AMENDED & RESTATED EMPLOYMENT AGREEMENT FOR LARRY A FRAKES

Positions & Titles :

 

Responsibilities :

 

 

Reporting :

 

 

Term :

 

 

 

 

 

 

 

 

A.  Plan & Performance Score:

 

 

a.   Plan : Prior to the commencement of each Bonus Year, Executive shall prepare and submit to the Board for its approval a comprehensive business plan for the Company and its Affiliates projecting the business performance (including among other matters, consolidated net income per share) of the Company and its Affiliates in respect of the forthcoming Bonus Year (including any changes made in the good faith judgment of the Board at the time of its

 

approval, the “ Plan ”). The Plan shall be prepared and presented both (1) in accordance with Generally Accepted Accounting Principles (“ GAAP ”) and (2) on an accident year basis.

 

 

b.   Performance Score : Within 75 days after completion of each Bonus Year, a performance score (“ Performance Score ”) for such Bonus Year shall be determined by the Board in accordance with the following steps: (1) dividing (i) the actual consolidated net income per share of the Company (adjusted to account for all items of gain, loss or expenses determined by the Board in its sole discretion to be unanticipated and/or extraordinary), determined on an Accident Year Basis and as verified by the Company’s independent auditors for such Bonus Year by (ii) the projected consolidated net income per share of the Company (determined on an Accident Year Basis) as set forth in the Plan for such Bonus Year (and as approved by the Board prior to the commencement of such Bonus Year in accordance with paragraph a. (immediately preceding)), (2) multiplying the quotient determined in accordance with Step (1) (immediately preceding) by 100, and (3) rounding the result obtained in Step (2) (immediately preceding) to the nearest tenth.

 

 

B.  Bonus Computation: The Annual Bonus shall equal:

 

 

a.   $50,000 multiplied by the excess of the Performance Score over 90, plus

 

 

b.   $200,000 multiplied by the excess of the Performance Score (capped at 100 for this purpose) over 95, plus

 

 

c.  A cash payment equal to Executive’s net federal and state tax liability directly resulting from the vesting of the 2007 Restricted Shares or the restricted shares comprising the restricted shares portion of the Annual Bonus (to the extent provided for in Section C below), if Executive is employed by the Company and in good standing

 

at the time of such vesting, with such payment to be made on or within 90 days after the applicable vesting date (even if such date is prior to Executive’s actual payment of such tax liability).

 

 

Example: If the Performance Score in respect of the 2008 Original Bonus Year equaled 100, the Annual Bonus in respect of 2008 would be equal to $1,500,000 [($50,000 x (100-90)) + ($200,000 x (100-95))= $1,500,000].

 

 

Example: If the Performance Score in respect of the 2008 Original Bonus Year equaled 110, the Annual Bonus in respect of 2008 would be equal to $2,000,000 [($50,000 x (110-90)) + ($200,000 x (100-95))=$2,000,000].

 

 

C.  First $500,000 of each Annual Bonus:

 

 

a.    Restricted Shares . Subject to the immediately succeeding paragraph b., the first $500,000 of each Annual Bonus (determined in accordance with the immediately preceding Section B but not including the tax liability payments made pursuant to paragraph c. of such Section) shall be satisfied by the issuance to Executive of restricted Class A common shares of the Company as of March 15 of the year following the Bonus Year, subject to Executive being employed by the Company in good standing as of such date (or if such date is not a business day, the immediately preceding business day) (valued for this purpose at the closing price of the Company’s Class A common shares on the last trading day of the relevant Bonus Year as reported in the Wall Street Journal ). Twenty-five percent (25%) of the Company shares that may be issued to Executive pursuant to this paragraph with respect to the 2008 Bonus Year, 2009 Bonus Year and the 2010 Bonus Year during the Term shall vest and become transferable on each of the first four anniversaries of the issuance thereof. One-third of the Company shares that may be issued to Executive pursuant to this paragraph with respect to the 2011 Bonus Year and subsequent Bonus Years during the Term shall vest and

 

become transferable on each of the first three anniversaries of the issuance thereof. Notwithstanding the foregoing sentence, vesting of any such restricted shares issued to Executive pursuant to this Section C shall cease in the event and at such time as (1) Executive resigns from the Company without Good Reason, (2) Executive is terminated by the Company for Cause, (3) the Term expires, if at the time of such expiration (x) Executive declined the Company’s proposal to extend the duration of this Agreement on terms at least substantially equivalent to the terms hereof, or (y) the Company had Cause (as defined below) to terminate Executive, or (4) Executive does not comply with the Non-Competition, Non-Solicitation, Confidential Information and Cooperation “Covenants” set forth in Schedule I hereto along with his obligations, if applicable, under any release which he is required to provide in favor of the Company and those under any separation agreement to which he is party with the Company and/or its Affiliates (collectively, the “ Post-Termination Obligations ”). (The terms of the Restricted Shares shall be otherwise subject to the Company’s form of “Restricted Share Agreement” attached as Exhibit C hereto)

 

 

b.   Operational Goals & Milestones . Prior to the commencement of the 2008 Bonus Year and each Bonus Year thereafter, it shall be Executive’s responsibility to propose in writing, based upon Executive’s discussions with the Chairman, Company milestones and operational goals for the forthcoming Bonus Year that must be achieved for Executive to become entitled to the restricted shares award provided in this Section C. The absence of such a proposal as of the commencement of a Bonus Year will result in no achievement of such milestones and goals. The Chairman shall review and revise such milestones and goals in his discretion and refer them to the Board in writing for its approval, in its discretion. In addition to the other requirements of paragraphs a., b., and c. of this

 

Section C, the Board shall make a good faith determination, which shall be conclusive, as to whether the milestones and operational goals as earlier approved by the Board have been satisfied thereby entitling Executive to the amount of restricted shares determined in accordance with paragraphs a. and b. of this Section C.

 

 

D.   Annual Bonus Cash Portion: To the extent an Annual Bonus amount exceeds $500,000 (but not including the tax liability payments made pursuant to paragraph c. of Section B above):

 

 

a.  Fifty percent (50%) of such excess shall be paid in cash to Executive (the “ Paid Cash Bonus ”) within thirty days of the Board’s determination with respect to such bonus as provided for in Sections A and B above; and

 

 

b.  Fifty percent (50%) of such excess shall be retained by the Company (the “ Retained Cash Bonus ”) to satisfy the true-up adjustments provided in Section E (immediately succeeding).

 

 

E.   Accident Year True-Up Provisions:

 

 

a.  The Performance Score and the amount of the Annual Bonus Cash Portion in respect to a Bonus Year (for purposes of this Section “Annual Bonus” and the Section “Additional Equity Participation” below, “ Target Year ”) shall be redetermined or trued-up on an Accident Year Basis within 15 days following the completion of the Company’s audited financial statements in respect of the third full calendar year succeeding such Target Year, with such redetermination or true-up assuming the capital structure of the Company as of the last day of the applicable Target Year (for purposes of computing consolidated net income, consolidated net income per share, and other capital structure dependent items that would affect computation of the true-up contemplated by this Section E). (The Performance Score and

 

Annual Bonus Cash Portion as so redetermined are referred to below as the “ Trued-Up Performance Score ” and the “ Trued-Up Annual Bonus Cash Portion ,” respectively.) Computation of the Trued-Up Performance Score and the Trued-Up Annual Bonus Cash Portion shall be verified by Company’s independent auditors and confirmed by the Board. All redeterminations hereunder shall (i) be made without regard to the tax liability payments made pursuant to paragraph c. of Section B above and (ii) not increase or reduce the number of restricted shares previously awarded to Executive pursuant to Section C of this “Annual Bonus” Section.

 

 

b.  Subject to paragraph c. (immediately succeeding), if the Trued-Up Annual Bonus Cash Portion in respect to a Target Year equals or exceeds the amount of the Annual Bonus Cash Portion originally determined in respect of such Target Year, then the following amounts shall be paid to Executive (whether or not Executive is then employed by the Company, unless pursuant to paragraph c. (immediately succeeding) Executive is no longer then entitled to payments under this paragraph b.) within thirty days of the redetermination:

 

 

1.  The excess of the Trued-Up Annual Bonus Cash Portion in respect of the Target Year over the Annual Bonus Cash Portion originally determined in respect of the Target Year; plus

 

 

2.  The Retained Cash Bonus in respect to the Target Year; plus

 

 

3.  A deemed investment return on the amounts to be paid to Executive pursuant to paragraphs 1 & 2 (immediately preceding), which shall be calculated by utilizing the investment return realized by the Company and the Company Affiliates on their investable assets (including cash) over the period

 

said amounts to be paid to Executive had been retained by the Company.

 

 

c.  Executive shall not be entitled to receive any payments pursuant to paragraph b. (immediately preceding) from and after the first to occur of the following: (1) Executive resigns from the Company without Good Reason; (2) Executive is terminated by the Company for Cause; (3) the expiration of the Term, if at the time of such expiration (x) Executive declined the Company’s proposal to extend the duration of this Agreement on terms at least substantially equivalent to the terms hereof, or (y) the Company had Cause to terminate Executive; or (4) Executive does not comply with the Post-Termination Obligations.

 

 

d.  If the amount of the Annual Bonus Cash Portion originally determined in respect of a Target Year exceeds the amount of the Trued-Up Annual Bonus Cash Portion in respect of such Target Year, then the amount of such excess shall be offset against and reduce dollar-for-dollar (whether or not Executive is then employed by the Company) the aggregate amount of Retained Cash Bonuses then or thereafter held by the Company. The remaining Retained Cash Bonus with respect to the Target Year, if any, shall then be paid to Executive within thirty days of the foregoing redetermination, along with a deemed investment return thereon, which shall be calculated by utilizing the investment return realized by the Company and the Company Affiliates on their investable assets (including cash) over the period such remaining Retained Cash Bonus had been retained by the Company.

 

 

Attached as Schedule II is an example of application of the Bonus provisions of this Agreement.

 

 

F.   Additional Matters: All bonus payments hereunder are intended to comply with Sections 162(m) and 409A of the Internal Revenue Code of 1986, as amended (the

 

“ Code ”), and to the extent applicable shall be governed by the terms of the Company’s incentive award plans and paid in a manner and at such time so as to result in tax deductibility to the Company.

 

 

 

A.  Executive shall be entitled to participate in or receive benefits under all employee benefit plans, including, but not limited to, any pension or retirement plan, savings plan, medical or health-and-accident plan, life, disability, and other insurance plans or arrangements generally made available by the Company to its executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements and of this Agreement. Following a termination by the Company of Executive’s employment with the Company without Cause or a resignation by Executive for Good Reason, Executive will be entitled to be reimbursed for the cost of COBRA continuation coverage under the Company’s group health plans for up to eighteen months following his termination date, subject to Executive’s continued eligibility for such coverage under COBRA and to the conditions described in the “Termination” Section below; any such reimbursement payments payable to Executive shall be paid to Executive as soon as practicable after the cost is incurred and the request for reimbursement is made, but in no event later than December 31 of the year following the year in which the cost was incurred.

 

 

B.  Executive shall be entitled to four weeks paid vacation per full year in accordance with the policies periodically established by the Board for other senior executives of the Company; and

 

 

C.  The Company shall pay or reimburse Executive for all reasonable expenses incurred or paid by Executive in the performance of Executive’s duties hereunder in accordance with the generally applicable policies and procedures of the Company.

 

Additional Equity Participation:

A.  Share Purchase & Option Grant: The Prior Agreement indicated that it was the Company’s goal for

 

the Executive to acquire from the Company $1,000,000 of the Company’s Class A common shares (“ Shares ”). As of the date of this Agreement, Executive has purchased the Shares and the details regarding the purchase dates and the prices at which Executive acquired the Shares are set forth on Schedule III. Executive agrees that the Shares shall not be transferable (other than for estate planning purposes where the ultimate beneficiary of the transfer is a member of Executive’s immediate family) earlier than (i) the end of the Term, (ii) the occurrence of a “Change of Control” (as defined below), or (iii) the date on which Executive’s employment is terminated. The Prior Agreement contemplated that the Company would also grant Executive stock options with an aggregate exercise price of $10,000,000, and on May 17, 2007, the Company granted Executive nonqualified options to purchase an aggregate of 394,946 Class A common shares of the Company at an exercise price of $25.32 per share (the “ Prior Options ”). The Company and Executive agree to provide for the cancellation of the Prior Options in order for the Company to be able to regrant the nonqualified stock options with an exercise price which approximates, to the extent permissible under the Company’s Share Incentive Plan, the average price at which Executive acquired the Shares (the “ Stock Options ”), as set forth below:

 

 

a.  The Company and Executive agree that the Prior Options shall be cancelled effective as of the first meeting of the Compensation Committee of the Board which occurs after the date of this Agreement (the date of such Compensation Committee meeting shall be the “ Grant Date ”), and Executive shall thereafter have no further rights with respect to the Prior Options or the agreements evidencing such options.

 

 

b.  Effective as of the Grant Date, the Company shall grant Stock Options to Executive as described below.

 

 

     1. Number of Shares . Executive shall be granted Stock Options for a number of the Company’s Class A common shares equal to the quotient of (i) $10,000,000, divided by (ii) the

 

“ Average Share Price ” (which is the aggregate price that Executive paid to acquire the Shares, divided by the number of Shares acquired), with such result rounded down to the nearest whole share.

 

 

     2. Exercise Price . The exercise price per share of the Stock Options shall be equal to the higher of (i) the closing price of the Company’s Class A common shares on the Grant Date, as reported in the Wall Street Journal (the “ Grant Date Closing Price ”), or (ii) the Average Share Price.

 

 

B.  Time Vesting Options: 12.5% of the Stock Options shall vest on each of December 31, 2008, December 31, 2009, December 31, 2010, and December 31, 2011 (aggregating 50% of the Stock Options) if Executive is employed by the Company and in good standing as of such respective dates.

 

 

C.  Performance Vesting Options:

 

 

a.  An additional 12.5% of the Stock Options shall provisionally vest on each of December 31, 2008, December 31, 2009, December 31, 2010 and December 31, 2011 (aggregating the remaining 50% of the Stock Options (the “ Performance Stock Options ”)) if, in addition to the criteria described below, on such dates Executive is employed by the Company and in good standing. The number of provisionally vested Performance Stock Options in respect to a calendar year that shall vest conclusively shall be determined by multiplying the number of such provisionally vested Performance Stock Options by a fraction, the numerator of which fraction shall equal the excess over 90 of the Trued-Up Performance Score for the Target Year inclusive of the date on which such Performance Stock Options provisionally vested (capped at ten for this purpose) and the denominator of which fraction shall equal ten.

 

 

b.  Provisionally vested Performance Stock Options shall become exercisable only in the event such options become conclusively vested as verified

 

by the Company’s independent auditors and confirmed by the Board.

 

 

D.  Special Vesting of Options, Restricted Shares and Retained Cash Bonus :

 

 

a.  Notwithstanding paragraph a. of Section C (immediately preceding), all provisionally vested Performance Stock Options shall vest conclusively (and thereafter be exercisable) as of the 120 ^th day following a two-year consecutive period of either calendar years (i) 2010 and 2011 or (ii) calendar years 2011 and 2012 if:

 

 

1.  the Company’s return on equity (determined in accordance with GAAP) and the Company’s percentage increase in gross written premiums (over the relevant preceding year) exceeded the return on equity (determined in accordance with GAAP) and the percentage increase in gross written premiums (over the relevant preceding year), of more than 50% of the Peer Group (as hereafter defined), as determined by the Board in its discretion within 120 days after the close of the relevant two-year period. The Board, in its sole discretion, may make such adjustments to the determination required by this paragraph as it deems appropriate to account for unanticipated and/or extraordinary matters affecting the Company’s or Peer Group members’ results; and

 

 

2.  Executive was employed by the Company and in good standing on (i) December 31 of each year in which the Company’s performance satisfied the conditions of paragraph 1 (immediately preceding) and (ii) the date on which the relevant Board determination was made.

 

 

Example: If the Company’s return on equity for 2010 of 15% exceeded the median return on equity for the Peer Group of 12%, the Company’s return on equity for 2011 of 18% exceeded the median return on equity for the

 

Peer Group of 15%, the Company’s increase in gross written premiums for 2010 of 5% exceeded the median increase for the Peer Group of 3%, and the Company’s increase in gross written premiums for 2011 of 8% exceeded the median increase for the Peer Group of 7%, then all necessary targets will have been achieved and all provisionally vested Performance Options may be conclusively vested, subject to Executive being employed in good standing on the required dates.

 

 

3.  For purposes of paragraph 1 of this Section D, the “ Peer Group ” shall consist of W.R. Berkley Corporation (BER), RLI Corporation (RLI), James River Group, Inc. (JRVR), Navigators Insurance Group (NAVG), Philadelphia Consolidated Group (PHLY), Markel Corporation (MKL), HCC Insurance Holdings, Inc. (HCC), Argonaut Group (AGII) and NYMAGIC, Inc. (NYM). The companies constituting the Peer Group may be modified by the Board from time to time in its discretion so as to take into account new competitive entrants to the Company’s market niche, the departure of companies from the Company’s market niche, as well as mergers, acquisitions and other changes affecting companies included in the Peer Group.

 

 

b.  Notwithstanding any other provision of this Agreement, upon the consummation of a Change of Control (as defined below), if Executive is then employed by the Company in good standing and has not given notice of resignation, all unvested and provisionally vested Stock Options and all unvested Restricted Shares shall vest conclusively (and thereafter become exercisable) and Executive shall be paid any then outstanding Paid Cash Bonus and Retained Cash Bonus (without being subject to any true-up adjustments provided for herein if the Company’s publicly traded shares appreciated in value by a 15% or greater annual compounded rate (over the period from August 15, 2007 through the date of the Change of Control), as measured by the comparison of the

 

Average Share Price to the closing price on the date of the consummation of the Change of Control (as reported in the Wall Street Journal ). In determining such compounded rate of the Company’s publicly traded shares for purposes of this paragraph, the Board shall give appropriate credit to dividends and other distributions made in respect to the Company’s shares to all shareholders as well as other relevant items (such as stock splits).

 

 

c.  For purposes of this Section D:

 

 

1.  A “Change of Control” shall mean (i) the acquisition of all or substantially all of the Company’s assets by an Unaffiliated Person, (ii) a merger, consolidation, statutory share exchange or similar form of corporate transaction after which the resulting entity is controlled by an Unaffiliated Person, or (iii) the acquisition by an Unaffiliated Person of sufficient voting shares of the Company to cause the election of a majority of the Company’s Directors.

 

 

2.  “Unaffiliated Person” shall mean a “person” (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 and as such term is used in Section 13(d)(3) and 14(d)(2) of such Act) or a group of “persons” which is not an Affiliate of Fox Paine & Company, LLC (“Fox Paine”), the members thereof, or Fox Paine Capital Fund II, L.P.

 

 

E.  Shareholding Guidelines. In addition to any other transfer restrictions contained herein, beginning as of January 1, 2010 and for the remainder of the Term, Executive shall be obligated at all times to hold shares in the Company with a value of no less than two times his “Annual Compensation” (as defined below) (or if less, the aggregate value of the shares if any acquired by Executive based on his agreement with the Chairman, any shares which he has been granted pursuant to this Agreement and any vested “in the money” Time Vesting Options which he has been granted pursuant to

 

this Agreement), or such higher amount as may be required by the Board pursuant to share ownership guidelines adopted with respect to the Company’s senior executive team. Such value shall include vested and exercisable “in the money” share options, assuming their exercise for the underlying shares. For purposes of this Section E, “Annual Compensation” shall be the Base Salary plus the Annual Bonus payable upon the achievement of a Performance Score of 100 and all applicable milestones and goals (including any retained portion of the Annual Bonus but excluding all tax liability payments).

 

 

F.  Equity Agreements. Any restricted shares or options which are granted pursuant to this Agreement shall be granted pursuant to the restricted share and share option agreements attached as Exhibits A, B and C hereto, and any grants hereunder shall be conditioned on (i) Executive’s execution of such agreements; and (ii) the Company’s shareholder-approved, publicly-filed equity compensation plan, i.e., its Share Incentive Plan, as such plan may be amended from time to time (or any successor thereto).

 

Compliance with Section 409A:

 

 

Termination :

 

 

 

 

Covenants :

 

Policies :

 

Miscellaneous :

 

 

 

 

 

Board Approval :

 

Governing Law :

 

Arbitration :