SCHEDULE 14A
(RULE 14A - 101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of
[X] Definitive Proxy Statement Commission Only (as permitted
[ ] Definitive Additional Materials by Rule 14a-6(e)(2))
[ ] Soliciting Material Under Rule 14a-12
HCC INSURANCE HOLDINGS, INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
N/A
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i) (I) and 0-11.
1) Title of each class of securities to which transaction applies:
--------------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
--------------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
--------------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
--
--------------------------------------------------------------------------------
5) Total fee paid:
--------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials:
--------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
1) Amount Previously Paid:
--------------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
--------------------------------------------------------------------------------
3) Filing Party:
--------------------------------------------------------------------------------
4) Date Filed:
--------------------------------------------------------------------------------
HCC INSURANCE HOLDINGS, INC.
13403 NORTHWEST FREEWAY
HOUSTON, TEXAS 77040-6094
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 15, 2003 AT 8:30 A.M.
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the
"Meeting") of HCC Insurance Holdings, Inc. ("HCC" or the "Company") will be held
on Thursday May 15, 2003 at 8:30 a.m. Houston time, at The InterContinental
Houston, 2222 West Loop South, Houston, Texas, 77027 for the following purposes:
1. To elect ten directors for a one-year term, each to serve until the
Annual Meeting of Shareholders in 2004 and until his successor is duly
elected and qualifies.
2. To transact such other business as may properly come before the
meeting or any postponement or adjournment thereof.
The Board of Directors has fixed the close of business on April 3, 2003, as
the record date for determining those Shareholders who are entitled to notice
of, and to vote at, the Meeting. A list of such Shareholders will be open to
examination by any Shareholder at the Meeting and for a period of ten days prior
to the date of the Meeting during ordinary business hours at 13403 Northwest
Freeway, Houston, Texas. A copy of the Annual Report of the Company for the
fiscal year ended December 31, 2002, is enclosed.
By Order of the Board of Directors,
CHRISTOPHER L. MARTIN,
Secretary
Houston, Texas
April 25, 2003
WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE MEETING, PLEASE MARK, SIGN
AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED PREPAID ENVELOPE TO
ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE MEETING. IF YOU ATTEND THE
MEETING, YOU MAY VOTE IN PERSON IF YOU WISH TO DO SO, EVEN IF YOU HAVE
PREVIOUSLY SENT IN YOUR PROXY.
HCC INSURANCE HOLDINGS, INC.
13403 NORTHWEST FREEWAY
HOUSTON, TEXAS 77040-6094
---------------------
PROXY STATEMENT
---------------------
ANNUAL MEETING OF SHAREHOLDERS
MAY 15, 2003
---------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
This Proxy Statement is first being mailed on or about April 25, 2003 to
Shareholders of HCC Insurance Holdings, Inc. ("HCC" or the "Company"), in
connection with the solicitation by the Board of Directors of the Company of
proxies to be voted at the Annual Meeting of Shareholders to be held on
Thursday, May 15, 2003, at 8:30 a.m. Houston time, at The InterContinental
Houston, 2222 West Loop South, Houston, Texas 77027, or any postponement or
adjournment thereof (the "Meeting"). 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.
The cost of soliciting proxies will be borne by the Company. Copies of
solicitation material may be furnished to brokers, custodians, nominees and
other fiduciaries for forwarding to beneficial owners of shares of the Company's
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 officers and other management employees of the
Company, who will receive no additional compensation for their services. It is
contemplated that additional solicitation of proxies will be made in the same
manner under the engagement and direction of Georgeson Shareholder
Communications, Inc., 111 Commerce Road, Carlstadt, New Jersey 07072-2586 at an
anticipated cost of $7,000 plus reimbursement of out-of-pocket expenses.
Only Shareholders of record on April 3, 2003 (the "Record Date") will be
entitled to vote at the Meeting, and each share will have one vote. At the close
of business on the Record Date, there were 62,692,899 shares of the Company's
Common Stock outstanding and entitled to vote at the Meeting.
A majority of the outstanding shares of the Company's Common Stock,
represented in person or by proxy will constitute a quorum at the Meeting. The
election of Directors will be determined by a plurality of the votes cast if a
quorum is present. The Board of Directors does not anticipate calling for a vote
on any matter other than those described herein.
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. Each is tabulated separately. 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 a broker is not permitted to vote stock held in
street name on certain matters in the absence of instructions from the
beneficial owner of the stock. The shares subject to any such proxy which are
not being voted with respect to a particular matter (the "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
purposes and will count for purposes of determining the presence of a quorum.
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 STOCKHOLDERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the Record Date by (a) each person
known by the Company to be the beneficial owner of more than 5% of the Company's
Common Stock, (b) each Executive Officer of the Company named in the Summary
Compensation Table, (c) each Director and Advisory Director and (d) all
Directors, Advisory Directors and Executive Officers of the Company as a group.
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF COMMON
NAME OWNERSHIP(1)(2) STOCK OUTSTANDING
---- ----------------- -----------------
Ariel Capital Management, Inc...................... 6,965,101(3) 11.1%
307 North Michigan Avenue
Chicago, Illinois 60601
FMR Corp........................................... 4,329,386(4) 6.9%
82 Devonshire Street
Boston, Massachusetts 02109
Stephen L. Way..................................... 3,758,626 6.0%
13403 Northwest Freeway
Houston, Texas 77040-6094
Frank J. Bramanti.................................. 168,382(5) *
Edward H. Ellis, Jr................................ 106,000 *
Allan W. Fulkerson................................. 95,000(6) *
Walter J. Lack..................................... 87,750 *
Edwin H. Frank, III................................ 67,650(7) *
J. Robert Dickerson................................ 63,000 *
Marvin P. Bush..................................... 57,500(8) *
James R. Crane..................................... 55,000 *
Craig J. Kelbel.................................... 50,000 *
Christopher L. Martin.............................. 47,666 *
Patrick B. Collins................................. 47,500 *
James C. Flagg, Ph.D............................... 25,833 *
Michael A. F. Roberts.............................. 0 *
Michael J. Schell.................................. 0 *
All Directors, Advisory Directors and Executive
Officers as a group (15 persons)................. 4,629,907 7.3%
---------------
* Less than 1%.
(1) Directors, Advisory Directors and Executive Officers have sole voting and
investment powers of the shares shown unless otherwise indicated.
(2) Includes shares which Directors, Advisory Directors and Executive Officers
have the right to acquire upon the exercise of options within 60 days from
the Record Date, including the following: Stephen L. Way -- 443,700 shares;
Edward H. Ellis, Jr. -- 105,000 shares; Allan W. Fulkerson -- 85,000 shares;
Edwin H. Frank, III -- 62,500 shares; Marvin P. Bush -- 55,000 shares; Craig
J. Kelbel -- 50,000 shares; Christopher L. Martin -- 47,666 shares; Patrick
B. Collins -- 42,500 shares; J. Robert Dickerson -- 37,500 shares; James R.
Crane -- 35,000 shares; James C. Flagg, Ph.D. -- 25,833 shares; Frank J.
Bramanti -- 12,500 shares; Walter J. Lack -- 12,500 shares; and all
Directors, Advisory Directors and Executive Officers as a group -- 1,014,699
shares.
(3) This share information was obtained from a Schedule 13G filed on February 4,
2003 with the Securities and Exchange Commission (the "SEC").
(4) This share information was obtained from a Schedule 13G filed on February
14, 2003 with the SEC.
2
(5) Includes 750 shares owned of record by Mr. Bramanti's wife in trust for
their children and 2,250 shares owned of record by their children. Mr.
Bramanti disclaims beneficial ownership of such shares.
(6) Includes 5,000 shares owned of record in Mr. Fulkerson's IRA.
(7) Includes 400 shares owned of record by Mr. Frank's children. Mr. Frank
disclaims beneficial ownership of such shares.
(8) Includes 2,500 shares owned of record by Winston Holdings, LLC, a limited
liability company in which Mr. Bush has an ownership interest. Mr. Bush
disclaims beneficial ownership of such shares, except to the extent of his
actual pecuniary interest therein.
PROPOSAL I
ELECTION OF DIRECTORS
Each Director elected at the Meeting will continue to serve for a one-year
term only and until his successor is duly elected and qualified at the next
annual meeting of Shareholders in 2004 or until his earlier death, resignation
or removal.
Each of the nominees is currently a Director of the Company. Michael A. F.
Roberts was appointed to the Board of Directors in November, 2002. Edwin H.
Frank, III, a Director, is not standing for re-election.
The following table provides information concerning persons nominated for
election as Directors of the Company, including current membership on committees
of the Board of Directors, principal occupation or affiliations during the last
five years and certain directorships held.
Although the Board of Directors does not contemplate that any of the
nominees will be unable to serve, if such a situation arises prior to the
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 DIRECTORS
SERVED
AS
PRINCIPAL OCCUPATION DIRECTOR
NAME DURING THE PAST FIVE YEARS AGE SINCE
---- -------------------------- --- --------
Stephen L. Way....................... Mr. Way founded HCC in 1974 and has served as a 54 1974
Director, Chairman of the Board of Directors
and Chief Executive Officer of HCC since its
organization. He served as President of HCC
from its founding until May, 1996 and again
since January 1, 2003. Mr. Way is a member of
the Investment and Finance Committee and is
also a Director and Officer of various of the
Company's subsidiaries.
Frank J. Bramanti.................... Mr. Bramanti is a Director and until his 46 1980
retirement in December, 2001, was an Executive
Vice President of HCC and since 1982, has
served in various capacities, including
Director, Secretary, Chief Financial Officer
and from June, 1997 to November, 1997, interim
President. Mr. Bramanti is a member of HCC's
Investment and Finance Committee and a
Certified Public Accountant.
3
SERVED
AS
PRINCIPAL OCCUPATION DIRECTOR
NAME DURING THE PAST FIVE YEARS AGE SINCE
---- -------------------------- --- --------
Patrick B. Collins................... Mr. Collins is a Certified Public Accountant 74 1993
and a retired partner of the international
accounting firm of PricewaterhouseCoopers LLP,
a position he held from 1967 through 1991. Mr.
Collins has served as an HCC Director since
1993 and is a member of the Audit Committee.
James R. Crane....................... Mr. Crane is the Chairman of the Board of 49 1999
Directors and Chief Executive Officer of EGL
Inc. (Nasdaq symbol: EAGL), a freight
forwarding company he founded in 1984. Mr.
Crane has served as an HCC Director since 1999
and is a member of the Compensation Committee
and the Nominating and Corporate Governance
Committee.
J. Robert Dickerson.................. Mr. Dickerson is an attorney and has served as 61 1981
an HCC Director since 1981. Mr. Dickerson is
the Chairman of the Audit Committee.
Edward H. Ellis, Jr. ................ Mr. Ellis is a Director, Executive Vice 60 2001
President and the Chief Financial Officer of
HCC. Mr. Ellis is a Certified Public Accountant
with over 34 years of public accounting
experience. Prior to joining HCC in October,
1997, Mr. Ellis served as a partner
specializing in the insurance industry with the
international accounting firm of
PricewaterhouseCoopers from November, 1988 to
September, 1997. Mr. Ellis has served as a
Director since 2001. Mr. Ellis is a member of
the Investment and Finance Committee and is
also a Director and Officer of various of the
Company's subsidiaries.
James C. Flagg, Ph.D. ............... Dr. Flagg is a Certified Public Accountant and 51 2001
an Associate Professor in the Department of
Accounting, Lowery Mays College and Graduate
School of Business at Texas A&M University,
where he has served since 1988. Dr. Flagg holds
a Bachelor of Science and a Master of Science
in Economics and an M.B.A. and a Ph.D. in
Accounting. Dr. Flagg has served as a Director
since 2001 and is a member of the Audit
Committee.
Allan W. Fulkerson................... Mr. Fulkerson is the President and a Director 69 1997
of Century Capital Management, Inc., a
registered investment advisor which specializes
in the financial services industry. In
addition, since 1976, he has served as Chairman
and Trustee of Century Shares Trust, a mutual
fund established in 1928 which invests
primarily in financial institutions. Mr.
Fulkerson has served as an HCC Director since
1997 and is the Chairman of the Investment and
Finance Committee.
4
SERVED
AS
PRINCIPAL OCCUPATION DIRECTOR
NAME DURING THE PAST FIVE YEARS AGE SINCE
---- -------------------------- --- --------
Walter J. Lack....................... Mr. Lack is an attorney and a shareholder in 55 1981
the law firm of Engstrom, Lipscomb & Lack, A
Professional Corporation in Los Angeles,
California. Mr. Lack has served as an HCC
Director since 1981 and is also the Chairman of
the Compensation Committee and the Nominating
and Corporate Governance Committee. Mr. Lack is
a Director of Microvision, Inc. (Nasdaq symbol:
MVIS) and SuperGen Inc. (Nasdaq symbol: SUPG).
Michael A. F. Roberts................ Mr. Roberts is a retired Managing Director of 62 2002
Salomon Smith Barney and the former head of its
Insurance Investment Banking Group, a position
he held since 1987. Prior to his retirement in
2002, Mr. Roberts served in a number of
capacities at Salomon Smith Barney since
joining the firm in 1969. Mr. Roberts was
appointed to the Board of Directors in
November, 2002 and is a member of the
Compensation Committee and the Nominating and
Corporate Governance Committee. Mr. Roberts is
a Director of Triad Guaranty, Inc. (Nasdaq
symbol: TGIC).
The Company's management notes that each of the proposed nominees are
standing for reelection to the Board of Directors and that each has served the
Company's and its Shareholders' interests well during his tenure as a Director.
The Company's management believes that the Company and its Shareholders benefit
from the wide variety of industry and professional experience which characterize
the Nonemployee Director members of its Board of Directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" EACH OF THE
PROPOSED NOMINEES. YOUR PROXY WILL BE SO VOTED UNLESS YOU SPECIFY OTHERWISE.
5
INFORMATION REGARDING ADVISORY DIRECTORS AND EXECUTIVE OFFICERS WHO ARE NOT
NOMINEES FOR DIRECTOR
SERVED
THE
PRINCIPAL OCCUPATION COMPANY
NAME DURING THE PAST FIVE YEARS AGE SINCE
---- -------------------------- --- --------
Marvin P. Bush....................... Mr. Bush is the President of Winston Capital 46 1999
Management, LLC, a registered investment
adviser which specializes in hedge fund
investments, and the founder and a Managing
Director of Winston Partners, L.P. Mr. Bush was
first appointed as an HCC Director in 1999 and
became an Advisory Director in November, 2002
and is a member of the Investment and Finance
and Compensation Committees. Mr. Bush is also a
member of the Board of Trustees for the George
H.W. Bush Presidential Library.
Susan L. Howie....................... Ms. Howie is an Executive Vice President and 53 1997
the Director of Human Resources, Information
Systems and Corporate Administration. Prior to
joining HCC in 1997, Ms. Howie was a Senior
Vice President with PM Reality Group, Inc. Ms.
Howie is also a Director and Officer of various
of the Company's subsidiaries.
Craig J. Kelbel...................... Mr. Kelbel is an Executive Vice President and 48 1999
oversees the operations of the Company's
underwriting agency and intermediary
subsidiaries. Prior to joining HCC in 1999, Mr.
Kelbel was the President of U.S. Benefits
Corporation and a Vice President of its parent,
the Centris Group, Inc., which was acquired by
HCC in 1999. Mr. Kelbel has over 25 years of
experience in the insurance industry. Mr.
Kelbel is also a Director and Officer of
various of the Company's subsidiaries.
Christopher L. Martin................ Mr. Martin is an Executive Vice President and 36 1997
the General Counsel and Secretary of HCC. Prior
to joining HCC in 1997, Mr. Martin was an
attorney with the law firm of Winstead Sechrest
& Minick, P.C. Mr. Martin is also a Director
and Officer of various of the Company's
subsidiaries.
Michael J. Schell.................... Mr. Schell is an Executive Vice President and 52 2002
oversees the operations of the Company's
insurance company subsidiaries. He is also the
President and Chief Executive Officer of
Houston Casualty Company and HCC's other
insurance company subsidiaries. Prior to
joining the Company in June, 2002, Mr. Schell
was with the St. Paul companies for over 25
years, most recently as President and Chief
Operating Officer of St. Paul Re. Mr. Schell is
also a Director and Officer of various of the
Company's subsidiaries.
6
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During 2002, the Board of Directors met five times and acted by written
consent on various other occasions. Each Director attended or participated via
teleconference in 75% or more of the meetings of the Board of Directors or the
meetings of any committee on which he served. The Board of Directors has
standing Audit, Compensation, Investment and Finance, and Nominating and
Corporate Governance Committees.
AUDIT COMMITTEE
The Audit Committee is composed entirely of independent directors (as
defined under the New York Stock Exchange's listing standards) who are not
officers or employees of the Company ("Nonemployee Directors") and with whom the
Company does not have a business relationship. In the opinion of the Board of
Directors, these Directors are independent of management and free of any
relationship that may interfere with the exercise of their independence from the
Company and its management. The members of the Audit Committee during 2002 and
currently are Patrick B. Collins, J. Robert Dickerson (Chairman) and James C.
Flagg. The Audit Committee held six meetings in 2002. The Audit Committee
recommends to the Board of Directors the selection of the Company's outside
auditors and reviews with the independent and internal auditors the scope and
results of the Company's audits, the Company's internal accounting controls and
the professional services furnished by the independent auditors to the Company.
See "Report of the Audit Committee" below.
COMPENSATION COMMITTEE
The Board of Directors has a Compensation Committee which consists of three
Nonemployee Directors. The current members of the Compensation Committee are
James R. Crane, Walter J. Lack (Chairman) and Michael A. F. Roberts. Mr. Lack
has been the Chairman of the Compensation Committee since September, 1999. Until
his November, 2002 change to Advisory Director status, Marvin P. Bush was a
member of the Compensation Committee. The Compensation Committee held four
meetings during 2002. The Compensation Committee monitors compensation
arrangements for senior management employees for consistency of corporate
objectives with the interests of the Company's Shareholders, approves salary and
non-salary compensation for senior management, recommends bonus programs to the
Board of Directors, and administers the Company's stock option plans. See
"Report of the Compensation Committee" below.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee is or has been an officer or
employee of the Company or any of its subsidiaries. No Executive Officer of the
Company served as a member of the 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 the Compensation Committee or as a Director of the Company.
No Executive Officer of the Company served as a director of another corporation,
one of whose executive officers served on the Compensation Committee.
INVESTMENT AND FINANCE COMMITTEE
The Investment and Finance Committee is currently composed of Stephen L.
Way, Frank J. Bramanti, Marvin P. Bush (Advisory), Edward H. Ellis, Jr. and
Allan W. Fulkerson (Chairman). The Investment and Finance Committee held four
meetings in 2002. The Investment and Finance Committee is charged with
establishing investment policies for the Company and its subsidiaries and
directing the investment of the funds of the Company and its subsidiaries in
accordance with those policies. In this regard, the Investment and Finance
Committee oversees the investment management activities of General Re-New
England Asset Management, Inc., a subsidiary of Berkshire Hathaway, Inc. (NYSE
symbol: BRK), the Company's third party investment manager.
7
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
The Nominating and Corporate Governance Committee consists of three
Nonemployee Directors and was formed in 2002. The current members of the
Nominating and Corporate Governance Committee are James R. Crane, Walter J. Lack
(Chairman) and Michael A. F. Roberts. The Nominating and Corporate Governance
Committee is charged with identifying and making recommendations to the Board of
Directors of individuals suitable to become members of the Board of Directors
and overseeing the administration of the Company's various policies related to
corporate governance matters. The Nominating and Corporate Governance Committee
met one time in 2002.
COMPENSATION OF DIRECTORS
A Director who is an employee of the Company is not compensated for
services rendered as a member of the Board of Directors or any committee of the
Board of Directors. Prior to August, 2002, the Nonemployee Directors received
cash compensation consisting of a fee of $3,500 for each meeting of the Board of
Directors attended and $1,000 for each teleconference meeting of the Board of
Directors in which they participated. An additional fee of $1,000 was paid to
each Nonemployee Director committee member and $2,000 was paid to the committee
chairman for each Audit, Compensation or Investment and Finance Committee
meeting attended. Nonemployee Directors receive cash compensation of $500 for
committee members and $1,000 for the committee chairman for each teleconference
committee meeting in which they participate. In August, 2002, the Board of
Directors adjusted the meeting fees paid to its Nonemployee Director members for
Board of Director and committee meetings in accordance with the following table:
IN-PERSON MEETING TELECONFERENCE MEETING
----------------- ----------------------
Board of Directors................................ $5,000 $1,000
Audit Committee
Chair........................................ $3,000 $1,500
Member....................................... $2,000 $1,000
Compensation Committee
Chair........................................ $2,500 $1,250
Member....................................... $1,500 $ 750
Investment and Finance Committee
Chair........................................ $2,000 $1,000
Member....................................... $1,000 $ 500
Nominating and Corporate Governance
Chair........................................ $2,500 $1,250
Member....................................... $1,500 $ 750
The Company also reimburses its Directors for travel, lodging and related
expenses incurred in attending Board or committee meetings. During January 2002,
each Nonemployee Director serving at that time received an option to purchase
12,500 shares of the Company's Common Stock at an exercise price of $25.20 per
share under the Company's 2001 Flexible Incentive Plan. In November, 2002,
Michael A. F. Roberts received an option to purchase 35,000 shares of the
Company's Common Stock under that plan at an exercise price of $24.92 per share
in connection with his appointment to Board of Directors.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1997, the Company committed to make a $5.0 million investment as a
limited partner in Century Capital Partners II, Ltd. (the "Partnership"), an
investment partnership which specializes in investing in small and start-up
financial services companies. Mr. Fulkerson, a Director of the Company, is a
managing member of CCP Capital II, LLC, the Partnership's general partner and a
director, shareholder and President of Century Capital Management, Inc., the
investment advisor to the Partnership. As of
8
December 31, 2002, $4.8 million had been invested under this commitment. In
addition, in January 2002, the Company invested $5.0 million as a preferred
shareholder in CenCo Investment LLC, an entity in which the Partnership holds
the common shares and for which Mr. Fulkerson serves as a Director.
The Company holds a 20% interest in FRI Holdings, Inc. ("FRI"), an entity
in which Mr. Frank, a Director of the Company who is not standing for
reelection, is the controlling shareholder. FRI holds a 17% interest in
FileControl, Inc., an entity in which Mr. Frank owns a 17% interest and of which
he is a co-founder and Chairman. The Company previously made an additional
aggregate $1,035,000 investment in FileControl, Inc. During 2002, the Company
wrote off the entire amount of its interest in FRI and such investment in
FileControl, Inc.
In June, 1994, the Company entered into an arrangement with an entity owned
by the Chairman, Mr. Way, pursuant to which the Company leases equipment for
providing transportation services to employees, Directors and clients of the
Company. The Company, however, provides its own employees to operate the
equipment and pays all related operating expenses. During 2002, the Company paid
$1.2 million in lease payments to this entity.
In the opinion of management, the terms of the above arrangements are fair
and reasonable and as favorable to the Company as could have been obtained from
an unrelated party.
The Company has entered into employment agreements with each of Messrs.
Way, Kelbel, Schell, Ellis and Martin. A summary of the principal terms of such
employment agreements is included under the caption "Employment Agreements"
below.
There are no family relationships among the Executive Officers and
Directors, and there are no arrangements or understandings between any
Nonemployee Director or any other person pursuant to which that Nonemployee
Director was selected as a Director. The Company has agreed under the employment
agreement with Mr. Way to use its best efforts to ensure that Mr. Way is named
as a Director and Executive Chairman of the Board of Directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's Directors and Executive Officers and persons who own more than 10%
of a registered class of the Company's equity securities to file initial reports
of ownership and changes in ownership with the SEC. Such officers, Directors and
Shareholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file. Based upon a review of the copies of such
forms furnished to the Company and written representations from the Company's
Directors and Executive Officers, all persons subject to the reporting
requirements of Section 16(a) filed all required reports on a timely basis, with
the exception of Mr. Dickerson, a Director, who did not report the sale of
shares related to an option exercise within the prescribed time period. Such
transaction has since been reported.
9
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain information concerning compensation
paid or accrued by the Company to or on behalf of the Company's Chief Executive
Officer and the other four most highly compensated Executive Officers serving at
December 31, 2002 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- AWARDS SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
--------------------------- ---- --------- --------- --------------- ----------------- ---------------
Stephen L. Way(1)................ 2002 800,000 1,250,000 631,411 500,000 488,813
Chairman of the Board of 2001 800,000 -- 334,879 -- 82,900
Directors, Chief Executive 2000 800,000 -- 357,084 675,000 52,042
Officer and President
Craig J. Kelbel(2)............... 2002 425,000 50,000 -- 100,000 13,080
Executive Vice President 2001 325,000 200,000 -- -- 12,716
2000 300,000 175,000 -- -- 2,430
Michael J. Schell(3)............. 2002 265,500 N/A 92,710 200,000 2,876
Executive Vice President, 2001 -- -- -- -- --
President and Chief 2000 -- -- -- -- --
Executive Officer of Houston
Casualty Company
Edward H. Ellis, Jr.(4).......... 2002 325,000 75,000 -- 125,000 14,629
Executive Vice President and 2001 275,025 50,000 -- -- 13,787
Chief Financial Officer 2000 250,000 50,000 -- 75,000 13,722
Christopher L. Martin(5)......... 2002 195,000 30,000 -- 50,000 11,367
Executive Vice President, 2001 170,000 15,000 -- -- 11,315
General Counsel and Secretary 2000 147,500 15,000 -- -- 10,393
---------------
(1) Other annual compensation for 2002, 2001 and 2000, respectively, includes
$422,102, $200,000, and $170,709 for utilization of Company employees. All
other compensation for 2002, 2001 and 2000, respectively, includes $78,613,
$74,140 and $43,282 for life and disability premiums and $10,200, $10,200
and $10,200 for contributions by the Company under the Company's 401(k)
Plan. All other compensation for 2002 includes deferred compensation of
$400,000.
(2) All other compensation for 2002, 2001 and 2000, respectively, includes life
and disability premiums of $2,880, $2,880 and $2,516 and for 2002 and 2001,
respectively, contributions of $10,200 and $10,200 by the Company under the
Company's 401(k) plan.
(3) Information for 2002 includes all compensation paid to Mr. Schell from June
3, 2002, the date of his employment by the Company. Bonus information for
Mr. Schell had not been determined at the time of preparation. Other annual
compensation for 2002 includes $90,710 for relocation related expenses. All
other compensation for 2002 includes life and disability premiums of $2,876.
(4) All other compensation for 2002, 2001 and 2000, respectively, includes life
and disability premiums of $4,429, $3,587 and $3,522 and contributions of
$10,200, $10,200 and $10,200 by the Company under the Company's 401(k) plan.
(5) All other compensation for 2002, 2001, 2000, respectively, includes life and
disability premiums of $1,167, $1,128 and $943 and contributions of $10,200,
$10,187 and $9,450 by the Company under the Company's 401(k) Plan.
(6) John N. Molbeck, Jr. retired as President and Chief Operating Officer of the
Company in 2002. The Company paid Mr. Molbeck $600,000 in salary and
$200,000 as a bonus for his employment during 2002.
10
STOCK OPTIONS
The following table provides details regarding stock options granted to the
Named Executive Officers during 2002. In addition, in accordance with SEC rules,
there are shown the hypothetical gains or "option spreads" that would exist for
the respective options. The gains are based on assumed rates of annual
compounded growth in stock price of 5% and 10% from the date the options were
granted over the full option term. The actual value, if any, an executive may
realize will depend on the spread between the market price and the exercise
price on the date the option is exercised. The 5% and 10% assumed rates of
growth are for illustrative purposes only. They are not intended to predict
future stock prices, which will depend on market conditions and other factors
such as the Company's performance.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
----------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
PERCENT OF OF SHARE PRICE APPRECIATION
NUMBER OF TOTAL OPTIONS FOR OPTION TERM(1)
SECURITIES UNDERLYING GRANTED TO EMPLOYEES EXERCISE OR BASE EXPIRATION ---------------------------
NAME OPTIONS GRANTED IN FISCAL YEAR PRICE PER SHARE DATE 5% 10%
---- --------------------- -------------------- ---------------- ---------- ------------ ------------
Stephen L. Way......... 500,000 12% $20.39 07/22/08 $3,467,275 $7,866,064
Craig J. Kelbel........ 100,000 2% $25.20 12/31/07 $ 846,224 $1,916,443
Michael J. Schell...... 200,000 5% $20.96 06/03/08 $1,392,737 $3,149,547
Edward H. Ellis, Jr.... 100,000 2% $25.20 01/24/08 $ 857,041 $1,944,334
25,000 1% $20.39 07/22/08 $ 173,364 $ 393,303
Christopher L.
Martin............... 15,000 -- $25.20 01/24/08 $ 128,556 $ 291,650
35,000 1% $20.39 07/22/10 $ 340,736 $ 816,122
---------------
(1) Potential gains are net of the exercise price, but before taxes associated
with the exercise. These amounts represent certain assumed rates of
appreciation only, based on SEC rules. Actual gains, if any, on stock option
exercises are dependent on the future performance of the Common Stock,
overall market conditions and the option holders' continued employment
through the vesting period. The amount reflected in this table may not
necessarily be achieved. Amounts shown under the "Potential Realizable
Value" columns have been calculated by multiplying the exercise price by the
annual appreciation rate shown (compounded for the term of the options),
subtracting the exercise price per share and multiplying the gain per share
by the number of shares covered by the options.
STOCK OPTION EXERCISES AND HOLDINGS
The following table shows stock options exercised by the Named Executive
Officers during 2002, including the aggregate value of gains on the date of
exercise. In addition, this table includes the number of shares covered by both
exercisable and non-exercisable stock options as of the end of 2002. Also
11
reported are the values for "in-the-money" options which represent the positive
spread between the exercise price of any such existing stock option and the
year-end price of the Company's Common Stock.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS/SARS
SHARES YEAR-END AT FISCAL YEAR-END(1)
ACQUIRED ON --------------------------- ---------------------------
NAME EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------
Stephen L. Way........... 156,300 $2,469,416 243,700 500,000 $1,389,901 $3,770,487
Craig J. Kelbel.......... 25,000 $ 379,100 -- 125,000 -- $ 346,250
Michael J. Schell........ -- -- -- 200,000 -- $ 728,000
Edward H. Ellis, Jr...... 25,000 $ 349,437 85,000 125,000 $ 394,437 $ 105,250
Christopher L. Martin.... 11,667 $ 190,429 42,666 54,000 $ 212,382 $ 180,250
---------------
(1) The values were determined on the basis of the closing stock price of $24.60
at fiscal year-end December 31, 2002, and equal the aggregate amount by
which the market value of the option shares exceeds the exercise price of
such options.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with the Chief Executive
Officer and each of the Named Executive Officers, which set forth the general
terms and conditions of each Executive's employment by the Company. Each of the
Executives has the right to voluntarily terminate his employment at any time.
The following summarizes the terms of each of these Agreements:
STEPHEN L. WAY
Pursuant to the terms of the Employment Agreement effective as of January
1, 2003 between the Company and Mr. Way, Mr. Way has agreed to serve as
Executive Chairman of the Board and Chief Executive Officer of the Company. The
initial term of the agreement is through December 31, 2007; however, that term
is automatically extended each year in the absence of notice of termination.
Under the agreement, Mr. Way will receive an annual base salary of $800,000 and
annual deferred compensation of $400,000. The amount of any bonus to be paid to
Mr. Way is determined in the discretion of the Compensation Committee. Mr. Way
is also entitled to certain other perquisites, including the use of Company
automobiles, certain club memberships, extended medical coverage, utilization of
Company employees, and reimbursement for estate planning expenses. The agreement
further provides that upon its termination, Mr. Way will serve the Company as a
consultant for a period of five years and receive $450,000 per year as a
consulting fee. In the event Mr. Way's employment is terminated as a result of
his death or disability, he or his legal representative will be entitled to
receive the compensation he would have otherwise been entitled to receive
throughout the remaining term of the agreement. In addition, any unvested stock
options will immediately vest. Mr. Way will be entitled to receive all of the
sums otherwise due to him under the agreement in the event Mr. Way's employment
is terminated other than by the Company for Cause or by Mr. Way unless for Good
Reason after a Change of Control. The Company will also reimburse Mr. Way if
there are any payments made to him which are subject to any excise taxes. If the
agreement is terminated, Mr. Way has agreed to certain provisions relating to
non-competition, confidentiality and non-solicitation of customers and
employees.
CRAIG J. KELBEL
Mr. Kelbel has entered into an Employment Agreement effective as of January
10, 2002, which expires on December 31, 2005. Mr. Kelbel acts as an Executive
Vice President of the Company and oversees the Company's underwriting agency and
intermediary subsidiaries. Mr. Kelbel received a salary of
12
$425,000 in 2002 and will receive a salary of $450,000 in 2003, and increasing
by $25,000 for each year thereafter during the term of the agreement. Mr. Kelbel
was paid a bonus of $200,000 in 2002 in satisfaction of contractual bonus
requirements contained in a prior employment agreement. Mr. Kelbel is entitled
to an annual bonus of $10,000 for each subsidiary designated in the agreement
which meets budgeted earnings and an additional $50,000 if the aggregate earning
of such designated subsidiaries exceed budgeted earnings. Mr. Kelbel is also
entitled to certain perquisites, including a car allowance and a club
membership. In the event Mr. Kelbel's employment is terminated as a result of
his death or disability, his options will vest and remain exercisable for a
three month period and he or his estate will receive his contracted for
compensation through the date of his death or, if disabled, for a one year
period; thereafter, he will receive an amount equal to the after-tax amount of
his compensation prior to the disability, throughout the remaining term. The
agreement further provides that, upon its termination, Mr. Kelbel will serve the
Company as a consultant for a period of time equal to the number of years Mr.
Kelbel was employed by the Company after 2002 and receive $50,000 per year as a
consulting fee. The Company's obligation to pay Mr. Kelbel's consulting fee will
not terminate upon his death or disability. Mr. Kelbel's rights upon termination
are similar to those provided to Mr. Way. If the agreement is terminated, Mr.
Kelbel has agreed to certain provisions relating to non-competition,
confidentiality and non-solicitation of customers and employees.
MICHAEL J. SCHELL
Mr. Schell has entered into an Employment Agreement effective as of June 3,
2002, which expires on December 31, 2007. Mr. Schell acts as an Executive Vice
President of the Company and oversees the insurance company subsidiaries of the
Company. He is also President and Chief Operating Officer of Houston Casualty
Company and the Company's other insurance company subsidiaries. Under the
agreement, Mr. Schell receives a salary of $450,000 for the first year of the
agreement, increasing $25,000 each year thereafter. He also receives an annual
bonus of $12,500 for each subsidiary designated in the agreement that exceeds
its approved budget and an additional $50,000 if all designated subsidiaries
exceed their approved budgets. Mr. Schell is also entitled to certain
perquisites, including a car allowance, a club membership and life insurance.
Mr. Schell's rights upon termination, death or disability are similar to those
provided to Mr. Kelbel. If the agreement is terminated, Mr. Schell has agreed to
certain provisions relating to non-competition, confidentiality and
non-solicitation of customers and employees.
EDWARD H. ELLIS, JR.
Mr. Ellis has entered into an Employment Agreement effective as of January
1, 2002, which replaced a prior employment agreement. The agreement expires on
December 31, 2006. Mr. Ellis acts as Executive Vice President and Chief
Financial Officer of the Company. Mr. Ellis received a salary of $325,000 for
2002, and increasing by $25,000 for each year thereafter during the term of the
agreement. Mr. Ellis' rights upon termination, death or disability are similar
to those provided to Mr. Kelbel. If the agreement is terminated, Mr. Ellis has
agreed to certain provisions relating to non-competition, confidentiality and
non-solicitation of customers and employees.
CHRISTOPHER L. MARTIN
Mr. Martin has entered into an Employment Agreement effective as of January
1, 2003, which replaced a prior employment agreement. The agreement expires on
December 31, 2005. Mr. Martin acts as an Executive Vice President, General
Counsel and Secretary of the Company. Mr. Martin received a salary of $195,000
for 2002 and will receive a salary of $220,000 for 2003, $240,000 for 2004 and
$265,000 for 2005. Mr. Martin is also entitled to certain perquisites, including
a car allowance and a club membership. Mr. Martin's rights upon termination,
death or disability are similar to those provided to Mr. Kelbel. If the
agreement is terminated, Mr. Martin has agreed to certain provisions relating to
non-competition, confidentiality and non-solicitation of customers and
employees.
13
REPORT OF THE COMPENSATION COMMITTEE
Until November 2002, the Compensation Committee (the "Committee") consisted
of Marvin P. Bush, James R. Crane and Walter J. Lack (Chairman). In November
2002, Michael A. F. Roberts was appointed to fill Mr. Bush's seat on the
Compensation Committee.
All decisions by the Committee relating to the compensation of the
Company's Executive Officers are reviewed by the full Board of Directors. The
philosophy of the Company's compensation program is to employ, retain and reward
executives capable of leading the Company in achieving its business objectives.
These objectives include creating and then preserving strong financial
performance, increasing the assets of the Company, positioning the Company's
assets and business operations in geographic markets and industry segments
offering long-term growth opportunities, enhancing shareholder value and
ensuring the survival of the Company. The accomplishment of these objectives is
measured against conditions prevalent in the industry within which the Company
operates.
The Committee's executive compensation policies are intended to provide
competitive levels of compensation in order to attract and retain qualified
executives. The forms of executive compensation utilized during 2002 by the
Committee include base salary, cash bonus awards and stock options. Performance
of the Company is a key consideration for the Committee in considering executive
compensation matters. The Company's compensation policy recognizes, however,
that stock price performance is only one measure of performance and, given
industry business conditions and the long-term strategic direction and goals of
the Company, it may not necessarily be the best current measure of executive
performance. Therefore, the Company's compensation policy also gives
consideration to the Company's achievement of business objectives when
determining executive compensation.
The Committee has, with the approval of the full Board of Directors,
determined that the interests of the Company and its shareholders are best
served by the Company's entering into multi-year employment agreements with
certain executive officers, including the Chief Executive Officer and the Named
Executive Officers. A summary of the principal terms of such employment
agreements is included under the caption "Employment Agreements" above. The
Committee believes that such multi-year employment arrangements benefit the
Company and its Shareholders by permitting the Company to attract and retain
Executive Officers with demonstrated leadership abilities and to secure the
services of such Executive Officers at agreed upon terms over an extended period
of time. The compensation payable to the subject Executive Officers pursuant to
the employment agreements is consistent with the compensation policies of the
Company as established by the Committee.
Compensation paid to Executive Officers is based upon a company-wide salary
structure consistent for each position relative to its authority and
responsibility compared to industry peers. Stock option awards have historically
been used to reward Executive Officers and to retain them through the potential
of capital gains and equity buildup in the Company. In 2002, the number of stock
options granted, whether in conjunction with a written employment agreement or
otherwise, was determined by the subjective evaluation by the Committee of the
executive's ability to influence the Company's long term growth and
profitability. The Board of Directors believes the award of equity-based
incentives such as stock options represents an effective incentive to create
value for the Shareholders.
In 2002, the Committee reviewed base salary and annual bonus
recommendations made by the Chief Executive Officer based upon his assessment of
the performance of individual executive officers and his assessment of each
executive officer's past performance and expectation as to future contributions.
The Chief Executive Officer and other Executive Officers also made
recommendations to the Committee concerning the grant of stock options to other
officers.
Section 162(m) of the Internal Revenue Code of 1986 (the "Code"), generally
disallows a tax deduction to public companies for compensation over $1.0 million
paid to the corporation's Chief Executive Officer and the four other most highly
compensated executive officers.
Section 162(m) further provides that qualifying performance-based
compensation will not be subject to the deduction limit if certain requirements
are met. The Company currently intends to structure grants
14
under future stock option plans in a manner that complies with this statute. The
Company does not currently intend to structure the discretionary annual bonus
for Executive Officers to comply with Section 162(m). Such bonuses do not meet
Section 162(m)'s requirement that they be "payable solely on account of the
attainment of one or more performance goals." Therefore, the Committee believes
the annual discretionary bonuses, as currently structured, better serve the
interests of the Company's Shareholders by allowing broader discretion in
recognizing an Executive Officer's contribution and performance.
In connection with the compensation of the Company's Executive Officers,
the Committee is aware of Section 162(m) of the Code as it relates to
deductibility of qualifying compensation paid to Executive Officers. The
Committee is aware that the compensation paid in 2002 exceeded the deductibility
limitations on non-excluded compensation to certain of the Company's Executive
Officers.
CHIEF EXECUTIVE OFFICER COMPENSATION
As referenced above, the Company has entered into an employment agreement
with Mr. Way upon terms approved by the Committee, pursuant to which Mr. Way
would serve as Executive Chairman of the Board of Directors and Chief Executive
Officer of the Company. A summary of the principal terms of Mr. Way's employment
agreement is included under the caption "Employment Agreements" above. The
Committee determined that Mr. Way would be paid a bonus of $1,250,000 for 2002.
The Committee believes the Chief Executive Officer's cash compensation for 2002,
and as contemplated by the employment agreement, is warranted by the Company's
continuing performance and the substantial growth and diversification of the
Company's operations experienced by the Company under his leadership. The
Committee notes that 2002 represented a record year for the Company in terms of
both its total revenues and net earnings. The Company's underwriting experience
continues to be exceptional and during the period 1998 through 2001, the Company
had an average statutory combined ratio of 103.2% versus the less favorable
109.8% (source: A.M. Best Company, Inc.) recorded by the U.S. property and
casualty insurance industry overall. During the period 1998 through 2002, the
Company's gross written premium increased from $498.3 million to $1.2 billion,
an increase of 133%, while net written premium increased 348% from $121.9
million to $545.9 million. During this period, Company revenues increased from
$310.4 million to $669.4 million, an increase of 116%. Additionally, during the
same period, the Company's Shareholders' equity increased from $440.4 million to
$882.9 million, a 100% increase, and the Company's assets increased from $1.7
billion to $3.7 billion, a 117% increase. In addition, during 2002, the Company
completed the acquisition of two underwriting agency operations and a European
insurance company, which were intended to provide a further diversification of
the Company's business and to present opportunities for future growth.
Submitted by the Compensation
Committee:
Walter J. Lack, Chairman
James R. Crane
Michael A. F. Roberts
15
REPORT OF THE AUDIT COMMITTEE
The Audit Committee is composed of three independent directors and acts
under a written charter adopted by the Board of Directors, which was attached to
the Company's Proxy Statement for the May 24, 2001 Annual Meeting of
Shareholders. During 2002, the Audit Committee consisted of Patrick B. Collins,
J. Robert Dickerson (Chairman) and James C. Flagg. The Audit Committee is
responsible for overseeing the Company's financial reporting process on behalf
of the Board of Directors. The Audit Committee meets periodically with
management, the internal auditors and the independent auditors regarding
accounting policies and procedures, audit results and internal accounting
controls. The internal auditors and the independent auditors have free access to
the Audit Committee without management's presence, to discuss the scope and
results of their audit work. The Company's management is primarily responsible
for the Company's financial statements and the quality and integrity of the
reporting process, including the systems of internal controls. The independent
auditors, PricewaterhouseCoopers LLP, are responsible for auditing the Company's
financial statements and for expressing its opinion on the conformity of the
financial statements with accounting principles generally accepted in the United
States.
In fulfilling its oversight responsibilities, the Audit Committee has
reviewed and discussed the audited financial statements for the year ended
December 31, 2002, with the Company's management and representatives of the
independent auditors. The Audit Committee discussed with the independent
auditors the matters required to be discussed by Statement on Auditing Standards
No. 61, Communication with Audit Committees, as amended. In addition, the Audit
Committee discussed with the independent auditors their independence from the
Company and its management, including the matters in the written disclosures
required by Independence Standards Board Standard No. 1, Independence
Discussions with Audit Committees, and has received from PricewaterhouseCoopers
the written disclosure required by Standard No. 1. The Audit Committee has
considered the compatibility of the non-audit services rendered by
PricewaterhouseCoopers, primarily actuarial, tax consulting and auditing of the
statutory financial statements of the Company's insurance company subsidiaries,
with the auditors' independence.
PricewaterhouseCoopers audited the accounts of the Company and its
subsidiaries for the fiscal year ended December 31, 2002. It has served as the
Company's auditors since 1987. Representatives of PricewaterhouseCoopers are
expected to be present at the Annual Meeting and will have opportunity to make a
statement and respond to questions.
AUDIT FEES
During the year ended December 31, 2002, the aggregate fees billed by
PricewaterhouseCoopers for the audit of the Company's financial statements for
such year and for its review of the Company's interim financial statements was
$497,418.
ALL OTHER FEES
During the year ended December 31, 2002, the aggregate fees billed by
PricewaterhouseCoopers for professional services other than audit work was
$1,070,857. Such aggregate amount represented fees of $570,100 for required
regulatory, statutory audits and loss-reserve certifications and
employee-benefit work, $329,408 for tax consulting and $ 171,349 for
professional services rendered in connection with the Company's registration
statements and other matters.
The Audit Committee has determined that the rendering of the
above-mentioned non-audit services by PricewaterhouseCoopers was compatible with
maintaining the auditor's independence.
16
In reliance upon its review of the audited financial statements and the
discussion referred to above, the Audit Committee has recommended to the Board
of Directors that the audited financial statements be included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002, for filing with
the SEC.
Submitted by the Audit Committee:
J. Robert Dickerson, Chairman
Patrick B. Collins
James C. Flagg, Ph.D.
17
PERFORMANCE GRAPH
The following graph shows a comparison of cumulative total returns for an
investment of $100 made on December 31, 1997 in the Common Stock of the Company,
the Standard & Poor's 400 Midcap Index and the Standard & Poor's Super Composite
Insurance Index. During 2002, the Company utilized the Standard & Poor's 400
Midcap Insurance Index in the preparation of its Performance Graph and such
index is included below for reference. The Company has determined to replace the
Standard & Poor's Midcap Insurance Index with the Standard & Poor's Super
Composite Index, as it is the Company's view that such index represents a more
complete overview of the relative performance of all insurance industry
participants, irrespective as to their size. The graph assumes that all
dividends were reinvested.
TOTAL RETURN PERFORMANCE
(PERFORMANCE GRAPH)
-------------------------------------------------------------------------------------------
PERIOD ENDING
-------------------------------------------------------------------------------------------
INDEX 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02
-------------------------------------------------------------------------------------------
HCC Insurance Holdings,
Inc. 100.00 83.02 63.30 130.80 135.07 121.81
S&P 400 Midcap Index 100.00 119.12 136.65 160.58 159.59 136.41
S&P 400 Midcap Insurance
Index 100.00 131.44 122.63 184.80 174.03 151.15
S&P Super Composite
Insurance Index 100.00 109.67 113.82 152.99 133.06 105.39
OTHER BUSINESS
The Board of Directors has no knowledge of any other matter to be submitted
at the Meeting. If any other matter shall properly come before the Meeting, the
persons named in the Proxy will have discretionary authority to vote the shares
thereby represented in accordance with their best judgment.
CORPORATE GOVERNANCE
We are committed to good corporate governance practices. This commitment is
founded on our commitment to our Shareholders' best interests and in compliance
with the corporate governance rules promulgated by the NYSE and the SEC.
Consequently, our Board of Directors is presently working to draft new or to
revise our existing Board committee charters and codes of ethics to comply with
the new
18
requirements of the SEC and NYSE. Upon final SEC approval of the new NYSE rules,
we will finalize and publish our new charters and codes.
INCORPORATION BY REFERENCE
Notwithstanding anything to the contrary set forth in any of our previous
filings under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended, that might incorporate future filings including this
Proxy Statement, in whole or in part, the Performance Graph, the report of the
Compensation Committee and the report of the Audit Committee of included herein
shall not be incorporated by reference to any such filings.
SHAREHOLDER PROPOSALS
Any Shareholder proposal intended to be presented for consideration at the
2004 Annual Meeting of Shareholders and to be included in the Company's Proxy
Statement must be in proper form and received by the Secretary of the Company at
the principal executive offices of the Company by the close of business on
December 30, 2003. It is suggested that a proponent submit any proposal by
Certified Mail -- Return Receipt Requested and that all proposals should be sent
to the attention of the Secretary.
FORM 10-K
The Company will furnish without charge to each person whose proxy is being
solicited, upon request of any such person, a copy of the Annual Report of the
Company on Form 10-K for the fiscal year ended December 31, 2002, as filed with
the SEC, including the financial statements and schedules thereto, but not the
exhibits. Requests for copies of such report should be directed to L. Byron Way,
Investor Relations, HCC Insurance Holdings, Inc., 13403 Northwest Freeway,
Houston, Texas 77040-6094. Copies of any exhibit to the Form 10-K will be
forwarded upon receipt of a written request therefore addressed to Mr. Way.
EACH SHAREHOLDER WHO DOES NOT EXPECT TO ATTEND THE ANNUAL MEETING OF
SHAREHOLDERS IN PERSON IS URGED TO EXECUTE THE PROXY CARD AND RETURN IT PROMPTLY
IN THE ENCLOSED ENVELOPE. NO POSTAGE IS NECESSARY IF MAILED IN THE UNITED
STATES.
By Order of the Board of Directors,
CHRISTOPHER L. MARTIN,
Secretary
April 25, 2003
19
HCC INSURANCE HOLDINGS, INC.
ANNUAL MEETING OF SHAREHOLDERS -- TO BE HELD MAY 15, 2003
THE BOARD OF DIRECTORS SOLICITS THIS PROXY
The undersigned hereby constitutes and appoints Stephen L. Way and
Christopher L. Martin, and each of them, acting in the absence of others, as
proxies of the undersigned, with full power of substitution in the premises to
each of them, to appear and vote, as designated herein, all shares of stock of
the Common Stock of HCC Insurance Holdings, Inc.(the "Company") held of record
by the undersigned on April 3, 2003 at the Annual Meeting of Shareholders of the
Company to be held at The InterContinental Houston, 2222 West Loop South,
Houston, Texas 77027 on May 15, 2003, at 8:30 a.m., Houston time, and at any and
all postponements or adjournments thereof (the "Meeting").
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED AS DESIGNATED BELOW BY THE
UNDERSIGNED. IF NO CHOICE IS SPECIFIED, THE PROXY WILL BE VOTED "FOR" THE
ELECTION OF ALL NOMINEES FOR DIRECTOR LISTED BELOW, AND, ACCORDING TO THE
DISCRETION OF THE PROXY HOLDERS, ON ANY OTHER MATTERS THAT MAY PROPERLY COME
BEFORE THE MEETING OR ANY AND ALL POSTPONEMENTS OR ADJOURNMENTS THEREOF.
1. Election of Directors
[ ] FOR all nominees listed below (except as [ ] WITHHOLD AUTHORITY TO VOTE for all
marked to the contrary below). nominees listed below.
To elect the following Directors to serve for one-year terms of office
ending at the Annual Meeting of Shareholders in the year 2004, or until their
successors are duly elected and qualified.
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
STRIKE A LINE THROUGH THE NOMINEE'S NAME ON THE LIST BELOW.)
--------------------------------------------------------------------------------
Frank, J. Bramanti, Patrick B. Collins, James R. Crane, J. Robert Dickerson,
Edward H. Ellis, Jr.,
James C. Flagg, Allan W. Fulkerson, Walter J. Lack, Michael A. F. Roberts,
Stephen L. Way
2. In their discretion, the proxies are authorized to vote upon such business
as may properly come before the Meeting or any postponement or adjournment
thereof.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting
of Shareholders, the Proxy Statement for such meeting, and the Annual Report of
HCC Insurance Holdings, Inc. for the fiscal year ended December 31, 2002.
Dated: , 2003
-----------------------------------
-------------------------------------------------
Signature of Shareholder
-------------------------------------------------
Signature of Shareholder (if jointly held)
Note: Please sign exactly as your name appears on
this card. On joint accounts each joint holder
should sign. When signing as attorney, executor,
administrator, trustee, or guardian, please give
your full title as such. If a corporation, please
sign in full corporate name by President or other
authorized person. If a partnership, please sign
in partnership name by authorized person.
PLEASE MARK, SIGN, DATE, AND RETURN YOUR PROXY PROMPTLY IN THE ENCLOSED
ENVELOPE.