-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UfPryhaSGfWEP8vGDjwifKo7VV4Ixc9KPADXJZw7OnQ1unuTUc6fhZQQB92EXc/4 L5wmKS6KV2VWk7s/iEd68Q== 0000912057-00-024679.txt : 20000516 0000912057-00-024679.hdr.sgml : 20000516 ACCESSION NUMBER: 0000912057-00-024679 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HCC INSURANCE HOLDINGS INC/DE/ CENTRAL INDEX KEY: 0000888919 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 760336636 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13790 FILM NUMBER: 634038 BUSINESS ADDRESS: STREET 1: 13403 NORTHWEST FRWY CITY: HOUSTON STATE: TX ZIP: 77040-6094 BUSINESS PHONE: 7136907300 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended March 31, 2000 |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from _______ to __________ Commission file number 0-20766 -------------------------------------------------------- HCC Insurance Holdings, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 76-0336636 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 13403 Northwest Freeway, Houston, Texas 77040-6094 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (713) 690-7300 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. On May 5, 2000, there were 49,213,773 shares of Common Stock, $1.00 par value issued and outstanding. HCC INSURANCE HOLDINGS, INC. INDEX Page No. -------- Part I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Balance Sheets March 31, 2000 and December 31, 1999...........................3 Condensed Consolidated Statements of Earnings Three Months Ended March 31, 2000 and Three Months Ended March 31, 1999..............................4 Condensed Consolidated Statements of Changes in Shareholders' Equity Three Months Ended March 31, 2000 and Year Ended December 31, 1999..........................5 Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2000 and Three Months Ended March 31, 1999..............................7 Notes to Condensed Consolidated Financial Statements.............8 Item 2. Management's Discussion and Analysis............................17 Item 3. Quantitative and Qualitative Disclosures About Market Risk......21 Part II. OTHER INFORMATION....................................................22 2 HCC Insurance Holdings, Inc. and Subsidiaries --------- Condensed Consolidated Balance Sheets (Unaudited) --------
March 31, 2000 December 31, 1999 --------------- --------------- ASSETS Investments: Fixed income securities, at market (cost: 2000 $334,468,000; cost: 1999 $ 343,534,000) $ 335,320,000 $ 342,641,000 Marketable equity securities, at market (cost: 2000 $15,732,000; cost: 1999 $22,493,000) 11,385,000 19,970,000 Short-term investments, at cost, which approximates market 317,799,000 215,694,000 Other investments, at cost, which approximates fair value 5,995,000 3,017,000 --------------- --------------- Total investments 670,499,000 581,322,000 Cash 7,319,000 26,533,000 Restricted cash and cash investments 92,767,000 84,112,000 Premium, claims and other receivables 534,492,000 607,986,000 Reinsurance recoverables 690,339,000 736,485,000 Ceded unearned premium 129,825,000 133,657,000 Ceded life and annuity benefits 93,804,000 95,760,000 Deferred policy acquisition costs 36,872,000 40,450,000 Property and equipment, net 38,024,000 37,804,000 Goodwill 272,225,000 263,687,000 Other assets 26,316,000 42,827,000 --------------- --------------- Total assets $ 2,592,482,000 $ 2,650,623,000 =============== =============== LIABILITIES Loss and loss adjustment expense payable $ 853,321,000 $ 871,104,000 Life and annuity policy benefits 93,804,000 95,760,000 Reinsurance balances payable 114,433,000 113,373,000 Unearned premium 182,046,000 188,524,000 Deferred ceding commissions 34,758,000 39,792,000 Premium and claims payable 548,684,000 584,537,000 Notes payable 260,566,000 242,546,000 Accounts payable and accrued liabilities 36,106,000 57,559,000 --------------- --------------- Total liabilities 2,123,718,000 2,193,195,000 SHAREHOLDERS' EQUITY Common Stock, $1.00 par value; 250,000,000 shares authorized; (issued and outstanding: 2000 49,112,439 shares; 1999 48,839,027 shares) 49,112,000 48,839,000 Additional paid-in capital 177,347,000 176,359,000 Retained earnings 245,096,000 234,922,000 Accumulated other comprehensive income (loss) (2,791,000) (2,692,000) --------------- --------------- Total shareholders' equity 468,764,000 457,428,000 --------------- --------------- Total liabilities and shareholders' equity $ 2,592,482,000 $ 2,650,623,000 =============== ===============
See Notes to Condensed Consolidated Financial Statements. 3 HCC Insurance Holdings, Inc. and Subsidiaries -------- Condensed Consolidated Statements of Earnings (Unaudited) -------- For the three months ended March 31, 2000 1999 ---------------- ---------------- REVENUE Net earned premium $ 63,356,000 $ 33,979,000 Management fees 29,261,000 23,435,000 Commission income 12,985,000 17,755,000 Net investment income 8,239,000 7,264,000 Net realized investment gain (loss) (403,000) 170,000 Other operating income 6,651,000 9,384,000 ------------- ------------- Total revenue 120,089,000 91,987,000 EXPENSE Loss and loss adjustment expense 48,809,000 23,764,000 Operating expense: Policy acquisition costs, net 9,321,000 2,070,000 Compensation expense 21,385,000 18,922,000 Other operating expense 13,918,000 12,283,000 ------------- ------------- Net operating expense 44,624,000 33,275,000 Interest expense 5,021,000 3,309,000 ------------- ------------- Total expense 98,454,000 60,348,000 ------------- ------------- Earnings before income tax provision 21,635,000 31,639,000 Income tax provision 9,000,000 10,930,000 ------------- ------------- Net earnings $ 12,635,000 $ 20,709,000 ============= ============= Basic earnings per share data: Earnings per share $ 0.26 $ 0.42 ============= ============= Weighted average shares outstanding 49,403,000 48,764,000 ============= ============= Diluted earnings per share data: Earnings per share $ 0.25 $ 0.42 ============= ============= Weighted average shares outstanding 49,709,000 49,544,000 ============= ============= Cash dividends declared, per share $ 0.05 $ 0.05 ============= ============= See Notes to Condensed Consolidated Financial Statements. 4 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Condensed Consolidated Statements of Changes in Shareholders' Equity For the three months ended March 31, 2000 and for the year ended December 31, 1999 (Unaudited) ----------
Accumulated Additional other Total Common paid-in Retained comprehensive shareholders' Stock capital earnings income (loss) equity ------------- ------------- ------------- ------------- ------------- Balance as of December 31, 1998 $ 48,252,000 $ 162,102,000 $ 219,804,000 $ 9,705,000 $ 439,863,000 Net earnings -- -- 25,123,000 -- 25,123,000 Other comprehensive income (loss) -- -- -- (12,397,000) (12,397,000) 505,555 shares of Common Stock issued for exercise of options, including tax benefit of $1,156,000 506,000 4,277,000 -- -- 4,783,000 101,330 shares of Common Stock issued for purchased companies 101,000 1,899,000 -- -- 2,000,000 414,207 shares of Common Stock contractually issuable in the future -- 8,271,000 -- -- 8,271,000 Cash dividends declared, $0.20 per share -- -- (9,733,000) -- (9,733,000) Other (20,000) (190,000) (272,000) -- (482,000) ------------- ------------- ------------- ------------- ------------- Balance as of December 31, 1999 $ 48,839,000 $ 176,359,000 $ 234,922,000 $ (2,692,000) $ 457,428,000 ============= ============= ============= ============= =============
See Notes to Condensed Consolidated Financial Statements. 5 HCC Insurance Holdings, Inc. and Subsidiaries -------- Condensed Consolidated Statements of Changes in Shareholders' Equity For the three months ended March 31, 2000 and for the year ended December 31, 1999 (Unaudited) (continued) --------
Accumulated Additional other Total Common paid-in Retained comprehensive shareholders' Stock capital earnings income (loss) equity ------------- ------------- ------------- ------------- ------------- Balance as of December 31, 1999 $ 48,839,000 $ 176,359,000 $ 234,922,000 $ (2,692,000) $ 457,428,000 Net earnings -- -- 12,635,000 -- 12,635,000 Other comprehensive income (loss) -- -- -- (99,000) (99,000) 128,439 shares of Common Stock issued for exercise of options, including tax benefit of $142,000 128,000 1,133,000 -- -- 1,261,000 Issuance of 144,973 shares of contractually issuable Common Stock 145,000 (145,000) -- -- -- Cash dividends declared, $0.05 per share -- -- (2,461,000) -- (2,461,000) ------------- ------------- ------------- ------------- ------------- Balance as of March 31, 2000 $ 49,112,000 $ 177,347,000 $ 245,096,000 $ (2,791,000) $ 468,764,000 ============= ============= ============= ============= =============
See Notes to Condensed Consolidated Financial Statements. 6 HCC Insurance Holdings, Inc. and Subsidiaries -------- Condensed Consolidated Statements of Cash Flows (Unaudited) --------
For the three months ended March 31, 2000 1999 ---------------- ---------------- Cash flows from operating activities: Net earnings $ 12,635,000 $ 20,709,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Change in premium, claims and other receivables 71,428,000 39,769,000 Change in reinsurance recoverables 46,146,000 (65,925,000) Change in ceded unearned premium 3,832,000 477,000 Change in loss and loss adjustment expense payable (17,783,000) 34,331,000 Change in reinsurance balances payable 1,060,000 29,444,000 Change in unearned premium (6,478,000) (2,940,000) Change in premium and claims payable, net of restricted cash (44,508,000) (61,919,000) Net realized investment (gain) loss 403,000 (170,000) Gains on sales of strategic investments and inactive subsidiary (1,144,000) (5,319,000) Depreciation and amortization expense 4,439,000 3,080,000 Other, net (9,313,000) 15,355,000 ------------- ------------- Cash provided by operating activities 60,717,000 6,892,000 Cash flows from investing activities: Sales of fixed income securities 11,302,000 -- Maturity or call of fixed income securities 16,364,000 2,245,000 Sales of equity securities 6,547,000 1,520,000 Sales of strategic investments and inactive subsidiary 16,145,000 14,943,000 Change in short-term investments (120,823,000) (6,939,000) Cash paid for companies acquired, net of cash received (9,901,000) (57,863,000) Cost of securities acquired (14,815,000) (24,291,000) Purchases of property and equipment and other, net (1,569,000) (2,829,000) ------------- ------------- Cash used by investing activities (96,750,000) (73,214,000) Cash flows from financing activities: Proceeds from notes payable 24,000,000 202,000,000 Sale of Common Stock 1,261,000 606,000 Payments on notes payable (6,000,000) (145,600,000) Dividends paid (2,442,000) (1,930,000) ------------- ------------- Cash provided by financing activities 16,819,000 55,076,000 ------------- ------------- Net change in cash (19,214,000) (11,246,000) Cash at beginning of period 26,533,000 16,018,000 ------------- ------------- Cash at end of period $ 7,319,000 $ 4,772,000 ============= =============
See Notes to Condensed Consolidated Financial Statement 7 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (Unaudited) (1) GENERAL INFORMATION HCC Insurance Holdings, Inc. ("the Company" or "HCC") and its subsidiaries include domestic and foreign property and casualty and life insurance companies, underwriting agencies, intermediaries and service companies. HCC, through its subsidiaries, provides specialized property and casualty and life and health insurance to commercial customers in the areas of accident and health reinsurance, aviation, marine, medical stop-loss, property, offshore energy and workers' compensation insurance. Basis of Presentation The unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include all adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim periods. All adjustments made to the interim periods are of a normal recurring nature. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The condensed consolidated financial statements for periods reported should be read in conjunction with the annual consolidated financial statements and related notes thereto. The condensed consolidated balance sheet as of December 31, 1999, and the condensed consolidated statement of changes in shareholders' equity for the year then ended were derived from audited financial statements, but do not include all disclosures required by generally accepted accounting principles. During December, 1999, the Company acquired all of the outstanding shares of The Centris Group, Inc. ("Centris") in a transaction accounted for using the purchase method of accounting. Therefore, the results of operations of the Centris companies are included in the 2000 condensed consolidated statement of earnings but are not included in the 1999 condensed consolidated statement of earnings. Income Tax For the three months ended March 31, 2000 and 1999, the income tax provision has been calculated based on an estimated effective tax rate for each of the fiscal years. The difference between the Company's effective tax rate and the Federal statutory rate is primarily the result of nontaxable municipal bond interest included in pretax income, offset by the effects of the amortization of goodwill and state income taxes. Effects of Recent Accounting Pronouncements Statement of Financial Accounting Standards ("SFAS") No. 133 entitled "Accounting for Derivative Instruments and Hedging Activities" was issued in June, 1998 and is effective for all fiscal quarters of fiscal years beginning after June 15, 2000, with early adoption permitted. The Company has utilized derivative or hedging strategies only infrequently in the past and in immaterial amounts, although it is currently using derivatives and hedging strategies to a greater extent as it expands its foreign operations. The effects of SFAS No. 133, as well as the timing of its adoption, are currently being reviewed by management. 8 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (1) GENERAL INFORMATION, continued During December, 1999 the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101 entitled "Revenue Recognition in Financial Statements" which becomes effective for the Company during the second quarter of 2000. The Company does not expect the adoption of SAB No. 101 to have a material effect on the Company's financial position, results of operations or cash flows. Reclassifications Certain amounts in the 1999 condensed consolidated financial statements have been reclassified to conform to the 2000 presentation. Such reclassifications had no effect on the Company's net earnings, shareholders' equity or cash flows. (2) REINSURANCE In the normal course of business the Company's insurance company subsidiaries cede a substantial portion of their premium to non-affiliated domestic and foreign reinsurers through quota share, surplus, excess of loss and facultative reinsurance agreements. Although the ceding of reinsurance does not discharge the primary insurer from liability to its policyholder, the subsidiaries participate in such agreements for the purposes of limiting their loss exposure, protecting against catastrophic loss and diversifying their business. The majority of assumed reinsurance was written by underwriting agency subsidiaries of the Company utilizing unaffiliated insurance companies as the primary writer. The following tables represent the effect of such reinsurance transactions on net premium and loss and loss adjustment expense:
Loss and Loss Written Earned Adjustment Premium Premium Expense ------------- ------------- ------------- For the three months ended March 31, 2000: Direct business $ 144,625,000 $ 138,417,000 $ 95,227,000 Reinsurance assumed 62,513,000 78,118,000 60,141,000 Reinsurance ceded (146,478,000) (153,179,000) (106,559,000) ------------- ------------- ------------- Net amounts $ 60,660,000 $ 63,356,000 $ 48,809,000 ============= ============= =============
9 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (2) REINSURANCE, continued
Loss and Loss Written Earned Adjustment Premium Premium Expense ------------- ------------- ------------- For the three months ended March 31, 1999: Direct business $ 50,038,000 $ 60,270,000 $ 46,961,000 Reinsurance assumed 91,605,000 85,347,000 90,512,000 Reinsurance ceded (111,224,000) (111,638,000) (113,709,000) ------------- ------------- ------------- Net amounts $ 30,419,000 $ 33,979,000 $ 23,764,000 ============= ============= =============
The table below represents the approximate composition of reinsurance recoverables in the accompanying condensed consolidated balance sheets: March 31, 2000 December 31, 1999 -------------- ----------------- Reinsurance recoverable on paid losses $ 110,020,000 $ 91,318,000 Commuted receivable -- 53,210,000 Reinsurance recoverable on outstanding losses 358,233,000 382,565,000 Reinsurance recoverable on IBNR 228,375,000 214,933,000 Reserve for uncollectible reinsurance (6,289,000) (5,541,000) ------------- ------------- Total reinsurance recoverables $ 690,339,000 $ 736,485,000 ============= ============= The insurance company subsidiaries require reinsurers not authorized by the subsidiaries' respective states of domicile to collateralize their reinsurance obligations to the Company. The table below shows amounts held by the Company as collateral plus other credits available for potential offset. March 31, 2000 December 31, 1999 -------------- ----------------- Payables to reinsurers $ 222,169,000 $212,962,000 Letters of credit 134,521,000 154,111,000 Cash deposits 23,302,000 19,882,000 -------------- ------------ Total credits $ 379,992,000 $386,955,000 ============== ============ 10 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (2) REINSURANCE, continued The Company has established a reserve of $6.3 million as of March 31, 2000 for potential collectibility issues related to reinsurance recoverables. The adverse economic environment in the worldwide insurance industry has placed great pressure on reinsurers and the results of their operations. Ultimately, these conditions could affect reinsurers' solvency. Historically, there have been insolvencies following a period of competitive pricing in the industry, such as the marketplace has experienced for the last several years. Therefore, while management believes that the reserve is adequate based on current available information, conditions may change or additional information might be obtained that would affect management's estimate of the adequacy of the level of the reserve and which may result in a future increase or decrease in the reserve. Management continually reviews the Company's financial exposure to the reinsurance market and will continue to take actions to protect shareholders' equity. 11 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (3) SEGMENT AND GEOGRAPHIC INFORMATION The performance of each segment is evaluated by management based upon net earnings. Net earnings is calculated after tax and after all corporate expense allocations, purchase price allocations and intercompany eliminations have been charged or credited to the individual segments. The following tables show information by business segment and geographic location. Geographic location is determined by physical location of the Company's offices and does not represent the location of insureds or reinsureds from whom the business was generated.
Insurance Underwriting Other Company Agency Intermediary Operations Corporate Total =================================================================================== For the three months ended March 31, 2000: Revenue: Domestic $67,640,000 $29,893,000 $ 7,431,000 $6,179,000 $ 254,000 $111,397,000 Foreign 1,447,000 938,000 6,307,000 -- -- 8,692,000 Inter-segment -- 2,184,000 38,000 351,000 -- 2,573,000 ----------------------------------------------------------------------------------- Total segment revenue $69,087,000 $33,015,000 $13,776,000 $6,530,000 $ 254,000 122,662,000 =================================================================== Inter-segment revenue (2,573,000) ------------ Consolidated total revenue $120,089,000 ============ Net earnings (loss): Domestic $ 3,704,000 $ 6,882,000 $ 3,318,000 $ 966,000 $(1,653,000) $ 13,217,000 Foreign (1,269,000) 187,000 767,000 -- -- (315,000) ----------------------------------------------------------------------------------- Total segment net earnings (loss) $ 2,435,000 $ 7,069,000 $ 4,085,000 $ 966,000 $(1,653,000) 12,902,000 =================================================================== Inter-segment eliminations (267,000) ------------ Consolidated net earnings $ 12,635,000 ============ Other items: Net investment income $ 5,828,000 $ 1,440,000 $ 757,000 $ 113,000 $ 101,000 $ 8,239,000 Depreciation and amortization 789,000 2,829,000 609,000 107,000 105,000 4,439,000 Interest expense 5,000 2,282,000 1,285,000 -- 1,449,000 5,021,000 Capital expenditures 710,000 1,144,000 157,000 117,000 56,000 2,184,000 Income tax provision 274,000 5,677,000 2,733,000 470,000 20,000 9,174,000 Inter-segment eliminations (174,000) ------------ Consolidated income tax provision $ 9,000,000 ============
12 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (3) SEGMENT AND GEOGRAPHIC INFORMATION, continued
Insurance Underwriting Other Company Agency Intermediary Operations Corporate Total ==================================================================================== For the three months ended March 31, 1999: Revenue: Domestic $37,288,000 $ 23,440,000 $10,519,000 $9,216,000 $ (33,000) $ 80,430,000 Foreign 3,024,000 872,000 7,661,000 -- -- 11,557,000 Inter-segment -- 279,000 241,000 344,000 -- 864,000 ------------------------------------------------------------------------------------ Total segment revenue $40,312,000 $ 24,591,000 $18,421,000 $9,560,000 $ (33,000) 92,851,000 ==================================================================== Inter-segment revenue (864,000) ------------ Consolidated total revenue $ 91,987,000 ============ Net earnings (loss): Domestic $ 6,202,000 $ 4,459,000 $ 4,065,000 $4,261,000 $ (394,000) $ 18,593,000 Foreign 68,000 (110,000) 2,158,000 -- -- 2,116,000 ------------------------------------------------------------------------------------ Net earnings (loss) $ 6,270,000 $ 4,349,000 $ 6,223,000 $4,261,000 $ (394,000) $ 20,709,000 ==================================================================================== Other items: Net investment income $ 5,766,000 $ 909,000 $ 425,000 $ 81,000 $ 83,000 $ 7,264,000 Depreciation and amortization 625,000 1,363,000 880,000 63,000 149,000 3,080,000 Interest expense 9,000 1,149,000 919,000 -- 1,232,000 3,309,000 Capital expenditures 782,000 1,342,000 399,000 31,000 275,000 2,829,000 Income tax provision 1,309,000 3,367,000 3,928,000 2,306,000 20,000 10,930,000
13 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (4) EARNINGS PER SHARE Basic earnings per share is based on the weighted average number of common shares outstanding during the period divided into net earnings. Diluted earnings per share is based on the weighted average number of common shares outstanding plus the potential common shares outstanding during the period divided into net earnings. Outstanding common stock options, when dilutive, are considered to be potential common stock for the purpose of the diluted calculation. The treasury stock method is used to calculate potential common stock due to options. Contingent shares to be issued are included in the earnings per share computation only when the underlying conditions for issuance have been met. The following table provides a reconciliation of the denominators used in the earnings per share calculations:
For the three months ended March 31, 2000 1999 ---------------- ---------------- Net earnings $ 12,635,000 $ 20,709,000 ============ ============ Reconciliation of number of shares outstanding: Shares of Common Stock outstanding at period end 49,112,000 48,410,000 Effect of Common Stock issued during the period (73,000) (60,000) Contingent shares to be issued 95,000 -- Common Stock contractually issuable in the future 269,000 414,000 ------------ ------------ Weighted average Common Stock outstanding 49,403,000 48,764,000 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method) 306,000 780,000 ------------ ------------ Weighted average Common Stock and potential common stock outstanding 49,709,000 49,544,000 ============ ============
As of March 31, 2000, there were approximately 3.5 million options that were not included in the computation of diluted earnings per share because to do so would have been antidilutive. There are 283,500 shares of the Company's Common Stock to be issued if certain conditions are met as of December 31, 2000, or in subsequent years. These shares were not included in the earnings per share computation because the conditions for issuance have not yet been met. 14 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (5) OTHER INFORMATION Supplemental Information Supplemental information for the three months ended March 31, 2000 and 1999, is summarized below:
2000 1999 ------------ ----------- Interest paid $ 2,660,000 $ 2,997,000 Income tax paid (received) (6,896,000) 1,054,000 Comprehensive income 12,536,000 20,078,000 Ceding commissions netted with policy acquisition costs 46,700,000 23,138,000
Restructuring As of December 31, 1999, the Company had accrued two separate restructuring liabilities, relating to HCC's ongoing operations ("HCC internal") and to HCC's acquisition of Centris. Changes in the accruals between December 31, 1999 and March 31, 2000 are shown in the tables below: HCC Internal Restructuring Accrued Paid 2000 Accrued at 12/31/99 in 2000 Adjustments at 3/31/00 ----------- ---------- ----------- ---------- Severance $3,115,000 $3,115,000 $ -- $ -- Other 911,000 70,000 (514,000) 327,000 ---------- ---------- --------- -------- Total $4,026,000 $3,185,000 $(514,000) $327,000 ========== ========== ========= ======== During the first quarter of 2000, the Company determined that one of the leased offices scheduled to be closed would be retained. Therefore, the Company reversed $789,000 (included as a credit in other operating expenses) of the restructuring expense recorded during the fourth quarter of 1999, of which $514,000 was the reversal of the accrual for the future lease payments and $275,000 was the reversal of the write down of certain assets. 15 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (5) OTHER INFORMATION, continued Centris Restructuring Accrued Paid 2000 Accrued at 12/31/99 in 2000 Adjustments at 3/31/00 ----------- ---------- ----------- ---------- Contractual executive severance accruals $5,866,000 $4,024,000 $ -- $1,842,000 Other severance accruals 397,000 186,000 171,000 382,000 Lease obligation accruals 848,000 345,000 239,000 742,000 ---------- ---------- -------- ---------- Total $7,111,000 $4,555,000 $410,000 $2,966,000 ========== ========== ======== ========== It is expected that most of the remaining severance accrual will be paid during the second quarter of 2000. The adjustments in 2000 were recorded as management decided to take additional steps to integrate parts of the Centris operations. Management continues to evaluate what additional actions, if any, are necessary to finalize the integration of the Centris operations. In addition, there are unresolved contingencies remaining from the acquisition. Any additional accruals for either the unresolved contingencies or the integration of operations will be recorded as an adjustment to the purchase price allocation. 16 Management's Discussion and Analysis Three months ended March 31, 2000 versus three months ended March 31, 1999 During December, 1999, the Company acquired all of the outstanding shares of The Centris Group, Inc. ("Centris") in a transaction accounted for using the purchase method of accounting. Therefore, the results of operations of the Centris companies are included in the 2000 condensed consolidated statement of earnings, but are not included in the 1999 condensed consolidated statement of earnings. Results of Operations Total revenue increased 31% to $120.1 million for the first quarter of 2000 from $92.0 million for the same period in 1999. The revenue increase was in the insurance company and underwriting agency segments and resulted from the effects of internal growth, increased rates, increased retentions of premium underwritten by the Company's insurance company subsidiaries and the Centris acquisition. Net investment income increased 13% to $8.2 million for the first quarter of 2000 from $7.3 million for the same period in 1999. This reflects the higher level of invested assets resulting from higher retentions of premium underwritten by the insurance company subsidiaries and a commuted reinsurance agreement. Compensation expense increased $2.5 million during the first quarter of 2000 from the same period in 1999. This increase reflects a normal progressional increase due to business growth plus the increase due to the Centris acquisition offset by the savings resulting from the 1999 restructuring. Other operating expenses increased $1.6 million during the same period for similar reasons. Other operating expenses for the first quarter of 2000 also included a credit of $789,000 reflecting the reversal of certain restructuring charges previously recorded. Interest expense was $5.0 million for the first quarter of 2000, an increase of $1.7 million from $3.3 million for the same period in 1999. The increase is a result of increased debt outstanding, principally as a result of funding for the acquisition of Centris, and higher interest rates. Income tax expense was $9.0 million for the first quarter of 2000 compared to $10.9 million for the same period in 1999. The Company's effective tax rate was 42% in the 2000 quarter compared to 35% in 1999. Most of this increase was due to increased amortization of goodwill, which is not deductible for income tax purposes, as a result of the Centris acquisition and increased income subject to state income taxes. Net earnings for the first quarter of 2000 decreased to $12.6 million, or $0.25 per share, from $20.7 million, or $0.42 per share, for the same period in 1999. The decreases result from a strong performance by the underwriting agency segment offset by a reduction in commission income earned by the intermediary segment. The insurance company segment result was lower in this period due to the run-off of the 1999 account. The Company's book value per share was $9.49 as of March 31, 2000, up from $9.29 as of December 31, 1999. SEGMENTS Insurance Companies Gross written premium increased 46% to $207.1 million for the first quarter of 2000 from $141.6 million for the same period in 1999 due to the substantial increase in medical stop-loss premium following the acquisition of Centris, new business, rate increases and the increase in participation by the Company's insurance company subsidiaries in this business. This increase was somewhat offset by a reduction in aviation premium, although there was a timing difference on two large items that will now be recorded in the second quarter 2000. The increase was the result of internal growth as the Company's insurance company subsidiaries increased their participation in the business underwritten by the Company's underwriting agency subsidiaries and the effect of the medical stop-loss business acquired in conjunction with the acquisition of Centris. Net written premium for the first quarter of 2000 increased 99% to $60.7 million from $30.4 million 17 for the same period in 1999, as the insurance company subsidiaries have increased retentions on many of their lines of business as underwriting results begin to improve. Net earned premium increased 86% to $63.4 million for the same reasons. The increase in earned premium is expected to continue throughout 2000 and 2001. Loss and loss adjustment expense increased to $48.8 million for the first quarter of 2000 from $23.8 million for the same period in 1999. The GAAP net loss ratio increased to 77% for the first quarter of 2000 from 70% for the same period in 1999. The increase in net loss and loss adjustment expense is due to the increase in net retained premium and higher loss ratio. The net loss ratio was negatively affected by unfavorable underwriting results as a result of the run-off of certain lines of business written in prior years. Improved underwriting results were experienced in the domestic aviation and medical stop-loss lines of business. The GAAP gross loss ratio was 72% in the first quarter of 2000 compared to 94% for the same period in 1999. The decrease in the gross loss ratio represents the effects of steps taken in the first quarter of 2000 to increase premium rates on certain lines of business, reduced writings on other unprofitable lines of business and an improvement in the underwriting results for the domestic aviation and medical stop-loss lines of business. The statutory combined ratio was 100.9% in the first quarter of 2000 compared to 93.7% for the same period in 1999. Policy acquisition costs, which are net of ceding commissions on reinsurance ceded, increased to $9.3 million during the first quarter of 2000, compared to the same period in 1999, due to increased retained premium as the Company purchased less reinsurance. Net earnings of the insurance companies decreased to $2.4 million in the first quarter of 2000 from $6.3 million for the same period in 1999, as a result of the higher combined ratio which is expected to improve later in 2000. Underwriting Agencies Management fees increased 25% to $29.3 million for the first quarter of 2000, compared to $23.4 million for the same period in 1999. Premiums underwritten increased 28% to $268.9 million for the first quarter of 2000 from $210.9 million for the same period in 1999. These increases resulted from the acquisition of Centris. Net earnings of the underwriting agencies increased 63% to $7.1 million in the first quarter of 2000 from $4.3 million in 1999 due to the increased revenue and higher pretax margins. Growth in underwriting agency volume is also expected to have a positive impact on the insurance company segment. Intermediaries Commission income decreased to $13.0 million in the first quarter of 2000 from $17.8 million for the same period in 1999. Net earnings of the intermediaries decreased to $4.1 million in the first quarter of 2000 from $6.2 million for the same period in 1999. The decreases were primarily due to a reduction in the amount of ceded reinsurance by the Company's insurance company subsidiaries. Other Operations The decrease in other operating revenue to $6.7 million during the first quarter of 2000 from $9.4 million for the same period in 1999 results principally from the recognition of gains from the disposition of strategic operational investments. A gain of $4.9 million was recorded during the first quarter of 1999 compared to a $1.1 million gain in the first quarter of 2000. Net earnings of other operations decreased to $1.0 million in 2000 from $4.3 million in 1999 for the same reasons. Quarter to quarter comparisons will vary substantially depending on strategic investments or dispositions in any given period. 18 Restructuring As of December 31, 1999, the Company had accrued two separate restructuring liabilities, relating to HCC's ongoing operations ("HCC internal") and to HCC's acquisition of Centris. Changes in the accruals between December 31, 1999 and March 31, 2000 are shown in the tables below: HCC Internal Restructuring Accrued Paid 2000 Accrued at 12/31/99 in 2000 Adjustments at 3/31/00 ----------- ---------- ----------- ---------- Severance $3,115,000 $3,115,000 $ -- $ -- Other 911,000 70,000 (514,000) 327,000 ---------- ---------- --------- -------- Total $4,026,000 $3,185,000 $(514,000) $327,000 ========== ========== ========= ======== During the first quarter of 2000, the Company determined that one of the leased offices scheduled to be closed would be retained. Therefore, the Company reversed $789,000 (included as a credit in other operating expenses) of the restructuring expense recorded during the fourth quarter of 1999, of which $514,000 was the reversal of the accrual for future lease payments and $275,000 was the reversal of the write down of certain assets.
Centris Restructuring Accrued Paid 2000 Accrued at 12/31/99 in 2000 Adjustments at 3/31/00 ----------- ---------- ----------- ---------- Contractual executive severance accruals $5,866,000 $4,024,000 $ -- $1,842,000 Other severance accruals 397,000 186,000 171,000 382,000 Lease obligation accruals 848,000 345,000 239,000 742,000 ---------- ---------- -------- ---------- Total $7,111,000 $4,555,000 $410,000 $2,966,000 ========== ========== ======== ==========
It is expected that most of the remaining severance accrual will be paid during the second quarter of 2000. The adjustments in 2000 were recorded as management decided to take additional steps to integrate parts of the Centris operations. Management continues to evaluate what additional actions, if any, are necessary to finalize the integration of the Centris operations. In addition, there are unresolved contingencies remaining from the acquisition. Any additional accruals for either the unresolved contingencies or the integration of operations will be recorded as an adjustment to the purchase price allocation. Liquidity and Capital Resources The Company receives substantial cash from premiums, reinsurance recoverables, management fees and commission income and, to a lesser extent, investment income and proceeds from sales and redemptions of investment and other assets. The principal cash outflows are for the payment of claims and loss adjustment expenses ("LAE"), payment of premiums to reinsurers, purchase of investments, debt service, policy acquisition costs, operating expenses, income and other taxes and dividends. The Company continues to collect its receivables and recoverables generally in the ordinary course and has not incurred and does not expect to incur any significant liquidity difficulties. The Company limits its liquidity exposure by holding funds, letters of credit and other security such that net balances due to it are less than the gross balances shown in the condensed consolidated balance sheet. 19 The Company's consolidated cash and investment portfolio increased $70.0 million, or 12%, since December 31, 1999, and totaled $677.8 million as of March 31, 2000, of which $325.1 million was cash and short-term investments. The increase in short-term investments resulted from the collection of the commutation receivable recorded during December 1999, the proceeds from the sale of a strategic operational investment during 2000, as well as the proceeds from the sale of Centris' portfolio of common equity securities. Total assets were unchanged at $2.6 billion as of March 31, 2000. On December 17, 1999, the Company entered into a $300.0 million Revolving Loan Facility (the "Facility") with a group of banks. Borrowings under the Facility may be made from time to time by the Company for general corporate purposes until the Facility's expiration on December 18, 2004. Outstanding advances under the Facility bear interest at agreed upon rates. The Facility is collateralized in part by the pledge of the stock the Company's principal insurance company subsidiaries and by the pledge of stock of and guarantees entered into by the Company's principal underwriting agency and intermediary subsidiaries. The Facility agreement contains certain restrictive covenants, including, without limitation, minimum net worth requirements for the Company and certain subsidiaries, restrictions on certain extraordinary corporate actions, notice requirements for certain material occurrences, and required maintenance of specified financial ratios. Management believes that the restrictive covenants and other obligations of the Company which are contained in the Facility agreement are typical for comparable financing arrangements. The initial funding available under the Facility was used, among other things, to refinance existing indebtedness and to partially fund the Centris acquisition. As of March 31, 2000, total debt outstanding under the Facility was $253.0 million and the weighted average interest rate was 7.59%. The Company believes that its operating cash flows, short-term investments and the Facility will provide sufficient sources of liquidity to meet its operating needs for the foreseeable future. Effects of Recent Accounting Pronouncements Statement of Financial Accounting Standards ("SFAS") No. 133 entitled "Accounting for Derivative Instruments and Hedging Activities" was issued in June, 1998 and is effective for all fiscal quarters of fiscal years beginning after June 15, 2000, with early adoption permitted. The Company has utilized derivative or hedging strategies only infrequently in the past and in immaterial amounts, although it is currently using derivatives and hedging strategies to a greater extent as it expands its foreign operations. The effects of SFAS No. 133, as well as the timing of its adoption, are currently being reviewed by management. During December, 1999 the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101 entitled "Revenue Recognition in Financial Statements" which becomes effective for the Company during the second quarter of 2000. The Company does not expect the adoption of SAB No. 101 to have a material effect on the Company's financial position, results of operations or cash flows. Year 2000 The Year 2000 issue is the result of date coding within computer programs that were written using just two digits rather than four digits to define the applicable year. If not corrected, these date codes could cause computers to fail to calculate dates beyond 1999 and, as a result, computer applications could fail or create erroneous information as a result of the Year 2000 date change. Although the Company experienced no material system failures attributed to the year 2000 change-over, the Company may have exposure in the property and casualty operations of its insurance company subsidiaries to claims asserted under certain insurance policies for damages caused by an insured's failure to address its own Year 2000 computer problems. As with other companies in the insurance industry, the Company has evaluated and continues to evaluate the potential Year 2000 insurance exposures. The Company's insurance company subsidiaries did not generally offer policies of insurance marketed as Year 2000 liability coverage. However, due to the nature of certain of the policies, such as policies of property insurance, an insured may submit purported claims for coverage under such policies, which may result from Year 2000 related causes. In this regard, the Company continues to assess appropriate responses to such attempted claims in light of Year 2000 coverage issues under the insurance coverages offered by the 20 insurance company subsidiaries. The nature of the Company's response to such attempted claims is generally dependent on the particular facts and circumstances of the underlying claims and coverage. Management does not believe that Year 2000 coverage issues associated with the insurance coverages offered by the Company's insurance company subsidiaries will have a material adverse effect on the Company's results of operations or cash flows. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in market risk from the information provided in Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" of the Company's Annual Report on Form 10-K for the year ended December 31, 1999. This report on Form 10-Q (the "Report") contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forward-looking statements necessarily involve risks and uncertainty, including, without limitation, the risk of a significant natural disaster, the inability of the Company to reinsure certain risks, the adequacy of its loss reserves, the financial viability of reinsurers, the expansion or contraction in its various lines of business, the impact of inflation, changing licensing requirements and regulations in the United States and in foreign countries, the ability of the Company to integrate its recently acquired businesses, the effect of pending or future acquisitions as well as acquisitions which have recently been consummated, general market conditions, competition, licensing and pricing. All statements, other than statements of historical facts, included or incorporated by reference in this Report that address activities, events or developments that the Company expects or anticipates will or may occur in the future, including, without limitation, such things as future capital expenditures (including the amount and nature thereof), business strategy and measures to implement such strategy, competitive strengths, goals, expansion and growth of the Company's businesses and operations, plans, references to future success, as well as other statements which includes words such as "anticipate", "believe", "estimate", "expect", "intend", "plan", "probably" and other similar expressions, constitute forward-looking statements. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could over time prove to be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Report will themselves prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. 21 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits: 10.1 Employment Agreement effective as of January 5, 2000, between HCC Insurance Holdings, Inc. and John N. Molbeck. 10.2 Employment Agreement effective as of January 5, 2000, between HCC Insurance Holdings, Inc. and Edward H. Ellis, Jr. 27 EDGAR Financial Data Schedule - March 31, 2000 (b) Reports on Form 8-K: None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HCC Insurance Holdings, Inc. ---------------------------------------- (Registrant) May 15, 2000 /s/ Stephen L. Way - ------------ ---------------------------------------- (Date) Stephen L. Way, Chairman of the Board and Chief Executive Officer May 15, 2000 /s/ Edward H. Ellis, Jr. - ------------ ---------------------------------------- (Date) Edward H. Ellis, Jr., Senior Vice President and Chief Financial Officer 22 EX-10.1 2 EXHIBIT 10.1 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 5th day of January, 2000 (the "Effective Date"), between HCC INSURANCE HOLDINGS, INC. ("HCC" or "Company"), and JOHN N. MOLBECK, JR. ("Executive"), sometimes collectively referred to herein as the "Parties." R E C I T A L S: WHEREAS, Executive is to be employed as President of HCC, and, as an integral part of its management who participates in the decision-making process relative to short and long-term planning and policy for the Company, will serve on the Company's Executive Management Committee; WHEREAS, it is the desire of the Board of Directors of HCC (the "Board") to (i) directly engage Executive as an officer of HCC and its subsidiaries; and (ii) directly engage, if elected, the services of Executive as a director of HCC and its subsidiaries; WHEREAS, Executive is desirous of committing himself to serve HCC on the terms herein provided; and WHEREAS, Executive and HCC have previously entered into an Employment Agreement effective as of January 1, 1998 (the "1998 Contract") which is to be cancelled, terminated and of no further force or effect. NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements set forth below, the Parties agree as follows: 1. Termination of 1998 Contract and Term. Effective as of the Effective Date, the 1998 Contract shall be cancelled, terminated and of no further force or effect. The Company hereby agrees to employ Executive as its President, and Executive hereby agrees to accept such employment, on the terms and conditions set forth herein, for the period commencing on the Effective Date and expiring as of 11:59 p.m. on December 31, 2002 (the "Basic Term") (unless sooner terminated as hereinafter set forth). Until the Company retains the services of a Chief Operating Officer ("COO"), Executive shall also serve as the COO. 2. Duties. (a) Duties as Employee of the Company. Executive shall, subject to the supervision of the Chief Executive Officer and Board, have general management and control of HCC in the ordinary course of its business with all such powers with respect to such management and control as may be reasonably incident to such responsibilities. During normal business hours, Executive shall devote his full time and attention to diligently attending to the business of the Company during the Basic Term. During the Basic Term, Executive shall not directly or indirectly render any services of a business, commercial, or professional nature to any other person, firm, corporation, or organization, whether for compensation or otherwise, without the prior written consent of the Chairman of the Board. However, Executive shall have the right to engage in such activities as may be appropriate in order to manage his personal investments so long as such activities do not materially interfere or conflict with the performance of his duties to the Company hereunder. The conduct of such activity shall not be deemed to materially interfere or conflict with Executive's performance of his duties until Executive has been notified in writing thereof and given a reasonable period in which to cure the same. Executive may perform his duties from time-to-time at his residences in Colorado or Arizona during reasonable times when his absence from the HCC Houston office would not effect the successful performance of his duties. (b) Other Duties. At all times during the Basic Term, the Company shall use its best efforts to cause Executive to be elected a director and to serve on the Executive Committee and Senior Management Committee of HCC. Any such failure to use its best efforts prior to a Change of Control shall be a material breach of this Agreement for purposes of Paragraph 4(a)(iv). If elected, Executive agrees to serve as a director and on the Executive Committee and Senior Management Committee of HCC and of any of its subsidiaries and in one or more executive offices of any of HCC's subsidiaries, provided Executive is indemnified for serving in any and all such capacities in a manner acceptable to the Company and Executive. If elected, Executive agrees that he shall not be entitled to receive any compensation for serving as a director of HCC or in any capacities of HCC's subsidiaries other than the compensation to be paid to Executive by the Company pursuant to this Agreement. 3. Compensation and Related Matters. (a) Base Salary. Executive shall receive a base salary (the "Base Salary") paid by the Company at the annual rate of $600,000, payable not less frequently than in substantially equal monthly installments. (b) Bonus Payments. Each year Executive shall be entitled to receive, in addition to the Base Salary, an annual bonus payment of $150,000 if HCC's annual net earnings per share increases by at least 10% from the net earnings per share of the immediately proceeding year. For purposes of this Agreement, net earnings per share is defined as HCC's consolidated net earnings per share as reported in HCC's Annual Report on Form 10-K. (c) Expenses. During the Basic Term, Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by him in accordance with the policies and procedures established by the Compensation Committee for the Company's senior executive officers in performing services hereunder, provided that Executive properly accounts therefor in accordance with Company policy. (d) Other Benefits. Executive shall be entitled to participate in or receive benefits under any compensatory employee benefit plan or other arrangement made available by the Company now or in the future to its senior executive officers and key management employees, subject to and on a basis consistent with the terms, conditions, and overall administration of such 2 plan or arrangement. Nothing paid to Executive under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the Base Salary payable to Executive pursuant to Paragraph (a) of this Section. The Company shall not make any changes in any employee benefit plans or other arrangements in effect on the date hereof or subsequently in effect in which Executive currently or in the future participates (including, without limitation, each pension and retirement plan, supplemental pension and retirement plan, savings and profit sharing plan, stock or unit ownership plan, stock or unit purchase plan, stock or unit option plan, life insurance plan, medical insurance plan, disability plan, dental plan, health and accident plan, or any other similar plan or arrangement) that would adversely affect Executive's rights or benefits thereunder, unless such change occurs pursuant to a program applicable to substantially all executives of the Company and does not result in a proportionately greater reduction in the rights of or benefits to Executive as compared with any other executive of the Company. (e) Vacations. Executive shall be entitled to twenty-five (25) paid vacation days per year during the Basic Term. There shall be no carryover of unused vacation from year to year. For purposes of this Paragraph, weekends shall not count as vacation days, and Executive shall also be entitled to all paid holidays and personal days given by the Company to its senior executive officers. (f) Perquisites. Executive shall be entitled to receive the perquisites and fringe benefits appertaining to an executive officer of HCC in accordance with any practice established by the Compensation Committee. Notwithstanding, and in addition to, any perquisites to which Executive is entitled pursuant to the preceding sentence, Executive shall: (i) have use of a new Mercedes 500 SEL automobile, and the Company shall pay all expenses related to Executive's use of such car, including gasoline, insurance, and maintenance; (ii) be allowed to travel on business utilizing first class passage (whether domestic or international); (iii) receive the membership fee and annual dues to Shadow Hawk Country Club in addition to the golf and other clubs which Executive is a member and for which Executive's fees and expenses are to be reimbursed,; (iv) receive a total of $1,000,000 term life insurance (which shall be in addition to the standard benefits provided to Executive under the Company's group life insurance program that covers officers); (v) in addition to the other benefits provided in this Agreement, Executive shall be entitled to receive medical insurance as currently provided under the Company's group program, as such group program may be changed from time-to-time in the future, and Executive shall be entitled to continue to be covered by such group program or, if not permitted under the terms of the group program, then the Company shall provide Executive with a medical insurance policy providing substantially similar benefits as to the group program, for the period ending on the date of the later to die of Executive or, if Executive is married on the date of his death, Executive's spouse or the date all of Executive's children complete college (as defined in the Company's group program). Executive shall be entitled to receive the medical benefits defined herein at no cost to the Executive. However, Executive's rights pursuant to this subparagraph (v) shall be void if Executive is terminated for Cause or if Executive voluntarily terminates his employment; and (vi) HCC shall pay for Executive's preparation of estate planning and wealth preservation documents during the course of Executive's employment with the Company. Such estate planning and wealth preservation documents may be changed from time-to-time at the Company's cost and expense, pursuant to Executive's change in circumstances. 3 (g) Proration. Any payments or benefits payable to Executive hereunder in respect of any calendar year during which Executive is employed by the Company for less than the entire year, unless otherwise provided in the applicable plan or arrangement, shall be prorated in accordance with the number of days in such calendar year during which he is so employed. Notwithstanding the foregoing, any payments pursuant to Paragraphs 4(c) or 4(d) of this Agreement shall not be subject to proration. 4. Termination. (a) Definitions. (1) "Cause" shall mean: (i) Material dishonesty which is not the result of an inadvertent or innocent mistake of Executive with respect to the Company or any of its subsidiaries; (ii) Willful misfeasance or nonfeasance of duty by Executive intended to injure or having the effect of injuring in some material fashion the reputation, business, or business relationships of the Company or any of its subsidiaries or any of their respective officers, directors, or employees; (iii) Material violation by Executive of any material term of this Agreement; or (iv) Conviction of Executive of any felony, any crime involving moral turpitude or any crime other than a vehicular offense which could reflect in some material fashion unfavorably upon the Company or any of its subsidiaries. Executive may not be terminated for Cause unless and until there has been delivered to Executive written notice from the Board supplying the particulars of Executive's acts or omissions that the Board believes constitute Cause, a reasonable period of time (not less than 30 days) has been given to Executive after such notice to either cure the same or to meet with the Board, with his attorney if so desired by Executive, and following which the Board by action of not less than two-thirds of its members furnishes to Executive a written resolution specifying in detail its findings that Executive has been terminated for Cause as of the date set forth in the notice to Executive. (2) A "Change of Control" shall be deemed to have occurred if: (i) Any "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of 50% or more of the Company's then outstanding voting common stock; or 4 (ii) At any time during the period of three (3) consecutive years (not including any period prior to the date hereof), individuals who at the beginning of such period constituted the Board (and any new director whose election by the Board or whose nomination for election by the Company's shareholders were approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority thereof; or (iii) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation (a) in which a majority of the directors of the surviving entity were directors of the Company prior to such consolidation or merger, and (b) which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being changed into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation; or (iv) The shareholders approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. (3) A "Disability" shall mean the absence of Executive from Executive's duties with the Company on a full-time basis for 180 consecutive days, or 180 days in a 365-day period, as a result of incapacity due to mental or physical illness which results in the Executive being unable to perform the essential functions of his position, with or without reasonable accommodation. (4) A "Good Reason" shall mean any of the following (without Executive's express written consent): (i) Following a Change of Control, a material alteration in the nature or status of Executive's title, duties or responsibilities, or the assignment of duties or responsibilities inconsistent with Executive's status, title, duties and responsibilities; (ii) A failure by the Company to continue in effect any employee benefit plan in which Executive was participating, or the taking of any action by the Company that would adversely affect Executive's participation in, or materially reduce Executive's benefits under, any such employee benefit plan, unless such failure or such taking of any action adversely affects the senior members of corporate management of the Company generally to the same extent; (iii) A relocation of the Company's principal executive offices, or Executive's relocation to any place other than the principal executive offices, exceeding a distance of fifty (50) miles from the Company's current executive office located in Houston, Texas, except for reasonably required travel by Executive on the Company's business; 5 (iv) Any material breach by the Company of any provision of this Agreement; or (v) Any failure by the Company to obtain the assumption and performance of this Agreement by any successor (by merger, consolidation, or otherwise) or assign of the Company. However, Good Reason shall exist with respect to an above specified matter only if such matter is not corrected by the Company within thirty (30) days of its receipt of written notice of such matter from Executive, and in no event shall a termination by Executive occurring more than ninety (90) days following the date of the event described above be a termination for Good Reason due to such event. (5) "Termination Date" shall mean the date Executive is terminated for any reason pursuant to this Agreement. (b) Termination Without Cause or Termination For Good Reason: Benefits. In the event there is a termination by the Company without Cause, or if Executive terminates for Good Reason within ninety (90) days after a Change of Control (a "Termination Event"), this Agreement shall terminate, except as provided in Paragraph 6, and Executive shall be entitled to the following severance benefits: (1) For a period of twelve (12) months after the Termination Date (unless the remainder of the Basic Term is less than twelve (12) months in which case, for an amount of time equal to the remainder of the Basic Term), Base Salary (as defined in Paragraph 3(a)), at the rate, and payable quarterly unless such termination is by the Company without Cause, in which event such amount of Base Salary shall be paid in a lump sum within ten (10) days of the Termination Event. (2) If there is a Change of Control or if there is a Termination Event, any stock options ("Stock Awards") which Executive has received under this Agreement shall vest immediately and, if there is a Termination Event, all such Stock Awards shall be exercisable for ten (10) days from the date of such Termination Event or the remainder of their term, whichever is less. (3) To the extent not theretofore paid or provided, the Company shall timely pay or provide to Executive any other amounts or benefits required to be paid or provided or which Executive is eligible to receive under any plan, program, policy or practice, or contract or agreement of the Company and its affiliated companies for the period of time equal to the remainder of the Basic Term (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). Without limiting the preceding sentence and without limiting any other provision of this Agreement, through December 31, 2002 the Company, at its sole expense, shall continue to provide (through its own plan and/or 6 individual policies) Executive (and Executive's dependents) with health benefits no less favorable than the group health plan benefits provided during such period to any senior executive officer of the Company or any affiliated company (to the extent any such coverage or benefits are taxable to Executive by reason of being provided under a self-insured health plan of the Company or an affiliate, the Company shall make Executive "whole" for the same on an after-tax basis). In any event, the Other Benefits provided for pursuant to this Paragraph shall be secondary to any benefits and coverage Executive (or his dependents) receive from another employer. (4) If Executive receives any payments whether or not pursuant to this Agreement which are subject to an excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended, or any similar tax imposed under federal, state, or local law (collectively, "Excise Taxes"), the Company shall pay to Executive (on or before the date on which the Company is required to withhold such Excise Taxes), 1) an additional amount equal to all Excise Taxes then due and payable, and 2) the amount necessary to defray Executive's increased (federal, state, and local) tax liability arising due to payment of the amount specified in this Subsection (4) which shall include any costs and expenses, including penalties and interest incurred by Executive in connection with any audit, proceedings, etc. related to the payment of such Excise Taxes or this payment. For purposes of calculating the amount payable to Executive under this Paragraph, the federal and state income tax rates used shall be the highest marginal federal and state rates applicable to ordinary income in Executive's state of residence, taking into account any federal income tax deductions or credits available to Executive for state income taxes. The Company shall cause its independent auditors to calculate such amount and provide Executive a copy of such calculation at least ten (10) days prior to the date specified above for payment of such amount. It is the intent of the Parties that this Subsection (4) shall place Executive in the same net after-tax position Executive would have been in had no payment been subject to an Excise Tax and, notwithstanding anything herein to the contrary, it shall be construed to effectuate said result. (5) All accrued compensation and unreimbursed expenses through the Termination Date. Such amounts shall be paid to Executive in a lump sum in cash within thirty (30) days after the Termination Date; and (6) Executive shall be free to accept other employment during such period, and there shall be no offset of any employment compensation earned by Executive in such other employment during such period against payments due Executive under this Paragraph (4), and there shall be not offset in any compensation received from such other employment against the Base Salary set forth above. (c) Termination In Event of Death: Benefits. If Executive's employment is terminated by reason of Executive's death during the Basic Term, this Agreement shall terminate, except as provided in Paragraph 6, without further obligation to Executive's legal representatives under this Agreement, other than for payment of all accrued compensation, unreimbursed expenses, 7 the timely payment or provision of Other Benefits through the date of death, and, if such death occurs on or after October 1 of any year, such cash or stock bonus as Executive would otherwise have been awarded in such year if Executive's death had not occurred. Such amounts shall be paid to Executive's estate or beneficiary, as applicable, in a lump sum in cash within ninety (90) days after the date of death. With respect to the provision of Other Benefits, the term Other Benefits as used in this Paragraph 4(c) shall include, without limitation, and Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company to the estates and beneficiaries of other executive level employees of the Company under such plans, programs, practices, and policies relating to death benefits, if any, as in effect with respect to other executives and their beneficiaries at any time during the 120-day period immediately preceding the date of death. Additionally, all Stock Awards shall be vested immediately and shall be exercisable for the greater of one year after the date of such vesting or the remaining term of such option. (d) Termination In Event of Disability: Benefits. If Executive's employment is terminated by reason of Executive's Disability during the Basic Term, this Agreement shall continue in full force for a period of one (1) year following such Disability and if such Disability occurs on or after October 1 of any year Executive shall be entitled to the same cash or stock bonus in such year that Executive would have been awarded if such Disability had not occurred. Following such one (1) year period, this Agreement shall continue in full force except that (a) the Base Salary shall be reduced by 50% and (b) Executive shall not be entitled to any subsequent cash or stock bonuses. In addition, all outstanding Stock Awards shall vest immediately upon such termination due to Disability. If Executive's Disability occurs prior to the commencement of the Consulting Period, defined below, in addition to the amounts provided for herein, Executive shall receive the Consulting Fee, defined below, at such time as it would have otherwise been earned, whether or not Executive can perform Consulting Services, defined below. Additionally, all Stock Awards shall be vested immediately and shall be exercisable for the greater of one year after the date of such vesting or the remaining term of such option. (e) Voluntary Termination by Employee and Termination for Cause: Benefits. Executive may terminate his employment with the Company without Good Reason by giving written notice of his intent and stating an effective Termination Date at least ninety (90) days after the date of such notice; provided, however, that the Company may accelerate such effective date by paying Executive through the proposed Termination Date and also vesting awards that would have vested but for this acceleration of the proposed Termination Date. Upon such a termination by Executive except as provided in Paragraph 6 or upon termination for Cause by the Company, this Agreement shall terminate and the Company shall pay to Executive all accrued compensation, unreimbursed expenses and the Other Benefits through the Termination Date. Such amounts shall be paid to Executive in a lump sum in cash within thirty (30) days after the date of termination. In addition, all unvested stock options shall terminate and all vested options will terminate ten (10) days after the Termination Date. (f) Director Positions. Executive agrees that upon termination of employment, for any reason, at the request of the Chairman of the Board, he will immediately tender his 8 resignation from any and all Board positions held with the Company and/or any of its subsidiaries and affiliates. If Executive remains as a director, after such termination, Executive shall be compensated as an outside director. 5. Non-Competition, Non-Solicitation, and Confidentiality. Executive recognizes and agrees that the benefit of not being employed at-will, is provided in consideration for, among other things, the agreements contained in this Section, as well as the Stock Awards granted to Executive pursuant to this Agreement. The Company agrees that while employed pursuant to this Agreement, Executive will be provided with confidential information of Company; specialized training on how to perform his duties; and contact with the Company's customers and potential customers. Furthermore, in the event Executive is terminated without Cause, or terminates for Good Reason, and more than one (1) year remains on the existing Basic Term, then Executive shall receive additional consideration in an amount equal to the quotient of the Base Salary divided by 12, which shall thereupon be multiplied by the number of months remaining in the Basic Term minus 12 months and which shall be paid in one lump sum within ten (10) days of such termination. In consideration of all of the foregoing, Executive agrees as follows: (a) Non-Competition During Employment. Executive agrees during the Basic Term and the Consulting Period he will not compete with the Company by engaging in the conception, design, development, production, marketing, or servicing of any product or service that is substantially similar to the products or services which the Company provides, and that he will not work for, in any capacity, assist, or become affiliated with as an owner, partner, etc., either directly or indirectly, any individual or business which offers or performs services, or offers or provides products substantially similar to the services and products provided by Company. (b) Conflicts of Interest. Executive agrees that during the Basic Term and the Consulting Period, he will not engage, either directly or indirectly, in any activity (a "Conflict of Interest") which might adversely affect the Company or its affiliates, including ownership of a material interest in any supplier, contractor, distributor, subcontractor, customer or other entity with which the Company does business or accepting any material payment, service, loan, gift, trip, entertainment, or other favor from a supplier, contractor, distributor, subcontractor, customer or other entity with which the Company does business, and that Executive will promptly inform the Chairman of the Company as to each offer received by Executive to engage in any such activity. Executive further agrees to disclose to the Company any other facts of which Executive becomes aware which might in Executive's good faith judgment reasonably be expected to involve or give rise to a Conflict of Interest or potential Conflict of Interest. (c) Non-Competition After Termination. Executive agrees that Executive shall not, at any time during the period of two (2) years after the termination of the later of the Basic Term or the Consulting Period, for any reason, within any of the markets in which the Company has sold products or services or formulated a plan to sell products or services into a market during the last twelve (12) months of Executive's employ or which the Company enters into within three (3) months thereafter, engage in or contribute Executive's knowledge to any work which is competitive with or 9 similar to a product, process, apparatus, service, or development on which Executive worked or with respect to which Executive had access to Confidential Information while employed by the Company; provided, however, this Paragraph (c) shall not operate to prevent Executive from engaging in retail insurance or re-insurance activities during such two-year period to the extent such activities do not compete or permit any other person or entity to compete with any business the Company or any of its subsidiaries or affiliated companies were engaged in at the time of such termination or which the Company enters into within three (3) months thereafter. Following the expiration of said two (2) year period, Executive shall continue to be obligated under the Confidential Information Paragraph of this Agreement not to use or to disclose Confidential Information of the Company so long as it shall not be publicly available. It is understood that the geographical area set forth in this covenant is divisible so that if this clause is invalid or unenforceable in an included geographic area, that area is severable and the clause remains in effect for the remaining included geographic areas in which the clause is valid. (d) Non-Solicitation of Customers. Executive further agrees that for a period of two (2) years after the termination of the Basic Term and the Consulting Period, he will not solicit or accept any business from any customer or client or prospective customer or client with whom Executive dealt or solicited while employed by Company during the last twelve (12) months of his employment. (e) Non-Solicitation of Employees. Executive agrees that for the duration of the Basic Term, and for a period of two (2) years after the termination of the Basic Term and the Consulting Period, he will not either directly or indirectly, on his own behalf or on behalf of others, solicit, attempt to hire, or hire any person employed by Company to work for Executive or for another entity, firm, corporation, or individual. (f) Confidential Information. Executive further agrees that he will not, except as the Company may otherwise consent or direct in writing, reveal or disclose, sell, use, lecture upon, publish or otherwise disclose to any third party any Confidential Information or proprietary information of the Company, or authorize anyone else to do these things at any time either during or subsequent to his employment with the Company. This Section shall continue in full force and effect after termination of Executive's employment and after the termination of this Agreement. Executive's obligations under this Paragraph with respect to any specific Confidential Information and proprietary information shall cease when that specific portion of the Confidential Information and proprietary information becomes publicly known, in its entirety and without combining portions of such information obtained separately. It is understood that such Confidential Information and proprietary information of the Company include matters that Executive conceives or develops, as well as matters Executive learns from other employees of Company. Confidential Information is defined to include information: (1) disclosed to or known by the Executive as a consequence of or through his employment with the Company; (2) not generally known outside the Company; and (3) which relates to any aspect of the Company or its business, finances, operation plans, budgets, research, or strategic development. "Confidential Information" includes, but is not limited to the Company's trade secrets, proprietary information, financial documents, long range plans, customer lists, employer compensation, marketing strategy, data bases, costing data, computer software 10 developed by the Company, investments made by the Company, and any information provided to the Company by a third party under restrictions against disclosure or use by the Company or others. (g) Return of Documents, Equipment, Etc. All writings, records, and other documents and things comprising, containing, describing, discussing, explaining, or evidencing any Confidential Information, and all equipment, components, parts, tools, and the like in Executive's custody or possession that have been obtained or prepared in the course of Executive's employment with the Company shall be the exclusive property of the Company, shall not be copied and/or removed from the premises of the Company, except in pursuit of the business of the Company, and shall be delivered to the Company, without Executive retaining any copies, upon notification of the termination of Executive's employment or at any other time requested by the Company. The Company shall have the right to retain, access, and inspect all property of Executive of any kind in the office, work area, and on the premises of the Company upon termination of Executive's employment and at any time during employment by the Company to ensure compliance with the terms of this Agreement. (h) Reaffirm Obligations. Upon termination of his employment with the Company, Executive, if requested by Company, shall reaffirm in writing Executive's recognition of the importance of maintaining the confidentiality of the Company's Confidential Information and proprietary information, and reaffirm any other obligations set forth in this Agreement. (i) Prior Disclosure. Executive represents and warrants that he has not used or disclosed any Confidential Information he may have obtained from Company prior to signing this Agreement, in any way inconsistent with the provisions of this Agreement. (j) Confidential Information of Prior Companies. Executive will not disclose or use during the period of his employment with the Company any proprietary or Confidential Information or Copyright Works which Executive may have acquired because of employment with an employer other than the Company or acquired from any other third party, whether such information is in Executive's memory or embodied in a writing or other physical form. (k) Breach. Executive agrees that any breach of Paragraphs 5(a), (c), (d), (e) or (f) above cannot be remedied solely by money damages, and that in addition to any other remedies Company may have, Company is entitled to obtain injunctive relief against Executive. Nothing herein, however, shall be construed as limiting Company's right to pursue any other available remedy at law or in equity, including recovery of damages and termination of this Agreement and/or any payments that may be due pursuant to this Agreement. (l) Right to Enter Agreement. Executive represents and covenants to Company that he has full power and authority to enter into this Agreement and that the execution of this Agreement will not breach or constitute a default of any other agreement or contract to which he is a party or by which he is bound. 11 (m) Extension of Post-Employment Restrictions. In the event Executive breaches Paragraphs 5(b), (d), or (e) above, the restrictive time periods contained in those provisions will be extended by the period of time Executive was in violation of such provisions. (n) Enforceability. The agreements contained in Section 5 are independent of the other agreements contained herein. Accordingly, failure of the Company to comply with any of its obligations outside of this Paragraph do not excuse Executive from complying with the agreements contained herein. (o) Survivability. The agreements contained in Paragraphs 5(c)-(g) shall survive the termination of this Agreement for any reason. 6. Consulting Agreement. Effective upon Executive's termination of employment for any reason other than Executive's termination by the Company for Cause prior to the end of the Basic Term, HCC hereby retains Executive as a consultant (an independent contractor and not as an employee) for a period of ten (10) years (the "Consulting Period"). Termination of the Basic Term shall not effect the Parties' rights and obligations under this Paragraph 6. Subject to the following, Executive agrees to provide, if requested, a minimum of 200 hours of service per year, or, as requested by the Company, up to a total of 600 hours during any one year of the Consulting Period; provided, however, that the total number of hours to be worked over the duration of the Consulting Period shall not exceed 2,000 (the "Consulting Services"). The Consulting Services to be provided shall be commensurate with Executive's training, background, experience and prior duties with the Company. Executive agrees to make himself reasonably available to provide such Consulting Services during the Consulting Period; provided, however, the Company agrees that it shall provide reasonable advance notice to Executive of its expected consulting needs and any request for Consulting Services hereunder shall not unreasonably interfere with Executive's other business activities and personal affairs as determined in good faith by Executive. In addition, Executive shall not be required to perform any requested Consulting Services which, in Executive's good faith opinion, would cause Executive to breach any fiduciary duty or contractual obligation Executive may have to another employer. Further, during the Consulting Period, Executive shall not be subject to any non-competition provisions except for the two-year period provided for in Paragraph 5(c). Unless waived by Executive, Executive shall not be required to perform Consulting Services for more than four (4) days during any week or for more than eight (8) hours during any day. Executive's travel time shall constitute hours of Consulting Services for purposes of this Paragraph 6. The Parties contemplate that, when appropriate, the Consulting Services shall be performed at Executive's office, residence or at the Company's executive offices in Houston, Texas and may be performed at such other locations only as they may mutually agree upon. Executive shall be properly reimbursed for all travel and other expenses reasonably incurred by Executive in rendering the Consulting Services. HCC shall pay Executive $200,000 per year (the "Consulting Fee") during the Consulting Period, payable monthly in arrears. In addition, Executive shall receive, on an "as-is" basis, the automobile Executive was utilizing at the commencement of the Consulting Period. Executive may elect to delay payment for services but not the services themselves. Except as set forth below and in Paragraphs 4(c) or 4(d) hereof, if Executive fails to provide the hours requested by the Company in any 24-month period, Executive's rights to receive any further Consulting Fee 12 shall immediately terminate. During the Consulting Period, except as otherwise provided for herein, Executive shall receive no employment benefits from HCC. If Executive dies or becomes Disabled during the Basic Term (or as an employee of the Company following the Basic Term) or during the Consulting Period he (or, on his death, his beneficiary or estate) shall receive or continue to receive as the case may be the Consulting Fee during the remainder of the Consulting Period as if such death or Disability had not occurred. 7. Assignment. This Agreement cannot be assigned by Executive. The Company may assign this Agreement only to a successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and assets of the Company provided such successor expressly agrees in writing reasonably satisfactory to Executive to assume and perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession and assignment had taken place. Failure of the Company to obtain such written agreement prior to the effectiveness of any such succession shall be a material breach of this Agreement. 8. Binding Agreement. Executive understands that his obligations under this Agreement are binding upon Executive's heirs, successors, personal representatives, and legal representatives. 9. Notices. All notices pursuant to this Agreement shall be in writing and sent certified mail, return receipt requested, addressed as set forth below, or by delivering the same in person to such party, or by transmission by facsimile to the number set forth below. Notice deposited in the United States Mail, mailed in the manner described hereinabove, shall be effective upon deposit. Notice given in any other manner shall be effective only if and when received: If to Executive: John N. Molbeck, Jr. 3424 Ella Lee Lane Houston, Texas 77027 If to Company: HCC Insurance Holdings, Inc. 13403 Northwest Freeway Houston, Texas 77040 Fax: (713) 462-2401 with a copy (which shall Arthur S. Berner, Esq. not constitute notice) to: Haynes and Boone 1000 Louisiana Street, Suite 4300 Houston, Texas 77002-5012 Fax: (713) 236-5652 10. Waiver. No waiver by either party to this Agreement of any right to enforce any term or condition of this Agreement, or of any breach hereof, shall be deemed a waiver of such right in the future or of any other right or remedy available under this Agreement. 13 11. Severability. If any provision of this Agreement is determined to be void, invalid, unenforceable, or against public policy, such provisions shall be deemed severable from the Agreement, and the remaining provisions of the Agreement will remain unaffected and in full force and effect. 12. Arbitration. In the event any dispute arises out of Executive's employment with or by the Company, or separation/termination therefrom, whether as an employee or as a consultant, which cannot be resolved by the Parties to this Agreement, such dispute shall be submitted to final and binding arbitration. The arbitration shall be conducted in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association ("AAA"). If the Parties cannot agree on an arbitrator, a list of seven (7) arbitrators will be requested from AAA, and the arbitrator will be selected using alternate strikes with Executive striking first. The cost of the arbitration will be shared equally by Executive and Company ; provided, however, the Company shall promptly reimburse Executive for all costs and expenses incurred in connection with any dispute in an amount up to, but not exceeding 20 percent of Executive's Base Salary (or, if the dispute arises during the Consulting Period, Executive's Base Salary as in effect immediately prior to the beginning of the Consulting Period) unless such termination was for Cause in which event Executive shall not be entitled to reimbursement unless and until it is determined he was terminated other than for Cause. Arbitration of such disputes is mandatory and in lieu of any and all civil causes of action and lawsuits either party may have against the other arising out of Executive's employment with Company, or separation therefrom. Such arbitration shall be held in Houston, Texas. 13. Entire Agreement. The terms and provisions contained herein shall constitute the entire agreement between the parties with respect to Executive's employment with Company during the time period covered by this Agreement. This Agreement replaces and supersedes any and all existing Agreements entered into between Executive and the Company relating generally to the same subject matter, if any, and shall be binding upon Executive's heirs, executors, administrators, or other legal representatives or assigns. 14. Modification of Agreement. This Agreement may not be changed or modified or released or discharged or abandoned or otherwise terminated, in whole or in part, except by an instrument in writing signed by the Executive and an officer or other authorized executive of Company. 15. Understand Agreement. Executive represents and warrants that he has read and understood each and every provision of this Agreement, and Executive understands that he has the right to obtain advice from legal counsel of choice, if necessary and desired, in order to interpret any and all provisions of this Agreement, and that Executive has freely and voluntarily entered into this Agreement. 16. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. 14 17. Jurisdiction and Venue. With respect to any litigation regarding this Agreement, Executive agrees to venue in the state or federal courts in Harris County, Texas, and agrees to waive and does hereby waive any defenses and/or arguments based upon improper venue and/or lack of personal jurisdiction. By entering into this Agreement, Executive agrees to personal jurisdiction in the state and federal courts in Harris County, Texas. [REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK] 15 IN WITNESS WHEREOF, the Parties have executed this Agreement in multiple copies, effective as of the date first written above. EXECUTIVE COMPANY HCC INSURANCE HOLDINGS, INC. /s/ John N. Molbeck, Jr. /s/ Stephen L. Way - ------------------------------------ By: ------------------------------------ JOHN N. MOLBECK, JR. STEPHEN L. WAY, Chief Executive Officer and Chairman of the Board Dated: April 20, 2000 Dated: 5/1/00 ------------------------------ ---------------------------------- [SIGNATURE PAGE TO MOLBECK EMPLOYMENT AGREEMENT] 16 EX-10.2 3 EXHIBIT 10.2 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") is entered into effective as of the 5th day of January, 2000 (the "Effective Date"), between HCC INSURANCE HOLDINGS, INC. ("HCC" or "Company"), and EDWARD H. ELLIS, JR. ("Executive"), sometimes collectively referred to herein as the "Parties." R E C I T A L S: WHEREAS, Executive is to be employed as Senior Vice President and Chief Financial Officer ("CFO") and, as an integral part of its management who participates in the decision-making process relative to short and long-term planning and policy for the Company, will serve on the Company's Executive Management Committee; WHEREAS, it is the desire of the Board of Directors of HCC (the "Board") to (i) directly engage Executive as an officer of HCC and its subsidiaries; WHEREAS, Executive is desirous of committing himself to serve HCC on the terms herein provided; and WHEREAS, Executive and HCC have previously entered into an Employment Agreement effective as of January 1, 1998 (the "1998 Contract") which is to be cancelled and of no further force and effect. NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements set forth below, the Parties agree as follows: 1. Termination of 1998 Contract and Term. Effective as of the Effective Date, the 1998 Contract shall be cancelled, terminated and of no further force or effect. The Company hereby agrees to employ Executive as a Senior Vice President and CFO, and Executive hereby agrees to accept such employment, on the terms and conditions set forth herein, for the period commencing on the Effective Date and expiring as of 11:59 p.m. on December 31, 2002 (the "Basic Term") (unless sooner terminated as hereinafter set forth). At Executive's option, Executive shall have the right to retire on or after December 31, 2001. In such event, Executive shall be retained as a consultant to the Company for the period beginning on the date of such retirement and ending one year thereafter (the "Consulting Period"). Executive shall receive a fee during such Consulting Period of $100,000 (the "Consulting Fee"). During the Consulting Period, any options or grants pursuant to this Agreement shall continue to vest and be exercisable. In addition to the Consulting Fee, the Company shall on behalf of the Executive provide for medical insurance in accordance with the Company's policy and COBRA and, subject to the terms of any plan, all other benefits Executive would have received if he were an employee. 2. Duties. (a) Duties as Employee of the Company. Executive shall, subject to the supervision of the Board of Directors, act as Chief Financial Officer of HCC in the ordinary course of its business with all such powers with respect to such management and control as may be reasonably incident to such responsibilities. During normal business hours, Executive shall devote his full time and attention to diligently attending to the business of the Company during the Basic Term. During the Basic Term, Executive shall not directly or indirectly render any services of a business, commercial, or professional nature to any other person, firm, corporation, or organization, whether for compensation or otherwise, without the prior written consent of the Board of Directors of HCC. However, Executive shall have the right to engage in such activities as may be appropriate in order to manage his personal investments so long as such activities do not materially interfere or conflict with the performance of his duties to the Company hereunder. The conduct of such activity shall not be deemed to materially interfere or conflict with Executive's performance of his duties until Executive has been notified in writing thereof and given a reasonable period in which to cure the same. (b) Other Duties. If elected, Executive agrees to serve as a member of the Senior Management Committee of HCC and of any of its subsidiaries and in one or more executive offices of any of HCC's subsidiaries, provided Executive is indemnified for serving in any and all such capacities in a manner acceptable to the Company and Executive. If elected, Executive agrees that he shall not be entitled to receive any compensation for serving as a director of HCC, or in any capacities of HCC's subsidiaries other than the compensation to be paid to Executive by the Company pursuant to this Agreement. 3. Compensation and Related Matters. (a) Base Salary. Executive shall receive a base salary paid by the Company as follows: $250,000 for the year ending December 31, 2000; $275,000 for the year ending December 31, 2001; and $300,000 for the year ending December 31, 2002, payable in each calendar year in substantially equal monthly installments. For purposes of this Agreement, "Base Salary" shall mean the Executive's initial base salary or, if increased, then the increased base salary. (b) Bonus Payments. Executive shall be eligible to receive, in addition to the Base Salary, an annual cash and/or stock bonus payment in amount, which may be zero, to be determined at the sole discretion of the Compensation Committee. (c) Expenses. During the Basic Term, Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by him (in accordance with the policies and procedures established by the Board for the Company's senior executive officers) in performing services hereunder, provided that Executive properly accounts therefor in accordance with Company policy. (d) Other Benefits. Executive shall be entitled to participate in or receive benefits under any compensation employee benefit plan or other arrangement made available by the 2 Company now or in the future to its senior executive officers, subject to and on a basis consistent with the terms, conditions, and overall administration of such plan or arrangement. Nothing paid to Executive under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the Base Salary payable to Executive pursuant to Paragraph (a) of this Section. The Company shall not make any changes in any employee benefit plans or other arrangements in effect on the date hereof or subsequently in effect in which Executive currently or in the future participates (including, without limitation, each pension and retirement plan, supplemental pension and retirement plan, savings and profit sharing plan, stock or unit ownership plan, stock or unit purchase plan, stock or unit option plan, life insurance plan, medical insurance plan, disability plan, dental plan, health and accident plan, or any other similar plan or arrangement) that would adversely affect Executive's rights or benefits thereunder, unless such change occurs pursuant to a program applicable to substantially all executives of the Company and does not result in a proportionately greater reduction in the rights of or benefits to Executive as compared with any other executive of the Company. (e) Vacations. Executive shall be entitled to twenty (20) paid vacation days per year during the Basic Term. There shall be no carryover of unused vacation from year to year. For purposes of this Paragraph, weekends shall not count as vacation days, and Executive shall also be entitled to all paid holidays given by the Company to its senior executive officers. (f) Perquisites. Executive shall be entitled to receive the perquisites and fringe benefits appertaining to an executive officer of HCC in accordance with any practice established by the Board. (g) Proration. Any payments or benefits payable to Executive hereunder in respect of any calendar year during which Executive is employed by the Company for less than the entire year, unless otherwise provided in the applicable plan or arrangement, shall be prorated in accordance with the number of days in such calendar year during which he is so employed. Notwithstanding the foregoing, any payments pursuant to Paragraph 4(c) or 4(d) this Agreement shall not be subject to proration. 4. Termination. (a) Definitions. (1) "Cause" shall mean: (i) Material dishonesty which is not the result of an inadvertent or innocent mistake of Executive with respect to the Company or any of its subsidiaries; (ii) Willful misfeasance or nonfeasance of duty by Executive intended to injure or having the effect of injuring in some material fashion the reputation, business, or business relationships of the Company or any of its subsidiaries or any of their respective officers, directors, or employees; 3 (iii) Material violation by Executive of any material term of this Agreement; (iv) Conviction of Executive of any felony, any crime involving moral turpitude or any crime other than a vehicular offense which could reflect in some material fashion unfavorably upon the Company or any of its subsidiaries. Executive may not be terminated for Cause unless and until there has been delivered to Executive written notice from the Board supplying the particulars of his acts or omissions that the Board believes constitute Cause, a reasonable period of time (not less than 30 days) has been given to Executive after such notice to either cure the same or to meet with the Board with his attorney if so desired by Executive, and following which the Board by action of not less than two-thirds of its members furnishes to Executive a written resolution specifying in detail its findings that Executive has been terminated for Cause as of the date set forth in the notice to Executive. (2) A "Change of Control" shall be deemed to have occurred if: (i) Any "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of 50% or more of the Company's then outstanding voting common stock; or (ii) At any time during the period of three (3) consecutive years (not including any period prior to the date hereof), individuals who at the beginning of such period constituted the Board (and any new director whose election by the Board or whose nomination for election by the Company's shareholders were approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority thereof; or (iii) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation (a) in which a majority of the directors of the surviving entity were directors of the Company prior to such consolidation or merger, and (b) which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being changed into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation; or 4 (iv) The shareholders approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Executive may not be terminated for Cause unless and until there has been delivered to Executive written notice from the Board supplying the particulars of his acts or omissions that the Board believes constitute Cause, a reasonable period of time (not less than 30 days) has been given to Executive after such notice to either cure the same or to meet with the Board with his attorney if so desired by Executive, and following which the Board by action of not less than two-thirds of its members furnishes to Executive a written resolution specifying in detail its findings that Executive has been terminated for Cause as of the date set forth in the notice to Executive. (3) A "Disability" shall mean the absence of Executive from Executive's duties with the Company on a full-time basis for 180 consecutive days, or 180 days in a 365-day period, as a result of incapacity due to mental or physical illness which results in the Executive being unable to perform the essential functions of his position, with or without reasonable accommodation. (4) A "Good Reason" shall mean any of the following (without Executive's express written consent): (i) Following a change of control, a material alteration in the nature or status of Executive's title, duties or responsibilities, or the assignment of duties or responsibilities inconsistent with, Executive's status title, duties and responsibilities; (ii) A failure by the Company to continue in effect any employee benefit plan in which Executive was participating, or the taking of any action by the Company that would adversely affect Executive's participation in, or materially reduce Executive's benefits under, any such employee benefit plan, unless such failure or such taking of any action adversely affects the senior members of corporate management of the Company generally; (iii) A relocation of the Company's executive offices, or Executive's relocation to any place other than the executive offices, exceeding a distance of fifty (50) miles from the Company's current executive office located in Houston, Texas, except for reasonably required travel by Executive on the Company's business; (iv) Any material breach by the Company of any provision of this Agreement; or (v) Any failure by the Company to obtain the assumption and performance of this Agreement by any successor (by merger, consolidation, or otherwise) or assign of the Company. 5 However, Good Reason shall exist with respect to an above specified matter only if such matter is not corrected by the Company within thirty (30) days of its receipt of written notice of such matter from Executive and in no event shall a termination by Executive occurring more than ninety (90) days following the date of the event described above be a termination for Good Reason due to such event. (5) "Termination Date" shall mean the date Executive is terminated for any reason pursuant to this Agreement. (6) "Termination Following a Change of Control" shall mean failure of any successor/surviving company to adopt this Agreement. (b) Termination Without Cause or For Good Reason: Benefits. In the event there is a termination by the Company without Cause, or if Executive terminates for Good Reason within ninety (90) days after a Change of Control (a "Termination Event"), this Agreement shall terminate and Executive shall be entitled to the following severance benefits: (1) For the remainder of the Basic Term after the Termination Date, Base Salary (as defined in Paragraph 3(a)), at the rate in effect immediately prior to the Termination Event, payable in a lump sum; (2) If there is a Change of Control or if there is a Termination Event, any stock options ("Stock Awards") which Executive has received under this Agreement shall vest immediately and, if there is a Termination Event, all such Stock Awards shall be exercisable for ten (10) days from the date of such Termination Event or the remainder of their term, whichever is less; (3) To the extent not theretofore paid or provided, the Company shall timely pay or provide to Executive any other amounts or benefits required to be paid or provided or which Executive is eligible to receive under any plan, program, policy or practice, or contract or agreement of the Company and its affiliated companies for the period of time equal to the remainder of the Basic Term and through December 31, 2002 the Company, at its sole expense, shall continue to provide (through its own plan and/or individual policies) Executive (and Executive's dependents) with health benefits no less favorable than the group health plan benefits provided during such period to any senior executive officer of the Company or any affiliated company (to the extent any such coverage or benefits are taxable to Executive by reason of being provided under a self-insured health plan of the Company or an affiliate, the Company shall make Executive "whole" for the same on an after-tax basis), provided, however, such coverage shall be secondary to any group health plan coverage Executive (or his dependents) receive from another employer, (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"); (4) If Executive receives any payments whether or not pursuant to this Agreement which are subject to an excise tax imposed under Section 4999 of the Internal 6 Revenue Code of 1986, as amended, or any similar tax imposed under federal, state, or local law (collectively, "Excise Taxes"), the Company shall pay to Executive (on or before the date on which the Company is required to withhold such Excise Taxes), 1) an additional amount equal to all Excise Taxes then due and payable, and 2) the amount necessary to defray Executive's increased (federal, state, and local) tax liability arising due to payment of the amounts specified in this Subsections (4) of this Paragraph 4, which shall include any costs and expenses, including penalties and interest incurred by Executive in connection with any audit, proceedings, etc. related to the payment of such Excise Taxes or this payment. For purposes of calculating the amount payable to Executive under this Paragraph, the federal and state income tax rates used shall be the highest marginal federal and state rates applicable to ordinary income in Executive's state of residence, taking into account any federal income tax deductions or credits available to Executive for state income taxes. The Company shall cause its independent auditors to calculate such amount and provide Executive a copy of such calculation at least ten (10) days prior to the date specified above for payment of such amount. It is the intent of the Parties that this Subsection (4) shall place Executive in the same net after-tax position Executive would have been in had no payment been subject to an Excise Tax and, notwithstanding anything herein to the contrary, it shall be construed to effectuate said result; (5) All accrued compensation and unreimbursed expenses through the Termination Date. Such amounts shall be paid to Executive in a lump sum in cash within thirty (30) days after the Termination Date; and (6) Executive shall be free to accept other employment during such period, and there shall be no offset of any employment compensation earned by Executive in such other employment during such period against payments due Executive under this Paragraph (4), and there shall be no offset in any compensation received from such other employment against the Base Salary set forth above. (c) Termination In Event of Death: Benefits. If Executive's employment is terminated by reason of Executive's death during the Basic Term, this Agreement shall terminate without further obligation to Executive's legal representatives under this Agreement, other than for payment of all accrued compensation, unreimbursed expenses, the timely payment or provision of Other Benefits through the date of death. Such amounts shall be paid to Executive's estate or beneficiary, as applicable, in a lump sum in cash within ninety (90) days after the date of death. With respect to the provision of Other Benefits, the term Other Benefits as used in this Paragraph 4(c) shall include, without limitation, and Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company to the estates and beneficiaries of other executive level employees of the Company under such plans, programs, practices, and policies relating to death benefits, if any, as in effect with respect to other executives and their beneficiaries at any time during the 120-day period immediately preceding the date of death. Additionally, all Stock Awards shall be vested immediately and shall be exercisable for the greater of one year after the date of such vesting or the remaining term of such option. 7 (d) Termination In Event of Disability: Benefits. If Executive's employment is terminated by reason of Executive's Disability during the Basic Term, this Agreement shall continue in full force for a period of one (1) year following such Disability. Following such one (1) year period, this Agreement shall continue in full force except that (a) the Base Salary shall be reduced by 50% and (b) Executive shall, not be entitled to any subsequent cash or stock bonuses. In addition, all outstanding Stock Awards shall vest immediately upon such termination due to Disability and shall be exercisable for the greater of one year after the date of such vesting or the remaining term of the option. (e) Voluntary Termination by Employee and Termination for Cause: Benefits. Executive may terminate his employment with the Company without Good Reason by giving written notice of his intent and stating an effective Termination Date at least ninety (90) days after the date of such notice; provided, however, that the Company may accelerate such effective date by paying Executive through the proposed Termination Date and also vesting awards that would have vested but for this acceleration of the proposed Termination Date. Upon such a termination by Executive or upon termination for Cause by the Company, this Agreement shall terminate and the Company shall pay to Executive all accrued compensation, unreimbursed expenses and the Other Benefits through the Termination Date. Such amounts shall be paid to Executive in a lump sum in cash within thirty (30) days after the date of termination. In addition, all unvested stock options shall terminate and all vested options will terminate ten (10) days after the Termination Date. (f) Director Positions. Executive agrees that upon termination of employment, for any reason, at the request of the Chairman of the Board, Executive will immediately tender his resignation from any and all Board positions held with the Company and/or any of its subsidiaries and affiliates. 5. Non-Competition, Non-Solicitation, and Confidentiality. Executive recognizes and agrees that the benefit of not being employed at-will, is provided in consideration for, among other things, the agreements contained in this Section, as well as the Stock Awards granted to Executive pursuant to this Agreement. The Company agrees that while employed pursuant to this Agreement, Executive will be provided with confidential information of Company; specialized training on how to perform his duties; and contact with the Company's customers and potential customers. (a) Non-Competition During Employment. Executive agrees that during the Basic Term and the Consulting Period, he will not compete with the Company by engaging in the conception, design, development, production, marketing, or servicing of any product or service that is substantially similar to the products or services which the Company provides, and that he will not work for, in any capacity, assist, or become affiliated with as an owner, partner, etc., either directly or indirectly, any individual or business which offers or performs services, or offers or provides products substantially similar to the services and products provided by Company, provided, Executive shall not be prevented from owning no more than 2% of any Company whose stock is publicly traded. 8 (b) Conflicts of Interest. Executive agrees that during the Basic Term and the Consulting Period, he will not engage, either directly or indirectly, in any activity (a "Conflict of Interest") which might adversely affect the Company or its affiliates, including ownership of a material interest in any supplier, contractor, distributor, subcontractor, customer or other entity with which the Company does business or accepting any material payment, service, loan, gift, trip, entertainment, or other favor from a supplier, contractor, distributor, subcontractor, customer or other entity with which the Company does business, and that Executive will promptly inform the President of the Company as to each offer received by Executive to engage in any such activity. Executive further agrees to disclose to the Company any other facts of which Executive becomes aware which in Executive's good faith judgment could reasonably be expected to involve or give rise to a Conflict of Interest or potential Conflict of Interest. (c) Non-Competition After Termination. Executive agrees that Executive shall not, at any time during the period of two (2) years after the later of termination of the Basic Term or the Consulting Period for any reason, within any of the markets in which the Company has sold products or services or formulated a plan to sell products or services into a market during the last twelve (12) months of Executive's employ or which the Company enters into within three (3) months thereafter, engage in or contribute Executive's knowledge to any work which is competitive with or similar to a product, process, apparatus, service, or development on which Executive worked or with respect to which Executive had access to Confidential Information while employed by the Company. Following the expiration of said two (2) year period, Executive shall continue to be obligated under the Confidential Information Paragraph of this Agreement not to use or to disclose Confidential Information of the Company so long as it shall not be publicly available. It is understood that the geographical area set forth in this covenant is divisible so that if this clause is invalid or unenforceable in an included geographic area, that area is severable and the clause remains in effect for the remaining included geographic areas in which the clause is valid. (d) Confidential Information. Executive further agrees that he will not, except as the Company may otherwise consent or direct in writing, reveal or disclose, sell, use, lecture upon, publish or otherwise disclose to any third party any Confidential Information or proprietary information of the Company, or authorize anyone else to do these things at any time either during or subsequent to his employment with the Company. This Section shall continue in full force and effect after termination of Executive's employment and after the termination of this Agreement. Executive's obligations under this Paragraph with respect to any specific Confidential Information and proprietary information shall cease when that specific portion of the Confidential Information and proprietary information becomes publicly known, in its entirety and without combining portions of such information obtained separately. It is understood that such Confidential Information and proprietary information of the Company include matters that Executive conceives or develops, as well as matters Executive learns from other employees of Company. Confidential Information is defined to include information: (1) disclosed to or known by the Executive as a consequence of or through his employment with the Company; (2) not generally known outside the Company; and (3) which relates to any aspect of the Company or its business, finances, operation plans, budgets, research, or strategic development. "Confidential Information" includes, but is not limited to the Company's trade secrets, proprietary information, financial documents, long range plans, customer 9 lists, employer compensation, marketing strategy, data bases, costing data, computer software developed by the Company, investments made by the Company, and any information provided to the Company by a third party under restrictions against disclosure or use by the Company or others. (e) Return of Documents, Equipment, Etc. All writings, records, and other documents and things comprising, containing, describing, discussing, explaining, or evidencing any Confidential Information, and all equipment, components, parts, tools, and the like in Executive's custody or possession that have been obtained or prepared in the course of Executive's employment with the Company shall be the exclusive property of the Company, shall not be copied and/or removed from the premises of the Company, except in pursuit of the business of the Company, and shall be delivered to the Company, without Executive retaining any copies, upon notification of the termination of Executive's employment or at any other time requested by the Company. The Company shall have the right to retain, access, and inspect all property of Executive of any kind in the office, work area, and on the premises of the Company upon termination of Executive's employment and at any time during employment by the Company to ensure compliance with the terms of this Agreement. (f) Reaffirm Obligations. Upon termination of his employment with the Company, Executive, if requested by Company, shall reaffirm in writing Executive's recognition of the importance of maintaining the confidentiality of the Company's Confidential Information and proprietary information, and reaffirm any other obligations set forth in this Agreement. (g) Prior Disclosure. Executive represents and warrants that he has not used or disclosed any Confidential Information he may have obtained from Company prior to signing this Agreement, in any way inconsistent with the provisions of this Agreement. (h) Confidential Information of Prior Companies. Executive will not disclose or use during the period of his employment with the Company any proprietary or Confidential Information or Copyright Works which Executive may have acquired because of employment with an employer other than the Company or acquired from any other third party, whether such information is in Executive's memory or embodied in a writing or other physical form. (i) Breach. Executive agrees that any breach of Paragraphs .A.5(a) or (c) above cannot be remedied solely by money damages, and that in addition to any other remedies Company may have, Company is entitled to obtain injunctive relief against Executive. Nothing herein, however, shall be construed as limiting Company's right to pursue any other available remedy at law or in equity, including recovery of damages and termination of this Agreement and/or any payments that may be due pursuant to this Agreement. (j) Right to Enter Agreement. Executive represents and covenants to Company that he has full power and authority to enter into this Agreement and that the execution of this Agreement will not breach or constitute a default of any other agreement or contract to which he is a party or by which he is bound. 10 (k) Enforceability. The agreements contained in Section .A.5 are independent of the other agreements contained herein. Accordingly, failure of the Company to comply with any of its obligations outside of this Paragraph do not excuse Executive from complying with the agreements contained herein. (l) Survivability. The agreements contained in Paragraphs .A.5(c)-(d) shall survive the termination of this Agreement for any reason. 6. Assignment. This Agreement cannot be assigned by Executive. The Company may assign this Agreement only to a successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and assets of the Company provided such successor expressly agrees in writing reasonably satisfactory to Executive to assume and perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession and assignment had taken place. Failure of the Company to obtain such written agreement prior to the effectiveness of any such succession shall be a material breach of this Agreement. 7. Binding Agreement. Executive understands that his obligations under this Agreement are binding upon Executive's heirs, successors, personal representatives, and legal representatives. 8. Notices. All notices pursuant to this Agreement shall be in writing and sent certified mail, return receipt requested, addressed as set forth below, or by delivering the same in person to such party, or by transmission by facsimile to the number set forth below (which shall not constitute notice). Notice deposited in the United States Mail, mailed in the manner described hereinabove, shall be effective upon deposit. Notice given in any other manner shall be effective only if and when received: If to Executive: Edward H. Ellis, Jr. 1826 Castlerock Houston, Texas 77090 Fax: (281) 397-6440 If to Company: HCC Insurance Holdings, Inc. 13403 Northwest Freeway Houston, Texas 77040 Fax: (713) 462-2401 with a copy (which shall Arthur S. Berner, Esq. not constitute notice) to: Haynes and Boone, LLP 1000 Louisiana Street, Suite 4300 Houston, Texas 77002-5012 Fax: (713) 236-5652 11 9. Waiver. No waiver by either party to this Agreement of any right to enforce any term or condition of this Agreement, or of any breach hereof, shall be deemed a waiver of such right in the future or of any other right or remedy available under this Agreement. 10. Severability. If any provision of this Agreement is determined to be void, invalid, unenforceable, or against public policy, such provisions shall be deemed severable from the Agreement, and the remaining provisions of the Agreement will remain unaffected and in full force and effect. 11. Arbitration. In the event any dispute arises out of Executive's employment with or by the Company, or separation/termination therefrom, which cannot be resolved by the Parties to this Agreement, such dispute shall be submitted to final and binding arbitration. The arbitration shall be conducted in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association ("AAA"). If the Parties cannot agree on an arbitrator, a list of seven (7) arbitrators will be requested from AAA, and the arbitrator will be selected using alternate strikes with Executive striking first. The cost of the arbitration will be shared equally by Executive and Company ; provided, however, the Company shall promptly reimburse Executive for all costs and expenses incurred in connection with any dispute in an amount up to, but not exceeding 20 percent of Executive's base salary unless such termination was for Cause in which event Executive shall not be entitled to reimbursement unless and until it is determined he was terminated other than for Cause. Arbitration of such disputes is mandatory and in lieu of any and all civil causes of action and lawsuits either party may have against the other arising out of Executive's employment with Company, or separation therefrom. Such arbitration shall be held in Houston, Texas. 12. Entire Agreement. The terms and provisions contained herein shall constitute the entire agreement between the parties with respect to Executive's employment with Company during the time period covered by this Agreement. This Agreement replaces and supersedes any and all existing Agreements entered into between Executive and the Company relating generally to the same subject matter, if any, and shall be binding upon Executive's heirs, executors, administrators, or other legal representatives or assigns. 13. Modification of Agreement. This Agreement may not be changed or modified or released or discharged or abandoned or otherwise terminated, in whole or in part, except by an instrument in writing signed by the Executive and an officer or other authorized executive of Company. 14. Understand Agreement. Executive represents and warrants that he has read and understood each and every provision of this Agreement, and Executive understands that he has the right to obtain advice from legal counsel of choice, if necessary and desired, in order to interpret any and all provisions of this Agreement, and that Executive has freely and voluntarily entered into this Agreement. 12 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. 16. Jurisdiction and Venue. With respect to any litigation regarding this Agreement, Executive agrees to venue in the state or federal courts in Harris County, Texas, and agrees to waive and does hereby waive any defenses and/or arguments based upon improper venue and/or lack of personal jurisdiction. By entering into this Agreement, Executive agrees to personal jurisdiction in the state and federal courts in Harris County, Texas. [REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK] 13 IN WITNESS WHEREOF, the Parties have executed this Agreement in multiple copies, effective as of the date first written above. EXECUTIVE COMPANY HCC INSURANCE HOLDINGS, INC. /s/ Edward H. Ellis, Jr. /s/ Stephen L. Way - ------------------------------------ By: ------------------------------------ EDWARD H. ELLIS, JR. STEPHEN L. WAY, Chief Executive Officer and Chairman of the Board Dated: 4/24/00 Dated: 5/1/00 ------------------------------ ---------------------------------- [SIGNATURE PAGE TO ELLIS EMPLOYMENT AGREEMENT] 14 EX-27 4 EXHIBIT 27
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOUND IN THE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 335,320,000 0 0 11,385,000 0 0 670,499,000 7,319,000 690,339,000 2,114,000 2,592,482,000 947,125,000 182,046,000 0 0 260,566,000 0 0 49,112,000 419,652,000 2,592,482,000 63,356,000 8,239,000 (403,000) 48,897,000 48,897,000 9,321,000 35,303,000 21,635,000 9,000,000 12,635,000 0 0 0 12,635,000 0.26 0.25 273,606,000 0 0 0 0 266,713,000 0
-----END PRIVACY-ENHANCED MESSAGE-----