelbel and Schell participated in cash performance awards under the 2008 Plan. Mr. Whamond did not participate because he was not an employee at the date the targets for 2009 were established. Mr. Cook did not participate because approximately half of his compensation costs were allocated to UK and Spain subsidiaries of the Company since he resides and works in the UK. Our Compensation Committee established maximum bonus amounts for each of these executives, expressed as a percentage of pretax income for HCC. Those maximum targets were as follows: Mr. Bramanti — 1.0%, Mr. Molbeck — 1.0%, Mr. Ellis — 0.25%, Mr. Kelbel — 0.25% and Mr. Schell — 0.25%. For 2009, our pretax income was $518.6 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 actual operating results against budget, 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 cash incentive awards for the participants in the 2008 Plan as allowed under Section 162(m). For purposes of Section 162(m), the maximum annual incentive award is determined to the extent we achieve our performance goal of pretax 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). Any 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 “Tax Deductibility of the Named Executive Officers’ Incentives and Equity Compensation” below.

Discretionary Annual Incentive.  Named Executive Officers, who are not participants in the 2008 Plan, are eligible for a discretionary annual incentive award. These discretionary annual bonuses 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 2008 Plan, above, in that they reward, motivate, attract and retain key executives and foster accountability and teamwork. A portion of Mr. Whamond’s and all of Mr. Cook’s annual cash bonuses for 2009 were subject to the discretion of the CEO and the Compensation Committee. Mr. Whamond was entitled to a minimum annual bonus for 2009 of $250,000 under the terms of the employment agreement he entered into in connection with his assumption of the duties of Executive Vice President and Chief Financial Officer.

 

For 2009, we determined the actual payouts under our 2008 Plan, as well as the actual amount of discretionary bonus for Mr. Whamond and Mr. Cook, based on individual performance and our performance, which included the following factors:

 

 

No formula was applied to these measures in arriving at the actual bonus amounts, although performance against budget was weighted roughly two-thirds while individual factors were weighted approximately one-third. The peer group adopted by the Compensation Committee with input from management was comprised of: The Chubb Corporation, The Travelers Companies, Argo Group International Holdings, Ltd., RLI Corp., Navigators Group, Inc., W.R. Berkley Corporation and Markel Corporation. These companies were selected on the basis that they have significant specialty insurance operations and compete with the Company for talent, stockholders investments and in the marketplace for business.

 

The following summarizes the key individual performance factors, considered by the Committee for each of the Named Executive Officers in determining the bonus payments:

 

 

 

Taking these factors into account and utilizing reasoned, subjective judgment, the Compensation Committee approved bonus payments as follows: Mr. Molbeck — $2,750,000; Mr. Whamond — $600,000; Mr. Ellis — $200,000; Mr. Kelbel — $525,000; Mr. Cook — $1,134,775 and Mr. Schell — $500,000. In each case, for participants in the 2008 Plan, the actual bonus paid was less than the target amount established under the 2008 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 because they only provide value to the Named Executive Officers to the extent that the price of our common stock appreciates, and they serve as a good retention vehicle for the Named Executive Officers because they vest based on the executive officer’s continued employment. We also grant restricted stock awards that generally cliff vest at a later date. These long-term equity awards also serve the goal of allowing our executives to obtain a significant stake in our company.

 

In 2009, in connection with his new employment agreement, we granted 100,000 stock options and 32,203 shares of restricted stock to Mr. Whamond. In connection with the amendment and extension of Mr. Kelbel’s employment agreement, we granted him 15,855 shares of restricted stock. In determining the amount of these grants, the Compensation Committee considered prior grants made to Mr. Kelbel, grants 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 the grant of stock options and the fair value of the restricted shares was set at the closing price of our common stock on the date of the Compensation Committee meeting at which such grants were approved. In addition, Mr. Bramanti received a grant of 3,381 shares of fully-vested common stock following his election as a non-employee director at our 2009 annual meeting.

 

In addition, in November 2009, our Compensation Committee approved awards of restricted stock for thirty-three key employees, including Named Executive Officers, to be granted on January 4, 2010. These awards were made under the 2008 Plan and were granted in order to enhance executive retention and stock ownership. The grant amounts were based on a multiple of the grantees’ current base salary (100% for NEOs and other executives identified as demonstrating superior performance and 50% for all other grantees identified as key employees) and totaled $9.1 million. The awards generally vest after five years from the date of grant, although they are subject to an additional second restriction period of five years unless the grantee has met applicable stock ownership requirements.

 

In December 2009, our Compensation Committee approved an award of $4.0 million in restricted stock to Mr. Molbeck, with a grant date of January 4, 2010. The award was made in connection with Mr. Molbeck’s assumption of the additional responsibilities of Chief Executive Officer. Seventy-five percent of the grant is subject to performance-based vesting and 25% is subject to time-based vesting. Between 331/3% and 100% of the performance-based portion of the award will vest if our compound annual growth rate of book value over a three-year period is between 100% and 120% of the compound annual growth rate of a selected peer group. None of the performance-based portion of the award will vest if our compound annual growth rate over the three-year period is less than 100% of the compound annual growth rate of the peer group. The peer group was determined by the Compensation Committee, with input from management, and is comprised of companies with specialty insurance operations that compete with us for talent, stockholder investment and in the marketplace for business. Subject to the applicable performance and service criteria, the awards will vest, if at all, on May 31, 2013 when the current term of Mr. Molbeck’s employment agreement expires.

 

Additional equity awards may be made at any of our Compensation Committee meetings during the year. The Compensation Committee’s policy is to set the exercise price of stock option awards 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.  Mr. Molbeck is entitled to the payment of deferred compensation under the terms of his employment agreement. We believe the tax benefit from our deferring payment of a portion of compensation is valuable to Mr. Molbeck and assists us in meeting our retention goals. Paying a portion of base compensation as deferred compensation also ensures Mr. Molbeck’s total compensation will be fully tax deductible. Consequently, we have adopted a non-qualified deferred compensation plan for Mr. Molbeck. The plan is discussed in more detail under the caption “Deferred Compensation Plans,” below. In addition, in connection with Mr. Bramanti’s retirement as our Chief Executive Officer, and under the terms of the separation agreement executed in connection with his retirement as our Chief Executive Officer, HCC agreed to make one final contribution to his participant account under his deferred compensation plan of $48,387.

 

Perquisites.  Our current policy is that the costs of perquisites 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 comparable perquisites in order to attract these 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 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 (or in the case of Mr. Bramanti, under his separation agreement), each of Messrs. Bramanti, Ellis, Molbeck, Kelbel and Schell and their respective qualified beneficiaries, where applicable, is entitled to extended medical benefits under our medical plan after termination of their respective employment. In the case of Messrs. Ellis, Kelbel and Schell, 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 terms of employment with us.

 

Retirement Benefits.  The Named Executive Officers 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.

 

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 approves 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 bonuses, cash incentive awards 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 bonuses, 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.

 

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 2009.

 

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. The Compensation Committee did not engage a compensation consultant in 2009.

 

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 and to the extent permitted by applicable law, it will seek to recoup amounts, determined to have been inappropriately paid to an executive officer as a result of a financial restatement.

 

Stock Ownership Requirements.  The Compensation Committee has adopted minimum ownership requirements for company stock for its Named Executive Officers. Ownership targets have been established as a multiple of current annual base compensation for each of our Named Executive Officers based on their position with the company as follows: CEO — 3X; President — 2X; CFO — 1.5X; and other Section 16 Officers — 1X. Executives are expected to comply with the guidelines within five years of becoming subject to the ownership guidelines. As of the record date, all Named Executive Officers have complied with the ownership guidelines.

 

Trading in Our Stock Derivatives.  Our Insider Trading Policy prohibits our employees, including Named 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 three 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 2008 Flexible Incentive 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 recently adopted Section 409A of the Internal Revenue Code and believe we should structure our compensation plans in ways to minimize the likelihood that 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 Treasury Regulations or IRS 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, Kelbel and Schell require us to reimburse the executives for any Section 409A excise taxes incurred by the executives.

 

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 of Control Agreements.  Our executive officers’ employment agreements provide for severance in the event of change of control. Payments will only be made under these agreements if there is both a change of control and a termination of employment. In the case of Mr. Molbeck, payment will only be made if there is both a change of control and a termination or replacement of his position as Chief Executive Officer. This is discussed in more detail under the caption “Employment Agreements and Potential Payments Upon Termination or Change of Control” below. The Compensation Committee believes this benefit is required to offer competitive benefits to attract and retain highly qualified executives.

 

COMPENSATION COMMITTEE REPORT

 

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 HCC’s Annual Report on Form 10-K for the year ended December 31, 2009 and in this Proxy Statement to be delivered to shareholders.

 

Submitted by the Compensation Committee:

 

James E. Oesterreicher, Chairman

Judy C. Bozeman

Thomas M. Hamilton

 

Disclosure Regarding Compensation Consultants

 

Management retained Mercer to provide advice on management and director compensation during 2009. Mercer’s services were in connection with the review of HCC’s equity based compensation for key employees. The aggregate fees paid to Mercer for these services were $69,651. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies, Inc. During 2009, we paid $20.4 million in fees in the ordinary course of business for insurance brokerage and other related services provided by other affiliates of Marsh & McLennan Companies, Inc. Neither the Board nor the Compensation Committee specifically approved the unrelated services.

 

The Compensation Committee intends to adopt a practice by which any compensation consultant engaged by the Committee, including any affiliates of such consultant shall not be engaged by management or the Company.

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 Officers, Principal Financial Officers and the other three most highly compensated executive officers serving at December 31, 2009, who are sometimes referred to in this Proxy Statement collectively as the “Named Executive Officers.”

 

2009 Summary Compensation Table

 

 

 

 

All Other Compensation

 

The following table describes each component of the All Other Compensation column in the Summary Compensation Table for 2009.

 

 

 

 

 

2009 Grants of Plan Based Awards

 

The following table provides details regarding plan based awards granted to the Named Executive Officers during 2009. All grants detailed below were made under our 2008 Flexible Incentive Plan.

 

 

 

 

 

2009 Outstanding Equity Awards at Fiscal Year End

 

The following table contains information with respect to outstanding option and stock awards at December 31, 2009.

 

 

 

 

 

2009 Option Exercises and Stock Vested Table

 

The following table contains information with respect to the options exercised by the Named Executive Officers during 2009. No stock awards to our Named Executive Officers vested in 2009.

 

 

 

 

2009 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 2009.

 

 

 

 

Deferred Compensation Plans

 

Mr. Molbeck receives deferred compensation under his respective employment agreement. Up to his retirement in 2009, Mr. Bramanti also received deferred compensation. 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. Mr. Molbeck remains eligible to participate in his plan for so long as he remains an employee of HCC. Under Mr. Molbeck’s plan, monthly contributions are credited to his account in an amount equal to one-twelfth of the annual deferred compensation under his employment agreement, and the Compensation Committee may also make additional discretionary company contributions. The amount credited to his account will accrue earnings, which shall compound monthly, at the executive’s election, which may be changed once per quarter, at one of the following rates: the prime rate (3.25% for 2009), the rate of return on HCC common stock (4.56% for 2009), or the rate of return on the S&P 500 (23.45% for 2009). Payment of Mr. Molbeck’s account balance will occur within 30 days of his separation from service with HCC (subject to a six-month delay if necessary in order to comply with Internal Revenue Code Section 409A) and will be payable to him (or in the event of his death, to his 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 plan will be paid from HCC’s general assets.

 

Equity Compensation Plan Information

 

The following table sets forth information as of December 31, 2009, with respect to compensation plans under which our equity securities are authorized for issuance. All such plans were approved by our shareholders.

 

 

 

 

Employment Agreements and Potential Payments Upon Termination or Change of Control

 

We have entered into employment agreements with our Chief Executive Officer, Chief 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:

 

John N. Molbeck, Jr.

 

General.  According to the terms of his Employment Agreement effective as of May 5, 2009, Mr. Molbeck serves as President and Chief Executive Officer of HCC. Mr. Molbeck’s employment agreement expires on May 31, 2013. He will receive an annual salary of $1,950,000 (consisting of a base salary of $1,000,000 and deferred compensation of $950,000) during the term. Mr. Molbeck will be eligible to receive bonus compensation under the 2008 Flexible Incentive Plan. Mr. Molbeck and his qualified beneficiaries are entitled to medical coverage at no cost. Mr. Molbeck and his qualified beneficiaries are entitled to extended medical coverage after termination of Mr. Molbeck’s employment at our 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 supplementary term life insurance of $1,000,000 at our 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 (for two years post-termination), confidentiality, and non-solicitation of customers and employees (for two years post-termination).

 

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” or by Mr. Molbeck for “Good Reason,” 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, and continuing medical benefits as described above. Mr. Molbeck shall also be entitled to a discounted lump sum cash payment in an amount equal to the average of the bonuses that were paid to Mr. Molbeck for the prior two years, except that in the event of a termination for Good Reason, he shall receive an amount equal to the aggregate of the Base Salary and bonus received by Mr. Molbeck for the two (2) full calendar years prior to such termination. Mr. Molbeck may terminate his employment for Good Reason in the event of his termination or replacement as Chief Executive Officer, including after a “Change of Control,” as defined in the agreement. 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. Mr. Molbeck is also eligible to receive a bonus payment for all events for the reasons listed in the 2008 Plan, assuming the Compensation Committee would not use its negative authority to reduce the bonus.

 

Frank J. Bramanti

 

Mr. Bramanti retired as our Chief Executive Officer on May 5, 2009. At the time of Mr. Bramanti’s retirement as our Chief Executive Officer, we entered into a Separation Agreement with Mr. Bramanti effective as of May 5, 2009. Under the terms of the Separation Agreement, Mr. Bramanti received a lump sum cash payment in the amount of $1,000,000 and a regular monthly contribution to the HCC Insurance Holdings, Inc. Nonqualified Deferred Compensation Plan for Frank J. Bramanti for the month of May 2009. Mr. Bramanti and his qualified beneficiaries continue to receive medical benefits as provided in his former employment agreement with us.

 

 

General.  According to the terms of his Employment Agreement effective as of May 1, 2009, Mr. Whamond acts as Executive Vice President of HCC and as of August 11, 2009 as Chief Financial Officer of HCC. His employment agreement expires on April 30, 2013. Mr. Whamond receives a salary of $750,000 each year during the term of the agreement. If Mr. Whamond is not a participant under our 2008 Flexible Incentive Plan, he is eligible for a discretionary bonus to be determined by our Compensation Committee provided that Mr. Whamond is entitled to a bonus of not less than $250,000 for the year ended December 31, 2009. Mr. Whamond is also entitled to certain perquisites, including company provided life insurance and reimbursement of relocation expenses under the term of a Relocation Policy and Reimbursement Agreement. If the employment agreement is terminated, Mr. Whamond

has agreed to certain provisions relating to non-competition (for 24 months post-termination, or in the event of termination without “Cause,” for “Good Reason,” or upon a “Change in Control,” for twelve months), confidentiality, and non-solicitation of customers and employees (for 24 months post-termination, or in the event of termination without “Cause,” for “Good Reason,” or upon a “Change in Control,” for twelve months).

 

Benefits upon the Occurrence of Certain Termination Events.  In the event Mr. Whamond’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, any bonus relating to a prior year that was unpaid as of the date of death, an amount equal to twelve months base salary and, in lieu of a bonus payment for the year during which such termination occurs, an amount equal to a pro rata portion of Mr. Whamond’s bonus for the prior calendar year. In the event Mr. Whamond’s employment is terminated by HCC without “Cause,” by Mr. Whamond for “Good Reason,” or by Mr. Whamond after a “Change of Control,” in each such case as set forth in the agreement, Mr. Whamond 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 remaining Base Salary due under the agreement, plus, in lieu of a bonus payment for the year during which such termination occurs, an amount equal to his current annual Base Salary. Mr. Whamond may terminate on a Change of Control if within 12 months of a Change of Control of HCC, there is a material change in the nature or status of Mr. Whamond’s duties or responsibilities. In the event Mr. Whamond’s employment is terminated for “Cause” or by Mr. Whamond without “Good Reason,” Mr. Whamond will be entitled to receive his accrued salary and unreimbursed expenses through the date of termination.

 

Edward H. Ellis, Jr.

 

We have entered into a Consulting Agreement with Mr. Ellis that took effect upon his retirement as Chief Financial Officer from our Company on January 1, 2010. The Consulting Agreement has a term of one year provided that it is terminable by either party on sixty days’ notice. Under the Consulting Agreement, Mr. Ellis will provide up to 1,100 hours of service to us as we request and continue to assist with the transition of the new Chief Financial Officer. Mr. Ellis will receive compensation in the amount of $200,000 per annum under the Consulting Agreement and is eligible for consideration for an additional bonus at our discretion. The Consulting Agreement contains provisions relating to non-competition (for two years post-termination), confidentiality, and non-solicitation of customers and employees (for two years post-termination).

 

Barry J. Cook

 

According to the terms of his Service Agreement effective as of January 1, 2009, 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, 2011. 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 and he is eligible for consideration for an additional bonus at the discretion of the Company. Mr. Cook received a salary of $804,170 (£498,000) in 2009 and will receive $836,466 (£518,000) in 2010. In addition, Mr. Cook is eligible for a discretionary bonus. Additional compensation under the agreement includes supplemental medical, and company-provided life insurance. If the agreement is terminated, Mr. Cook has agreed to certain provisions relating to non-competition (for one year post-termination), confidentiality and non-solicitation of customers and employees (for one year post-termination). All 2009 compensation totals for Mr. Cook have been converted to U.S. dollars from British pounds sterling at the rate of 1.6148. For forward-looking amounts, such exchange rate is subject to fluctuation.

 

Craig J. Kelbel

 

General.  According to the terms of his Employment Agreement effective as of March 1, 2007, as amended effective September 1, 2009, Mr. Kelbel acts as Executive Vice President of HCC and President and Chief Executive Officer of HCC Life Insurance Company. Mr. Kelbel oversees our life, accident and health operations. His employment agreement expires on December 31, 2013. 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 2008 Flexible Incentive 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 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 a company-provided apartment. Mr. Kelbel was also provided a company-owned golf club membership in the Atlanta, Georgia area, in exchange for his country club membership in Houston, Texas. 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 (for two years post-termination), confidentiality, and non-solicitation of customers and employees (for two years post-termination).

 

Benefits upon the Occurrence of Certain Termination Events.  In the event Mr. Kelbel’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. Kelbel’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 $2,200 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. Kelbel’s employment is terminated by HCC without “Cause,” by Mr. Kelbel for “Good Reason” or by Mr. Kelbel after a “Change in Control,” in each such case as set forth in the agreement, Mr. Kelbel 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 $2,200 times the months remaining in the term, 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 and continuing medical benefits as described above. Mr. Kelbel is also eligible to receive a bonus payment for all events for the reasons listed in the 2008 Plan, assuming the Compensation Committee would not use its negative authority to reduce the bonus.

 

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 and Chief Underwriting Officer of HCC and Chief Executive Officer of Houston Casualty Company and U.S. Specialty Insurance Company. Mr. Schell oversees underwriting policy across the Company and oversees our domestic surety and credit operation. 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 2008 Flexible Incentive 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 (for two years post-termination), confidentiality and non-solicitation of customers and employees (for two years post-termination).

 

Benefits upon the Occurrence of Certain Termination Events.  In the event Mr. Schell’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. Schell’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 $1,600 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. Schell’s employment is terminated by HCC without “Cause,” by Mr. Schell for “Good Reason” or by Mr. Schell after a “Change in Control,” in each such case as set forth in the agreement, Mr. Schell 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 $1,600 times the months remaining in the term and continuing medical benefits as described above. Mr. Schell may terminate on a “Change of Control,” as defined in the agreement, if within 12 months of a Change in Control of HCC, there is a material change in the nature or status of Mr. Schell’s duties or responsibilities. In the event Mr. Schell’s employment is terminated for “Cause” or by Mr. Schell without “Good Reason,” Mr. Schell will be entitled to receive his accrued salary and unreimbursed expenses through the date of termination. Mr. Schell is also eligible to receive a bonus payment for all events for the reasons listed in the 2008 Plan, assuming the Compensation Committee would not use its negative authority to reduce the bonus.

 

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 each 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 of 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 and/or restricted stock granted under our 2001 Flexible Incentive Plan, our 2004 Flexible Incentive Plan and/or our 2008 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. The terms of the employment agreements are discussed more fully in the section immediately above.

 

Following is a discussion and related disclosure on potential payments on a Change of Control for each of our Named Executive Officers. Because their employment with us terminated on or prior to December 31, 2009, Mr. Bramanti and Mr. Ellis are not included in this discussion.

 

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, restricted stock awards, stock option awards and other benefits, upon different termination events.

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.

 

 

 

 

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

 

 

 

 

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