HCC INSURANCE HOLDINGS INC/DE/, DEF 14A, 1998-04-24

HCC INSURANCE HOLDINGS INC/DE/
DEF 14A, 1998-04-24
FIRE, MARINE & CASUALTY INSURANCE

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<PAGE>
SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934

Filed by the Registrant /X/
Filed by a Party other than the Registrant / /

Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12

HCC INSURANCE HOLDINGS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)

CHRISTOPHER L. MARTIN
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)

Payment of Filing Fee (Check the appropriate box):

/X/ No fee required.
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), OR 14A-6(i)(3).
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:*
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
*Set forth the amount on which the filing fee is calculated and state how it was
determined.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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<PAGE>
HCC INSURANCE HOLDINGS, INC.
13403 NORTHWEST FREEWAY
HOUSTON, TEXAS 77040-6094

------------------------

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 21, 1998 AT 9:30 A.M.

------------------------

NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the
"Meeting") of HCC Insurance Holdings, Inc. (the "Company") will be held on
Thursday, May 21, 1998 at 9:30 a.m. Houston time, at the NationsBank Center
Auditorium, 700 Louisiana, Fourth Floor, Houston, Texas, for the following
purposes:

1. To elect twelve (12) Directors to serve until the next Annual Meeting of
Shareholders and until their successors are elected and qualify;

2. To vote on a proposal to amend the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock, par
value $1.00, from 100,000,000 shares to 250,000,000 shares;

3. To vote on a proposal to amend the Company's 1997 Flexible Incentive
Plan (the "1997 Flexible Plan") to increase the number of shares of Common Stock
for which options may be granted thereunder from 2,000,000 to 4,000,000 and to
make certain other technical amendments;

4. To vote on a proposal to amend the Company's 1996 Nonemployee Director
Stock Option Plan (the "1996 Directors' Plan") to increase the number of shares
of Common Stock for which options may be granted thereunder from 250,000 to
450,000, to increase the annual grant of options to nonemployee directors from
5,000 to 10,000, to establish the exercise price for such options as the average
closing price of the Company's Common Stock on the New York Stock Exchange for
the last ten trading days of each calendar year, to extend the term of the 1996
Directors' Plan, and to provide for grants of options for newly elected members
of the Board of Directors; and

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

The Board of Directors has fixed the close of business on April 1, 1998, as
the record date for determining those Shareholders who are entitled to notice
of, and to vote at, the Meeting. A list of such Shareholders will be open to
examination by any Shareholder at the Meeting and for a period of ten days prior
to the date of the Meeting during ordinary business hours at 13403 Northwest
Freeway, Houston, Texas. A copy of the Annual Report of the Company for the
fiscal year ended December 31, 1997, is enclosed.

By Order of the Board of Directors,

CHRISTOPHER L. MARTIN,
SECRETARY

Houston, Texas
April 28, 1998

WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE MEETING, PLEASE MARK, SIGN
AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED PREPAID ENVELOPE TO
ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE MEETING. IF YOU ATTEND THE
MEETING, YOU MAY VOTE IN PERSON IF YOU WISH TO DO SO, EVEN IF YOU HAVE
PREVIOUSLY SENT IN YOUR PROXY.
<PAGE>
HCC INSURANCE HOLDINGS, INC.
13403 NORTHWEST FREEWAY
HOUSTON, TEXAS 77040-6094

------------------------

PROXY STATEMENT

---------------------

ANNUAL MEETING OF SHAREHOLDERS
MAY 21, 1998

------------------------

INFORMATION CONCERNING SOLICITATION AND VOTING

This Proxy Statement is first being mailed on or about April 28, 1998 to
Shareholders of HCC Insurance Holdings, Inc. (the "Company"), in connection with
the solicitation by the Board of Directors of the Company of proxies to be voted
at the Annual Meeting of Shareholders to be held on Thursday, May 21, 1998, at
9:30 a.m. Houston time, at the NationsBank Center Auditorium, 700 Louisiana,
Fourth Floor, Houston, Texas, or any adjournment or adjourments thereof (the
"Meeting"). A Shareholder giving a proxy has the power to revoke the proxy at
any time before it is exercised. Such right of revocation is not limited by or
subject to compliance with any formal procedure.

The cost of soliciting proxies will be borne by the Company. Copies of
solicitation material may be furnished to brokers, custodians, nominees and
other fiduciaries for forwarding to beneficial owners of shares for the
Company's Common Stock, and normal handling charges may be paid for such
forwarding service. Solicitation of proxies may be made by mail, personal
interview, telephone and facsimile by officers and other management employees of
the Company, who will receive no additional compensation for their services.

Only Shareholders of record on April 1, 1998 (the "Record Date") will be
entitled to vote at the Meeting, and each share will have one vote. At the close
of business on the Record Date, there were 47,851,134 shares of the Company's
Common Stock issued and outstanding and entitled to vote at the Meeting.

The majority of the issued and outstanding shares of the Company's Common
Stock, represented in person or by proxy will constitute a quorum at the
Meeting. The election of directors will be determined by a plurality of the
votes cast if a quorum is present and voting. The amendment to the Certificate
of Incorporation requires approval of a majority of the shares issued and
outstanding on the Record Date. The amendments to the 1997 Flexible Plan and the
1996 Directors' Plan must be approved by a majority of the shares present and
voting at the Meeting. The Board of Directors does not anticipate calling for a
vote on any matter other than those described above.

Abstentions and broker non-votes, are each included in the determination of
the number of shares present and voting for purposes of determining the presence
of a quorum. Each is tabulated separately. A proxy submitted by a Shareholder
may indicate that all or a portion of the shares represented by such proxy are
not being voted by such Shareholder with respect to a particular matter. This
may occur, for example, when a broker is not permitted to vote stock held in
street name on certain matters in the absence of instructions from the
beneficial owner of the stock. The shares subject to any such proxy which are
not being voted with respect to a particular matter (the "Non-Voted Shares")
will be treated as shares not present and entitled to vote on such matter,
although such shares may be considered present and entitled

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<PAGE>
to vote for other purposes and will count for purposes of determining the
presence of a quorum. Shares voted to abstain as to a particular matter will not
be considered Non-Voted Shares. The election of Directors requires a plurality
of the shares. Thus, abstention's and Non-Voted Shares will not affect the
outcome of the election of Directors. Approval of the proposal to amend the
Company's Certificate of Incorporation requires the affirmative vote of the
majority of the issued and outstanding shares of Common Stock entitled to vote
on the amendment. Thus, abstentions and Non-Voted Shares with respect to the
proposal to amend the Company's Certificate of Incorporation have the legal
effect of a vote against such proposal. The adoption of the amendments to the
1997 Flexible Plan and the 1996 Directors' Plan require a majority of all votes
cast on each issue. Thus, abstentions will have the same effect as a vote
against the matter, but Non-Voted Shares will not affect the determination of
whether such matters are approved.

STOCK OWNERSHIP OF CERTAIN PRINCIPAL STOCKHOLDERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the Record Date by (a) each person
known by the Company to be the beneficial owner of more than 5% of the Company's
Common Stock, (b) each executive officer of the Company named in the Summary
Compensation Table, (c) each director, advisory director and nominee for
director, and (d) all directors, advisory directors, nominees and executive
officers of the Company as a group.

<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT OF
BENEFICIAL COMMON STOCK
NAME OWNERSHIP(1)(2) OUTSTANDING
- ----------------------------------------------------------------------------------- --------------- -------------
<S> <C> <C>
Stephen L. Way .................................................................... 4,650,962 9.6%
13403 Northwest Freeway
Houston, Texas 77040-6094
Stephen J. Lockwood ............................................................... 4,030,535(3) 8.4
401 Edgewater Place, Suite 400
Wakefield, Massachusetts, 01880
Pilgrim Baxter & Associates, Ltd .................................................. 2,774,870(4) 5.8
825 Duportail Road
Wayne, Pennsylvania 19087
Putnam Investments, Inc. .......................................................... 2,613,857(5) 5.5
One Post Office Square
Boston, Massachusetts 02109
Frank J. Bramanti.................................................................. 640,063(6) 1.3
Peter B. Smith, Jr................................................................. 391,618 *
Allan W. Fulkerson................................................................. 271,500(7) *
Walter J. Lack..................................................................... 155,000 *
Hugh T. Wilson..................................................................... 70,500 *
John L. Kavanaugh.................................................................. 61,250 *
Edwin H. Frank, III................................................................ 44,700(8) *
J. Robert Dickerson................................................................ 40,000 *
James M. Berry..................................................................... 28,750 *
Patrick B. Collins................................................................. 20,000 *
John N. Molbeck, Jr................................................................ 15,000 *
All directors, advisory directors, nominees and executive officers as a group (14
persons)......................................................................... 10,430,378 21.0%
</TABLE>

- ------------------------
* Less than 1%.

(1) Directors and executive officers have sole voting and investment powers of
the shares shown unless otherwise indicated.

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<PAGE>
(2) Includes shares which directors and executive officers have the right to
acquire upon the exercise of options within 60 days from the Record Date,
including the following: Stephen L. Way--805,867 shares; Frank J.
Bramanti--417,069 shares; Peter B. Smith, Jr.--328,400 shares; Stephen J.
Lockwood--187,500 shares; James M. Berry, J. Robert Dickerson, Edwin H.
Frank, III, John L. Kavanaugh, and Hugh T. Wilson--17,500 shares each;
Patrick B. Collins--15,000 shares; Edward H. Ellis, Jr.--10,000 shares;
Walter J. Lack--7,500 shares; Alan W. Fulkerson--5,000 shares; and all
directors, nominees and executive officers as a group--1,888,811 shares.

(3) Includes 93,200 owned of record by The Lockwood Family Limited Partnership,
a partnership of which Mr. Lockwood is the general partner.

(4) Pilgrim Baxter & Associates, Ltd. reported that it is an investment advisor
with sole dispositive power over 2,774,870 shares of the Company's Common
Stock with shared voting power over such shares. The foregoing information
was obtained from a Schedule 13G dated January 20, 1998, filed with the
Securities and Exchange Commission (the "SEC") by Pilgrim Baxter &
Associates, Ltd.

(5) Putnam Investments, Inc., a wholly owned subsidiary of Marsh & McLennan
Companies, Inc., reported that it is a holding company which wholly owns two
registered investment advisers. Both subsidiaries have reported shared
dispositive power over the shares of the Company's Common Stock, with one
subsidiary reporting having shared voting power over 74,650 shares of the
Company's Common Stock. Putnam Investments, Inc. disclaims beneficial
ownership of these shares. The foregoing information was obtained from a
Schedule 13G dated January 16, 1998, filed with the SEC by Putnam
Investments, Inc.

(6) Includes 750 shares owned of record by Mr. Bramanti's wife in trust for his
children and 2,472 shares owned of record by his children. Mr. Bramanti
disclaims beneficial ownership of such shares.

(7) Mr. Fulkerson is a director, shareholder and President of Century Capital
Management, Inc., a registered investment advisor, which exercises both
voting and investment power with respect to 100,000 shares owned of record
by Century Capital Partners, L.P. ("Century") and 65,000 shares owned of
record by ISF Limited Partnership ("ISF"). Although Mr. Fulkerson may be
deemed to beneficially own the 100,000 shares owned of record by Century and
ISF, he disclaims beneficial ownership of such shares, except to the extent
of his actual pecuniary interest therein. Mr. Fulkerson is a director,
shareholder and President of Massachusetts Fiduciary Advisors, Inc., a
registered investment advisor, which exercises both voting and investment
power with respect to 100,000 shares owned of record by MFA-Masters Limited
Partnership ("MFA"). Although Mr. Fulkerson may be deemed to beneficially
own the 100,000 shares owned of record by MFA, he disclaims beneficial
ownership of such shares, except to the extent of his actual pecuniary
interest therein.

(8) Mr. Frank is a principal shareholder and the President of Underwriters
Indemnity Holdings, Inc. ("UIH"). UIH is the parent company of Underwriters
Indemnity Company ("UIC") and Planet Indemnity Company ("PIC"), which own
11,250 and 10,000 shares of record, respectively. Mr. Frank is also the
President of each of UIC and PIC. Although Mr. Frank may be deemed to
beneficially own the 21,250 shares owned of record by UIC and PIC, he
disclaims beneficial ownership of such shares, except to the extent of his
actual pecuniary interest therein. The number also includes 1,200 shares
owned of record by Mr. Frank's children; Mr. Frank disclaims beneficial
ownership of such shares.

3
<PAGE>
PROPOSAL I--ELECTION OF DIRECTORS

The Board of Directors has set the number of Directors to be elected at the
Meeting at twelve (12). Each Director is to hold office until the next Annual
Meeting of Shareholders and until his successor is elected and qualified. It is
intended that the votes represented by the proxies will be cast for the election
as Directors of the persons listed below. A plurality of shares present at the
Meeting cast in favor of a nominee is required for the election of each of the
nominees listed below. Each of the nominees is currently a Director of the
Company.

The following table presents information concerning persons nominated for
election as Directors of the Company, including current membership on committees
of the Board of Directors, principal occupation or affiliations during the last
five years and certain directorships held.

Although the Board of Directors does not contemplate that any of the
nominees will be unable to serve, if such a situation arises prior to the
Meeting, the persons named in the enclosed form of Proxy will vote in accordance
with their best judgment for a substitute nominee.

INFORMATION REGARDING NOMINEES FOR DIRECTORS

<TABLE>
<CAPTION>
SERVED
AS
PRINCIPAL OCCUPATION DIRECTOR
NAME DURING THE PAST FIVE YEARS AGE SINCE
- --------------------------------- -------------------------------------------------------------- --- -----------
<S> <C> <C> <C>
Stephen L. Way................... Mr. Way is the founder of the Company and has served as a 49 1974
Director, Chairman of the Board of Directors and Chief
Executive Officer of the Company since its organization. He
served as President from the Company's founding until May,
1996. Mr. Way has also served as a Director, Chairman of the
Board of Directors and, until June, 1997, President of Houston
Casualty Company ("HC"), the Company's principal insurance
company subsidiary, since its organization in 1981. Mr. Way
also serves as a director and officer of various of the
Company's other subsidiaries. In addition, in January, 1998,
Mr. Way was appointed as a member of the Board of Directors of
Fresh Del Monte Produce, Inc. (NYSE-- Symbol: FDP).

James M. Berry................... Mr. Berry is the retired Vice Chairman of NationsBank of 67 1992
Texas, N.A., a wholly owned subsidiary of NationsBank N.A.,
having served in such capacity from August, 1988 until
December, 1992. He was Corporate Executive Vice President of
NCNB of North Carolina from 1983 to 1988. Mr. Berry also
serves as a Director of Williams-Sonoma, Inc. (Nasdaq--Symbol:
WSGC). Mr. Berry has served as a Director of the Company since
March, 1992 and as a Director of HC from December, 1993 to
May, 1996. Mr. Berry is a member of the Audit Committee.
</TABLE>

4
<PAGE>
<TABLE>
<CAPTION>
SERVED
AS
PRINCIPAL OCCUPATION DIRECTOR
NAME DURING THE PAST FIVE YEARS AGE SINCE
- --------------------------------- -------------------------------------------------------------- --- -----------
<S> <C> <C> <C>
Frank J. Bramanti................ Mr. Bramanti currently serves as Executive Vice President of 41 1997
the Company. Mr. Bramanti has served as a Director from the
Company's organization until May, 1996, as Secretary until
July, 1997, as Chief Financial Officer until October, 1997,
and as interim President from June, 1997 to November, 1997.
Mr. Bramanti was re-appointed by the Board of Directors to
serve as a Director in August, 1997. Mr. Bramanti has also
served as Executive Vice President of HC from September, 1994
to December, 1997, and as a Director of HC from March, 1982 to
December, 1988, and from December, 1990, to the present. Mr.
Bramanti also serves as a director and officer of various of
the Company's other subsidiaries.

Patrick B. Collins............... Mr. Collins is a retired partner of the international 69 1993
accounting firm of Coopers & Lybrand L.L.P., where he held
that position from 1967 through 1991. Mr. Collins was
appointed as a Director of the Company in December, 1993 and
was a Director of HC from the same date to May, 1996. Mr.
Collins is the Chairman of the Audit Committee.

J. Robert Dickerson.............. Mr. Dickerson is an attorney and from May, 1991 to August, 56 1981
1993, he was a member in the law firm of Dickerson, Carmouche
& Jones, a Professional Corporation. Mr. Dickerson has served
as a Director of the Company since its organization. He served
as a Director of HC from its organization in 1981 through
December 31, 1990, and was re-elected as a Director of HC in
December, 1993, and served until May, 1996. Mr. Dickerson is a
member of the Compensation Committee.

Edwin H. Frank, III.............. Mr. Frank is a principal shareholder of Underwriters Indemnity 48 1993
Holdings, Inc. and President of its subsidiaries, Underwriters
Indemnity Company and Planet Indemnity Company having served
in such capacities since 1985. Both subsidiary companies are
property and casualty insurance companies. Mr. Frank has
served as a Director of the Company since May, 1993 and as a
Director of HC from December, 1993 until May, 1996. Mr. Frank
is a member of the Audit Committee.
</TABLE>

5
<PAGE>
<TABLE>
<CAPTION>
SERVED
AS
PRINCIPAL OCCUPATION DIRECTOR
NAME DURING THE PAST FIVE YEARS AGE SINCE
- --------------------------------- -------------------------------------------------------------- --- -----------
<S> <C> <C> <C>
Allan W. Fulkerson............... Mr. Fulkerson is President and a Director of Century Capital 64 1997
Management, Inc., a registered investment advisor which
specializes in the insurance industry and President and a
Director of Massachusetts Fiduciary Advisors, Inc, a
registered investment advisor. In addition, he serves as
Chairman and Trustee of Century Shares Trust, a mutual fund
which invests exclusively in the stocks of larger insurance
companies and banks since 1976. Mr. Fulkerson has served as a
Director of the Company since May, 1997. Mr. Fulkerson is also
a Director of Mutual Risk Management, Ltd., Terra Nova
(Bermuda) Holdings, Ltd. and Wellington Underwriting plc.

Walter J. Lack................... Mr. Lack is an attorney and a shareholder in the law firm of 50 1985
Engstrom, Lipscomb & Lack, a professional corporation in Los
Angeles, California. Mr. Lack has been a Director of the
Company since its organization and has also served as a
Director of HC from October, 1985 until May, 1996. Mr. Lack is
a member of the Compensation Committee. Mr. Lack also serves
as a director of Microvision, Inc. (Nasdaq--Symbol: MVIS).

Stephen J. Lockwood.............. Mr. Lockwood serves as Vice-Chairman of the Board of 50 1985
Directors. Mr. Lockwood was appointed President of the Company
in May, 1996 in connection with the Company's acquisition of
the company he founded, LDG Management Company, Incorporated
("LDG") and served in that capacity until May, 1997. He has
been President and Chief Executive Officer of LDG since 1988.
Mr. Lockwood served as a Director of the Company from its
inception to May, 1993, but did not stand for re-election in
1993. Mr. Lockwood was reappointed as a Director of the
Company in December, 1993 to fill a vacancy. He also has
served as a Director of HC from October, 1985 until July,
1997. Mr. Lockwood also serves as a director and officer of
various of the Company's other subsidiaries. Mr. Lockwood also
serves as a board member of four mutual funds managed by The
Dreyfus Corporation, a subsidiary of Mellon Bank Corporation
(NYSE--MEL).
</TABLE>

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<PAGE>
<TABLE>
<CAPTION>
SERVED
AS
PRINCIPAL OCCUPATION DIRECTOR
NAME DURING THE PAST FIVE YEARS AGE SINCE
- --------------------------------- -------------------------------------------------------------- --- -----------
<S> <C> <C> <C>
John N. Molbeck, Jr.............. Upon joining the Company as its President, Mr. Molbeck was 51 1997
appointed a Director by the Board of Directors in November,
1997. Mr. Molbeck has over 22 years of experience within the
insurance industry. Prior to joining the Company, Mr. Molbeck
was the Managing Director of AON Natural Resources Group, a
subsidiary of AON Corporation which specializes in energy
related insurance and reinsurance brokerage. Prior to its
acquisition by AON Corporation, Mr. Molbeck served as the
President and Chief Operating Officer of Energy Insurance
International, Inc., an independent retail insurance and
reinsurance brokerage company. Mr. Molbeck also serves as a
director and officer of various of the Company's subsidiaries.

Peter B. Smith, Jr............... Mr. Smith was appointed Vice President of the Company in 39 1997
January, 1993, and Executive Vice President in December, 1994
and served as a Director of the Company from May, 1994 until
May, 1996. Mr. Smith was re-appointed as a Director by the
Board of Directors in August, 1997. Mr. Smith has served as
Chief Executive Officer of HC since September, 1997, as
President since June, 1997, as Executive Vice President from
January, 1993 to June, 1997, and Senior Vice President of HC
from September, 1990 to December, 1992. Mr. Smith has served
as a Director of HC from December, 1990 to December, 1993 and
from August, 1994 to the present. Mr. Smith also serves as a
director and officer of various of the Company's other
subsidiaries.

Hugh T. Wilson................... Mr. Wilson is President of AON Risk Services of Texas, Inc., 67 1981
an international insurance broker and a subsidiary of AON
Corporation, having served in that capacity since 1985. Mr.
Wilson has served as a Director of the Company from its
organization. He additionally served as a Director of HC from
its organization in 1981 until May, 1996. Mr. Wilson is the
Chairman of the Compensation Committee.
</TABLE>

7
<PAGE>
INFORMATION REGARDING EXECUTIVE OFFICERS OR ADVISORY DIRECTORS WHO ARE NOT
NOMINEES FOR DIRECTORS

John L. Kavanaugh................ Mr. Kavanaugh has served as Chief Executive Officer of Bain 54 1983
Hogg International Ltd., a Lloyd's insurance broker and a
subsidiary of AON Corporation, since 1994 and now
additionally serves as Deputy Chairman and a Director of AON
Group, Ltd. Prior to that time, he was Chairman of Bain
Clarkson Aviation from 1989 to 1994. Mr. Kavanaugh has
served as a Director or Advisory Director of the Company
since its organization has also served as a Director or
Advisory Director of HC from October, 1983 until May, 1997.
Mr. Kavanaugh was appointed as an Advisory Director by the
Board of Directors in May, 1997.
</TABLE>

MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS

During 1997, the Board of Directors met four times. Each incumbent Director
attended 75% or more of the Board meetings that were held while he was a
Director. The Board of Directors has standing Audit and Compensation Committees.
It does not have a standing Nominating Committee.

AUDIT COMMITTEE

The Audit Committee is composed entirely of outside Directors who are not
officers or employees of the Company ("Nonemployee Directors"). In the opinion
of the Board, these Nonemployee Directors are independent of management and free
of any relationship that would interfere with their exercise of independent
judgment as members of this committee. The current members of the Audit
Committee are James M. Berry, Patrick B. Collins (Chairman), and Edwin H. Frank.
The Audit Committee held three meetings in 1997.

The Audit Committee recommends to the Board of Directors the selection of
the Company's outside auditors and reviews with the independent auditors the
scope and results of the Company's audits, the Company's internal accounting
controls and the professional services furnished by the independent auditors to
the Company.

COMPENSATION COMMITTEE

The Board of Directors has a Compensation Committee which consists of three
Nonemployee Directors. The current members of the Compensation Committee are
Walter J. Lack, J. Robert Dickerson and Hugh T. Wilson (Chairman). The
Compensation Committee met three times during 1997. The

8
<PAGE>
Compensation Committee advises management on matters pertaining to management
development and corporate organizational planning; monitors compensation
arrangements for management employees for consistency of corporate objectives
with the interests of the Company's Shareholders; approves salary and non-salary
compensation for management; recommends bonus programs to the Board of
Directors; and administers the Company's stock option plans. See "Report of the
Compensation Committee" below.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of the Compensation Committee is or has been an officer or
employee of the Company or any of its subsidiaries or had any relationship
requiring disclosure pursuant to Item 404 of the SEC's Regulation S-K. No
Executive Officer of the Company served as a member of the Compensation
Committee. No Executive Officer of the Company served as a member of the
compensation committee (or other board committee performing similar functions
or, in the absence of any such committee, the entire board of directors) of
another corporation, one of whose executive officers served on the Compensation
Committee or as a Director of the Company. No Executive Officer of the Company
served as a director of another corporation, one of whose executive officers
served on the Compensation Committee.

COMPENSATION OF DIRECTORS

A Director who is an employee of the Company is not compensated for services
rendered as a member of the Board of Directors or any committee of the Board.
During 1997, the Nonemployee Directors received cash compensation consisting of
a fee of $2,500 for each meeting of the Board of Directors attended. An
additional fee of $750 is paid to each committee member and $1,500 is paid to
the committee chairman for each Audit or Compensation Committee meeting
attended. In addition, during 1997, each Nonemployee Director received an option
to purchase 5,000 shares of the Company's Common Stock. The Company also
reimburses its Directors for travel, lodging and related expenses incurred in
attending Board or committee meetings. If the amendments to the 1996 Directors'
Plan are approved, Nonemployee Directors will receive a yearly option to acquire
10,000 shares of the Company's Common Stock at a price to be determined in
accordance with that Plan. See "Proposal IV--Proposal to Approve the Amendments
to the 1996 Nonemployee Director Stock Option Plan."

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Underwriters Indemnity Holdings, Inc. ("UIH") is a property and casualty
insurance group whose controlling shareholder, Mr. Frank, is a Director of the
Company. During 1996, HC purchased 9.3% of UIH, from unrelated parties and in
1997 increased its ownership to approximately 20.6% through additional purchases
of stock from unrelated parties. In 1997, HC ceded $14.7 million in written
premium to UIH. As of December 31, 1997, HC had ceded unearned premium of $7.7
million and reinsurance recoverables of $15.9 million due from UIH and
reinsurance balances payable of $5.6 million due to UIH. In addition, during
1997, HC assumed $672,000 in written premium from UIH and had $661,000 in
outstanding losses due UIH as of December 31, 1997.

The law firm of Engstrom, Lipscomb & Lack, A Professional Corporation,
represents the Company and certain of its insureds regarding claim-related
matters. Mr. Lack, a Director of the Company, is a shareholder of the firm.

During 1997, the Company committed to make a $5.0 million investment as a
limited partner in Century Capital Partners II, Ltd. (the "Partnership"), an
investment partnership which specializes in investing in small and start-up
insurance companies. Mr. Fulkerson, a Director of the Company, is a managing
member of CCP Capital II, LLC, the Partnership's general partner and a director,
shareholder and President of Century Capital Management, Inc., the investment
advisor to the Partnership. As of the Record Date, the Company has invested
$273,000 pursuant to this commitment.

9
<PAGE>
In June, 1994, the Company entered into an arrangement with an entity owned
by Mr. Way, pursuant to which the Company pays the operating expenses for
providing transportation services to the Company. The Company, however, provides
its own employees to operate the equipment. During 1997, the Company paid
$683,000 to this entity. None of these funds were paid directly to Mr. Way.

On December 31, 1997, Mr. Bramanti, Executive Vice President and a Director
of the Company, executed a Promissory Note related to a loan of $100,000 from
the Company. Such loan bears interest at a rate of 5.75% per annum and is due in
full, together with accrued interest, on December 31, 2000. The entire amount of
the loan was outstanding as of the Record Date.

In the opinion of management, the terms of the above arrangements are fair
and reasonable and as favorable to the Company as could have been obtained from
a wholly unrelated party.

There are no family relationships among the Executive Officers and
Directors, and there are no arrangements or understandings between any officer
or any other person pursuant to which that officer was elected.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, requires the Company's
Directors and Executive Officers and persons who own more than 10% of a
registered class of the Company's equity securities to file initial reports of
ownership and changes in ownership with the SEC. Such officers, Directors and
Shareholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file. Based solely on a review of the copies of
such forms furnished to the Company and written representations from the
Company's Directors and Executive Officers, all persons subject to the reporting
requirements of Section 16(a) filed all required reports on a timely basis with
the exception of Stephen J. Lockwood, who failed to timely report the exercise
of a stock option and the related sale of a portion of the underlying
securities. Mr. Lockwood's Form 4 with respect to such transaction has since
been filed.

10
<PAGE>
EXECUTIVE COMPENSATION

SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION

The following table provides certain information concerning compensation
paid or accrued by the Company to or on behalf of the Company's Chief Executive
Officer and the other four most highly compensated Executive Officers serving at
December 31, 1997 (the "Named Executive Officers"). All share figures have been
adjusted to reflect the five-for-two stock split, issued in the form of a
dividend, distributed to Shareholders on May 15, 1996.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-----------------
AWARDS
ANNUAL COMPENSATION -----------------
----------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS (#) COMPENSATION
- ------------------------------------ --------- --------- --------- ------------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen L. Way(1) .................. 1997 $ 800,000 -- $ 64,567 387,500 $ 62,817
Chairman of the Board of Directors 1996 600,000 $ 420,615 99,303 -- 36,118
and Chief Executive Officer 1995 600,000 400,000 110,286 125,000 54,069

Stephen J. Lockwood(2)(3) .......... 1997 $ 800,000 -- -- 137,500 $ 10,352
Vice Chairman of the Board of 1996 606,557 -- -- -- 5,977
Directors and President and Chief
Executive Officer of LDG

Peter B. Smith, Jr.(4) ............. 1997 $ 250,000 $ 44,740 $ 26,014 45,000 $ 11,669
Executive Vice President 1996 250,000 56,210 25,782 -- 10,810
1995 180,000 100,000 24,975 75,000 10,079

Frank J. Bramanti(5) ............... 1997 $ 250,000 $ 17,219 $ 27,044 45,000 $ 12,580
Executive Vice President 1996 250,000 41,706 27,189 -- 11,350
1995 190,000 191,627 27,728 75,000 10,637

John N. Molbeck, Jr.(6) ............ 1997 $ 60,417 -- -- -- $ 333
President
</TABLE>

- ------------------------

(1) Other annual compensation includes for 1997, 1996 and 1995, respectively,
$33,073, $34,570 and $35,069 for automobile expenses; $31,494, $41,477 and
$41,719 for miscellaneous personal expenses; and for 1996 and 1995,
respectively, $23,256 and $33,500 for personal travel expenses. All other
compensation includes for 1997, 1996 and 1995, respectively, $53,317,
$27,118 and $45,069 for life and disability premiums and $9,500, $9,000 and
$9,000 for contributions by the Company under the Company's 401(k) Plan. In
1995, the Compensation Committee granted Mr. Way $750,000 deferred
compensation payable in 10 years or upon retirement which bears interest at
6% per annum. In addition, in 1997, 1996 and 1995, respectively, $108,000,
$108,600 and $60,000 of interest accrued on Mr. Way's deferred compensation.

(2) Includes all compensation paid to Mr. Lockwood and Mr. Suydam from May 24,
1996, the effective date of the acquisition of LDG.

(3) All other compensation for 1997 and 1996, respectively, includes life and
disability premiums of $852 and $518 and contributions of $9,500 and $5,459
by the Company under the Company's 401(k) Plan.

(4) Other annual compensation for 1997, 1996 and 1995, respectively, includes
automobile expenses of $25,547, $25,379 and $24,589 and miscellaneous
personal expenses of $467, $403 and $386. All other compensation for 1997,
1996 and 1995, respectively, includes life and disability premiums of
$2,169, $1,810 and $1,079 and contributions of $9,500, $9,000 and $9,000 by
the Company under the Company's 401(k) Plan.

(5) Other annual compensation for 1997, 1996 and 1995, respectively, includes
automobile expenses of $25,797, $25,752 and $26,494 and miscellaneous
personal expenses of $1,247, $1,437 and $1,234. All other compensation for
1997, 1996 and 1995, respectively, includes life and disability premiums of
$3,080, $2,350 and $1,637 and contributions of $9,500, $9,000 and $9,000 by
the Company under the Company's 401(k) Plan.

(6) Includes all compensation paid to Mr. Molbeck from November 18, 1997, the
date of his employment as President of the Company. All other compensation
includes life and disability premiums of $333.

11
<PAGE>
STOCK OPTIONS

The following table provides details regarding stock options granted to the
Named Executive Officers during 1997. In addition, in accordance with SEC rules
there are shown the hypothetical gains or "option spreads" that would exist for
the respective options. The gains are based on assumed rates of annual
compounded growth in stock price of 5% and 10% from the date the options were
granted over the full option term. The actual value, if any, an executive may
realize will depend on the spread between the market price and the exercise
price on the date the option is exercised. The 5% and 10% assumed rates of
growth are for illustrative purposes only. They are not intended to predict
future stock prices, which will depend on market conditions and other factors
such as the Company's performance.

OPTIONS/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS SHARE PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM (2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------------
NAME GRANTED(1) FISCAL YEAR PER SHARE DATE 5% 10%
- --------------------------------- ----------- --------------- ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen L. Way................... 387,500 30% $ 22.50 01/02/07 $ 5,483,125 $ 13,895,750
Stephen J. Lockwood.............. 137,500 11 22.50 01/02/07 1,945,625 4,930,750
Peter B. Smith, Jr............... 45,000 3 22.50 01/02/07 636,750 1,613,700
Frank J. Bramanti................ 45,000 3 22.50 01/02/07 636,750 1,613,700
John N. Molbeck, Jr.............. 0 -- -- -- -- --
</TABLE>

- ------------------------

(1) The options became exercisable on January 2, 1998.

(2) Potential gains are net of the exercise price, but before taxes associated
with the exercise. These amounts represent certain assumed rates of
appreciation only, based on the SEC rules. Actual gains, if any, on stock
option exercises are dependent on the future performance of the Common
Stock, overall market conditions and the optionholders' continued employment
through the vesting period. The amount reflected in this table may not
necessarily be achieved. One share of stock purchased at $22.50 in 1997
would yield profits of $14.15 per share at 5% appreciation over ten years,
or $35.86 per share at 10% appreciation over the same period. Amounts shown
under the "Potential Realizable Value" columns have been calculated by
multiplying the exercise price by the annual appreciation rate shown
(compounded for the term of the options), subtracting the exercise price per
share and multiplying the gain per share by the number of shares covered by
the options.

STOCK OPTION EXERCISES AND HOLDINGS

The following table shows stock options exercised by the Named Executive
Officers during 1997, including the aggregate value of gains on the date of
exercise. In addition, this table includes the number of shares covered by both
exercisable and non-exercisable stock options as of the end of 1997. Also
reported are the values for "in-the-money" options which represent the positive
spread between the exercise price of any such existing stock options and the
year end price of the Company's Common Stock.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE- MONEY OPTIONS/SARS
SHARES OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END(1)
ACQUIRED ON VALUE -------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ----------- ------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen L. Way.............. 129,367 $ 2,144,981 118,367 527,266 $ 1,115,619 $ 1,396,494
Stephen J. Lockwood......... 7,500 81,187 0 142,500 0 64,750
Peter B. Smith, Jr.......... 15,000 272,175 272,125 145,250 3,582,380 1,118,525
Frank J. Bramanti........... 1,700 29,784 208,007 143,905 2,469,609 1,095,271
John N. Molbeck, Jr......... 0 0 0 0 0 0
</TABLE>

- ------------------------

(1) The values were determined on the basis of the closing stock price of $21.25
at fiscal year end December 31, 1997, and equal the aggregate amount by
which the market value of the option shares exceeds the exercise price of
such options.

12
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE

During the first eight months of 1997, the Compensation Committee (the
"Committee") consisted of Patrick B. Collins, J. Robert Dickerson and Hugh T.
Wilson (Chairman). In August, 1997, Walter J. Lack assumed Mr. Collins' position
on the Committee. The current members of the Committee are Messrs. Dickerson,
Lack and Wilson.

All decisions by the Committee relating to the compensation of the Company's
Executive Officers are reviewed and approved by the full Board of Directors. The
philosophy of the Company's compensation program is to employ, retain and reward
executives capable of leading the Company in achieving its business objectives.
These objectives include creating and then preserving strong financial
performance, increasing the assets of the Company, positioning the Company's
assets and business operations in geographic markets and industry segments
offering long-term growth opportunities, enhancing shareholder value and
ensuring the survival of the Company. The accomplishment of these objectives is
measured against conditions prevalent in the industry within which the Company
operates. In recent years these conditions reflect a highly competitive market
environment and rapidly changing overall industry market conditions.

The available forms of executive compensation include base salary, cash
bonus awards and stock options. Performance of the Company is a key
consideration. The Company's compensation policy recognizes, however, that stock
price performance is only one measure of performance and, given industry
business conditions and the long term strategic direction and goals of the
Company, it may not necessarily be the best current measure of executive
performance. Therefore, the Company's compensation policy also gives
consideration to the Company's achievement of business objectives when
determining Executive Officer compensation. An additional objective of the
Committee has been to reward Executive Officers with equity compensation in
addition to salary in keeping with the Company's overall compensation
philosophy, which attempts to place equity in the hands of its employees in an
effort to further instill shareholder considerations and values in the actions
of all the employees and Executive Officers.

Compensation paid to Executive Officers is based upon a Company-wide salary
structure consistent for each position relative to its authority and
responsibility compared to industry peers. Stock option awards have been used to
reward Executive Officers and to retain them through the potential of capital
gains and equity buildup in the Company. In 1997, the number of stock options
granted was determined by the subjective evaluation by the Committee of the
executive's ability to influence the Company's long term growth and
profitability. The Board of Directors believes the award of stock options
represents an effective incentive to create value for the Shareholders.

The Committee's executive compensation policies are intended to provide
competitive levels of compensation in order to attract and retain qualified
officers. Compensation for each of the Executive Officers, as well as other
officers, consists of three basic elements: base salary, cash bonuses and
long-term incentive compensation. The base salaries have been fixed at levels
which the Committee believes are comparable to those of executives of similar
status in the property and casualty insurance industry. Each Executive Officer
is also eligible to receive an annual bonus dependent upon the Company's success
as well as an assessment of the performance and contribution of each Executive
Officer of the Company for the year. The Committee feels that longer-term
incentives are appropriate to motivate and retain key personnel and that stock
ownership by management is beneficial in aligning management and Shareholder
interests in the enhancement of Shareholder value.

In 1997, the Committee reviewed base salary and annual bonus recommendations
made by the Chief Executive Officer based upon his assessment of the performance
of individual Executive Officers and his assessment of each officer's past
performance and expectation as to future contributions. The Committee then
formulated its own recommendations which were submitted for approval to the
Board of Directors. The Chief Executive Officer and other Executive Officers
also made recommendations to the Committee concerning the grant of stock options
to other officers and employees.

13
<PAGE>
During 1997, stock options covering 735,000 shares of Common Stock were
granted to the Named Executive Officers of the Company and 611,700 shares were
granted to 98 other officers and employees of the Company and its subsidiaries.

CHIEF EXECUTIVE OFFICER COMPENSATION

The base salary of the Chief Executive Officer was established by the
Committee at the beginning of 1997. As with other Executive Officers of the
Company, the Committee did not follow any specific formula nor any predetermined
financial performance measures to calculate the Chief Executive Officer's total
compensation for 1997. The Committee believes the Chief Executive Officer's cash
compensation for 1997 is warranted by the Company's continuing outstanding
performance and the substantial growth experienced by the Company under his
leadership. The Company's underwriting experience continues to be exceptional
and during the period 1995 through 1997, the Company's average combined ratio
was 82.3% as compared with the industry's average of 106.1% (1995-1996). This
places the Company's performance at the uppermost performance levels within the
industry, a position it has maintained since 1992. During the period, the
Company's gross written premium increased from $283.5 million to $346.4 million,
an increase of 22%, management fee and commission income increased from $5.9
million (prior to both pooling-of-interests restatements) to $75.9 million and
net earnings increased from $26.1 million to $49.8 million, an increase of 91%.
In addition, the Company's assets increased by 26.8% during 1997 and
shareholders' equity increased by 23%. Total shares outstanding increased by 6.4
million shares or 22% during 1996 and 1997, while the Company experienced no
dilution in book value or earnings per share for the period or during either
year. In addition, during 1997, the Company completed six acquisitions of stock
and/or assets of various companies which have resulted in a significant
diversification of the Company's operations.

Section 162(m) of the Internal Revenue Code of 1986 (the "Code"), generally
disallows a tax deduction to public companies for compensation over $1.0 million
paid to the corporation's Chief Executive Officer and the four other most highly
compensated Executive Officers. The Company believes that Section 162(m) does
not apply to stock options currently outstanding or subsequently granted under
the Company's existing stock option plans.

Section 162(m) further provides that qualifying performance-based
compensation will not be subject to the deduction limit if certain requirements
are met. The Company currently intends to structure grants under future stock
option plans in a manner that complies with this statute. The Company does not
currently intend to structure the discretionary annual bonus for Executive
Officers to comply with Section 162(m). Such bonuses do not meet Section
162(m)'s requirement that they be "payable solely on account of the attainment
of one or more performance goals." Therefore, the Committee believes the annual
discretionary bonuses, as currently structured, better serve the interests of
the Company's Shareholders, by allowing broader discretion in recognizing an
Executive Officer's contribution and performance.

In connection with the compensation of the Company's Executive Officers, the
Committee is aware of Section 162(m) of the Code as it relates to deductibility
of qualifying compensation paid to Executive Officers. The Committee believes
that compensation to be paid in 1998 may exceed the deductibility limitations on
non-excluded compensation to certain of the Company's Executive Officers.

J. Robert Dickerson
Walter J. Lack
Hugh T. Wilson

14
<PAGE>
PERFORMANCE GRAPH

The following graph shows a comparison of cumulative total returns for an
investment of $100 made on December 31, 1992 in the Common Stock of the Company,
the NYSE Composite Index and the NASDAQ Insurance Stock Index. The graph assumes
that all dividends were reinvested.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
TOTAL RETURN PERFORMANCE INDEX VALUE

<S> <C> <C> <C>
HCC Insurance Holdings, Inc. NYSE Composite NASDAQ Insurance Index
12/31/92 100.00 100.00 100.00
12/31/93 150.46 110.88 106.96
12/31/94 155.56 110.44 100.68
12/31/95 274.07 148.45 143.01
12/31/96 445.53 180.31 163.03
12/31/97 396.41 239.10 239.18
</TABLE>

<TABLE>
<CAPTION>
PERIOD ENDING
----------------------------------------------------------------------------
INDEX 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- ------------------------------------------------------ ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
HCC Insurance Holdings, Inc........................... 100.00 150.46 155.56 274.07 445.53 396.41
NYSE Composite........................................ 100.00 110.88 110.44 148.45 180.31 239.10
NASDAQ Insurance Index................................ 100.00 106.96 100.68 143.01 163.03 239.18
</TABLE>

15
<PAGE>
PROPOSAL II--PROPOSAL TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION TO
INCREASE THE NUMBER OF AUTHORIZED SHARES

The Board of Directors proposes an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock from
100,000,000 to 250,000,000 shares. On the Record Date, there were 47,851,134
shares of Common Stock issued and outstanding and an additional 5,397,199 shares
of Common Stock were reserved for future issuance upon the exercise of stock
options issued by the Company to employees and Directors. In addition, 356,952
additional shares are reserved for future issuance upon the grant and subsequent
exercise of stock options which may be issued by the Company to employees and
Directors. In addition, 2,250,000 are reserved for issuance pursuant to the 1997
Flexible Plan, if amended, and the 1996 Directors' Plan, if amended. See
Proposal III and Proposal IV. As a result, the Company will have 55,855,285
shares of Common Stock outstanding and reserved for issuance pursuant to its
Stock Option Plans. On the Record Date, there were 46,394,715 authorized and
unreserved shares of Common Stock available for general corporate purposes
including future financing and corporate actions involving Common Stock such as
stock splits, stock dividends, mergers, acquisitions, etc. If the proposed
amendment to the Certificate of Incorporation is adopted and if Proposals III an
IV are approved, there will be available for issuance by the Company 194,144,715
authorized and unreserved shares of Common Stock.

Other than in connection with its existing stock options plans, including
the 1997 Flexible Plan and the 1996 Directors' Plan, the Company has no present
plans, understandings, or agreements for the issuance or use of the additional
shares of Common Stock proposed to be authorized. However, the Board of
Directors believes that the proposed increase in the number of authorized shares
of Common Stock is desirable in order to enable the Company, as the need may
arise, to take prompt advantage of market conditions and to enhance the
Company's flexibility in connection with possible future actions, such as stock
splits, stock dividends, financings, investment opportunities, acquisitions, use
in employee benefit plans, or other corporate purposes. However, Shareholders
should note that the issuance of shares for any of these corporate purposes
could have the effect of diluting the current Shareholders' interest in the
Company.

Unless required by applicable laws or regulations, no further authorization
by vote of Shareholders will be solicited for the issuance of the additional
shares of Common Stock. This proposed amendment is not intended to have an
anti-takeover effect. However, Shareholders should note that the availability of
additional shares of Common Stock could make any attempt to gain control of the
Company or the Board of Directors more difficult, costly, or time-consuming.
Under certain circumstances, the Board could create voting impediments or
frustrate persons seeking to effect a takeover or otherwise gain control of the
Company, by causing such shares to be issued to a holder or holders who might
side with the Board in opposing a takeover bid that the Board determines is not
in the best interests of the Company and its Shareholders.

The adoption of this amendment to the Certificate of Incorporation will
require the affirmative vote of a majority of the issued and outstanding shares
of Common Stock. As of the Record Date, the Executive Officers and Directors of
the Company owned, in the aggregate 8,541,567 shares or 17.8% of the issued and
outstanding shares of Common Stock. Such officers and directors have informed
the Company that they intend to vote their shares for the proposed amendment.

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE PROPOSAL TO
AMEND THE CERTIFICATE OF INCORPORATION OF THE COMPANY TO INCREASE THE NUMBER OF
AUTHORIZED SHARES. YOUR PROXY WILL BE SO VOTED UNLESS YOU SPECIFY OTHERWISE.

16
<PAGE>
PROPOSAL III--PROPOSAL TO APPROVE THE AMENDMENTS
TO THE 1997 FLEXIBLE INCENTIVE PLAN

The Company's 1997 Flexible Incentive Plan (the "1997 Flexible Plan") was
approved by the Company's Shareholders at a meeting held on May 22, 1997. On
February 26, 1998, the Board unanimously approved an amendment to the 1997
Flexible Plan to increase the number of shares of Common Stock for which options
may be granted from 2,000,000 to 4,000,000. The amendment also modifies the
terms of the definition of "Change in Control" set forth in the 1997 Flexible
Plan to increase the specified percentage of combined voting power of the
Company's outstanding securities which must be transferred in order for there to
be a deemed "change in control" under the 1997 Flexible Plan from 25% to 50%.
The Board believes the amendment will make the definition of "Change of Control"
set forth in the 1997 Flexible Plan more consistent with an actual change of
control of the Company and will avoid the inadvertant acceleration of vesting of
options granted under the 1997 Flexible Plan. The amendment does not change the
1997 Flexible Plan in any other manner. A copy of the 1997 Flexible Plan, as
amended, is attached as EXHIBIT "A". The description of the 1997 Flexible Plan
contained herein is not intended to be complete and is qualified in its entirety
by reference to EXHIBIT "A", which contains the complete text of the 1997
Flexible Plan.

The purposes of the 1997 Flexible Plan are to enable the Company to attract,
motivate and retain highly talented officers and key employees by enabling the
Company to make awards that recognize the creation of long-term value for the
Company's Shareholders and promote the continued growth and success of the
Company. To accomplish this purpose, the 1997 Flexible Plan provides for the
granting to eligible persons of stock options, stock appreciation rights,
restricted stock, performance awards, performance stock, dividend equivalent
rights and any combination thereof. The Board of Directors deems the 1997
Flexible Plan to be in the best interests of the Company in view of the
flexibility the options will provide to the Board of Directors to retain and
attract key employees and officers. As of the Record Date, there were 209,452
shares of Common Stock of the Company allocated to the 1997 Flexible Plan which
were not covered by options. The Board of Directors deems the amendment to the
1997 Flexible Plan to be in the best interests of the Company in view of the
flexibility the additional options will provide to the Board of Directors to
fulfill the purposes of the 1997 Flexible Plan.

AVAILABLE SHARES

As amended, the aggregate number of shares of Common Stock which may be
issued under the 1997 Flexible Plan (or with respect to which awards may be
granted) shall not exceed 4,000,000 shares. Unless the amendment is approved,
the maximum number of shares with respect to which awards may be granted shall
not exceed 2,000,000. Shares issued under the 1997 Flexible Plan may be either
authorized and unissued Common Stock or Common Stock held in or acquired for the
treasury of the Company. Any shares of Common Stock subject to a stock option or
stock appreciation right that are not issued prior to the expiration of such
awards, or any restricted stock or performance shares that are forfeited, will
again be available for award under the 1997 Flexible Plan. In the event that
shares of Common Stock are delivered to the Company in payment of the exercise
price with respect to any stock option granted under the 1997 Flexible Plan, the
number of shares available for future awards under the 1997 Flexible Plan will
be reduced only by the net number of shares issued.

PERSONS ELIGIBLE TO PARTICIPATE

Eligibility for participation in the 1997 Flexible Plan is confined to
officers and key employees of the Company and its subsidiaries, as determined by
the Board of Directors or its designated Compensation Committee (the
"Committee") in its sole discretion. Unless otherwise employed by the Company,
Nonemployee Directors are not entitled to participate in the 1997 Flexible Plan.

17
<PAGE>
ADMINISTRATION

The Committee administers the 1997 Flexible Plan and has broad powers under
the 1997 Flexible Plan to, among other things, administer and interpret the 1997
Flexible Plan, establish guidelines for the 1997 Flexible Plan's operation,
select persons to whom awards are to be made under the 1997 Flexible Plan,
determine the types, sizes and combinations of awards to be granted under the
1997 Flexible Plan, and determine other terms and conditions of an award. In
addition, except as set forth below under "Amendment and Termination," the
Committee also has the power to modify or waive restrictions or limitations on
the exercisability of awards and to accelerate and extend existing awards. The
Committee may also determine whether, and to what extent and under what
conditions to provide loans to eligible participants to purchase Common Stock
under the 1997 Flexible Plan. In addition, the Committee has the power to modify
the terms of existing awards.

TYPES OF AWARDS

The 1997 Flexible Plan provides for the grant of any or all of the following
types of awards: (1) stock options, including incentive stock options and
non-qualified stock options; (2) stock appreciation rights, either in tandem
with stock options or freestanding; (3) restricted stock awards; (4) performance
shares; (5) performance units; (6) dividend equivalent rights; and (7) other
stock-based awards. Each of these types of awards is described in greater detail
in the 1997 Flexible Plan. Awards may be granted singly, in combination or in
tandem, as determined by the Committee. The specific amount of awards to be
received by or allocated to the officers or employees or any other participant
under the 1997 Flexible Plan is in the discretion of the Committee and is
therefore not determinable for future periods.

PAYMENT FOR AWARDS

The purchase price of any shares of Common Stock purchased pursuant to the
exercise of an award granted under the 1997 Flexible Plan is payable in full on
the exercise date in cash, by check, by surrender to the Company of shares of
Common Stock of the Company registered in the name of the Optionee, by delivery
to the Company of such other lawful consideration as the Committee may
determine, or by a combination of the foregoing. Any such shares so surrendered
shall be deemed to have a value per share equal to the fair market value of a
share of Common Stock on such date.

AMENDMENT AND TERMINATION

The Committee may at any time, and from time to time, amend, in whole or in
part, any or all of the provisions of the 1997 Flexible Plan or suspend or
terminate it entirely, retroactively or otherwise; provided, however, that
unless otherwise required by law or specifically provided in the 1997 Flexible
Plan, the rights of the Optionee with respect to options or other awards granted
prior to such amendment, suspension or termination may not be impaired without
the consent of such participants; and, provided further, that without the
approval of the Shareholders of the Company, no amendment may be made which
would materially increase the aggregate number of shares of Common Stock that
may be issued under the 1997 Flexible Plan; materially change the definition of
employees eligible to receive awards under the 1997 Flexible Plan; decrease the
minimum option price permitted under the 1997 Flexible Plan; increase the
ten-year maximum option term permitted under the 1997 Flexible Plan. The 1997
Flexible Plan does not permit the subsequent repricing of options granted
thereunder.

No award or grant may be made under the 1997 Flexible Plan on or after June
1, 2007 (the tenth anniversary of the effective date of the 1997 Flexible Plan).

The 1997 Flexible Plan is not subject to any provision of ERISA and is not
qualified under Section 401(a) of the Internal Revenue Code of 1986.

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE PROPOSAL TO
AMEND THE 1997 FLEXIBLE INCENTIVE PLAN. YOUR PROXY WILL BE SO VOTED UNLESS YOU
SPECIFY OTHERWISE.

18
<PAGE>
PROPOSAL IV--PROPOSAL TO APPROVE THE AMENDMENTS TO THE
1996 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN

The Company's 1996 Nonemployee Director Stock Option Plan (the "1996
Directors' Plan") was approved by the Company's Shareholders at a meeting held
on May 23, 1996. On February 26, 1998, the Board unanimously approved an
amendment to the 1996 Directors' Plan to increase the number of shares of Common
Stock for which options may be granted from 250,000 to 450,000, to increase the
annual grant of options to Nonemployee Directors from 5,000 to 10,000, to
establish the exercise price for such options as the average closing price of
the Company's Common Stock on the New York Stock Exchange (the "NYSE") for the
last ten trading days of each calendar year, to extend the term of the 1996
Directors' Plan, and to provide for options to be granted to new directors. The
amendment does not change the 1996 Directors' Plan in any other manner. A copy
of the 1996 Directors' Plan, as amended, is attached as EXHIBIT "B". The
description of the 1996 Directors' Plan contained herein is not intended to be
complete and is qualified in its entirety by reference to EXHIBIT "B", which
contains the complete text of the 1996 Directors' Plan.

The purpose of the 1996 Directors' Plan is to permit Nonemployee Directors
of the Board to share in the growth of the value of the Company through the
grant and exercise of stock options, thereby reinforcing a mutuality of
interests, with Shareholders. The proposed amendments to the 1996 Directors'
Plan further this purpose by increasing the number of shares available to the
Nonemployee Directors through the grant and exercise of stock options. Members
of the Board of Directors who are also employees of the Company are not entitled
to participate in the 1996 Directors' Plan.

As amended, the 1996 Directors' Plan provides for the award of options
covering up to 450,000 shares of Common Stock. As of the Record Date, there were
135,000 shares of Common Stock allocated to the 1996 Directors' Plan which were
not covered by options.

The 1996 Directors' Plan is largely self-administered because the awards
under the 1996 Directors' Plan are automatic and non-discretionary. However, to
the extent necessary, the Board is authorized to administer the 1996 Directors'
Plan. In the event of a merger, reorganization, consolidation, recapitalization,
stock dividend or other change in corporate structure affecting the Common
Stock, the Board is required to make such substitution or adjustment in the
aggregate number of shares of Common Stock reserved for issuance under the 1996
Directors' Plan, and in the number and option price of shares of Common Stock
subject to outstanding stock options granted under the 1996 Directors' Plan, to
prevent any enlargement or diminution of intended rights.

The Board may amend, alter or discontinue the 1996 Directors' Plan at any
time and from time to time; provided however, that no amendment, alteration, or
discontinuation may adversely affect any outstanding options without the
optionee's consent.

As amended, the 1996 Directors' Plan provides for a yearly formula grant to
Nonemployee Directors of the option to purchase 10,000 shares of Common Stock at
a price equal to the average closing price of the Company's Common Stock as
reported on the NYSE on the last ten trading days of such calendar year.

A new member elected to the Board of Directors will receive the option to
purchase 10,000 shares upon his election at a price determined by taking the
average of the closing prices on the NYSE on the ten trading days immediately
preceding such new member's election to the Board of Directors. Options granted
to new members when elected, become fully exercisable on the first anniversary
of the grant of additional options to all Directors at the end of the year the
new member was elected.

Except for options granted to new members, stock options granted under the
1996 Directors' Plan may be exercised beginning one year from the date the
option is granted and are exercisable for a period of ten years from the date of
grant.

A participant who is no longer serving on the Board (except for reasons of
death, disability or cause) will be permitted to exercise options granted under
the 1996 Directors' Plan for a period of two months following the expiration of
his or her Board term.

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If a participating Director terminates service on the Board as a result of
disability, all of the holder's options will become immediately exercisable, but
such options must be exercised within the earlier of six months after such
termination or ten years after grant. In the event of the death of the holder of
any unexercised option either while serving on the Board or within such period
after service on the Board is terminated as a result of disability, all of the
holders' outstanding options will become immediately exercisable by his or her
legal representative, but must be exercised within one year of such death.

Each option is non-assignable and non-transferable other than by will or the
laws of descent and distribution.

A participant will be required to give notice to the Company of the number
of shares he or she will purchase and provide cash payment for the option price.

As amended, the 1996 Directors' Plan shall terminate upon and no award or
grant may be made under the 1996 Directors' Plan after December 31, 2001.

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE PROPOSAL TO
AMEND THE 1996 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN. YOUR PROXY WILL BE SO
VOTED UNLESS YOU SPECIFY OTHERWISE.

OTHER BUSINESS

The Board of Directors has no knowledge of any other matters to be submitted
at the Meeting. If any other matters shall properly come before the Meeting, the
persons named in the Proxy will have discretionary authority to vote the shares
thereby represented in accordance with their best judgment.

SHAREHOLDER PROPOSALS

Any Shareholder proposal intended to be presented for consideration at the
1999 Annual Meeting of Shareholders and to be included in the Company's Proxy
Statement must be in proper form and received by the Secretary of the Company at
the principal executive offices of the Company by the close of business on
December 20, 1998. It is suggested that a proponent submit any proposal by
Certified Mail--Return Receipt Requested and all proposals should be sent to the
attention of the Secretary.

FORM 10-K

THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH PERSON WHOSE PROXY IS BEING
SOLICITED, UPON REQUEST OF ANY SUCH PERSON, A COPY OF THE ANNUAL REPORT OF THE
COMPANY ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997, AS FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE FINANCIAL STATEMENTS AND
SCHEDULES THERETO BUT NOT THE EXHIBITS. REQUESTS FOR COPIES OF SUCH REPORT
SHOULD BE DIRECTED TO FRANK J. BRAMANTI, EXECUTIVE VICE PRESIDENT, HCC INSURANCE
HOLDINGS, INC., 13403 NORTHWEST FREEWAY, HOUSTON, TEXAS 77040-6094. COPIES OF
ANY EXHIBIT TO THE FORM 10-K WILL BE FORWARDED UPON RECEIPT OF A WRITTEN REQUEST
THEREFORE ADDRESSED TO MR. BRAMANTI.

EACH SHAREHOLDER WHO DOES NOT EXPECT TO ATTEND THE ANNUAL MEETING OF
SHAREHOLDERS IN PERSON IS URGED TO EXECUTE THE PROXY CARD AND RETURN IT PROMPTLY
IN THE ENCLOSED ENVELOPE. NO POSTAGE IS NECESSARY IF MAILED IN THE UNITED
STATES.

By Order of the Board of Directors,

CHRISTOPHER L. MARTIN,
SECRETARY

Dated April 28, 1998

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EXHIBIT "A"

HCC INSURANCE HOLDINGS, INC.
1997 FLEXIBLE INCENTIVE PLAN

1. PURPOSE

The purposes of HCC Insurance Holdings, Inc. 1997 Flexible Incentive Plan
(the "1997 Flexible Plan") are to promote the interests of HCC Insurance
Holdings, Inc. and its subsidiaries (together with any successor thereto, the
"Company") and its Shareholders by enabling the Company to attract, motivate and
retain key employees by offering such key employees performance-based stock
incentives and other equity interests in the Company and other incentive awards
that recognize the creation of value for the Shareholders of the Company and
promote the Company's long-term growth and success. To achieve these purposes,
eligible persons may receive stock options, Stock Appreciation Rights,
Restricted Stock, Performance Awards, performance stock, Dividend Equivalent
Rights and any other Awards, or any combination thereof.

2. DEFINITIONS

As used in the 1997 Flexible Plan, the following terms shall have the
meanings set forth below unless the content otherwise requires:

2.1 "AWARD" shall mean the grant of a stock option, a Stock Appreciation
Right, a Restricted Stock, a Performance Award, performance stock, a Dividend
Equivalent Right or any other Award under the 1997 Flexible Plan.

2.2 "BOARD" shall mean the Board of Directors of the Company, as the same
may be constituted from time to time.

2.3 "CHANGE IN CONTROL" shall mean, after the effective date of the 1997
Flexible Plan, (i) the occurrence of an event of a nature that would be required
to be reported in response to Item 1 or Item 2 of a Form 8-K Current Report of
the Company promulgated pursuant to Sections 13 and 15(d) of the Exchange Act;
provided that, without limitation, such a Change in Control shall be deemed to
have occurred if (a) any "person", as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than the Company, any trustee or other
fiduciary holding securities under any employee benefit plan of the Company, or
any company owned, directly or indirectly, by the Shareholders of the Company in
substantially the same proportions as their ownership of stock of the Company),
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
fifty percent (50%) or more of the combined voting power of the Company's then
outstanding securities or (b) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board cease for
any reason to constitute at least a majority thereof, unless the election by the
Board or the nomination for election by the Company's Shareholders was approved
by a vote of at least two-thirds ( 2/3) of the Directors then still in office
who either were Directors at the beginning of the two-year period or whose
election or nomination for election was previously so approved; (ii) the
Shareholders of the Company approve a merger or consolidation of the Company
with any other corporation, other than a merger or consolidation that would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than fifty-one
percent (51%) of the combined voting power of the voting securities of the
surviving entity outstanding immediately after such merger or consolidation;
provided, however, that a merger or consolidation effected to implement a
reorganization or recapitalization of the Company, or a similar transaction
(collectively, a "Reorganization"), in which no "person" acquires more than
twenty percent (20%) of the combined voting power of the Company's then
outstanding securities shall not constitute a Change in Control of the Company;
or

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(iii) the Shareholders of the Company approve a plan of complete liquidation of
the Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets.

2.4 "CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time.

2.5 "COMMITTEE" shall mean the Stock Option or Compensation Committee, if
such a separate committee is appointed by the Board, or, until such time as a
separate committee is appointed, it shall mean the Board. If a separate
committee is appointed, the Committee shall meet the applicable requirements for
"disinterested administration" within the requirements of Rule 16b-3 promulgated
under the Exchange Act and any successor thereunder promulgated during the
duration of the 1997 Flexible Plan. The Board may amend the 1997 Flexible Plan
to modify the definition of Committee within the limits of Rule 16b-3 to assure
that the 1997 Flexible Plan is administered in compliance with Rule 16b-3.
Initially, the Committee will consist of not less than three (3) members of the
Board who are appointed by, and serve at the pleasure of, the Board and who are
(i) "disinterested" within the meaning of Rule 16b-3 and (ii) "outside
directors," as required under Section 162(m) of the Code and such Treasury
Regulations as may be promulgated thereunder.

2.6 "COMMON STOCK" shall mean the Common Stock, $1.00 par value per share,
of the Company.

2.7 "DESIGNATED BENEFICIARY" shall mean the beneficiary designated by an
Optionee in a manner determined by the Committee, to exercise rights of the
Optionee in the event of the Optionee's death. In the absence of an effective
designation by an Optionee the Designated Beneficiary shall be the Optionee's
estate.

2.8 "DISABILITY" shall mean permanent and total inability to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or which has lasted
or can be expected to last for a continuous period of not less than twelve (12)
months, as determined in the sole and absolute discretion of the Committee.

2.9 "DIVIDEND EQUIVALENT RIGHT" shall mean the right of the holder thereof
to receive credits based on the cash dividends that would have been paid on the
Shares specified in an Award granting Dividend Equivalent Rights if the Shares
subject to such Award were held by the person to whom the Award is made.

2.10 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended from time to time.

2.11 "FAIR MARKET VALUE" shall mean with respect to the Shares, as of any
date, (i) the last reported sales price on any stock exchange on which the
Common Stock is traded or, if not reported on such exchange, on the composite
tape, or, in case no such sale takes place on such day, the average of the
reported closing bid and asked quotations on such exchange; (ii) if the Common
Stock is not listed on a stock exchange or no such quotations are available, the
closing price of the Common Stock as reported by the National Market System of
the National Association of Securities Dealers, Inc., or, if no such quotations
are available, the average of the high bid and low asked quotations in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated, or similar organization; or (iii) in the event that there shall be
no public market for the Common Stock, the fair market value of the Common Stock
as determined (which determination shall be conclusive) in good faith by the
Committee, based upon the value of the Company as a going concern, as if such
Common Stock were publicly owned stock, but without any discount with respect to
minority ownership.

2.12 "INCENTIVE STOCK OPTION" shall mean any stock option awarded under the
1997 Flexible Plan which qualifies as an "Incentive Stock Option" under Section
422 of the Code or any successor provision.

2.13 "NON-TANDEM STOCK APPRECIATION RIGHT" shall mean any Stock Appreciation
Right granted alone and not in connection with an Award which is a stock option.

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2.14 "NON-QUALIFIED STOCK OPTION" shall mean any stock option awarded under
the 1997 Flexible Plan that does not qualify as an Incentive Stock Option.

2.15 "OPTIONEE" shall mean any person who has been granted a stock option
under the 1997 Flexible Plan and who has executed a written stock option
agreement with the Company reflecting the terms of such grant.

2.16 "PERFORMANCE AWARD" shall mean any Award hereunder of Shares, units or
rights based upon, payable in, or otherwise related to, Shares (including
Restricted Stock), or cash of an equivalent value, as the Committee may
determine, at the end of a specified performance period established by the
Committee.

2.17 "1997 FLEXIBLE PLAN" shall mean the HCC Insurance Holdings, Inc. 1997
Flexible Incentive Plan set forth herein.

2.18 "RESTRICTED STOCK" shall mean any Award of Shares under the 1997
Flexible Plan that are subject to restrictions or risk of forfeiture.

2.19 "RETIREMENT" shall mean termination of employment other than discharge
for cause, after age 65 or on or before age 65 if pursuant to the terms of any
retirement plan maintained by the Company or any of its Subsidiaries in which
such person participates.

2.20 "SHARES" shall mean shares of the Company's Common Stock and any shares
of capital stock or other securities of the Company hereafter issued or issuable
upon, in respect of or in substitution or exchange for such Shares.

2.21 "STOCK APPRECIATION RIGHT" shall mean the right of the holder thereof
to receive an amount in cash or Shares equal to the excess of the Fair Market
Value of a Share on the date of exercise over the Fair Market Value of a Share
on the date of the grant (or such other value as may be specified in the
agreement granting the Stock Appreciation Right).

2.22 "SUBSIDIARY" shall mean a subsidiary corporation of the Company, as
defined in Section 424(f) of the Code.

2.23 "TANDEM STOCK APPRECIATION RIGHT" shall mean a Stock Appreciation Right
granted in connection with an Award which is a stock option.

3. ADMINISTRATION OF THE 1997 FLEXIBLE PLAN

3.1 COMMITTEE. The 1997 Flexible Plan shall be administered and
interpreted by the Committee.

3.2 AWARDS. Subject to the provisions of the 1997 Flexible Plan and
directions from the Board, the Committee is authorized to:

(a) determine the persons to whom Awards are to be granted;

(b) determine the types and combinations of Awards to be granted, the number
of Shares to be covered by the Award, the pricing of the Award, the time or
times when the Award shall be granted and may be exercised, the terms,
performance criteria or other conditions, vesting periods or any restrictions
for an Award, any restrictions on Shares acquired pursuant to the exercise of an
Award and any other terms and conditions of an Award;

(d) prescribe, amend and rescind the rules and regulations relating to the
1997 Flexible Plan or make individual decisions as questions arise, or both;

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(e) determine whether, to what extent and under what circumstances to
provide loans from the Company to participants to purchase Shares subject to
Awards under the 1997 Flexible Plan, and the terms and conditions of such loans;

(f) rely upon employees of the Company for such clerical and record keeping
duties as may be necessary in connection with the administration of the 1997
Flexible Plan; and

(g) make all other determinations and take all other actions necessary or
advisable for the administration of the 1997 Flexible Plan.

3.3 PROCEDURES. A majority of the Committee members shall constitute a
quorum. All determinations of the Committee shall be made by a majority of its
members. All questions of interpretation and application of the 1997 Flexible
Plan or pertaining to any question of fact or Award granted hereunder shall be
decided by the Committee, whose decision shall be final, conclusive and binding
upon the Company and each other affected party.

4. SHARES SUBJECT TO 1997 FLEXIBLE PLAN

4.1 LIMITATIONS. The maximum number of Shares that may be issued with
respect to Awards under the 1997 Flexible Plan shall not exceed 4,000,000 unless
such maximum shall be increased or decreased by reason of changes in
capitalization of the Company as hereinafter provided. The Shares issued
pursuant to the 1997 Flexible Plan may be authorized but unissued Shares, or may
be issued Shares which have been reacquired by the Company.

4.2 CHANGES. To the extent that any Award under the 1997 Flexible Plan,
shall be forfeited, shall expire or shall be canceled, in whole or in part, then
the number of Shares covered by the Award or stock option so forfeited, expired
or canceled may again be awarded pursuant to the provisions of the 1997 Flexible
Plan. In the event that Shares are delivered to the Company in full or partial
payment of the exercise price for the exercise of a stock option granted under
the 1997 Flexible Plan, the number of Shares available for future Awards under
the 1997 Flexible Plan shall be reduced only by the net number of Shares issued
upon the exercise of the option. Awards that may be satisfied either by the
issuance of Shares or by cash or other consideration shall, until the form of
consideration to be paid is finally determined, be counted against the maximum
number of Shares that may be issued under the 1997 Flexible Plan. If the Award
is ultimately satisfied by the payment of consideration other than Shares, as,
for example, a stock option granted in tandem with a Stock Appreciation Right
that is settled by a cash payment of the stock appreciation, such Shares may
again be made the subject of an Award under the 1997 Flexible Plan. Awards will
not reduce the number of Shares that may be issued pursuant to the 1997 Flexible
Plan if the settlement of the Award will not require the issuance of Shares, as,
for example, a Stock Appreciation Right that can be satisfied only by the
payment of cash.

5. ELIGIBILITY

Eligibility for participation in the 1997 Flexible Plan shall be confined to
those persons who are employed by the Company, and who are officers of the
Company, or who are in managerial or other key positions within the Company or
are otherwise valuable employees of the Company. In making any determination as
to persons to whom Awards shall be granted, the type of Award, and/or the number
of Shares to be covered by the Award, the Committee shall consider the position
and responsibilities of the person, his or her importance to the Company, the
duties of such person, his or her past, present and potential contributions to
the growth and success of the Company, and such other factors as the Committee
shall deem relevant in connection with accomplishing the purposes of the 1997
Flexible Plan.

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6. STOCK OPTIONS

6.1 GRANTS. The Committee may grant stock options alone or in addition to
other Awards granted under the 1997 Flexible Plan to any eligible officer or
other key employee. Each person so selected shall be offered an option to
purchase the number of Shares determined by the Committee. The Committee shall
specify whether such option is an Incentive Stock Option or Non-Qualified Stock
Option and any other terms and conditions relating to such Award. To the extent
that any stock option does not qualify as an Incentive Stock Option (whether
because of its provisions or the time or manner of its exercise or otherwise),
such stock option or the portion thereof which does not qualify shall constitute
a separate Non-Qualified Stock Option. Each such person so selected shall have a
reasonable period of time within which to accept or reject the offered option.
Failure to accept within the period so fixed by the Committee may be treated as
a rejection. Each person who accepts an option shall enter into a written
agreement with the Company, in such form as the Committee may prescribe, setting
forth the terms and conditions of the option, consistent with the provisions of
the 1997 Flexible Plan. The Optionee and the Company shall enter into option
agreements for Incentive Stock Options and Non-Qualified Stock Options. At any
time and from time to time, the Optionee and the Company may agree to modify an
option agreement so that an Incentive Stock Option may be converted to a
Non-Qualified Stock Option.

The Committee may require that an Optionee meet certain conditions before
the option or a portion thereof may vest or be exercised, as, for example, that
the Optionee remain in the employ of the Company for a stated period or periods
of time before the option, or stated portions thereof, may vest or be exercised.

6.2 OPTION PRICE. The option exercise price of the Shares covered by each
stock option shall be determined by the Committee; provided, however, that the
option exercise price of an Incentive Stock Option shall not be less than one
hundred percent (100%) of the Fair Market Value of Shares on the date of the
grant of such Incentive Stock Option.

6.3 INCENTIVE STOCK OPTIONS LIMITATIONS.

(a) In no event shall any person be granted Incentive Stock Options to the
extent that the Shares covered by any Incentive Stock Options (and any Incentive
Stock Options granted under any other plans of the Company and its Subsidiaries)
that may be exercised for the first time by such person in any calendar year
have an aggregate Fair Market Value in excess of $100,000. For this purpose, the
Fair Market Value of the Shares shall be determined as of the dates on which the
Incentive Stock Options are granted. It is intended that the limitation on
Incentive Stock Options provided in this subsection 6.3(a) be the maximum
limitation on options which may be considered Incentive Stock Options under the
Code.

(b) Notwithstanding anything herein to the contrary, in no event shall any
employee owning more than ten percent (10%) of the total combined voting power
of the Company or any Subsidiary be granted an Incentive Stock Option hereunder
unless the option exercise price shall be at least one hundred ten percent
(110%) of the Fair Market Value of the Shares subject to such Incentive Stock
Option at the time that the Incentive Stock Option is granted and the term of
such Incentive Stock Option shall not exceed five (5) years.

6.4 OPTION TERM. Subject to subsection 6.3(b) hereof, the term of a stock
option shall be for such period of months or years from the date of its grant as
may be determined by the Committee; provided, however, that no stock option
shall be exercisable later than ten (10) years from the date of its grant.
Furthermore, no stock option may be exercised unless, at the time of such
exercise, the Optionee is, and has been continuously since the date of grant of
his or her stock option, employed by the Company, except that:

(a) A stock option may, to the extent vested, be exercised within the period
of two months after the date the Optionee ceases to be an employee of the
Company (or within such lesser period as may be specified in the applicable
option agreement), provided that the option agreement may designate a longer

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exercise period and that the exercise after such two-month period shall be
treated as the exercise of a Non-Qualified Stock Option under the 1997 Flexible
Plan;

(b) If the Optionee dies within two months of the Optionee ceasing to be an
employee of the Company, the stock option may, to the extent vested and
previously unexercised, be exercised by the Optionee's Designated Beneficiary
within the period of one year after the date of death (or within such lesser
period as may be specified in the applicable option agreement, whichever is
shorter); and

(c) If the Optionee dies while in the employ of the Company, the stock
option may be exercised by the Optionee's Designated Beneficiary for the full
number of shares or any portion thereof except as to the issuance of fractional
shares, to the full extent of the option, less any previously exercised shares,
at any time within the period of one year after the date of death of the
Optionee (or within such lesser period as may be specified in the applicable
option agreement, whichever is shorter); and

(d) If the Optionee ceases to be an employee of the Company by reason of the
Optionee's Disability, the stock option may be exercised by the Optionee for the
full number of shares or any portion thereof except as to the issuance of
fractional shares, to the full extent of this option less any previously
exercised shares at any time within the period of one year after the date of
Disability of the Optionee (or within such lesser period as maybe specified in
the applicable option agreement, whichever is shorter).

6.5 VESTING OF STOCK OPTIONS.

(a) Each stock option granted hereunder may only be exercised to the extent
that the Optionee is vested in such option. Each stock option shall vest
separately in accordance with the option vesting schedule, if any, determined by
the Committee in its sole discretion, which will be incorporated in the stock
option agreement entered into between the Company and each Optionee. The option
vesting schedule will be accelerated if, in the sole discretion of the
Committee, the Committee determines that acceleration of the option vesting
schedule would be desirable for the Company.

(b) In the event of the dissolution or liquidation of the Company, each
stock option granted under the 1997 Flexible Plan shall terminate as of a date
to be fixed by the Board; provided, however, that not less than thirty (30)
days' written notice of the date so fixed shall be given to each Optionee and
each such Optionee shall be fully vested in and shall have the right during such
period to exercise the option, even though such option would not otherwise be
exercisable under the option vesting schedule. At the end of such period, any
unexercised option shall terminate and be of no other effect.

(1) If there is no plan or agreement respecting the Reorganization, or
if such plan or agreement does not specifically provide for the change,
conversion or exchange of the Shares under outstanding and unexercised stock
options for other securities then the provisions of subsection 6.5(b) shall
apply as if the Company had dissolved or been liquidated on the effective
date of the Reorganization; or

(2) If there is a plan or agreement respecting the Reorganization, and
if such plan or agreement specifically provides for the change, conversion
or exchange of the Shares under outstanding and unexercised stock options
for securities of another corporation, then the Board shall adjust the
Shares under such outstanding and unexercised stock options (and shall
adjust the Shares remaining under the 1997 Flexible Plan which are then
available to be awarded under the 1997 Flexible Plan, if such plan or
agreement makes no specific provision therefor) in a manner not inconsistent
with the provisions of such plan or agreement for the adjustment, change,
conversion or exchange of such Shares and such options.

(3) In the event of a Change in Control of the Company, all stock
options and any associated Stock Appreciation Rights shall become fully
vested and immediately exercisable and the vesting of all performance-based
stock options shall be determined as if the performance period or cycle
applicable to such stock options had ended immediately upon such Change in
Control; provided, however, that if

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in the opinion of counsel to the Company the immediate exercisability of
options when taken into consideration with all other "parachute payments" as
defined in Section 280G of the Code, as amended, would result in an "excess
parachute payment" as defined in such section as well as an excise tax
imposed by Section 4999 of the Code, such options and any associated Stock
Appreciation Rights shall become fully vested and immediately exercisable,
except as and to the extent the Committee, in its sole discretion, shall
otherwise determine, and which determination by the Committee shall be based
solely upon maximizing the after-tax benefits to be received by any such
Optionee.

6.6 EXERCISE OF STOCK OPTIONS.

(a) Stock options may be exercised as to Shares only in amounts and at
intervals of time specified in the written option agreement between the Company
and the Optionee. Each exercise of a stock option, or any part thereof, shall be
evidenced by a notice in writing to the Company. The purchase price of the
Shares as to which an option shall be exercised shall be paid in full at the
time of exercise, and may be paid to the Company either:

(1) in cash (including check, bank draft or money order); or

(2) by the delivery of Shares having a Fair Market Value equal to the
aggregate option rate;

(3) by a combination of cash and Shares; or

(4) by other consideration deemed acceptable by the Committee in its
sole discretion.

(b) The amount, as determined by the Committee, of any Federal, state or
local tax required to be withheld by the Company due to the exercise of a stock
option shall be satisfied by payment by the Optionee to the Company of the
amount of such withholding obligation in cash or other consideration acceptable
to the Committee in its sole discretion.

(c) An Optionee shall not have any of the rights of a Shareholder of the
Company with respect to the Shares covered by a stock option except to the
extent that one or more certificates representing such Shares shall have been
delivered to the Optionee, or the Optionee has been determined to be a
Shareholder of record by the Company's transfer agent, upon due exercise of the
option.

6.7 DATE OF A STOCK OPTION GRANT. The granting of a stock option shall
take place only upon the execution and delivery by the Company and an Optionee
of an option agreement. Neither any action taken by the Board nor anything
contained in the 1997 Flexible Plan or in any resolution adopted or to be
adopted by the Board or the Shareholders of the Company shall constitute the
granting of a stock option under the 1997 Flexible Plan.

7. STOCK APPRECIATION RIGHTS

7.1 GRANTS. The Committee may grant to any eligible employee either
Non-Tandem Stock Appreciation Rights or Tandem Stock Appreciation Rights. Stock
Appreciation Rights shall be subject to such terms and conditions as the
Committee shall impose. The grant of the Stock Appreciation Right may provide
that the holder may be paid for the value of the Stock Appreciation Right either
in cash or in Shares, or a combination thereof, at the discretion of the
Committee. In the event of the exercise of a Stock Appreciation Right payable in
Shares, the holder of the Stock Appreciation Right shall receive that number of
whole Shares of stock of the Company having an aggregate Fair Market Value on
the date of exercise equal to the value obtained by multiplying (i) either (a)
in the case of a Tandem Stock Appreciation Right, the difference between the
Fair Market Value of a Share on the date of exercise over the per share exercise
price of the related option, or (b) in the case of a Non-Tandem Stock
Appreciation Right the difference between the Fair Market Value of a Share on
the date of exercise over the Fair Market Value on the date of the grant by (ii)
the number of Shares as to which the Stock Appreciation Right is exercised.
However, notwithstanding the foregoing, the Committee, in its sole discretion,
may

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place a ceiling on the amount payable upon exercise of a Stock Appreciation
Right but any such limitation shall be specified at the time that the Stock
Appreciation Right is granted.

7.2 EXERCISABILITY. A Tandem Stock Appreciation Right may be granted at
the time of the grant of the related stock option or, if the related stock
option is a Non-Qualified Stock Option, at any time thereafter during the term
of the stock option. A Tandem Stock Appreciation Right granted in connection
with an Incentive Stock Option (i) may be exercised at, and only at, the times
and to the extent the related Incentive Plan Stock Option is exercisable, (ii)
expires upon the termination of the related Incentive Stock Option, (iii) may
not exceed 100% of the difference between the exercise price of the related
Incentive Stock Option and the market price of the Shares subject to the related
Incentive Stock Option at the time the Tandem Stock Appreciation Right is
exercised and (iv) may be exercised at, and only at, such times as the market
price of the Shares subject to the related Incentive Stock Option exceeds the
exercise price of the related Incentive Stock Option. The Tandem Stock
Appreciation Right may be transferred at, and only at, the times and to the
extent the related stock option is transferable. If a Tandem Stock Appreciation
Right is granted, there shall be surrendered and canceled from the related
option at the time of exercise of the Tandem Stock Appreciation Right, in lieu
of exercise under the related option, that number of Shares as shall equal the
number of Shares as to which the Tandem Stock Appreciation Right shall have been
exercised.

7.3 CERTAIN LIMITATIONS ON NON-TANDEM STOCK, APPRECIATION RIGHTS. A
Non-Tandem Stock Appreciation Right will be exercisable as provided by the
Committee and will have such other terms and conditions as the Committee may
determine. A Non-Tandem Stock Appreciation Right is subject to acceleration of
vesting or immediate termination in certain circumstances in the same manner as
stock options pursuant to subsections 6.4 and 6.5 of the 1997 Flexible Plan.

7.4 LIMITED STOCK APPRECIATION RIGHTS. The Committee is also authorized to
grant "Limited Stock Appreciation Rights," either as Tandem Stock Appreciation
Rights or Non-Tandem Stock Appreciation Rights. Limited Stock Appreciation
Rights would become exercisable only upon the occurrence of a Change in Control
or such other event as the Committee may designate at the time of grant or
thereafter.

8. RESTRICTED STOCK

8.1 GRANTS. The Committee may grant Awards of Restricted Stock for no cash
consideration, for such minimum consideration as may be required by applicable
law, or for such other consideration as may be specified by the grant. The terms
and conditions of the Restricted Stock shall be specified by the grant
agreement. The Committee, in its sole discretion, may specify any particular
rights which the person to whom an Award of Restricted Stock is made shall have
in the Restricted Stock during the restriction period and the restrictions
applicable to the particular Award, the vesting schedule (which may be based on
service, performance or other factors) and rights to acceleration of vesting
(including, without limitation, whether non-vested Shares are forfeited or
vested upon termination of employment). Further, the Committee may award
performance-based Restricted Stock by conditioning the grant, or vesting or such
other factors, such as the release, expiration or lapse of restrictions upon any
such Award (including the acceleration of any such conditions or terms) of such
Restricted Stock upon the attainment of specified performance goals or such
other factors as the Committee may determine. The Committee shall also determine
when the restrictions shall lapse or expire and the conditions, if any, under
which the Restricted Stock will be forfeited or sold back to the Company. Each
Award of Restricted Stock may have different restrictions and conditions. The
Committee, in its discretion, may prospectively change the restriction period
and the restrictions applicable to any particular Award of Restricted Stock.
Unless otherwise set forth in the 1997 Flexible Plan, Restricted Stock may not
be disposed of by the recipient until the restrictions specified in the Award
expire.

8.2 AWARDS AND CERTIFICATES. Any Restricted Stock issued hereunder may be
evidenced such manner as the Committee, in its sole discretion, shall deem
appropriate including, without limitation, book-entry

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registration or issuance of a stock certificate or certificates. In the event
any stock certificate is issued in respect of Shares of Restricted Stock awarded
hereunder, such certificate shall bear an appropriate legend with respect to the
restrictions applicable to such Award. The Company may retain, at its option,
the physical custody of any stock certificate representing any awards of
Restricted Stock during the restriction period or require that the Restricted
Stock be placed in escrow or trust, along with a stock power endorsed in blank,
until all restrictions are removed or expire.

9. PERFORMANCE AWARDS

9.1 GRANTS. A Performance Award may consist of either or both, as the
Committee may determine, of (i) "Performance Shares" or the right to receive
Shares, Restricted Stock or cash of an equivalent value, or any combination
thereof as the Committee may determine, or (ii) "Performance Units," or the
right to receive a fixed dollar amount payable in cash, Common Stock, Restricted
Stock or any combination thereof, as the Committee may determine. The Committee
may grant Performance Awards to any eligible employee, for no cash
consideration, for such minimum consideration as may be required by applicable
law or for such other consideration as may be specified at the time of the
grant. The terms and conditions of Performance Awards shall be specified at the
time of the grant and may include provisions establishing the performance
period, the performance criteria to be achieved during a performance period the
criteria used to determine vesting (including the acceleration thereof), whether
Performance Awards are forfeited or vest upon termination of employment during a
performance period and the maximum or minimum settlement values. Each
Performance Award shall have its own terms and conditions, which shall be
determined at the discretion of the Committee. If the Committee determines, in
its sole discretion, that the established performance measures or objectives are
no longer suitable because of a change in the Company's business, operations,
corporate structure or for other reasons that the Committee deems satisfactory,
the Committee may modify the performance measures or objectives and/or the
performance period.

9.2 TERMS AND CONDITIONS. Performance Awards may be valued by reference to
the Fair Market Value of a Share or according to any formula or method deemed
appropriate by the Committee, in its sole discretion, including, but not limited
to, achievement of specific financial, production, sales, cost or earnings
performance objectives that the Committee believes to be relevant to the
Company's business and for remaining in the employ of the Company for a
specified period of time, or the Company's performance or the performance of its
Common Stock measured against the performance of the market, the Company's
industry segment or its direct competitors. Performance Awards may be paid in
cash, Shares (including Restricted Stock) or other consideration, or any
combination thereof. If payable in Shares, the consideration for the issuance of
the Shares may be the achievement of the performance objective established at
the time of the grant of the Performance Award. Performance Awards may be
payable in a single payment or in installments and may be payable at a specified
date or dates or upon attaining the performance objective, all at the
Committee's discretion. The extent to which any applicable performance objective
has been achieved shall be conclusively determined by the Committee.

10. DIVIDEND EQUIVALENT RIGHTS

The Committee may grant a Dividend Equivalent Right either as a component of
another Award or as a separate Award, and, in general, each such holder of a
Dividend Equivalent Right that is outstanding on a dividend record date for the
Company's Common Stock shall be credited with an amount equal to the cash or
stock dividends or other distributions that would have been received had the
Shares covered by the Award been issued and outstanding on the dividend record
date. The terms and conditions of the Dividend Equivalent Right shall be
specified by the grant. Dividend equivalents credited to the holder of a
Dividend Equivalent Right may be paid currently or may be deemed to be
reinvested in additional Shares (which may thereafter accrue additional Dividend
Equivalent Rights). Any such reinvestment shall be at the Fair Market Value at
the time thereof. Dividend Equivalent Rights may be settled in cash or Shares,
or a

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combination thereof, in a single payment or in installments. A Dividend
Equivalent Right granted as a component of another Award may provide that such
Dividend Equivalent Right shall be settled upon exercise, settlement or payment
for or lapse of restrictions on such other Award, and that such Dividend
Equivalent Right shall expire or be forfeited or annulled under the same
conditions as such other Award. A Dividend Equivalent Right granted as a
component of another Award may also contain terms a conditions different from
such other Award.

11. OTHER AWARDS

The Committee may grant to any eligible employee other forms of Awards based
upon, payable in or otherwise related to, in whole or in part, Shares, if the
Committee, in its sole discretion, determines that such other form of Award is
consistent with the purposes and restrictions of the 1997 Flexible Plan. The
terms and conditions of such other form of Award shall be specified by the grant
including, but not limited to, the price, if any, and the vesting schedule, if
any. Such Awards may be granted for no cash consideration, for such minimum
consideration as may be required by applicable law or for such other
consideration as may be specified by the grant.

12. COMPLIANCE WITH SECURITIES AND OTHER LAWS

In no event shall the Company be required to sell or issue Shares under any
Award if the sale or issuance thereof would constitute a violation of applicable
Federal or state securities laws or regulations or a violation of any other law
or regulation of any governmental or regulatory agency or authority or any
national securities exchange. As a condition to any sale or issuance of Shares,
the Company may place legends on Shares, issue stop transfer orders and require
such agreements or undertakings as the Company may deem necessary or advisable
to assure compliance with any such laws or regulations, including, if the
Company or its counsel deems it appropriate, representations from the person to
whom an Award is granted that he or she is acquiring the Shares solely for
investment and not with a view to distribution and that no distribution of the
Shares will be made unless registered pursuant to applicable Federal and state
securities laws, or in the opinion of counsel of the Company, such registration
is unnecessary.

13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR REORGANIZATION

The value of an Award in Shares shall be adjusted from time to time as
follows:

(a) Subject to any required action by Shareholders, the number of Shares
covered by each outstanding Award, and the exercise price, shall be
proportionately adjusted for any increase or decrease in the number of issued
Shares of the Company resulting from a subdivision or consolidation of Shares or
the payment of a stock dividend (but only in Shares) or any other increase or
decrease in the number of Shares affected without receipt of consideration by
the Company.

(b) Subject to any required action by Shareholders, if the Company shall be
the surviving corporation in any Reorganization, merger or consolidation, each
outstanding Award shall pertain to and apply to the securities to which a holder
of the number of Shares subject to the Award would have been entitled, and if a
plan or agreement reflecting any such event is in effect that specifically
provides for the change, conversion or exchange of Shares, then any adjustment
to Shares relating to an Award hereunder shall not be inconsistent with the
terms of any such plan or agreement.

(c) In the event of a change in the Shares of the Company as presently
constituted, which is limited to a change of par value into the same number of
Shares with a different par value or without par value, the Shares resulting
from any such change shall be deemed to be the Shares within the meaning of the
1997 Flexible Plan.

To the extent that the foregoing adjustments relate to stock or securities
of the Company, such adjustments shall be made by the Board, whose determination
shall be final, binding and conclusive.

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Except as hereinbefore expressly provided in the 1997 Flexible Plan, any
person to whom an Award is granted shall have no rights by reason of any
subdivision or consolidation of stock of any class or the payment of any stock
dividend or any other increase or decrease in the number of shares of stock of
any class or by reason of any dissolution, liquidation, reorganization, merger
or consolidation or spin-off of assets or stock of another corporation, and any
issue by the Company of shares of stock of any class, or securities convertible
into shares of stock of any class, shall not affect and no adjustment by reason
thereof shall be made with respect to, the number or exercise price of Shares
subject to an Award.

The grant of an Award pursuant to the 1997 Flexible Plan shall not affect in
any way the right or power of the Company to make adjustments,
reclassifications, Reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or sell or
transfer all or any part of its business or assets.

14. AMENDMENT OR TERMINATION OF THE 1997 FLEXIBLE PLAN

14.1 AMENDMENT OF THE 1997 FLEXIBLE PLAN. Notwithstanding anything
contained in the 1997 Flexible Plan to the contrary, all provisions of the 1997
Flexible Plan may at any time or from time to time be modified or amended by the
Board; provided, however, that no Award at any time outstanding under the 1997
Flexible Plan may be modified, impaired or canceled adversely to the holder of
the Award without the consent of such holder; and provided, further, that the
1997 Flexible Plan may not be amended without approval by the holders of a
majority of the Shares of the Company represented and voted at a meeting of the
Shareholders (a) to increase the maximum number of Shares subject to the 1997
Flexible Plan, (b) to materially modify the requirements as to eligibility for
participation in the 1997 Flexible Plan, (c) to decrease the minimum exercise
price for options, (d) to otherwise materially increase the benefits accruing to
persons to whom Awards may be made under the 1997 Flexible Plan, as amended, or
(e) if such approval is otherwise necessary, to comply with Rule 16b-3
promulgated under the Exchange Act as amended, or to comply with any other
applicable laws, regulations or listing requirements, or to qualify for an
exemption or characterization that is deemed desirable by the Board.

14.2 TERMINATION OF THE 1997 FLEXIBLE PLAN. The Board may suspend or
terminate the 1997 Flexible Plan at any time, and such suspension or termination
may be retroactive or prospective. However, no Award may be granted on or after
the tenth anniversary of the adoption of the 1997 Flexible Plan. Termination of
the 1997 Flexible Plan shall not impair or affect any Award previously granted
hereunder and the rights of the holder of the Award shall remain in effect until
the Award has been exercised in its entirety or has expired or otherwise has
been terminated by the terms of such Award.

15. AMENDMENTS AND ADJUSTMENTS TO AWARDS

The Committee may amend, modify or terminate any outstanding Award with the
Participants consent at any time prior to payment or exercise in any manner not
inconsistent with the terms of the 1997 Flexible Plan, including, without
limitation to change the date or dates as of which (a) an option becomes
exercisable or (b) a performance-based Award is deemed earned. The Committee is
also authorized to make adjustments in the terms and conditions of, and the
criteria included in, Awards in recognition of unusual or non-recurring events
(including, without limitation, the events described in Section 13 hereof)
affecting the Company, or the financial statements of the Company or any
Affiliate, or of changes in applicable laws, regulations or accounting
principles, whenever the Committee determines that such adjustments are
appropriate in order to prevent reduction or enlargement of the benefits or
potential benefits intended to be made available under the 1997 Flexible Plan.
Any provision of the 1997 Flexible Plan or any agreement regarding an Award to
the contrary notwithstanding, the Committee may cause any Award granted to be
canceled in consideration of a cash payment or alternative Award made to the
holder of such canceled Award equal in value to the Fair Market Value of such
canceled Award. The determinations of value under this Section 15 shall be made
by the Committee in its sole discretion.

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16. GENERAL PROVISIONS

16.1 NO LIMIT ON OTHER COMPENSATION ARRANGEMENTS. Nothing contained in the
1997 Flexible Plan shall prevent the Company from adopting or continuing in
effect other compensation arrangements, and such arrangements may be either
generally applicable or applicable only in specific cases.

16.2 NO RIGHT TO EMPLOYMENT. Nothing in the 1997 Flexible Plan or in any
Award, nor the grant of any Award, shall confer upon or be construed as giving
any recipient of an Award any right to remain in the employ of the Company.
Further, the Company may at any time dismiss an Optionee in the 1997 Flexible
Plan from employment, free from any liability or any claim under the 1997
Flexible Plan, unless otherwise expressly provided in the 1997 Flexible Plan or
in any Award agreement. No employee, Optionee or other person shall have any
claim to be granted any Award, and there is no obligation for uniformity or
treatment of employees, participants or holders or beneficiaries of Awards.

16.3 GOVERNING LAW. THE VALIDITY, CONSTRUCTION AND EFFECT OF THE 1997
FLEXIBLE PLAN AND ANY RULES AND REGULATIONS RELATING TO THE 1997 FLEXIBLE PLAN
SHALL BE DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.

16.4 SEVERABILITY. If any provision of the 1997 Flexible Plan or any Award
is or becomes or is deemed to be invalid, illegal or unenforceable in any
jurisdiction or as to any person or Award, or would disqualify the 1997 Flexible
Plan or any Award under any law deemed applicable by the Committee, such
provision shall be construed or deemed amended to conform to applicable laws, or
if it cannot be construed or deemed amended without, in the sole determination
of the Committee, materially altering the intent of the 1997 Flexible Plan or
the Award, such provision shall be stricken as to such jurisdiction, person or
Award and the remainder of the 1997 Flexible Plan and any such Award shall
remain in full force and effect.

16.5 NO FRACTIONAL SHARES. No fractional Shares shall be issued or
delivered pursuant to the 1997 Flexible Plan or any Award, and the Committee
shall determine whether cash, other securities or other property shall be paid
or transferred in lieu of any fractional Shares or whether such fractional
Shares or any rights thereto shall be canceled, terminated or otherwise
eliminated.

16.6 HEADINGS. Headings are given to the subsections of the 1997 Flexible
Plan solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
the 1997 Flexible Plan or any provision thereof.

16.7 EFFECTIVE DATE. The 1997 Flexible Plan shall be effective as of June
1, 1997 after its approval by the holders of a majority of the Shares of the
Company represented and voting at the Annual Meeting of Shareholders to be held
May 22, 1997. If the 1997 Flexible Plan is not approved by the Shareholders at
the 1997 Annual Meeting, the 1997 Flexible Plan shall be null and void.

16.8 NON-TRANSFERABILITY OF AWARDS. Awards shall not be transferable
otherwise than by will or the laws of descent and distribution, and Awards may
be exercised, during the lifetime of the holder, only by the holder; provided,
however, that with the approval of the Committee, Awards other than Incentive
Stock Options may be transferred as directed under a qualified domestic
relations order. Any attempted assignment, transfer, pledge, hypothecation or
other disposition of an Award contrary to the provisions hereof, or the levy of
any execution, attachment or similar process upon an Award shall be null and
void and without effect.

17. NAMED EXECUTIVE OFFICERS

17.1 APPLICABILITY OF SECTION 17. The provisions of this Section 17 shall
apply only to those Executive Officers (i) whose compensation is required to be
reported in the Company's proxy statement pursuant to

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Item 402(a)(3)(i) and (ii) of Regulation S-K under the general rules and
regulations under the Exchange Act, as amended, and (ii) whose total
compensation, including estimated Awards, is determined by the Committee to
possibly be subject to the limitations on deductions imposed by Section 162(m)
of the Code ("Named Executive Officers"). In the event of any inconsistencies
between this Section 17 and the other 1997 Flexible Plan provisions as they
pertain to Named Executive Officers, the provisions of this Section 17 shall
control.

17.2 ESTABLISHMENT OF PERFORMANCE GOALS. Awards for Named Executive
Officers, other than stock options and Stock Appreciation Rights, shall be based
on the attainment of certain performance goals. No later than the earlier of (i)
ninety (90) days after the commencement of the applicable fiscal year or such
other award period as may be established by the Committee ("Award Period") and
(ii) the completion of twenty-five percent (25%) of such Award Period, the
Committee shall establish, in writing, the performance goals applicable to each
such Award for Named Executive Officers. At the time the performance goals are
established by the Committee, their outcome must be substantially uncertain. In
addition, the performance goal must state, in terms of an objective formula or
standard, the method for computing the amount of compensation payable to the
Named Executive Officer if the goal is obtained. Such formula or standard shall
be sufficiently objective so that a third party with knowledge of the relevant
performance results could calculate the amount to be paid to the subject Named
Executive Officer. The material terms of the performance goals for Named
Executive Officers and the compensation payable thereunder shall be submitted to
the Shareholders of the Company for their review and approval. Shareholder
approval shall be obtained for such performance goals prior to any Award being
paid to such Named Executive Officer. If the Shareholders do not approve such
performance goals, no amount shall be paid to such Named Executive Officer for
such applicable Award Period under the 1997 Flexible Plan. The disclosure of the
"material terms" of a performance goal and the compensation payable thereunder
shall be determined under the guidelines set forth under Section 162(m) of the
Code, and the Treasury Regulations thereunder.

17.3 COMPONENTS OF AWARDS. Each Award to a Named Executive Officer, other
than stock options and Stock Appreciation Rights, shall be based on performance
goals which are sufficiently objective so that a third party having knowledge of
the relevant facts could determine whether the goal was met. Except as provided
in subsection 17.8 herein, performance measures which may serve as determinants
of Named Executive Officers Awards shall be limited to the following measures:
earnings per share; return on assets; return on equity; return on capital; net
profit after taxes; net profit before taxes; economic value added; operating
profits; stock price; market share; and sales or expenses. Within ninety (90)
days following the end of each Award Period, the Committee shall certify in
writing that the performance goals, and any other material terms were satisfied.
Thereafter, Awards shall be made for each Named Executive Officer as determined
by the Committee. The Awards may not vary from the pre-established amount based
on the level of achievement.

17.4 NO MID-YEAR CHANGE IN AWARDS. Except as provided in subsections 17.8
and 17.9 herein, each Named Executive Officers Awards shall be based exclusively
on the performance measures established by the Committee pursuant to subsection
17.2.

17.5 NO PARTIAL AWARD PERIOD PARTICIPATION. A Named Executive Officer who
becomes eligible to participate in the 1997 Flexible Plan after performance
goals have been established in an Award Period pursuant to subsection 17.2 may
not participation in the 1997 Flexible Plan prior to the next succeeding Award
Period, except with respect to Awards which are stock options or Stock
Appreciation Rights.

17.6 PERFORMANCE GOALS. Except as provided in subsection 17.8 herein,
performance goals shall not be changed following their establishment, and Named
Executive Officers shall not receive any payout, except with respect to Awards
which are stock options or Stock Appreciation Rights, when the minimum
performance goals are not met or exceeded.

17.7 INDIVIDUAL PERFORMANCE AND DISCRETIONARY ADJUSTMENTS. Except as
provided in subsection 17.8 herein, subjective evaluations of individual
performance of Named Executive Officers shall not be

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reflected in their Awards, other than Awards which are stock options or Stock
Appreciation Rights. The payment of such Awards shall be entirely dependent upon
the attainment of the pre-established performance goals.

17.8 AMENDMENTS. No amendment of the 1997 Flexible Plan with respect to
any Named Executive Officer may be made which would (i) increase the maximum
amount that can be paid to any one Optionee under the 1997 Flexible Plan, (ii)
change the specified performance goal for payment of Awards, or (iii) modify the
requirements as to eligibility for participation in the 1997 Flexible Plan,
unless the Company's Shareholders have first approved such amendment in a manner
which would permit the deduction under Section 162(m) of the Code of such
payment in the fiscal year it is paid. The Committee shall amend this Section 17
and such other provisions as it deems appropriate, to cause amounts payable to
Named Executive Officers to satisfy the requirements of Section 162(m) and the
Treasury Regulations promulgated thereunder.

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EXHIBIT "B"

HCC INSURANCE HOLDINGS, INC.
1996 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
AS RESTATED AND AMENDED

1. PURPOSE

The HCC INSURANCE HOLDINGS, INC. 1996 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
(the "1996 Directors' Plan") is intended to promote the interest of HCC
Insurance Holdings, Inc., a Delaware corporation (the "Company"), and its
Shareholders by helping to award and retain highly-qualified independent
directors, and allowing them to develop a sense of proprietorship and personal
involvement in the development and financial success of the Company.
Accordingly, the Company shall grant to members of the Board of Directors (the
"Board") of the Company who are not employees of the Company or any of its
subsidiaries ("Nonemployee Directors") the option ("Option") to purchase shares
of the common stock of the Company ("Stock"), as hereinafter set forth. Options
granted under the 1996 Director Plans' shall be options which do not constitute
incentive stock options, within the meaning of Section 422(b) of the Internal
Revenue Code of 1986, as amended.

2. OPTION AGREEMENTS

Each Option shall be evidenced by a written agreement in the form attached
to the 1996 Director Plan.

3. ELIGIBILITY OF OPTIONEE

Options may be granted only to individuals who are Nonemployee Directors of
the Company. Each Nonemployee Director who was serving on the Board of Directors
of the Company on December 14, 1995, shall receive, as of such date and without
the exercise of the discretion of any person or persons, an Option exercisable
for 5,000 shares of Stock. Each individual becoming a Nonemployee Director (a
"New Member") after April 1, 1997, shall on the date of his first election
receive an Option exercisable for 12,500 shares of Stock (the "New Member
Grant"). Such New Member Grant shall be provided from this 1996 Directors' Plan
or from such other stock option plan which the Company has in effect. Each
individual who is a Nonemployee Director as of the date of the last regularly
scheduled Board of Directors meeting to be held in each calendar year (the "Date
of Grant") and without the exercise of the discretion of any person or persons,
will be granted an additional Option exercisable for 10,000 shares of Stock
(subject to adjustment in the same manner as provided in Paragraph VII hereof
with respect to shares of Stock subject to Options then outstanding). If, as of
any date that the 1996 Directors' Plan is in effect, there are not sufficient
shares of Stock available under the 1996 Directors' Plan to allow for the grant
to each Nonemployee Director of an Option for the number of shares provided
herein, each Nonemployee Director shall receive an Option for a prorata share of
the total number of shares of Stock then available under the 1996 Directors'
Plan. All Options granted under the 1996 Directors' Plan shall be at the Option
price set forth in Paragraph 5 hereof and shall be subject to adjustment as
provided in Paragraph 7 hereof.

4. SHARES SUBJECT TO THE 1996 DIRECTOR PLAN

The aggregate number of shares which may be issued under Options granted
under the 1996 Directors' Plan shall not exceed 450,000 shares of Stock. Such
shares may consist of authorized but unissued shares of Stock or previously
issued shares of Stock reacquired by the Company. Any of such shares which
remain unissued and which are not subject to outstanding Options at the
termination of the 1996 Directors' Plan shall cease to be subject to the 1996
Directors' Plan, but, until termination of the 1996 Directors' Plan, the Company
shall at all times make available a sufficient number of shares to meet the
requirements of the 1996 Directors' Plan. Should any Option hereunder expire or
terminate prior to its

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exercise in full, the shares theretofore subject to such Option may again be
subject to an Option granted under the 1996 Directors' Plan. The aggregate
number of shares which may be issued under the 1996 Directors' Plan shall be
subject to adjustment in the same manner as provided in Paragraph 7 hereof with
respect to shares of Stock subject to Options then outstanding. Exercise of an
Option shall result in a decrease in the number of shares of Stock which may
thereafter be available, both for purposes of the 1996 Directors' Plan and for
sale to any one individual, by the number of shares as to which the Option is
exercised.

5. OPTION PRICE AND PERIOD

The purchase price of Stock issued under each Option shall be the average of
the closing sales price of the Company's Common Stock on the New York Stock
Exchange ("NYSE") or, if not traded on the NYSE, any other securities exchange
on which the Stock is traded, for, other than for a new Member Grant, the last
ten (10) trading days of the calendar year in which the Option is granted and
for a New Member Grant the ten (10) trading days immediately preceding the New
Member's election to the Board of Directors. In the event the Stock is not
publicly traded at the time a determination of the purchase price is required to
be made hereunder, the determination of the purchase price shall be made by the
Board in such manner as it deems appropriate.

Except as otherwise provided herein, each option and all rights or
obligations thereunder shall expire on the tenth anniversary of the grant date
(the "Expiration Date"), and shall be subject to earlier termination as
hereinafter provided.

6. TERM OF 1996 DIRECTOR PLAN

The 1996 Directors' Plan shall be effective on the date the 1996 Directors'
Plan is approved by the Shareholders of the Company. Except with respect to
Options then outstanding, if not sooner terminated under the provisions of
Paragraph 7, the 1996 Directors' Plan shall terminate upon and no further
Options shall be granted after December 31, 2001.

7. RECAPITALIZATION OR REORGANIZATION

(a) The existence of the 1996 Directors' Plan and the Options granted
hereunder shall not affect in any way the right or power of the Board or the
Shareholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, any merger or consolidation of the Company, any issue
of debt or equity securities, the dissolution or liquidation of the Company or
any sale, lease, exchange or other disposition of all or any part of its assets
or business or any other corporate act or proceeding.

(b) The shares with respect to which Options may be granted are shares of
Stock as presently constituted, but if, and whenever, prior to the expiration of
an Option theretofore granted, the Company shall effect a subdivision or
consolidation of shares of Stock or the payment of a stock dividend on Stock
without receipt of consideration by the Company, the number of shares of Stock
with respect to which such Option may thereafter be exercised (i) in the event
of an increase in the number of outstanding shares shall be proportionately
increased, and the purchase price per share shall be proportionately reduced,
and (ii) in the event of a reduction in the number of outstanding shares shall
be proportionately reduced, and the purchase price per share shall be
proportionately increased.

(c) If the Company merges or consolidates with one or more corporations and
the Company shall be the surviving corporation, thereafter upon any exercise of
this Option the Grantee shall be entitled to purchase under this Option, in lieu
of the number of shares of Stock as to which Option shall then be exercisable,
the number and class of shares of stock and securities to which the Grantee
would have been entitled pursuant to the terms of the agreement of merger or
consolidation if, immediately prior to such merger or consolidation, the Grantee
had been the holder of record of the number of shares of Stock as to

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which this Option is then exercisable. If the Company shall not be the surviving
corporation in any merger of consolidation, or if the Company is dissolved or
liquidated, this Option shall expire on the effective date of such merger or
consolidation or such dissolution or liquidation; provided, that nothing herein
shall preclude a surviving corporation or other corporation into which stock of
the Company may be converted from assuming or substituting new options for the
Option granted hereunder, which assumption or substitution may be made without
the consent of the holder of this Option to such assumption, substitution,
merger or consolidation, and further provided that immediately prior to such
expiration, the entire number of shares of Stock for which this Option may be
exercised shall be accelerated so that Grantee shall have the opportunity to
exercise the entire unexpired portion of this Option prior to its expiration.
The Company agrees to give at least 30 days prior notice to Grantee of the
effective date of any such merger, consolidation, dissolution or liquidation. If
the Company is acquired by another entity, in any manner, so that following such
acquisition the Company is a subsidiary of another entity, the Company shall be
deemed to be not the surviving corporation for purposes of this subparagraph
(c).

(d) If the Company recapitalizes or otherwise changes its capital structure,
thereafter upon any exercise of an Option theretofore granted the optionee shall
be entitled to purchase under such Option, in lieu of the number and class of
shares of Stock then covered by such Option, the number and class of shares of
stock and securities to which the optionee would have been entitled pursuant to
the terms of the recapitalization if, immediately prior to such
recapitalization, the optionee had been the holder of record of the number of
shares of Stock then covered by such Option.

(e) Any adjustment provided for in Subparagraphs (b), (c) or (d) above shall
be subject to any required Shareholder action.

(f) Except as hereinbefore expressly provided, the issuance by the Company
of shares of stock of any class or securities convertible into shares of stock
of any class, for cash, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
share or obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Stock subject to Options theretofore granted or the purchase price per
share.

8. AMENDMENT OR TERMINATION OF THE 1996 DIRECTORS' PLAN

The Board in its discretion may terminate the 1996 Directors' Plan at any
time with respect to any shares for which Options have not theretofore been
granted. The Board shall have the right to alter or amend the 1996 Directors'
Plan or any part thereof from time to time; provided, that no change in any
Option theretofore granted may be made which would impair the rights of the
optionee without the consent of such optionee; and provided, further, that the
Board may not make any alteration or amendment which would materially increase
the benefits accruing to participants under the 1996 Directors' Plan, increase
the aggregate number of shares which may be issued pursuant to the provisions of
the 1996 Directors' Plan, change the class of individuals eligible to receive
Options under the 1996 Directors' Plan or extend the term of the 1996 Directors'
Plan, without the approval of the Shareholders of the Company.

9. SECURITIES LAWS

(a) The Company shall not be obligated to issue any Stock pursuant to any
Option granted under the 1996 Directors' Plan at any time when the offering of
the shares covered by such Option have not been registered under the Securities
Act of 1933, as amended, (the "Act") and such other state and federal laws,
rules or regulations as the Company deems applicable and, in the opinion of
legal counsel for the Company, there is no exemption from the registration
requirements of such laws, rules or regulations available for the offering and
sale of such shares.

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<PAGE>
(b) It is intended that the 1996 Directors' Plan and any grant of an Option
made to a person subject to Section 16 of the Securities Exchange Act of 1934,
as amended (the "1934 Act"), meet all of the requirements of Rule 16b-3, as
currently in effect or as hereinafter modified or amended ("Rule 16b-3"),
promulgated under the 1934 Act. If any provision of the 1996 Directors' Plan or
any such Option would disqualify the 1996 Directors' Plan or such Option under,
or would otherwise not comply with, Rule 16b-3, such provision or Option shall
be construed or deemed amended to conform to Rule 16b-3.

10. VESTING AND EXERCISE OF OPTIONS

(a) (i) Except as set forth herein, any Option granted hereunder shall be
fully exercisable on the first anniversary of the Date of Grant.

(ii) A New Member Grant shall also be fully exercisable on the first
anniversary of the Date of Grant in the year such New Member is elected to
the Board of Directors (without regard to the date a New Member was first
elected to the Board of Directors).

(b) The purchase price of the Stock purchased upon exercise of an option
shall be paid in full at the time of each exercise of an option and may be paid
to the Company, either:

(1) in cash (including a check, bank draft or money order); or

(2) by the delivery of Stock having a fair market value equal to the
aggregate Option price; or

(3) by a combination of cash and Stock.

No options shall be exercisable except in respect of whole shares of Stock. Upon
exercise of an option, the person exercising the option shall be entitled to one
(1) stock certificate evidencing the shares acquired upon such exercise.

(c) An option granted under the 1996 Directors' Plan shall, by its terms, be
nontransferable by the Nonemployee Director other than by will or by the laws of
descent and distribution. During the Nonemployee Director's lifetime, the option
shall be exercisable only by the Nonemployee Director or by the Nonemployee
Director's duly appointed guardian or personal representative.

(d) If the directorship of the Nonemployee Director is terminated for any
reason other than (i) Disability (as hereinafter defined) of the Nonemployee
Director, (ii) death of the Nonemployee Director, or (iii) on account of any act
of fraud or intentional misrepresentation or embezzlement, misappropriation or
conversion of assets or opportunities of the Company, or cause as determined by
the Board of Directors, an option (to the extent otherwise exercisable by the
Nonemployee Director on the date of such termination) shall be exercisable by
the Nonemployee Director at any time prior to the Expiration Date of the Option
or within two (2) months after the date of such termination of the directorship,
whichever is the shorter period.

(e) If the Nonemployee Director's directorship is terminated by reason of
Disability, an option (whether or not exercisable on the date of the Nonemployee
Director's termination of directorship by reason of Disability) shall be
exercisable by the Nonemployee Director at any time prior to the Expiration Date
of the option or within six (6) months after the date of such termination,
whichever is the shorter period. As used herein, the term "Disability" shall
mean the inability to engage in any substantial gainful activity by reason of
any medically determinable physical or mental impairment which can be expected
to last for a continuous period of not less than twelve (12) months. The
determination of whether or not a Nonemployee Director's directorship is
terminated by reason of Disability shall be in the sole and absolute discretion
of the Board. An individual shall not be considered Disabled unless he furnishes
proof of the existence thereof in such form and manner, and at such times, as
the Board may require.

(f) If a Nonemployee Director dies while serving as a member of the Board or
during the six-month period described in subsection (e) above, the option shall
be exercisable (whether or not exercisable on the

B-4
<PAGE>
date of the death of such Nonemployee Director) by the person or persons
entitled to do so under the Nonemployee Director's will, or, if the Nonemployee
Director shall fail to make testamentary disposition of said option or shall die
intestate, by the Nonemployee Director's legal representative or
representatives, at any time prior to the Expiration Date of the option or
within six (6) months after the date of such death, whichever is the shorter
period. If a Nonemployee Director dies during the two-month period described in
subsection (d) above, the option shall be exercisable as described above.

(g) The option of a Nonemployee Director shall automatically terminate as of
the date his directorship is terminated, if the directorship is terminated on
account of any act of (i) fraud or intentional misrepresentation, or (ii)
embezzlement, misappropriation or conversion of assets or opportunities of the
Company or (iii) cause as determined by the Board of Directors.

11. MISCELLANEOUS

(a) Nothing contained in this 1996 Directors' Plan (nor in any option
granted pursuant to this 1996 Directors' Plan) shall confer upon any Nonemployee
Director any right to continue as a member of the Board or constitute any
contract or agreement or interfere in any way with the right of the Company to
remove such Nonemployee Director from the Board. Nothing contained herein or in
any Option Agreement shall affect any other contractual rights of a Nonemployee
Director.

(b) An option shall be deemed to be exercised when the Secretary of the
Company receives written notice of such exercise from the person entitled to
exercise the option together with payment of the purchase price made in
accordance with this 1996 Directors' Plan.

(c) The holder of an option shall not be entitled to the privilege of stock
ownership as to any shares of Stock not actually issued and delivered to the
holder. Subject to the provisions of Paragraph 9 above, upon exercise of an
option for Stock at a time when there is not in effect under the Act a
registration statement relating to the Stock issuable upon exercise thereof or
not available for delivery a prospectus meeting the requirements of Section 10
of the Act, the holder of the option shall represent and warrant in writing to
the Company that, inter alia, the shares of Stock purchased are being acquired
for investment and not with a view to the resale or distribution thereof. No
shares of Stock shall be issued upon the exercise of any option unless and until
there shall have been compliance with any then applicable requirements of the
Securities and Exchange Commission, other regulatory agencies having
jurisdiction and any exchanges upon which securities subject to the option may
be listed.

(d) The 1996 Directors' Plan and the options issued hereunder shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Delaware applicable to contracts made and performed within that State.

(e) The proceeds received by the Company from the sale of shares pursuant to
options shall be used for general corporate purposes.

(f) The members of the Board shall not be liable for any act, omission or
determination taken or made in good faith with respect to the 1996 Directors'
Plan or any option granted under it.

(g) Any payment or any issuance or transfer of shares of Stock to the
Nonemployee Director, or to his legal representative, heir, legatee or
distributee, in accordance with the provisions hereof, shall, to the extent
thereof, be in full satisfaction of all claims of such persons hereunder. The
Board may require any Nonemployee Director, legal representative, heir, legatee
or distributee, as a condition precedent to such payment, to execute a release
and receipt therefor in such form as it shall determine.

(h) Neither the Board nor the Company guarantees the Stock of the Company
from loss or depreciation.

(i) All expenses incident to the administration or termination of the 1996
Directors' Plan, including, but not limited to, legal and accounting fees, shall
be paid by the Company.

B-5
<PAGE>
(j) Records of the Company regarding the Nonemployee Director's period of
service, termination or service and the reason therefor, leaves of absence, and
other matters shall be conclusive for all purposes hereunder, unless determined
by the Board to be incorrect.

(k) The Company shall, upon request or as may be specifically required
hereunder, furnish or cause to be furnished all of the information or
documentation which is necessary or required by the Board to perform its duties
and functions under the 1996 Directors' Plan.

(l) The Company assumes no obligation or responsibility to the Nonemployee
Director or his or her personal representatives, heirs, legatees or distributees
for any act of, or failure to act on the part of the Board.

(m) Any action required of the Company shall be by resolution of the Board
or by a person authorized to act by Board resolution.

(n) If any provision of this 1996 Directors' Plan shall be held to be
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining provisions hereof, but shall be fully severable and the 1996
Directors' Plan shall be construed and enforced as if the illegal or invalid
provision had never been included herein.

(o) Whenever any notice is required or permitted hereunder, such notice must
be in writing and personally delivered or sent by mail. Any notice required or
permitted to be delivered hereunder shall be deemed to be delivered on the date
on which it is personally delivered in accordance herewith. The Company or a
Nonemployee Director may change, at any time and from time to time, by written
notice to the other, the address which it or he had theretofore specified for
receiving notices. Until it is changed in accordance herewith, the Company and
each Nonemployee Director shall specify as its and his address for receiving
notices the address set forth in the Option Agreement pertaining to the shares
to which such notice relates.

(p) Any person entitled to notice hereunder may waive such notice.

(q) The 1996 Directors' Plan shall be binding upon the Nonemployee Director,
his or her heirs, legatees and legal representatives, upon the Company, its
successors and assigns and upon the Board and its successors.

(r) The titles and headings of sections and paragraphs are included for
convenience of reference only and are not to be considered in construction of
the provisions hereof.

(s) Words used in the masculine shall apply to the feminine where applicable
and, wherever the context of this 1996 Directors' Plan dictates, the plural
shall be read as the singular and the singular as the plural.

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<PAGE>

PROXY PROXY

HCC INSURANCE HOLDINGS, INC.
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 21, 1998
THE BOARD OF DIRECTORS SOLICITS THIS PROXY

The undersigned hereby constitutes and appoints Frank J. Bramanti and
Christopher L. Martin, each of them, acting in the absence of others, as
proxies of the undersigned, with full power of substitution in the premises
to each of them, to appear and vote, as designated herein, all shares of
stock of the Common Stock of HCC Insurance Holdings, Inc. (the "Company")
held of record by the undersigned on April 1, 1998 at the Annual Meeting of
Shareholders of the Company to be held at the NationsBank Center Auditorium,
700 Louisiana, Fourth Floor, Houston, Texas on May 21, 1998, at 9:30 A.M.,
Central time, and at any and all postponements or adjournments thereof (the
"Meeting").

WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED AS DESIGNATED BELOW BY
THE UNDERSIGNED. IF NO CHOICE IS SPECIFIED, THE PROXY WILL BE VOTED "FOR" THE
ELECTION OF ALL NOMINEES FOR DIRECTOR LISTED BELOW, "FOR" PROPOSALS 2, 3, AND
4 AND, ACCORDING TO THE DISCRETION OF THE PROXY HOLDERS, ON ANY OTHER MATTERS
THAT MAY PROPERLY COME BEFORE THE MEETING OR ANY AND ALL POSTPONEMENTS OR
ADJOURNMENTS THEREOF.

PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY IN THE ENCLOSED ENVELOPE.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)

PROXY PROXY

<PAGE>

<TABLE>
<S> <C>
HCC INSURANCE HOLDINGS, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY / /

FOR all nominees listed below (except WITHHOLD AUTHORITY TO VOTE
as marked to the contrary below). for all nominees listed below.
For Against
1. Election of Directors / / / / 3. Approval of the amended 1997 / / / /
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE Flexible Incentive Plan to
FOR ANY INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH increase the number of shares of
THE NOMINEES'S NAME ON THE LIST BELOW.) Common Stock for which options may
Stephen L. Way, James M. Berry, Frank J. Bramanti, be granted from 2,000,000 to
Patrick B. Collins, J. Robert Dickerson, Edwin H. 4,000,000, et al.
Frank, III, Allan W. Fulkerson, Walter J. Lack,
Stephen J. Lockwood, John N. Molbeck, Jr., Peter B.
Smith, Jr., Hugh T. Wilson For Against Abstain For Against
4. Approval of the amended 1996 / / / /
2. Approval of the amendment to the Company's / / / / / / Nonemployee Director Stock Option
Certificate of Incorporation to increase the number Plan to increase the number of
of authorized shares of Common Stock, par value $1.00, shares of Common Stock for which
from 100,000,000 to 250,000,000. options may be granted from 250,000
to 450,000, et al.

5. In their discretion, the proxies are
authorized to vote upon such
business as may properly come before
the Meeting or postponement or any
adjournment thereof.

The undersigned hereby
acknowledges receipt of the
Notice of Annual Meeting
of Shareholders, the Proxy
Statement for such meeting,
and the Annual Report of HCC
Insurance Holdings, Inc. for
the fiscal year ended
December 31, 1997.

-----------------------------------------
Signature of Shareholder

-----------------------------------------
Signature of Shareholder (If jointly held)

Dated 1998
------------------------------

Note: Please sign exactly as your name appears on this card. On joint accounts each joint holder should sign. When signing as
attorney, executor, administrator, trustee, or guardian, please give your full title as such. If a corporation, please sign in
full corporate name by President or other authorized person. If a partnership, please sign in partnership name by authorized
person.

PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY IN THE ENCLOSED ENVELOPE.
</TABLE>