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Tower Group DEF 14A 2009 Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the
Registrant þ
Filed by a Party other than the
Registrant o
Check the appropriate box:
(Name of Registrant as Specified In
Its Charter)
(Name of Person(s) Filing Proxy
Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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120 Broadway, 31st Floor
New York, New York 10271
To the Holders of Our Common Stock:
The Annual Meeting of Stockholders of Tower Group, Inc. (the
“Company”) will be held on Thursday, May 14, 2009
at 10:00 A.M. at the Millenium Hilton Hotel, 55 Church
Street, New York, NY 10007 for the following purposes:
Stockholders of record at the close of business on
March 18, 2009 are entitled to notice of, and to vote at,
the meeting.
By Order of the Board of Directors,
Elliot S. Orol
Senior Vice President, General Counsel
and Secretary
March 20, 2009
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120 Broadway, 31st Floor
New York, New York 10271
The accompanying proxy is solicited by the Board of Directors of
Tower Group, Inc. (the “Company”), for use at the
Annual Meeting of Stockholders to be held at the Millenium
Hilton Hotel, 55 Church Street, New York, NY 10007 on
Thursday, May 14, 2009 at 10:00 A.M. This Proxy
Statement, the foregoing Notice and the enclosed Proxy are being
sent to stockholders of the Company on or about March 30,
2009.
Any proxy may be revoked at any time before it is voted by
written notice mailed or delivered to the Secretary of the
Company, by delivering a proxy bearing a later date or by
attending the meeting and voting in person. If your proxy card
is signed and returned without specifying a vote or an
abstention on any proposal, it will be voted in accordance with
the recommendation of the Board of Directors on each proposal.
The proxy materials are available over the Internet at the
web site address shown on your proxy card. Internet voting
is available 24 hours a day. If you have access to the
Internet, we encourage you to vote this way. If you vote over
the Internet, please do not return your proxy card. Stockholders
can elect to view future proxy statements and annual reports
over the Internet instead of receiving paper copies in the mail.
You can choose this option and save the Company the cost of
producing and mailing the documents by following the
instructions provided if you vote over the Internet. Should you
choose to view future proxy statements and annual reports over
the Internet, you will receive an
e-mail next
year with voting instructions and the Internet address of those
materials.
The Board of Directors knows of no other matters that are likely
to be brought before the meeting other than those specified in
the notice thereof. If any other matters properly come before
the meeting, however, the persons named in the enclosed proxy,
or their duly constituted substitutes acting at the meeting,
will be authorized to vote or otherwise act thereon in
accordance with their judgment on such matters. If the enclosed
proxy is properly executed and returned prior to voting at the
meeting, the shares represented thereby will be voted in
accordance with the instructions marked thereon. In the absence
of instructions, executed proxies will be voted “FOR”
the two nominees for the Board of Directors, and “FOR”
the ratification of the appointment by the Audit Committee of
the Board of Directors of Johnson Lambert & Co. LLP as
the Company’s independent registered public accounting firm
for the year 2009. Directors will be elected by a plurality of
the votes cast. Ratification of the appointment of the
Company’s independent registered public accounting firm
requires the affirmative vote of the majority of the shares
present (whether in person or by proxy) that are entitled to
vote.
Stockholders of record at the close of business on
March 18, 2009 are entitled to vote at the meeting. On
March 18, 2009, the Company had outstanding
40,366,926 shares of common stock, $.01 par value per
share. Each outstanding share of common stock is entitled to one
vote and there is no cumulative voting. As to each proposal, the
presence, in person or by proxy, of stockholders entitled to
cast at least a majority of the votes that all stockholders are
entitled to cast on the particular matter shall constitute a
quorum for the purpose of considering that matter. Abstentions
and broker non-votes will be counted only for the purpose of
determining whether a quorum is present. A copy of the
Company’s Annual Report for the year ended
December 31, 2008 is being mailed simultaneously herewith
and is electronically available to stockholders on the Internet
by logging on to www.proxyvote.com and following the
instructions provided.
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The Company is soliciting proxies on its own behalf and will
bear the expenses of printing and mailing this proxy statement.
The Company will also request persons, firms and corporations
holding shares in their own names, or in the names of their
nominees, which shares are beneficially owned by others, to send
this proxy material to and obtain proxies from such beneficial
owners and will reimburse such holders for their reasonable
expenses in so doing.
The Board of Directors has nominated the two persons named below
to hold office until their successors have been duly elected and
qualified. The Company believes that each nominee named below
will be able to serve. However, should any such nominee not be
able to serve as a Director, the persons named in the proxies
have advised the Company that they will vote for the election of
such substitute nominee as the Board of Directors may propose.
Directors hold office in accordance with the by-laws of the
Company, which provide for Class I, II and III
Directors. The Directors in each class serve three-year terms,
with the expiration of terms staggered according to class.
Officers are elected by and serve at the discretion of the Board
of Directors. The following Directors have terms that expire at
the 2009 Annual Meeting of Stockholders and have been nominated
to stand for election as Class II Directors with terms
expiring in 2012:
The names of the nominees, their principal occupation, length of
service as Directors of the Company and certain other
biographical information are set forth below:
Director
Mr. Van Gorder became a Director in February 2009, upon the
completion of the merger of CastlePoint Holdings, Ltd. into the
Company. Prior to joining the Company’s Board of Directors,
he served as a member of CastlePoint’s Board of Directors
from March 2007 until February 2009. Mr. Van Gorder was
employed by Erie Insurance Group from November 1981 through
December 2006. He held a variety of positions at that company,
including Acting Chief Executive Officer from January 2002 to
May 2002 and his most recent position as Senior Executive
Vice-President, Secretary and General Counsel from December 1990
through December 2006. He served as a consultant and acting
Secretary and General Counsel at Erie Insurance Group during the
period January 1, 2007 through May 12, 2007.
Mr. Van Gorder served as a member of the board of directors
of Erie Indemnity Company, Erie, Pennsylvania, from 1990 to
2004. Mr. Van Gorder has also served as a Director and
Chairman of the Insurance Federation of Pennsylvania.
Mr. Van Gorder received a B.A in International Relations
from the University of Pennsylvania in 1970 and a J.D. from
Temple University School of Law in 1975.
Director
Mr. Young, a Director since 2004, currently serves as a
Director and the Chairman of the Audit Committee of Administaff,
Inc. and Amerisafe, Inc. Previously, he served as Senior Vice
President, Chief Financial Officer and Treasurer of CellStar
Corporation from 1999 to December 2001, when he retired.
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Before joining CellStar Corporation, he served as Executive Vice
President — Finance and Administration of Metamor
Worldwide, Inc. from 1996 to 1999. Mr. Young also held the
position of Senior Vice President and Chief Financial Officer of
American General Corporation for over eight years. He was a
partner in the Houston and New York offices of KPMG Peat Marwick
where his career spanned 22 years before joining American
General Corporation. He holds an accounting degree from the
University of Texas and is also a member of the Houston and
State Chapters of the Texas Society of Certified Public
Accountants, the American Institute of Certified Public
Accountants and Financial Executives International.
Director Independence
The Board of Directors applies the standards of the NASDAQ Stock
Market (“NASDAQ”) in determining whether a Director is
“independent.” The NASDAQ rules generally provide that
no Director or nominee for Director qualifies as
“independent” unless the Board of Directors
affirmatively determines that such person has no relationship
with the Company that, in the opinion of the Board, would
interfere with the exercise of independent judgment in carrying
out the responsibilities of a Director. Specifically, the
following persons may not be considered independent: (i) a
Director or nominee for Director who is, or at any time during
the past three years was, employed by the Company or by any
subsidiary of the Company; (ii) a Director or nominee for
Director who accepts, or has a family member who accepts, any
payments from the Company or any subsidiary of the Company in
excess of $120,000 during any period of twelve consecutive
months within any of the past three fiscal years preceding the
determination of independence other than (1) compensation
for Board or Board Committee service, (2) compensation paid
to a family member who is a non-executive employee of the
Company or a subsidiary of the Company or (3) benefits
under a tax-qualified retirement plan, or non-discretionary
compensation; (iii) a Director or nominee for Director who
has a family member who is, or at any time during the past three
years was, employed by the Company or any subsidiary of the
Company as an executive officer; (iv) a Director or nominee
for Director who is, or has a family member who is, a partner
in, or a controlling stockholder or an executive officer of, any
organization to which the Company made, or from which the
Company received, payments for property or services in the
current or any of the past three fiscal years that exceeded 5%
of the recipient’s consolidated gross revenues for that
year or $200,000, whichever is more, other than
(1) payments arising solely from investments in the
Company’s securities or (2) payments under
non-discretionary charitable contribution matching programs;
(v) a Director or nominee for Director who is, or has a
family member who is, employed as an executive officer of
another entity at any time during the past three years where any
of the executive officers of the Company serves on the
compensation committee of such other entity; and (vi) a
Director or nominee for Director who is, or has a family member
who is, a current partner of the Company’s independent
registered public accounting firm, or was a partner or employee
of the Company’s independent registered public accounting
firm, who worked on the Company’s audit at any time during
the past three years.
The Board of Directors, in applying the above-referenced
standards, has affirmatively determined that each of the
following individuals is an “independent” Director of
the Company: Charles A. Bryan, William W. Fox, Jr., William
A. Robbie, Steven W. Schuster, Robert S. Smith, Jan R. Van
Gorder and Austin P. Young, III. As part of the
Board’s process in making such determination, each such
Director provided confirmation that (a) all of the
above-cited objective criteria for independence are satisfied
and (b) each such Director has no other relationship with
the Company that would interfere with the exercise of
independent judgment in carrying out the responsibilities of a
Director.
In 2006, the Board of Directors approved a policy providing that
independent directors shall not accept directly or indirectly
any consulting, legal, advisory, or other compensatory fee from
the Company
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or any of its subsidiaries, other than fees paid to such
director in his or her capacity as a member of the Board and its
Committees.
In October 2008, the Board of Directors approved a policy
providing that any director who changes his or her principal
employment submit a letter of resignation to the Board, which
shall determine in its discretion whether or not to accept such
resignation.
In February 2009, the Board of Directors approved director stock
ownership guidelines requiring each of the Company’s
independent directors to own, within five years from the later
of April 1, 2009 or the date on which such director joins
the Board, common stock of the Company having a minimum market
value equal to three times the base annual cash retainer paid to
the directors.
The Company’s Board of Directors has determined that seven
of its nine members, constituting more than a majority, meet
NASDAQ’s standards for independence. See “Director
Independence” above. The Company’s independent
Directors will meet in executive session at least twice during
2009.
The Company’s Board of Directors has determined that all
members of the Audit Committee meet the standards of
independence required of Audit Committee members by applicable
NASDAQ and United States Securities and Exchange Commission
(the “SEC” or the “Commission”) rules and
regulations. See “Director Independence” above.
The Board of Directors has determined that: (i) none of the
members of the Audit Committee has participated in the
preparation of the financial statements of the Company or any
current subsidiary of the Company at any time during the past
three years; (ii) all of the members of the Audit Committee
are able to read and understand fundamental financial
statements, including a company’s balance sheet, income
statement and cash flow statement; and
(iii) Mr. Austin P. Young, III, who previously
served as an audit partner in the Houston and New York offices
of KPMG Peat Marwick until 1986, is an Audit Committee financial
expert. In making this last determination, the Board of
Directors made a qualitative assessment of Mr. Young’s
level of knowledge and experience based on a number of factors,
including his formal education, past employment experience in
accounting and professional certification in accounting.
The Audit Committee operates under a formal written charter
adopted by the Board of Directors that governs its duties and
conduct. The charter is reviewed annually for appropriate
revisions. Copies of the charter can also be obtained free of
charge on the Company’s web site, www.twrgrp.com, or
by contacting the Company’s Secretary at the address
appearing on the first page of this proxy statement.
Johnson Lambert & Co. LLP, the Company’s
independent registered public accounting firm, reports directly
to the Audit Committee. The Audit Committee meets with
management and the Company’s independent registered public
accounting firm before the filing of officers’
certifications with the SEC to receive information concerning,
among other things, any significant deficiencies in the design
or operation of internal control over financial reporting. The
Audit Committee has also established procedures to enable
confidential and anonymous reporting to the Audit Committee of
concerns regarding accounting or auditing matters. The Company
conducts an appropriate review of all related party transactions
for potential conflict of interest situations on an ongoing
basis, and all such transactions must be approved by the Audit
Committee.
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All members of the Compensation Committee have been determined
to meet NASDAQ’s standards for independence. See
“Director Independence” above. Further, each member is
a “non-employee Director,” as defined under
Rule 16b-3(b)(3)
of the Securities Exchange Act of 1934, as amended, and an
“outside Director” as defined in Treasury Regulations
Section 1.162-27,
promulgated under the Internal Revenue Code of 1986, as amended
(the “Code”). The Compensation Committee operates
under a formal written charter adopted by the Board of Directors
that governs its duties and conduct. The charter is reviewed
annually for appropriate revisions. Copies of the charter can
also be obtained free of charge on the Company’s web site,
www.twrgrp.com, or by contacting the Company’s
Secretary at the address appearing on the first page of this
proxy statement.
All members of the Corporate Governance and Nominating Committee
have been determined to meet NASDAQ’s standards for
independence. See “Director Independence” above. The
Corporate Governance and Nominating Committee operates under a
formal written charter that governs its duties and standards of
performance. The charter is reviewed annually for appropriate
revisions. Copies of the charter can also be obtained free of
charge on the Company’s web site, www.twrgrp.com, or
by contacting the Company’s Secretary at the address
appearing on the first page of this proxy statement.
As part of its duties, the Corporate Governance and Nominating
Committee develops and recommends to the Board of Directors
corporate governance principles. The Corporate Governance and
Nominating Committee also identifies and recommends individuals
for Board of Directors membership. To be considered for
membership on the Board of Directors, a candidate should meet
the following criteria, at a minimum: a solid education,
extensive business, professional or academic experience, and the
requisite reputation, character, skills and judgment, which, in
the Corporate Governance and Nominating Committee’s view,
have prepared him or her for dealing with the multifaceted
financial, business and other issues that confront a Board of
Directors of a corporation with the size, complexity, reputation
and success of the Company.
In connection with each of the Company’s annual meetings of
stockholders, the Corporate Governance and Nominating Committee
will consider candidates for Director recommended by any
stockholder who (a) has been a continuous record owner of
at least 2% of the Company’s common stock for at least one
year prior to submission and (b) provides a written
statement that the holder intends to continue ownership of the
shares through the stockholders meeting. Such recommendations
must be made by written notice addressed to the Secretary of the
Company no more than 120 days and no less than 90 days
prior to the anniversary of the date the Company first mailed
its proxy materials for the previous year’s annual meeting
of stockholders. Consequently, any such recommendation for
consideration by the Corporate Governance and Nominating
Committee with respect to the Company’s 2010 annual meeting
of stockholders must be made no earlier than December 1,
2009 and no later than December 31, 2009.
Pursuant to the above procedures, once the Corporate Governance
and Nominating Committee has identified prospective nominees,
background information will be solicited on the candidates,
following which they will be investigated, interviewed and
evaluated by the Corporate Governance and Nominating Committee,
which will then report to the Board of Directors. No
distinctions will be made as between internally-recommended
candidates and those recommended by stockholders.
All the Director nominees named in this proxy statement met the
Board of Directors’ criteria for membership and were
recommended by the Corporate Governance and Nominating Committee
for election by stockholders at this Annual Meeting.
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All nominees for election at this Annual Meeting are current
members of the Board standing for re-election.
The Investment Committee of the Board was established by the
Board in February 2009. The Investment Committee monitors the
performance of the Company’s investment portfolio and
evaluates the Company’s individual investment portfolio
managers on a regular basis. Prior to the establishment of the
Investment Committee, these responsibilities were performed by
the Board. The Investment Committee will operate under a formal
written charter to be adopted by the Board of Directors that
governs its duties and conduct. The charter will be reviewed
annually for appropriate revisions. Copies of the charter will
be available free of charge on the Company’s web site,
www.twrgrp.com, or by contacting the Company’s
Secretary at the address appearing on the first page of this
proxy statement.
The Company has adopted a Code of Business Conduct and Ethics
that includes provisions ranging from restrictions on gifts to
conflicts of interest, portions of which Code are intended to
meet the definition of a “code of ethics” under
applicable SEC rules. The Code of Business Conduct and Ethics is
applicable to all Directors, officers and employees, including
the principal executive officer, principal financial officer and
persons performing similar functions. Copies of the Code of
Business Conduct and Ethics can be obtained free of charge from
the Company’s web site, www.twrgrp.com, or by
contacting the Company’s Secretary at the address appearing
on the first page of this proxy statement.
A stockholder, who wishes to communicate with the Board of
Directors, or specific individual Directors, may do so by
directing a written request addressed to such Directors or
Director at the address appearing on the first page of this
proxy statement. All communications directed to members of the
Board of Directors will be relayed to the intended Director(s).
Meetings. During 2008, the Board of Directors
met ten times. The Board’s standing independent committees
consist of the Audit, Compensation, and Corporate Governance and
Nominating Committees, as well as the Investment Committee,
which was established in 2009. In 2008, each Director attended
at least 75% of the total number of meetings of the Board of
Directors and any committees on which such Director served. All
Directors were present at the annual meeting of stockholders.
Board Committees. The Audit Committee met 13
times in 2008. During 2008, the Audit Committee consisted of
Messrs. Young (Chair), Bryan, Fox and Schuster. As of
February 2009, following the merger of CastlePoint Holdings,
Ltd. into the Company, the Audit Committee consists of
Messrs. Young (Chair), Bryan, Fox and Robbie. Among other
duties, the Audit Committee selects the Company’s
independent registered public accounting firm; reviews and
recommends action by the Board of Directors regarding the
Company’s quarterly and annual reports filed with the SEC;
discusses the Company’s audited financial statements with
management and the independent registered public accounting
firm; and reviews the scope and results of the independent audit
and any internal audit.
The Compensation Committee met 11 times in 2008. During 2008,
the Compensation Committee consisted of Messrs. Bryan
(Chair), Fox, Schuster and Young. As of February 2009, following
the merger of CastlePoint Holdings, Ltd. into the Company, the
Compensation Committee consists of Messrs. Bryan (Chair),
Schuster, Smith and Van Gorder. Among other duties, the
Compensation Committee evaluates the
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performance of the Company’s principal officers, recommends
to the Board of Directors the selection and compensation of
principal officers and administers the Company’s various
compensation plans.
The Corporate Governance and Nominating Committee met four times
in 2008. During 2008, the Corporate Governance and Nominating
Committee consisted of Messrs. Schuster (Chair), Bryan, Fox
and Young. As of February 2009, following the merger of
CastlePoint Holdings, Ltd. into the Company, the Corporate
Governance and Nominating Committee consists of
Messrs. Schuster (Chair), Bryan, Fox and Van Gorder. Among
other duties, the Corporate Governance and Nominating Committee
is responsible for recommending to the Board of Directors
candidates for nomination to the Board.
The Investment Committee, which was established in February
2009, consists of Messrs. Smith (Chair), Robbie, Schuster
and Young.
While the Company has not adopted a formal policy with regard to
attendance by members of the Board of Directors at annual
stockholder meetings, it encourages all Directors to attend the
Annual Meeting.
No member of the Compensation Committee is or has ever been an
officer or employee of the Company or of any of its subsidiaries
or affiliates. None of the Company’s executive officers
served as a director or member of the compensation committee (or
other board committee performing similar functions) of any
entity of which a member of the Company’s Compensation
Committee was an executive officer, nor did any of the
Company’s executive officers serve as a member of the
compensation committee (or other board committee performing
similar functions or, in the absence of such a committee, the
entire board of directors) of any entity for which any of the
Company’s Directors served as an executive officer.
The following table shows each of the four current standing
committees established by the Board and the members and chairman
of each committee:
* Independent Director
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Michael Lee, the Company’s Chairman of the Board, President
and Chief Executive Officer, was also the Chairman and Chief
Executive Officer of CastlePoint Holdings, Ltd.
(“CastlePoint”), a Bermuda-based insurance and
reinsurance holding company that the Company sponsored in 2006,
until the merger of CastlePoint into a wholly-owned subsidiary
of the Company in February 2009. Mr. Lee owned
644,138 shares of common stock of CastlePoint, representing
1.7% of the outstanding shares of CastlePoint, at the time of
the merger. Mr. Lee also had been granted a total of
1,122,498 vested and unvested options to acquire shares of stock
of CastlePoint. In 2008, Mr. Lee received a salary from
CastlePoint in the amount of $376,250. For 2008, Mr. Lee
received $785,000 in a cash bonus and $1,095,000 in restricted
shares of CastlePoint.
As part of the sponsorship and capitalization of CastlePoint,
the Company invested $15 million and received 2,555,000
common shares of CastlePoint. At the time of CastlePoint’s
capitalization in April 2006, the Company also received warrants
to purchase additional common shares of CastlePoint. The Company
did not exercise these warrants and they expired when the
companies were merged in 2009.
The Company had a strategic relationship with CastlePoint,
pursuant to which the Company’s subsidiaries entered into a
master agreement and a number of reinsurance, service and
expense sharing and management agreements with CastlePoint and
its subsidiaries. The master agreement is no longer in force and
effect as of the merger of CastlePoint into the Company in
February 2009. The other agreements were also modified and
simplified in connection with the closing of the merger.
In 2006, the Company entered into a master agreement with
CastlePoint (the “Master Agreement”). The Master
Agreement, as amended from time to time, provided in 2008 that,
subject to the receipt of any required regulatory approvals,
CastlePoint would manage the traditional program business and
the specialty program business, and the Company would manage the
brokerage business. CastlePoint, as program manager, was
required to purchase property and casualty excess of loss
reinsurance and property catastrophe excess of loss reinsurance
to protect the net exposure of the participants. In purchasing
the property catastrophe excess of loss reinsurance, the manager
was permitted to retain risk equating to no more than 10% of the
combined surplus of the Company and CastlePoint Insurance
Company (“CPIC”) (referred to as the pooled
catastrophe retention).
The parties to the Master Agreement agreed to exercise good
faith, and to cause their respective subsidiaries to exercise
good faith, to carry out the intent of the parties in the event
the specific agreements contemplated by the Master Agreement
needed to be revised to comply with regulatory requirements.
The Company’s insurance subsidiaries during 2008 were
parties to three multi-year quota share reinsurance agreements
with CastlePoint Reinsurance Company, Ltd. (“CastlePoint
Reinsurance”) covering brokerage business, traditional
program business and specialty program business.
Under the brokerage business quota share reinsurance agreement,
which covers business that the Company has historically written
through its retail and wholesale agents, the Company’s
insurance subsidiaries generally cede between 25% and 50% of
premiums and losses, such ceding percentage being subject to
periodic adjustment by the Company. For the fourth quarter of
2008 only, the ceding percentage was reduced to 17.5%. The
Company’s insurance subsidiaries ceded $122.7 million
of direct premium written and received commissions of
$56.9 million under this agreement in 2008. CPIC was a
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potential reinsurer under the brokerage business quota share
reinsurance agreement but it assumed no premiums or losses under
that agreement in 2008.
The traditional program business quota share reinsurance
agreement covers program business historically written by the
Company prior to the formation of CastlePoint in 2006. Under
this agreement, the Company’s insurance subsidiaries cede
50% of the Company’s net retention on the traditional
program business to CastlePoint Reinsurance and share premium
revenue and losses in proportion to the parties’ respective
quota share of participation. Ceding commissions, which are
intended to approximate expenses, are deemed to be approximately
30% of business ceded. Under the specialty program business and
insurance risk-sharing business quota share reinsurance
agreement, which covers business not historically written by the
Company, the Company’s insurance subsidiaries cede 85% of
the Company’s net retention on specialty program business
to CastlePoint Reinsurance and receive a provisional ceding
commission of 30%, subject to a minimum of 30% and a maximum of
36%. The Company’s insurance subsidiaries ceded
$72.0 million of direct premium written and received
commissions of $14.3 million under the traditional and
specialty program and insurance risk-sharing business quota
share reinsurance agreements in 2008.
Under the brokerage business property catastrophe reinsurance
program premium and loss reimbursement agreement, CastlePoint
agreed to pay 30% of the Company’s property catastrophe
reinsurance premiums relating to the brokerage business managed
by the Company and 30% of the Company’s net retained
property catastrophe losses. CPIC will participate
proportionately in catastrophe reinsurance on the underlying
brokerage business, and in 2008 CPIC paid $7.3 million in
ceded catastrophe reinsurance premiums that pertained to the
Company’s brokerage business. CastlePoint Reinsurance also
participated as a reinsurer on the Company’s excess of loss
reinsurance program.
In addition, the Company and CPIC entered into two aggregate
excess of loss reinsurance agreements for the brokerage business
with CPIC effective October 1, 2007. The purpose of the two
aggregate excess of loss reinsurance agreements was to equalize
the loss ratios for the brokerage business written by CPIC and
the Company. Under the first agreement, Tower Insurance Company
of New York (“TICNY”) reinsured approximately 85%
(which percentage would be adjusted to equal Tower’s actual
percentage of the total brokerage business written by the
Company and CPIC) of CPIC’s brokerage business losses above
a loss ratio of 52.5%. Under the second agreement, CPIC
reinsured approximately 15% (which percentage would be adjusted
to equal CastlePoint’s actual percentage of the total
brokerage business written by the Company and CPIC) of the
Company’s brokerage business losses above a loss ratio of
52.5%. The Company and CPIC each pay a premium to the other
under the agreement and paid $3.0 million to the other
under these agreements for 2008. These agreements were modified
as of October 1, 2008 to provide that the attachment point,
or the loss ratio at which the reinsurance begins, would be 45%.
Under the program management agreement, CastlePoint Management
Corp. (“CPM”) was appointed by TICNY to perform
certain underwriting and claims services, effective
January 1, 2007, with respect to the traditional and
specialty program business and insurance risk-sharing business,
such as soliciting, underwriting, quoting, binding, issuing and
servicing of insurance policies. In circumstances where CPM
cannot fully perform these functions on its own, CPM would
delegate authority to the program underwriting agents or
purchase services from the Company under the service and expense
sharing agreement. The Company paid $0 in expense reimbursements
to CPM in 2008 under this agreement.
Tower Risk Management Corp. (“TRM’) entered into a
management agreement with CPIC effective July 1, 2007 to
produce and manage brokerage business on behalf of CPIC. Under
this agreement, TRM
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receives a provisional management fee equal to 34.0% of the
subject premium of the business produced by TRM. The amount of
the fee is adjusted between 31.0% and 36.0% based on the loss
ratio of the business produced. During 2008, TRM produced
$171.7 million of premium and earned $55.4 million in
direct commission revenues from CPIC.
Under the service and expense sharing agreements, CPM can
purchase from TICNY, and TICNY can purchase from CPM, certain
insurance company services, such as claims adjustment, policy
administration, technology solutions, underwriting, and risk
management services, at cost and market these services to
program underwriting agents on an unbundled basis. CPM shares
with the Company 50% of the profits and losses generated from
marketed services. The Company charged CPM $3.6 million for
such services in 2008. There were no charges from CPM for
services in 2008.
In 2006, the Board of Directors passed a resolution stating that
independent directors shall not accept directly or indirectly
any consulting, legal, advisory, or other compensatory fee from
the Company or any of its subsidiaries, other than fees paid to
any such director in his or her capacity as a member of the
Board and its Committees.
In 2007, the Board of Directors adopted a written policy that
calls for the prior review and approval by the Audit Committee
of any proposed transaction (or series of transactions) between
the Company and any related party, other than transactions
involving a total amount less than $50,000. Under the policy,
full disclosure of all facts and circumstances relating to the
proposed transaction must be made to the Audit Committee, which
may only approve transactions that are in, or are not
inconsistent with, the best interests of the Company and its
stockholders. Related parties are defined as executive officers,
5% stockholders, directors, director nominees and any of their
immediate family members (as those terms are defined under
Item 404 of
Regulation S-K).
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The table below sets forth the names, ages and positions of the
Company’s Directors and executive officers.
Set forth below is certain biographical information on each of
the Company’s Directors and executive officers (other than
Messrs. Van Gorder and Young, for whom such information is
provided above under “Election of Directors —
Nominees for Director”):
Mr. Lee currently serves as Chairman of the Board of
Directors, President and Chief Executive Officer and has held
these positions at the Company since its formation in 1995 and
at its subsidiaries since their formation. Before founding the
Company’s first insurance subsidiary, Tower Insurance
Company of New York, in 1990, Mr. Lee was an attorney
in private practice specializing in advising entrepreneurs on
the acquisition, sale and formation of businesses in various
industries. Mr. Lee received a B.A. in Economics from
Rutgers University in 1980 and a J.D. from Boston College Law
School in 1983. He is admitted to practice law in New York and
New Jersey. Mr. Lee has worked in the insurance industry
for over 19 years with experience in insurance, finance,
underwriting, sales and marketing, claims management and
administration and law. Mr. Lee also served as Chairman,
President and Chief Executive Officer of CastlePoint Holdings,
Ltd. from its formation in 2006 until its merger into the
Company in February 2009.
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Mr. Colalucci joined the Company in February 2002 as Senior
Vice President, Chief Financial Officer and Treasurer. He has
been a Director of the Company since March 2002. From 1996 until
2001, Mr. Colalucci was employed by the Empire Insurance
Company, a property and casualty insurance company, and
ultimately served as Executive Vice President, Chief Financial
Officer and Treasurer in addition to being a member of that
company’s Board of Directors. From 1974 to 1996,
Mr. Colalucci was employed by the Continental Insurance
Companies in various senior financial positions. From 1966 to
1974, Mr. Colalucci was employed by Deloitte &
Touche, CPAs. Mr. Colalucci received a B.B.A. in Accounting
from St. John’s University in 1966 and is a New York State
licensed Certified Public Accountant and a member of the
American Institute of Certified Public Accountants, the New York
State Society of Certified Public Accountants and Financial
Executives International.
Director
Mr. Bryan, a Director since 2004, has been the President of
CAB Consulting, LLC, an insurance consulting firm that provides
general management, merger and acquisition, actuarial and
accounting services, since 2001. From 1998 to 2000,
Mr. Bryan served as Senior Vice President and Chief Actuary
for Nationwide Insurance Group. Mr. Bryan is a Fellow of
the Casualty Actuarial Society, a Certified Public Accountant,
and a Chartered Property and Casualty Underwriter.
Mr. Bryan also serves on the Board of Directors of Safe
Auto, Medical Mutual of Ohio and the Ohio Bureau of Workers
Compensation. Mr. Bryan received an M.B.A. in General
Management from Golden Gate University in 1970, an M.S. in
Mathematics from Purdue University in 1969 and a B.S. in
Mathematics from John Carroll University in 1968.
Director
Mr. Fox, who became a Director in April 2006, has over
40 years experience in the insurance and reinsurance
industry. Mr. Fox was employed by Balis & Co.,
Inc. and its successor, the Guy Carpenter reinsurance brokerage
division of Marsh & McLennan Companies, from 1962
through 1988, and again from 1992 through 1999. Mr. Fox had
a number of positions at Balis & Co., Inc., and Guy
Carpenter, including President of Balis from 1985 through 1988
and again from 1992 through 1999. Mr. Fox also served as a
member of Guy Carpenter’s Executive Committee and Board of
Directors, and as a Managing Director of J&H,
Marsh & McLennan. Between 1992 and 1999, Mr. Fox
was also the Chief Executive Officer of Excess Reinsurance
Company. In 1988, Mr. Fox founded PW Reinsurance Management
Company (“PW Group”), as a joint venture with
Providence Washington Insurance Company (“Providence”)
to underwrite reinsurance on behalf of Providence. Mr. Fox
was a Senior Vice President of Providence from 1988 to 1989 and
was responsible for selecting and overseeing reinsurance
intermediaries. In 1989, the Baloise Insurance Group acquired
Providence and appointed Mr. Fox President of the PW Group.
Mr. Fox has served on several insurance-related boards of
directors and is currently the Chairman of the Board of MII
Management Group, the
Attorney-in-Fact
for MutualAid Exchange. Mr. Fox is a member of the CPCU
Society and holds a Pennsylvania Property and Casualty
Broker’s License.
Director
Mr. Schuster has served on the Board of Directors of the
Company since 1997. Mr. Schuster has been engaged in the
practice of corporate law for over 25 years and is co-chair
of McLaughlin & Stern LLP’s
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corporate and securities department, where he has been a partner
since 1995. Mr. Schuster received his B.A. from Harvard
University in 1976 and his J.D. from New York University in 1980.
Director
Mr. Robbie became a Director in February 2009 upon the
completion of the merger of CastlePoint Holdings, Ltd. into the
Company. Prior to joining Tower’s Board of Directors, he
served as a member of CastlePoint’s Board of Directors from
January 2006 until February 2009. Since December 2004, he has
provided financial advisory services to the insurance industry
through his own consulting firm. From November 2002 to November
2004, Mr. Robbie was Chief Financial Officer of Platinum
Underwriters Reinsurance Ltd., a property and casualty
reinsurance company in Bermuda. From August 2002 to November
2002, Mr. Robbie held the same position at St. Paul
Reinsurance, a reinsurance operation of The St. Paul Companies,
Inc. From September 1997 to August 2002, Mr. Robbie held
various positions at XL Capital Ltd., a Bermuda-based insurance,
reinsurance and financial risk company, and its subsidiaries,
including Executive Vice President — Global Services,
Corporate Treasurer and Chief Financial Officer of XL Re, Ltd.
Prior to that, he held a variety of central and senior positions
in the insurance industry, including roles as Chief Financial
Officer of Prudential AARP Operations, Chief Accounting Officer
at Continental Insurance Companies, Treasurer of Monarch Life
Insurance Company and various positions at Aetna Life and
Casualty Company. From 2005 to January 2008, Mr. Robbie was
a director and chairman of the Audit Committee of American
Safety Insurance Company. Mr. Robbie is a Certified Public
Accountant. Mr. Robbie received his B.A. from St.
Michael’s College and his Master of Accounting and M.B.A.
from Northeastern University.
Director
Mr. Smith became a Director in February 2009 upon the
completion of the merger of CastlePoint Holdings, Ltd. into the
Company. Prior to joining Tower’s Board of Directors,
Mr. Smith served as a member of CastlePoint’s Board of
Directors from January 2006 until February 2009. Mr. Smith
is currently a principal of Sherier Capital LLC, a business
advisory firm that he founded in 2005, and a Managing Director
of National Capital Merchant Banking, LLC, an investment firm
that he joined in April 2008. He was previously Chief Operating
Officer (from December 1999 to April 2004) and Executive
Vice-President (from April 2004 to August 2004) of
Friedman, Billings, Ramsey Group, Inc., where he was
instrumental, among other things, in growing Friedman, Billings,
Ramsey Group, Inc. from a privately-held securities boutique to
a nationally recognized investment bank, helping accomplish its
1997 initial public offering and the creation of an affiliated
public company, FBR Asset Investment Corporation, and the merger
of the two companies in 2003. Before joining Friedman, Billings,
Ramsey Group, Inc. as its General Counsel, Mr. Smith was an
attorney with the law firm of McGuireWoods LLP from 1986 to
1996. Mr. Smith currently serves on the Board of Asset
Capital Corporation. Mr. Smith received his LL.B. and Dip
L.P. (graduate Diploma in Legal Practice) from Edinburgh
University, and his LL.M. from the University of Virginia.
Mr. Abano joined the Company in June 2008 as Senior Vice
President and Chief Information Officer. From 2006 to 2008, he
served as Vice President of Technology, Systems Development and
Infrastructure for QBE the Americas. From 2004 to 2006,
Mr. Abano was the Chief Technology Officer in the
United States Army, under Operation Iraqi Freedom III, for
the central region of Iraq. He was awarded the Bronze Star,
Combat Action Badge, and other prestigious awards during his
military reserves deployment. Mr. Abano is now a retired
Lieutenant Colonel from the military reserves with 26 years
of
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service. Prior to his overseas deployment, Mr. Abano held
the position of Vice President and CIO for Kemper Insurance
Companies Northeast Region from 1999 — 2004, and was
Assistant Vice President of Technology and Strategic Software
Development for Munich Re America (formerly American Reinsurance
Corporation) from
1993-1999.
Mr. Abano has held various positions within the insurance
and financial services industry, including with American
International Group. He currently serves as Secretary for the
New Jersey Chapter of the Society for Senior Information
Managers, and was elected in 2006 to the Board of Education
within his local community. Mr. Abano received an M.B.A. in
Business Management and Technology from Regis University in
2003, and is a graduate of Brooklyn College, The City University
of New York, where he received a B.S. in Computer and
Information Science in 1986.
Mr. Barrow joined the Company in February 2009, following
the merger of CastlePoint Holdings, Ltd. into the Company. From
April 2007 until the merger, he was the Senior Vice President
and Chief Accounting Officer of CastlePoint and its
subsidiaries. From June 1996 until April 2007, Mr. Barrow
was Senior Vice-President, Treasurer and Chief Financial Officer
for Gerling America Insurance Company, a
U.S.-based
subsidiary of the Talanx Group, a German company that writes
property, casualty and ocean marine coverage. Mr. Barrow
received his B.S. in Accounting from the State University of New
York at Albany.
Mr. Maier joined the Company in June 2005. Before joining
the Company, Mr. Maier served from April 2002 to
September 2004 as Senior Vice President and Chief Underwriting
Officer of OneBeacon Insurance Group in New York. In his role at
OneBeacon Insurance Group, Mr. Maier managed the
New York and New Jersey territories. From February 1987 to
March 2002, Mr. Maier served in a variety of positions at
Chubb Insurance Group, including most recently as Senior Vice
President and Chief Underwriting Officer of Commercial Lines for
Chubb Insurance Group’s Mid-Atlantic Region in which he
managed a $400 million middle-market commercial portfolio
in seven states with six field offices and a regional small
commercial underwriting center.
Mr. Orol joined the Company in December 2008 as Senior Vice
President, General Counsel and Secretary. Before joining Tower,
Mr. Orol had served until November 2008 at The Navigators
Group, Inc. as Chief Compliance Officer from November 2004,
Senior Vice President and General Counsel from May 2005, and
Secretary from May 2006. Prior to joining Navigators,
Mr. Orol was in private legal practice and, from 2002 to
2003, served as Managing Director and General Counsel of Gerling
Global Financial Products, Inc. From 1999 through 2001, he was a
partner with the law firm of Cozen O’Connor. He served from
1996-1999 as
Vice President, General Counsel and Secretary of the GRE
Insurance Group, and from
1987-1996 as
Vice President of The Continental Insurance Company.
Mr. Orol received a B.S. in Mathematics from the State
University of New York at Binghamton, a J.D. from the University
of Chicago Law School and an M.B.A. from the University of
Chicago Graduate School of Business.
Mr. Pechmann joined the Company in September 2003. Before
that, Mr. Pechmann was employed in various roles at Kemper
Insurance Companies for 32 years. His most recent position
with that company
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was as Northeast Region President, responsible for management
and profitability of seven operating branch offices. A 1971
graduate of Hartwick College, Mr. Pechmann received a B.A.
in English.
Ms. Ranegar joined the Company in October 2003 as Vice
President of Operations. She was promoted to Senior Vice
President in January 2006. She currently manages underwriting
operations, with responsibility for policy issuance service and
delivery, billing and collections, premium audit, statistical
reporting and process engineering. She has 24 years of
insurance industry experience. Her most recent prior experience
was with Kemper Insurance where she was Regional Operations
Director, responsible for underwriting operations in seven
branch offices located throughout the northeast from 2002 until
2003. Before Kemper, Ms. Ranegar held management positions
at Highlands Insurance Group, Inc. from 1996 until 2002, where
she was Vice President, Claim Field Operations, responsible for
technical claim handling and operations in the field claim
offices, and Vice President, Underwriting and Operations,
responsible for a small business service center. She began her
insurance career with Aetna Life and Casualty as a Liability
Claim Representative in New York City. At Aetna, and
subsequently Travelers, she held positions of increasing
responsibility including Assistant Director responsible for the
consolidation of Aetna and Travelers claim field offices.
Ms. Ranegar graduated from the University of Pittsburgh
with a B.A. in Economics.
Mr. Weiner joined the Company in February 2009, following
the merger of CastlePoint Holdings, Ltd. into the Company. He
joined CastlePoint as Vice President in January 2006, was a
director from January 2007 through March 2007, and became Chief
Financial Officer and Senior Vice President in February 2006.
Until the merger, Mr. Weiner was also Chief Financial
Officer, Senior Vice President and director of CastlePoint Re
since March 2006, and held the same positions at CastlePoint
Management Corp. since May 2006. Prior to joining CastlePoint,
Mr. Weiner served as Senior Vice President of Tower from
January 2004 to April 2006. From January 2002 until December
2003, he was employed as Managing Director at GAB Robins Capital
Partners, which provides outsourcing for claim operations. From
October 1991 to December 2001, he was employed by the accounting
firm PricewaterhouseCoopers LLP, where he led that
company’s U.S. middle market insurance consulting
practice and advised many property and casualty insurers on
strategic issues. He is an Associate member of the Casualty
Actuarial Society and a member of the American Academy of
Actuaries. Mr. Weiner received his B.S. from Drexel
University and his M.B.A. from the Wharton School of the
University of Pennsylvania.
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The following table sets forth certain information regarding the
ownership of the Company’s common stock as of
March 18, 2009 by: (i) each person known to the
Company to own beneficially more than 5% of the outstanding
common stock; (ii) each of the Company’s Directors and
persons referred to in the Summary Compensation Table; and
(iii) all of the Directors and executive officers as a
group. As used in this table, “beneficially owned”
means the sole or shared power to vote or dispose of, or to
direct the voting or disposition of, the shares, or the right to
acquire such power within 60 days after March 18, 2009
with respect to any shares.
Section 16(a) of the Securities Exchange Act of 1934, as
amended, requires the Company’s officers and Directors and
persons who own more than 10% of a registered class of the
Company’s equity securities to file initial reports of
ownership and reports of changes in ownership with the SEC. Such
persons are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file. Based
solely on the Company’s review of the copies of such forms
received by the Company with respect to fiscal year 2008 or
written representations from certain reporting persons during
the year ended December 31, 2008, all Section 16(a)
filing requirements applicable to the Directors, officers and
greater than 10% stockholders were complied with by such persons.
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COMPENSATION
DISCUSSION AND ANALYSIS
The Company’s approach to employee compensation is based
upon its
pay-for-performance
philosophy, which applies both to its Named Executive Officers
included in the Summary Compensation Table below and to its
employees generally. The Company’s executive compensation
program is designed to attract and retain the services of highly
qualified executives and to reward and provide incentives for
individual performance as well as for overall Company
performance. The Company seeks to establish and maintain a
performance-driven, entrepreneurial culture that delivers
exceptional value to its stockholders, and to attract and reward
individuals who fit that culture and reflect the Company’s
core values. To attract and retain highly skilled individuals,
the compensation program is intended to be competitive with that
offered by other employers within the industry that compete with
the Company for talent. The Company uses all of the elements of
its compensation program together to achieve these various
objectives.
The compensation for each Named Executive Officer reflects his
level of responsibility, the Company’s performance,
achievement of individually established goals, personal
contribution to the Company’s success, experience,
expertise, knowledge of the Company’s operations and the
insurance industry, and marketplace considerations. Other than
the Chief Executive Officer, no Named Executive Officer or other
officer plays a role in determining compensation for the Named
Executive Officers.
The Company’s management compensation program for its Named
Executive Officers consists of the following four key elements:
(i) base salary; (ii) an annual cash bonus, payable
under the Tower Group, Inc. Short Term Performance Incentive
Plan (the “Short Term Incentive Plan” or
“STIP”) to designated individuals that is intended to
qualify for tax deductibility under Section 162(m) of the
Internal Revenue Code of 1986, as amended (the
“Code”); (iii) an annual stock award, granted
under the Tower Group, Inc. 2004 Long Term Equity Compensation
Plan (the “Long Term Equity Plan” or “LTEP”)
to designated individuals that is intended to qualify for tax
deductibility under Section 162(m) of the Code; and
(iv) retirement income plans, including the Tower Group,
Inc. Deferred Compensation Plan (the “Deferred Compensation
Plan”), the Company’s 401(k) Plan with matching
Company contribution, and, beginning in 2009, the Tower Group,
Inc. Supplemental Executive Retirement Plan (the
“SERP”), which are described under “Elements of
Compensation — Retirement Income Plans” below.
The Company does not generally target any specific allocation
among these various elements of compensation for Named Executive
Officers or other employees.
Base Salaries. The annual base salary is the fixed
element of compensation and is intended to attract and retain
high performing executives. The level of base salary for each of
the Company’s Named Executive Officers reflects his
position and tenure with the Company, the Company’s needs,
the Named Executive Officer’s individual performance,
achievements and contributions to the Company, amounts paid to
executives with comparable experience at peer insurance
companies, and the overall financial results of the Company. In
2008, Mr. Lee’s base salary was increased from
$500,000 to $550,000, Mr. Colalucci’s base salary was
increased from $325,000 to $341,250, Mr. Haveron’s
base salary of $350,000 was not increased, Mr. Maier’s
base salary was increased from $295,000 to $325,000, and
Mr. Sanderson’s base salary was increased from
$236,001 to $275,000.
Annual Cash Bonuses. The Named Executive Officers
are eligible for annual cash bonuses under the Short Term
Incentive Plan. The Compensation Committee reviews at the
beginning of each year the various bonus award criteria included
in the Short Term Incentive Plan to determine which criteria to
use in setting the annual bonus awards under the STIP for that
year. The STIP bonus awards are intended to reflect the degree
to which the Company meets its annual budget plan. For 2008, the
STIP awards were
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determined with particular emphasis on the degree to which the
Company achieved corporate performance targets (the “Basic
Bonus Targets”) with respect to four equally weighted
components: (1) return on equity (excluding gains and
losses realized on investments), (2) growth in gross
premiums written and produced, (3) growth in diluted
operating earnings per share, and (4) growth in diluted
book value per share. For 2008, the mid-point of the Basic Bonus
Targets consisted of return on equity (excluding gains and
losses realized on investments) of 17.5%; growth in gross
premiums written and produced of 4.3%, to $629.1 million;
growth in diluted operating earnings per share of 4.5%, to $2.54
per share; and growth in diluted book value per share of 17.5%,
to $15.53 per share. The Company’s achievement of the
mid-point of all Basic Bonus Targets would entitle the Chief
Executive Officer to receive a cash bonus award under the STIP
equal to 100% of his base salary. For achievement of less than
100% of the mid-points of the Basic Bonus Targets, the Chief
Executive Officer would receive a cash bonus award under the
STIP of correspondingly less than 100% of his base salary. For
achievement of more than 100% of the mid-points of the Basic
Bonus Targets, the Chief Executive Officer would receive a cash
bonus award of correspondingly more than 100% of his base
salary. Achievement of the designated “low” level of
all Basic Bonus Targets (return on equity (excluding gains and
losses realized on investments) of 15.0%; growth in gross
premiums written and produced of 0%; growth in diluted operating
earnings per share of -11.9% to $2.14 per share; and growth in
diluted book value per share of 14.5% to $15.14 per share) would
not entitle the Chief Executive Officer to receive any cash
bonus award under the STIP. Achievement of the designated
“high’’ level of all Basic Bonus Targets (return
on equity (excluding gains and losses realized on investments)
of 20.0%; growth in gross premiums written and produced of
20.0%, to $720 million; growth in diluted operating
earnings per share of 21.3% to $2.95 per share; and growth in
diluted book value per share of 20.0%, to $15.93 per share)
would entitle the Chief Executive Officer to receive a cash
bonus award under the STIP equal to 200% of his base salary,
which is the maximum bonus award currently permitted by the
Compensation Committee under the Short Term Incentive Plan.
Achievement of the designated “maximum’’ level of
any individual Basic Bonus Target (return on equity (excluding
gains and losses realized on investments) of 25%; growth in
diluted operating earnings per share to $3.36; and growth in
diluted book value per share to $16.33; with no maximum Basic
Bonus Target level available for growth in gross premiums
written and produced) would result in a calculation for that
Basic Bonus Target component of the STIP equal to 250% of the
mid-point calculation for such Basic Bonus Target component,
subject to the maximum bonus award of 200% of base salary
currently permitted by the Compensation Committee under the
STIP. For 2008, the Company achieved the following Basic Bonus
Target levels: return on equity (excluding gains and losses
realized on investments) of 20.7%; growth in gross premiums
written and produced to $805.0 million; growth in diluted
operating earnings per share to $2.87; and growth in diluted
book value per share to $14.20. Based on this performance level,
the Compensation Committee determined that Mr. Lee was
entitled to receive a bonus award under the STIP equal to
147.13% of his base salary, or $809,235. The Compensation
Committee has discretion to adjust downward, but not upward, the
annual cash bonus award payable to the Chief Executive Officer
under the Short Term Incentive Plan.
With respect to the payment of annual cash bonus awards to Named
Executive Officers other than the Chief Executive Officer, the
Chief Executive Officer provides recommendations to the
Compensation Committee based upon the degree of the
Company’s achievement of the Basic Bonus Targets under the
STIP and upon his subjective assessment of the performance and
contribution of each Named Executive Officer. For each such
Named Executive Officer, the target annual cash bonus award is
expressed as a target percentage of his base salary (generally
no less than 20%) or as a target bonus amount. The Compensation
Committee then determines the amount of each Named Executive
Officer’s cash bonus award, taking into consideration the
recommendation of the Chief Executive Officer as well as the
Committee’s own subjective assessment of the performance
and contribution of such Named Executive Officer. For a
description of the factors considered by the Compensation
Committee in making its
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assessment, see “The Compensation Committee’s
Process — Assessment of Individual Performance”
and “The Compensation Committee’s Process —
Other Named Executive Officers” below. Because the annual
cash bonus awards payable to Named Executive Officers other than
the Chief Executive Officer are based upon the subjective
assessments of the Chief Executive Officer and the Compensation
Committee as well as upon the degree of the Company’s
achievement of the Basic Bonus Targets under the Short Term
Incentive Plan, these awards may vary upwards or downwards from
the award amounts calculated under the STIP, subject to the
maximum award amounts permitted by the Compensation Committee
under the STIP, in the Committee’s discretion. The
Compensation Committee believes that the Basic Bonus Targets for
annual cash bonus awards under the Short Term Incentive Plan
have been set at levels that can be achieved only with
significant effort on the part of the Chief Executive Officer
and the other Named Executive Officers, and that payment of the
maximum bonus award amounts under the STIP would reflect results
substantially exceeding expectations.
Reflecting its view that the interests of the Company’s
executive officers should be closely aligned with the interests
of its stockholders, the Compensation Committee determined, for
2008, to award to Mr. Lee a cash bonus under the Short Term
Incentive Plan in an amount equal to 30% of the award that he
would have otherwise received as a result of the Company’s
level of achievement of the 2008 Basic Bonus Targets, and to
award to Mr. Lee an equity grant under the LTEP vesting in
two equal installments on the first and second anniversaries of
the grant date in an amount equal to the remaining 70% of the
award that he would have otherwise received as a result of the
Company’s level of achievement of the 2008 Basic Bonus
Targets. For the same reason, the Compensation Committee
determined, for 2008, to award to each of Messrs. Colalucci
and Maier a cash bonus under the Short Term Incentive Plan in an
amount equal to 30%, and to award to Mr. Sanderson a cash
bonus under the Short Term Incentive Plan in an amount equal to
50%, of the award that such Named Executive Officer would have
otherwise received as a result of the Company’s level of
achievement of the 2008 Basic Bonus Targets, and to award to
each of Messrs. Colalucci, Maier and Sanderson an equity
grant under the LTEP vesting in two equal installments on the
first and second anniversaries of the grant date in an amount
equal to the remaining 70% of the award with respect to
Messrs. Colalucci and Maier, and the remaining 50% of the
award with respect to Mr. Sanderson, that such Named
Executive Officer would have otherwise received as a result of
the Company’s level of achievement of the 2008 Basic Bonus
Targets. Accordingly, for 2008, Mr. Lee received a cash
bonus award under the STIP of $242,770 and an equity grant under
the LTEP vesting over two years of $566,465; Mr. Colalucci
received a cash bonus award under the STIP of $76,781and an
equity grant under the LTEP vesting over two years of $179,156;
Mr. Maier received a cash bonus award under the STIP of
$64,350 and an equity grant under the LTEP vesting over two
years of $150,150; and Mr. Sanderson received a cash bonus
award under the STIP of $66,000 and an equity grant under the
LTEP vesting over two years of $66,000. Mr. Haveron, who
resigned from the Company on February 27, 2009, was awarded
a cash bonus under the STIP in the amount of $105,000 and did
not receive an equity grant.
The Short Term Incentive Plan supports the Company’s
recruitment objectives by enabling the Company to attract
qualified new employees. The STIP supports the Company’s
retention objectives by providing Named Executive Officers with
competitive compensation and appropriate incentives to enhance
the profitability and growth of the Company, and by rewarding
them for their service and personal contribution to the
Company’s success.
Stock-Based Incentives. The Named Executive Officers
are eligible for annual long term equity awards under the Long
Term Equity Plan. Under the LTEP, stock options, stock
appreciation rights, restricted stock, restricted stock units
and performance shares may be granted to key employees of the
Company, including the Named Executive Officers. The
Compensation Committee administers the Long Term Equity Plan and
determines awards under the Plan in its discretion. The maximum
annual bonus
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award currently permitted by the Compensation Committee to the
Chief Executive Officer or other Named Executive Officer under
the Long Term Equity Plan is 200% of his base salary (excluding
awards made in settlement of payments earned under any other
Company incentive or bonus plans). To provide consistent
incentives to its executives, regardless of short-term
variations in the price of the Company’s stock, the
Compensation Committee approved, with the exception of a
restricted stock unit award made to the Chief Executive Officer
on March 14, 2008, only restricted stock awards for
performance in 2008, 2007 and 2006 under the LTEP. The
restricted stock awards approved for 2008 and 2007 performance
vest, except as described under “Elements of
Compensation — Annual Cash Bonuses” above, in
equal annual installments over a four-year period from the date
of grant, while the restricted stock awards approved for 2006
performance vest in equal annual installments over a five-year
period from the date of grant. The restricted stock unit award
made to the Chief Executive Officer on March 14, 2008 vests
in equal annual installments over a three-year period on
December 31 of 2009, 2010 and 2011. For each such Named
Executive Officer, the target annual restricted stock award or
restricted stock unit award is expressed as a target percentage
of his base salary (generally no less than 20%) or as a target
bonus amount. The number of shares received by each Named
Executive Officer pursuant to his restricted stock award or
restricted stock unit award under the LTEP is determined by
dividing the stated value of the award by the price of the
Company’s stock (equal to 100% of the average of the
highest and lowest prices of the stock) on the date of grant. On
March 10, 2009, 43,665 shares of restricted stock were
granted, and on March 13, 2009, 24,270 additional shares of
restricted stock were granted, under the Long Term Equity Plan
to the Named Executive Officers based on their 2008 performance.
Although the Company encourages ownership by officers of the
Company’s stock through its equity-based awards, it does
not currently have any stock ownership requirements for
officers. On the occurrence of a change of control of the
Company as described below, the options and stock appreciation
rights issued under the Long Term Equity Plan become immediately
exercisable and the restrictions on restricted stock issued
under the Long Term Equity Plan lapse. Historically, the
Compensation Committee has awarded shares of restricted stock
after the performance period. The Committee considers vesting on
a change of control to be appropriate since the awards are
essentially earned at the time of grant.
The amount of the restricted stock unit award for the Chief
Executive Officer under the LTEP for 2008 was determined by the
degree to which the Company achieved the Basic Bonus Targets
under the Short Term Incentive Plan. As noted under
“Elements of Compensation — Annual Cash
Bonuses” above, the Committee believes that such Basic
Bonus Targets have been set at levels that can be achieved only
with significant effort on the part of the Chief Executive
Officer and other Named Executive Officers. For a description of
the various considerations relied upon by the Committee in
making this determination for the Chief Executive Officer,
please see “The Compensation Committee’s
Process — Assessment of Individual Performance”
and “The Compensation Committee’s Process —
Chief Executive Officer” below. For a description of the
considerations relied upon by the Compensation Committee in
determining the amount of the annual award of restricted stock
for the Named Executive Officers other than the Chief Executive
Officer under the LTEP for 2008, which are similar to the
considerations relied upon by the Committee in determining their
annual bonus awards under the Short Term Incentive Plan, please
see “The Compensation Committee’s Process —
Assessment of Individual Performance” and “The
Compensation Committee’s Process — Other Named
Executive Officers” below.
The Compensation Committee believes that the Long Term Equity
Plan supports the Company’s management compensation program
by explicitly aligning the long term interests of the Named
Executive Officers and other participating employees with those
of the Company’s stockholders, by facilitating the
retention of Named Executive Officers and by rewarding the Named
Executive Officers for their service and personal contribution
to the Company’s success. The Company believes that
stock-based incentives emphasize the importance of improving
stock price performance and increasing stockholder value over
the long term by encouraging executives to own the
Company’s common stock.
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Retirement Income Plans. The Company’s
retirement income plans include the Tower Group, Inc. Deferred
Compensation Plan (the “Deferred Compensation Plan”),
the Tower Group, Inc. Supplemental Executive Retirement Plan
(the “SERP”) in which, beginning in 2009, the Named
Executive Officers and certain other senior officers of the
Company are eligible to participate, and the Company’s
401(k) Plan with matching Company contribution, in which all
employees are eligible to participate. The Deferred Compensation
Plan is a voluntary, non-qualified plan offered, beginning in
2008, to all officers of the Company at the level of Vice
President and above and to all of the Company’s Directors.
Participants in the Deferred Compensation Plan are able to defer
a portion of their current base salary and annual cash bonus,
resulting in lower current taxable income and tax-deferred
earnings growth on their deferred amounts. Each participant is
able to self-direct the investment of his or her account balance
from a choice of 18 mutual funds. Currently, nine of the
eligible officers and directors of the Company are enrolled in
the Deferred Compensation Plan. Of the Named Executive Officers,
only Mr. Sanderson currently participates in the Deferred
Compensation Plan.
The SERP is a non-qualified defined contribution plan effective
as of January 1, 2009 that is intended to enhance
retirement benefits for the Company’s most senior
executives. In 2009, it is expected that all of the Named
Executive Officers, all Senior Vice Presidents, and certain
other key executives selected at the discretion of the
Compensation Committee will be eligible to participate in the
SERP. The Company will make annual contributions to the SERP on
behalf of each participant, beginning in 2009, with the amount
of the annual contribution for each participant being equal to
the product of a percentage of his or her base salary multiplied
by his or her number of years of service with the Company, up to
a maximum of 30 years. The percentage of base salary is
expected to range from 2.0% for the Chief Executive Officer down
to 1.0% for certain other participants.
In addition to the Deferred Compensation Plan and the SERP, each
Named Executive Officer is eligible to participate in the
Company’s 401(k) Plan. The 401(k) Plan provides for the
Company to match each participating employee’s annual
contributions to the Plan in an amount up to 4% of such
employee’s base salary and cash bonus at the matching rate
of $.50 per $1.00 contributed, subject to certain matching
contribution limits under applicable law. The Company’s
matching contributions vest ratably over a five-year period.
Supplemental Benefits. Except as noted below, Named
Executive Officers participate in the Company’s health and
welfare benefits on the same terms and conditions as other
employees. Executive compensation also includes a limited number
of supplemental benefits and perquisites for the Company’s
key executives. These include a country club membership for the
Chief Executive Officer, an automobile allowance for the Chief
Executive Officer and, for 2008, the Chief Operating Officer,
and a supplemental medical reimbursement plan for executive
officers in the annual amount of up to $5,000. The Company
believes that its supplemental benefits and perquisites are
customary and enhance the Company’s ability to retain
talented executives.
The Compensation Committee of the Board of Directors, working
with the Company’s senior management, develops and
implements the Company’s executive compensation policies.
The Compensation Committee is responsible for the Company’s
compensation programs for its Named Executive Officers and for
recommending to the Board of Directors the compensation of the
Company’s Directors. The Compensation Committee is also
responsible for the administration of the Long Term Equity Plan,
including designating the recipients, amounts and terms of
equity grants.
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While the elements of compensation described above are
considered separately, the Compensation Committee takes into
account the full compensation package offered by the Company to
each Named Executive Officer, including healthcare and other
benefits.
The Committee conducts its review of executive performance and
compensation on an annual basis and generally adjusts base
salaries and makes cash bonus and equity-based awards annually
in the first calendar quarter of the following year based on
this review. This process includes an assessment of the
performance of the Company and each Named Executive Officer for
the year, and a comparison of each Named Executive
Officer’s compensation to market data for executives in
similar positions at peer companies of the Company. The
Committee engages an independent compensation consultant to
compile this market data. Compensation adjustments can be made
during the year if circumstances are appropriate, such as when
an individual is promoted or takes on additional
responsibilities. Equity-based awards may also be made to
individuals during the year in which they join the Company.
Assessment of Company Performance. When evaluating
Company performance, the Committee considers various measures,
including: growth, measured by the increase in gross premiums
written and produced; underwriting profit, measured by the
Company’s combined ratio; profitability, measured by
operating earnings (net income, excluding gains and losses
realized on investments, net of tax) and diluted operating
earnings per share; and increase in shareholder value, measured
by return on average equity (excluding gains and losses realized
on investments, net of tax) and diluted book value per share.
The Committee does not apply a formula or assign these
performance measures relative weights. Instead, it makes a
subjective determination after considering such Company
performance measures collectively compared to the performance of
companies in the Company’s peer group and the industry. The
Committee also takes into consideration other significant
Company events (such as public offerings of the Company’s
securities and acquisitions) and general economic conditions
(such as recent investment and credit market conditions).
Assessment of Individual Performance. The
Compensation Committee considers the individual performance of
each Named Executive Officer. With respect to the Chief
Executive Officer, the Committee meets in executive session to
conduct his performance review based on the measures discussed
above, his contribution to the Company’s performance and
other leadership accomplishments.
For each of the other Named Executive Officers, the Committee
receives a performance assessment and compensation
recommendation from the Chief Executive Officer and also
exercises its independent judgment based on the Board’s
interaction with the Named Executive Officer. Factors that are
evaluated to determine each Named Executive Officer’s
individual contribution include his or her strategic vision,
leadership and management skills, technical skills and judgment
in performing his or her tasks. In addition, Named Executive
Officers, like all employees, are evaluated on how they reflect
the core values of the Company — leadership, passion,
hard work, teamwork, innovation, customer service, trust,
flexibility, social responsibility and excellence.
Benchmarking against Peer Group. In setting
compensation, the Compensation Committee compares the elements
of compensation for the Company’s executives against the
compensation of executives at a peer group of publicly traded
insurance companies of comparable size and complexity. The
Committee retains an executive compensation consulting firm to
assist it in selecting appropriate peer companies and to obtain
and organize the information. The Committee selects the peer
group companies after discussions with management and the
consulting firm. The Committee compares the Company’s
executive compensation program as a whole to the peer group and
compares the compensation of individual executives if the
positions are sufficiently similar to make the comparison
meaningful. The Committee uses the peer group data to ensure
that the compensation program, including each component element,
is competitive and as one factor in the decision on what
compensation levels to set. The peer group used for
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2008 consisted of Argo Group International Holdings, Ltd.,
Harleysville Group Inc., Horace Mann Educators Corporation, The
Navigators Group, Inc., ProAssurance Corporation, RLI Corp.,
Safety Insurance Group, Inc., Selective Insurance Group, Inc.,
United America Indemnity, Ltd., United Fire & Casualty
Company and Zenith National Insurance Corp.
The executive compensation consultant Pearl Meyer &
Partners provided reports to the Compensation Committee in
October 2008 and February 2009. These reports compared the
Company’s compensation program to those of its peer
companies and to available compensation surveys, and included
salary ranges and commonly used equity-based incentives,
structure and mix of compensation, design, and content of annual
and long term incentive plans. Since one of the objectives of
the Company’s compensation program is to attract and retain
talented executives, the Committee generally sets each Named
Executive Officer’s compensation at or above the
50th percentile of the range provided in the reports.
Similarly, the Committee has determined that the
75th percentile is a reasonable upper boundary on
compensation levels. The Committee believes that this
compensation range is further supported by the Company’s
performance when compared to its peer group. The Company’s
total return (change in share price assuming the reinvestment of
dividends) has significantly exceeded the average total return
of its peer group over the
2006-2008
period. In certain circumstances, the Named Executive
Officer’s compensation may fall outside the intended range
due to performance or market conditions. Other than providing
these reports to the Compensation Committee, Pearl
Meyer & Partners played no role in advising the Chief
Executive Officer or the Compensation Committee on compensation
decisions in 2008.
Chief Executive Officer. Mr. Lee serves as the
Company’s Chairman of the Board, President and Chief
Executive Officer. In determining Mr. Lee’s
compensation for 2008, the Compensation Committee applied the
principles outlined above. The Company’s financial
performance in 2008 was exceptional as exhibited by the
following key measures: (i) the Company’s gross
premiums written and produced increased 32.3% from
$608.4 million in 2007 to $805.0 million in 2008;
(ii) the net combined ratio decreased from 83.8% for 2007
to 82.4% for 2008; (iii) operating earnings increased 18.3%
from $56.5 million for 2007 to $66.8 million for 2008;
(iv) operating earnings per share increased 18.1% from
$2.43 for 2007 to $2.87 for 2008 on a fully diluted basis;
(v) the Company’s book value per share increased 7.6%
from $13.34 to $14.36; and (vi) the Company’s return
on average equity, excluding net realized gains and losses on
investments, decreased from 22.6% for 2007 to 20.7% for 2008.
Mr. Lee’s individual performance was likewise
evaluated by the Committee to be superior and played the most
significant role in the Company’s exceptional performance.
Mr. Lee is responsible for developing the Company’s
strategies and implementing them through his highly effective
leadership of the Company. Mr. Lee’s accomplishments
include leading the Company’s profitable growth,
notwithstanding the highly challenging market and investment
environment in 2008, and overseeing the merger, consummated in
February 2009, of CastlePoint Holdings, Ltd. into an indirect,
wholly-owned subsidiary of the Company, and the acquisition,
also completed in February 2009, of the Hermitage Insurance
Group.
Mr. Lee served in 2008 as Chief Executive Officer of both
the Company and CastlePoint and was expected to devote his full
business time to the Company and to CastlePoint. Accordingly,
the Compensation Committee took into consideration
Mr. Lee’s dual Chief Executive Officer
responsibilities, including the fact that he spent significant
time on CastlePoint matters for which he is compensated by
CastlePoint, when setting his Company compensation.
The Compensation Committee and Board of Directors determined
Mr. Lee’s compensation for 2008 as follows:
Mr. Lee received cash compensation of $784,437 for 2008,
consisting of an annual salary of $541,667 and a cash bonus of
$242,770 under the Short Term Incentive Plan. As described under
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“Elements of Compensation — Annual Cash
Bonuses” above, for 2008 Mr. Lee received, in lieu of
a portion of the cash bonus award that he would otherwise have
received under the STIP, an equity grant on March 13, 2009
under the Long Term Equity Plan in the amount of $566,465, which
vests in equal annual installments over two years from the date
of grant. For the long-term incentive component of his
compensation for 2008, Mr. Lee received restricted stock
units in the amount of $809,235 on March 10, 2009, pursuant
to the restricted stock unit award made to Mr. Lee on
March 14, 2008 under the Long Term Equity Plan, which vests
in three equal annual installments on December 31 of 2009, 2010
and 2011.
As a result of the Compensation Committee’s expectation
that Mr. Lee will devote his full business time to the
Company now that the merger of CastlePoint into the Company has
been completed, and of the increased size and complexity of the
Company following the merger, the Compensation Committee
determined that Mr. Lee’s base salary should be
increased to $900,000 as of March 1, 2009. The Compensation
Committee believes that Mr. Lee’s overall compensation
is reasonable when compared with the compensation of chief
executive officers of peer group companies, especially in view
of the exceptional performance achieved by the Company in 2008.
As described under “Elements of Compensation —
Annual Cash Bonuses” above, the Compensation Committee
approved an equity award grant to Mr. Lee under the LTEP in
lieu of a portion of the cash bonus award that he would
otherwise have received under the STIP. Such equity award grant
vests over two years, while the restricted stock unit award
grant made to Mr. Lee on March 14, 2008 under the LTEP
vests over three years, on December 31 of 2009, 2010 and 2011.
The Committee believes this mix strikes an appropriate balance
between salary and variable compensation arrangements, that it
is competitive with the Company’s peer group and consistent
with the Company’s compensation policies for employees in
general. The STIP and LTEP bonus awards are tied to the
Compensation Committee’s evaluation of Mr. Lee’s
performance and the Company’s performance and take into
consideration the key measures described above. Time-based
restricted stock awards provide rewards if Mr. Lee stays
with the Company for the required vesting periods, and the
benefit to him increases only if the holdings of other
stockholders increase in value as well. A large part of
Mr. Lee’s overall compensation is thus tied to Company
performance and to the creation of stockholder value.
Other Named Executive Officers. The same evaluation
of the Company performance applicable to the Chief Executive
Officer was used for the other Named Executive Officers as well.
On an individual basis, the Compensation Committee reviewed
similar individual considerations for those officers. The base
salary for each such Named Executive Officer was set by the
Compensation Committee at the beginning of 2008. The base salary
was set based on the individual’s position and experience,
and on peer company and compensation survey information provided
to the Committee. The 2008 performance review for each Named
Executive Officer other than the Chief Executive Officer began
with an evaluation provided by the Chief Executive Officer. The
Committee then reviewed the performance of the Named Executive
Officer and his contribution to the Company’s performance,
and took into consideration compensation information for similar
positions at peer companies to arrive at the total compensation
package, including the mix of overall compensation. With respect
to Mr. Colalucci, the Committee considered his contribution
to the merger with CastlePoint, the installation of a new
general ledger system for the Company, the development of a new
reinsurance accounting system and expense management system, and
the continuing enhancement of the Company’s capital model
and budget process. Mr. Haveron contributed to the
development of the catastrophe exposure management strategy, as
well as the improvement of the Company’s information
technology and business processes, including managing the
migration to a business process outsourcing system and the
Company’s business continuity planning. Mr. Maier
contributed significantly to the development and implementation
of the Company’s policy administration and web product
underwriting initiatives to sustain the disciplined growth and
underwriting
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profitability of the Company in the face of challenging market
conditions, and the development of the Company’s strategy
to manage its catastrophe exposure. Mr. Sanderson
contributed to the profitable growth of the Company’s
underwriting production and to the strengthening of its field
underwriting operations. Based on these considerations, the
recommendation of the Chief Executive Officer, the overall
financial performance of the Company and the compensation report
provided by Pearl Meyer and Partners, the Compensation Committee
determined the 2008 short term bonus and long term equity-based
compensation and established the 2008 base salary for each Named
Executive Officer other than the Chief Executive Officer. As
described under “Elements of Compensation —
Annual Cash Bonuses” above, the Committee approved an
equity award grant under the LTEP to each such Named Executive
Officer (other than Mr. Haveron) in lieu of a portion of
the cash bonus award that he would otherwise have received under
the STIP. Such equity award grant vests over two years from the
date of grant. Accordingly, for 2008, each of
Messrs. Colalucci, Maier and Sanderson received two equity
award grants under the LTEP, one of which vests over two years
and the other of which vests over four years. The Committee
believes this mix strikes an appropriate balance between salary
and variable compensation arrangements, that it is competitive
with the Company’s peer group and consistent with the
Company’s compensation policies for employees in general.
Mr. Colalucci received cash compensation of $415,323 for
2008 (consisting of an annual salary of $338,542 and a cash
bonus of $76,781), and restricted stock valued at $179,156 in a
two-year equity award grant and $255,937 in a four-year equity
award grant. Mr. Maier received cash compensation of
$384,350 for 2008 (consisting of an annual salary of $320,000
and a cash bonus of $64,350), and restricted stock valued at
$150,150 in a two-year equity award grant and $214,500 in a
four-year equity award grant. Mr. Sanderson received cash
compensation of $334,500 for 2008 (consisting of an annual
salary of $268,500 and cash bonus of $66,000) and restricted
stock with a value of $66,000 in a two-year equity award grant
and $132,000 in a four-year equity award grant.
Mr. Haveron, who resigned from the Company as of
February 27, 2009, received cash compensation of $455,000
for 2008 (consisting of an annual salary of $350,000 and a cash
bonus of $105,000) and did not receive restricted stock.
Employment Agreements. The Company has entered into
employment agreements with certain of its executive officers,
including each of the Named Executive Officers other than
Mr. Sanderson. The Company enters into employment
agreements to attract and retain talented executives. These
employment agreements were reviewed in prior years by the
Compensation Committee with the assistance of an independent
compensation consultant. Based on this review, the Company
believes the terms of these agreements are competitive with
those entered into by its peer companies. For a description of
the employment agreements with Named Executive Officers, see
“Summary of Key Agreements” below.
There are no
change-in-control
agreements or severance agreements between the Company and its
Named Executive Officers other than provisions set forth in
(i) the employment agreements between the Company and its
Named Executive Officers and (ii) the Long Term Equity
Plan. For a description of these provisions with respect to the
Named Executive Officers, see “Summary of Key
Agreements” below.
Tax Considerations. Under Section 162(m) of the
Code, annual compensation in excess of $1,000,000 paid to
certain executive officers of a publicly held corporation will
not be deductible unless such compensation is based upon
performance objectives meeting certain regulatory criteria or is
otherwise excluded from the limitation. Incentive compensation
paid to the Company’s executive officers pursuant to the
Company’s Short Term Incentive Plan and Long Term Equity
Plan currently is intended to qualify for deductibility by the
Company under Section 162(m).
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The Compensation Committee of the Company has reviewed and
discussed with management the Compensation Discussion and
Analysis required by Item 402(b) of
Regulation S-K
and, based on such review and discussions, the Compensation
Committee has recommended to the Board of Directors that the
Compensation Discussion and Analysis be included in the
Company’s Annual Report on
Form 10-K
for the year ended December 31, 2008 and in the
Company’s Proxy Statement for the 2009 Annual Meeting.
The Compensation Committee
Charles A. Bryan, Chairman
Steven W. Schuster Robert S. Smith Jan R. Van Gorder
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SUMMARY
COMPENSATION TABLE
The following table sets forth a summary of the compensation
paid by the Company to the Chief Executive Officer, the
Principal Financial Officer and each of the three other most
highly paid executive officers of the Company or its
subsidiaries (the “Named Executive Officers”).
ALL OTHER
COMPENSATION TABLE
The following table describes each component of the All Other
Compensation column in the Summary Compensation Table above.
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GRANTS OF
PLAN-BASED AWARDS IN 2008
The following table provides information concerning awards made
to the Named Executive Officers under the Company’s 2004
Long Term Equity Compensation Plan in 2008.
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Chief Executive Officer Employment Agreement. Under
Mr. Lee’s employment agreement, dated as of
August 1, 2004, Mr. Lee has agreed to serve as the
Company’s Chairman of the Board, President and Chief
Executive Officer. Mr. Lee’s term of service under
this agreement continues for five years followed by automatic
additional one-year terms unless notice not to extend the term
is provided by the Company or Mr. Lee at least one year
prior to the end of the term. Mr. Lee receives an annual
base salary and an annual incentive bonus, to be determined by
the Board of Directors, with the target bonus in an amount equal
to his annual base salary. Mr. Lee’s salary and target
annual bonus are subject to review for increase at the
discretion of the Board of Directors or a committee of the Board
of Directors. Mr. Lee may also participate in certain
executive benefit plans, which may include a paid country club
membership up to $10,000 annually and a monthly car allowance up
to $1,000. Mr. Lee may also participate in the
Company’s long-term incentive plans. On March 1, 2009,
Mr. Lee’s base salary was increased to $900,000.
If Mr. Lee’s employment terminates as a result of
disability or death, Mr. Lee’s employment agreement
automatically terminates, and he or his designated beneficiary
or administrator, as applicable, is entitled to accrued salary
through the termination date and a prorated target bonus.
Additionally, all of Mr. Lee’s stock-based awards will
vest and his stock options will remain exercisable for one year
after the date his employment terminates (or until the last day
of the stock option term, whichever occurs first).
If the Company terminates Mr. Lee’s employment
agreement for cause, which includes conviction of, or
Mr. Lee’s pleading nolo contendere to, a crime
involving moral turpitude or a felony, gross negligence or gross
misconduct, all of the Company’s obligations under the
agreement cease. Mr. Lee will only be entitled to receive
his accrued base salary and all outstanding incentive awards are
forfeited. If Mr. Lee voluntarily terminates his employment
agreement with the Company without good reason and not due to
death, disability or retirement, all of the Company’s
obligations under the agreement cease, and Mr. Lee will be
entitled to receive his accrued base salary plus a prorated
target bonus. In the case of voluntary termination, Mr. Lee
will have three months (or until the last day of the stock
option term, whichever occurs first) to exercise any vested
stock options, and all unvested incentive awards will be
forfeited.
If the Company terminates Mr. Lee’s employment without
cause or if Mr. Lee terminates his employment with good
reason, as defined in the employment agreement, then
Mr. Lee is entitled to (i) his accrued base salary and
a prorated target bonus, (ii) a cash severance payment
equal to 300% of the sum of his annual base salary and the
highest annual bonus paid to him within the preceding three
years, (iii) the continuation of life, accident and health
insurance coverage for three years, and (iv) at least three
months (or until the last day of the stock option term,
whichever occurs first) to exercise any vested stock options. If
the Company terminates Mr. Lee’s employment agreement
without cause, or if Mr. Lee terminates his employment with
good reason, in anticipation of, or within the
24-month
period following, a change of control, as defined in the
employment agreement, Mr. Lee is also entitled to receive
the foregoing benefits and an immediate vesting of his
previously unvested stock awards. The employment agreement also
provides for an excise tax
gross-up
payment if payments received under the agreement and other
payments received under other agreements or employee benefit
plans result in the imposition of an excise tax under
section 4999 of the Code.
If Mr. Lee retires, he receives his accrued base salary, a
prorated target bonus, applicable retiree benefits, if any, and
vesting of previously unvested stock awards, and his stock
options will remain exercisable for the full option term.
Mr. Lee will be eligible to retire for purposes of his
employment agreement upon attainment of age 55 with
15 years of service.
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Mr. Lee is also subject, under the terms of his employment
agreement, to non-competition provisions in the states of New
York and New Jersey and to non-solicitation provisions for a
period of two years after termination of employment, along with
ongoing confidentiality and non-disclosure requirements.
Other Named Executive Officers’ Employment
Agreements. Under their respective employment agreements,
each Named Executive Officer (other than Mr. Sanderson, who
does not have an employment agreement with the Company) has
agreed to serve in his current position
and/or in
such other positions as the Company may assign. The term of
service under the agreements continues for one year, with the
exception of Mr. Haveron whose term is for two years,
followed by automatic additional one-year terms unless a notice
not to extend the term is provided by the Company or the
employee three months, six months or one year (depending on the
agreement) prior to the end of the term. The amount of notice
required is three months for Mr. Colalucci, six months for
Mr. Maier, and one year for Mr. Haveron.
Mr. Haveron’s employment with the Company was
terminated as of February 27, 2009.
Each Named Executive Officer receives a minimum annual base
salary and an annual incentive bonus, to be determined by the
Board of Directors, with the target bonus of 20% of the annual
base salary for Mr. Colalucci and 30% of the annual base
salary for Messrs. Haveron (whose employment with the
Company was terminated as of February 27, 2009) and
Maier. Each Named Executive Officer’s salary and target
annual bonus are subject to review for increase at the
discretion of the Board of Directors or a committee of the Board
of Directors; however, they cannot be decreased below the
salaries and target bonus percentages stated above. Each named
executive may also participate in the Company’s long-term
incentive plans. Effective March 1, 2009, the current
annual base salaries are as follows:
Mr. Colalucci — $361,725;
Mr. Maier — $337,999; and
Mr. Sanderson — $288,750.
If a Named Executive Officer’s employment terminates as a
result of disability or death, his employment agreement
automatically terminates, and he or his designated beneficiary
or administrator, as applicable, is entitled to accrued salary
through the termination date and a prorated target bonus.
Additionally, all stock-based awards will vest and his stock
options will remain exercisable for one year after the date his
employment terminates (or until the last day of the stock option
term, whichever occurs first).
If the Company terminates the employment of the Named Executive
Officer (other than Mr. Sanderson, who does not have an
employment agreement with the Company) without cause or if the
Named Executive Officer terminates his employment with good
reason, as defined in his employment agreement, then the
terminated employee is entitled to (i) his accrued base
salary and a prorated target bonus, (ii) a cash severance
payment equal to 100% of the sum of his annual base salary and
his target annual bonus, (iii) the continuation of health
and welfare benefits for one year and (iv) three months (or
until the last day of the stock option term, whichever occurs
first) to exercise any vested stock options. The employment
agreement of Mr. Maier also provides for the vesting of
outstanding equity-based compensation. If the Company terminates
a Named Executive Officer’s employment agreement without
cause, or if the Named Executive Officer terminates his
employment with good reason, in anticipation of, or within the
24-month
period following, a change in control as defined in the
employment agreement, the Named Executive Officer is entitled to
receive the foregoing benefits and is also entitled to immediate
vesting of his previously unvested stock awards. The employment
agreements also provide for an excise tax
gross-up
payment if payments received under the agreement and other
payments received under other agreements or employee benefit
plans result in the imposition of an excise tax under
section 4999 of the Code.
If a Named Executive Officer (other than Mr. Sanderson, who
does not have an employment agreement with the Company) retires,
he receives his accrued base salary through the retirement date,
prorated target bonus, applicable retiree benefits, if any, and
vesting of previously unvested stock awards,
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and his stock options will remain exercisable for the full
option term. With the exception of Mr. Colalucci, each
named executive officer may retire under the terms of his
employment agreement upon attainment of age 55 with
15 years of service. Under the terms of
Mr. Colalucci’s employment agreement, he is eligible
to receive the above payments and benefits if requested to
retire by the Company before he attains age 62 or at his
discretion after attaining age 62 and he is currently
eligible to retire.
The Named Executive Officers (other than Mr. Sanderson, who
does not have an employment agreement with the Company) are also
subject under the terms of their respective employment
agreements to non-competition provisions in the states of New
York and New Jersey and non-solicitation provisions for a period
of six months or one year after the termination of their
employment, along with ongoing confidentiality and
non-disclosure requirements.
In the “Potential Payments Upon Termination of Employment
or Change of Control” table below, amounts are not provided
for the financial effect of a termination for cause, as defined
in each Named Executive Officer’s employment agreement,
because the Named Executive Officers are not entitled to further
benefits or compensation following such a termination.
2004 Long Term Equity Compensation Plan. On the
occurrence of a change of control, options issued under the 2004
Long Term Equity Plan become immediately exercisable and the
period of restriction for any restricted stock issued under the
LTEP lapses. A change in control is defined under the Long Term
Equity Plan to mean any of the following events: (a) any
Person (other than the Company, any trustee or other fiduciary
holding securities under an employee benefit plan of the
Company, or any corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportion
as the ownership of stock of the Company) that is not on
August 26, 2004 the “beneficial owner” (as
defined in
Rule 13d-3
under the Exchange Act), directly or indirectly, of securities
of the Company representing more than 20% of the combined voting
power of the Company’s then outstanding securities becomes
after August 26, 2004 the beneficial owner, directly or
indirectly, of securities of the Company representing more than
20% of the combined voting power of the Company’s then
outstanding securities; (b) individuals who, as of
August 26, 2004, constitute the Board (the “Incumbent
Board”) cease for any reason to constitute at least a
majority of the Board of the Company, provided that any person
becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company’s
stockholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board (other than an
election or nomination of an individual whose initial assumption
of office is in connection with an actual or threatened election
contest relating to the election of the directors of the
Company) shall be, for purposes of this definition, considered
as though such person were a member of the Incumbent Board;
(c) consummation of a merger, consolidation,
reorganization, share exchange or similar transaction (a
“Transaction”) of the Company with any other entity,
other than (i) a Transaction that would result in the
voting securities of the Company outstanding immediately prior
thereto directly or indirectly continuing to represent (either
by remaining outstanding or by being converted into voting
securities of the surviving entity or a parent company) more
than 80% of the combined voting power of the voting securities
of the Company or such surviving entity or parent company
outstanding immediately after such Transaction or (ii) a
Transaction effected to implement a recapitalization of the
Company (or similar transaction) in which no Person acquires
more than 20% of the combined voting power of the Company’s
then outstanding securities; (d) the sale, transfer or
other disposition (in one transaction or a series of related
transactions) of more than 50% of the operating assets of the
Company; or (e) the approval by the shareholders of a plan
or proposal for the liquidation or dissolution of the Company.
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OUTSTANDING
EQUITY AWARDS AT DECEMBER 31, 2008
The following table sets forth information for each Named
Executive Officer with respect to his outstanding equity awards
as of December 31, 2008.
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The following table provides information with respect to the
Company’s equity compensation plans as of December 31,
2008.
OPTION
EXERCISES AND STOCK VESTED IN 2008
The following table sets forth information for each Named
Executive Officer with respect to stock options that were
exercised and restricted shares that vested, and the value
realized on such exercise or vesting, during 2008.
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The following table sets forth information for each Named
Executive Officer with respect to his contribution in 2008, if
any, to the Company’s Deferred Compensation Plan.
POTENTIAL
PAYMENTS UPON TERMINATION OF
EMPLOYMENT OR CHANGE OF CONTROL
The following table provides information with respect to
potential payments to the Company’s Named Executive
Officers upon termination of their employment without cause by
the Company or for good reason by the Named Executive Officers
as these terms are defined in their respective employment
agreements described under “Summary of Key Agreements”
above. The table assumes a date of termination of
December 31, 2008.
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The following table sets forth the total compensation paid to
each independent Board member in 2008.
36
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Directors’ compensation is intended to attract and retain
well-qualified and dedicated independent directors. Fees paid to
independent directors are designed to compensate Directors for
time spent on Company matters. Stock-based awards are designed
to align the Directors’ interests with those of the
Company’s stockholders and to remain competitive with other
companies in attracting and retaining well-qualified directors.
Currently, non-employee Directors receive annual cash
compensation of $25,000 plus $1,500 for each Board of Directors
meeting attended and $1,125 for each Committee meeting attended.
In addition, the Audit Committee chairman receives an annual fee
of $10,000, the Compensation Committee chairman receives an
annual fee of $9,000, and the Corporate Governance and
Nominating Committee chairman receives an annual fee of $4,000.
In April 2008, each Director was also granted $40,000 in fair
value of restricted stock, which vests on the first anniversary
of the date of grant. Directors are reimbursed for expenses of
traveling to and from Board and committee meetings. In addition
to the standing committees described above, the Board also
creates special or temporary committees to address certain
unique issues or transactions as the Board deems appropriate.
The fees for the special committees can vary depending on the
effort and time commitment required of the committee members. In
2008, the Board established a special committee, consisting of
its independent directors, in connection with the negotiation of
the merger of CastlePoint into the Company. Mr. Schuster
was appointed to chair this special committee. The fees paid to
Directors for participation on this special committee are
included in the Director Compensation table above.
Effective as of the date of the 2009 annual meeting, the Board
has revised the compensation of independent Directors to provide
for the payment of an annual retainer consisting of $36,000 in
cash and $45,000 in restricted stock, which vests on the first
anniversary of the date of grant. Each Director will also be
paid $8,000 for each
two-day set
of quarterly Board and committee meetings, and $11,000 for each
three-day
set of quarterly Board and committee meetings, that he attends
in person. For attendance at each Board meeting other than the
four quarterly meetings, each Director will receive $2,000. For
each committee meeting other than the four quarterly meetings,
each Audit Committee member will receive $1,500 and each member
of the Compensation Committee, Corporate Governance and
Nominating Committee and Investment Committee will receive
$1,000. In addition, the Audit Committee chairman will receive
an annual fee of $15,000, the Compensation Committee chairman
will receive an annual fee of $11,500, and the Corporate
Governance and Nominating Committee and Investment Committee
chairmen will each receive an annual fee of $9,000.
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The Audit Committee (the “Committee”) has been
appointed by the Board of Directors to assist the Board of
Directors in fulfilling its responsibility to oversee the
financial affairs, risk management, accounting and financial
reporting processes and audits of the financial statements of
the Company. The Committee operates under a written charter
adopted by the Board of Directors and reviewed annually by the
Committee. The charter is available on the Company’s
website at www.twrgrp.com. The Committee has furnished
the following report for 2008.
Management has the primary responsibility for establishing and
maintaining adequate internal financial control for preparing
the financial statements and for the public reporting process.
Johnson Lambert & Co. LLP, the Company’s 2008
independent registered public accounting firm, is responsible
for expressing its opinions on the conformity of the
Company’s audited financial statements with generally
accepted accounting principles and on the effectiveness of the
Company’s internal control over financial reporting.
The Committee has reviewed and discussed with management and
with the independent registered public accounting firm the
audited financial statements for the year ended
December 31, 2008 and Johnson Lambert & Co.
LLP’s evaluation of the Company’s internal control
over financial reporting. The Committee has discussed with the
independent registered public accounting firm the matters
required to be discussed by the standards adopted or referenced
by the Public Company Accounting Oversight Board
(“PCAOB”) and SEC
Rule 2-07,
Communications with Audit Committees, as currently in effect.
The Committee has received the written disclosures and letter
from the independent registered public accounting firm required
by applicable requirements of the PCAOB regarding the
independent registered public accounting firm’s
communications with the Committee concerning independence, and
has discussed with the independent registered public accounting
firm that firm’s independence. The Committee has also
considered the compatibility of the provision for non-audit
services with the independent registered public accounting
firm’s independence.
Based on the Committee’s reviews and discussions referred
to above, the Committee recommended that the Board of Directors
include the audited consolidated financial statements in the
Company’s annual report on
Form 10-K
for the year ended December 31, 2008 for filing with the
Securities and Exchange Commission.
This report is provided by the following independent directors,
who constitute the Committee:
Austin P. Young, III, Chairman
Charles A. Bryan William W. Fox, Jr. William A. Robbie
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The Audit Committee is required to pre-approve all audit and
non-audit services provided by the independent registered public
accounting firm, both as to the permissibility of the auditors
performing such services and the amount of fees to be paid in
connection therewith, subject to certain de minimis exceptions
for which the Audit Committee’s approval is required before
completion of the audit. The Audit Committee may delegate
pre-approval authority to one or more of its members when
appropriate, provided that the decisions of such members to
grant pre-approvals shall be presented to the full Audit
Committee at its next scheduled meeting. Policies and procedures
for the pre-approval of audit and permissible non-audit services
must be detailed as to the particular service. The Audit
Committee must be informed of each service rendered pursuant to
any such policies or procedures.
The aggregate fees billed for professional services by Johnson
Lambert & Co. LLP in 2008 and 2007 for these various
services were:
In the above table, in accordance with the SEC’s
definitions and rules, “Audit fees” are fees and
out-of-pocket
expenses that are billed or expected to be billed by Johnson
Lambert & Co. LLP for the audit of annual financial
statements included in the
Form 10-K,
the review of financial statements included in the
Form 10-Qs,
the audit of internal control in compliance with
Section 404 of the Sarbanes-Oxley Act of 2002, the review
of comfort letters, the preparation of consents and the
completion of statutory audits.
“Audit-related fees” are fees billed for employee
benefit plan audits. “Tax fees” are fees billed for
tax compliance, tax advice and tax planning. “All other
fees” are for any services not included in the first three
categories.
The Audit Committee retained Johnson Lambert & Co. LLP
to audit the consolidated financial statements and internal
controls over financial reporting for 2008. In addition, the
Audit Committee retained Johnson Lambert & Co. LLP as
well as other accounting firms to provide other auditing and
advisory services in 2008. When Johnson Lambert & Co.
LLP’s proposed services are consistent with the Securities
and Exchange Commission’s rules on auditor independence and
other applicable laws, the Audit Committee considers whether
Johnson Lambert & Co. LLP is best positioned to
provide these services efficiently. The Audit Committee has also
adopted procedures to pre-approve all non-audit related work
performed by Johnson Lambert & Co. LLP. Specifically,
the Audit Committee has pre-approved the use of Johnson
Lambert & Co. LLP to perform procedures with respect
to the Company’s registration statements filed with the
Securities and Exchange Commission.
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Subject to the stockholders’ ratification, the Audit
Committee has appointed the firm of Johnson Lambert &
Co. LLP, which served as the Company’s independent
registered public accounting firm for 2008, to serve as the
Company’s independent registered public accounting firm for
2009. If the stockholders do not ratify this appointment by the
affirmative vote of a majority of shares present in person or
represented by proxy at the Annual Meeting, other independent
registered public accounting firms will be considered by the
Audit Committee.
A representative of Johnson Lambert & Co. LLP is
expected to be present at the Annual Meeting and will have the
opportunity to make a statement if the representative desires to
do so. The representative is also expected to be available to
respond to appropriate questions.
The Board
of Directors Recommendation.
The Board
of Directors recommends a vote “FOR” this
proposal.
Any stockholder proposal intended to be presented at the 2010
Annual Meeting must be received at the Company’s principal
executive office by December 1, 2009 for consideration for
inclusion in the Company’s proxy statement and form of
proxy related to that meeting. The proposal must comply in all
respects with the rules and regulations of the Securities and
Exchange Commission.
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THIS PROXY CARD IS VALID
ONLY WHEN SIGNED AND DATED.
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Important
Notice Regarding the Availability of Proxy Materials for the Annual Meeting:
The Notice and Proxy Statement and Annual Report are available at www.proxyvote.com.
TWRGR2
TOWER GROUP, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF TOWER GROUP, INC.
The undersigned hereby appoints Michael H. Lee, Francis M. Colalucci and Elliot S. Orol, and each
of them, proxies, with full power of substitution in each of them, for and on behalf of the
undersigned to vote as proxies, as directed and permitted herein, at the Annual Meeting of
Stockholders of Tower Group, Inc. to be held at 10:00 a.m.,
Eastern Time, on Thursday, May 14,
2009, at the Millenium Hilton Hotel, 55 Church Street, New York, NY 10007, and at any adjournments
thereof upon matters set forth in the Proxy Statement and, in their judgment and discretion, upon
such other business as may properly come before the meeting.
ANNUAL MEETING OF STOCKHOLDERS MAY 14, 2009
When properly executed, your proxy will be voted as you indicate, or where no contrary indication
is made, will be voted FOR Proposals 1 and 2. The full text of the proposals and the position of
the Board of Directors on each appear in the Proxy Statement and should be reviewed prior to
voting.
IMPORTANT: YOUR VOTE IS IMPORTANT. PLEASE VOTE THE SHARES TODAY.
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