Document:

EXHIBIT 10.4

 

 

CastlePoint Holdings, Ltd.

2006 Long Term Equity Compensation Plan

 

 

February 27, 2006

 

 

Contents

 

	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
  ARTICLE 1.

  	
  ESTABLISHMENT,
  OBJECTIVES, AND DURATION

  	
  1

  
	
   

  	
   

  	
   

  
	
  ARTICLE 2.

  	
  DEFINITIONS

  	
  2

  
	
   

  	
   

  	
   

  
	
  ARTICLE 3.

  	
  ADMINISTRATION

  	
  9

  
	
   

  	
   

  	
   

  
	
  ARTICLE 4.

  	
  SHARES SUBJECT
  TO THE PLAN; INDIVIDUAL LIMITS; AND ANTI-DILUTION ADJUSTMENT

  	
  12

  
	
   

  	
   

  	
   

  
	
  ARTICLE 5.

  	
  ELIGIBILITY AND
  PARTICIPATION

  	
  16

  
	
   

  	
   

  	
   

  
	
  ARTICLE 6.

  	
  OPTIONS

  	
  16

  
	
   

  	
   

  	
   

  
	
  ARTICLE 7.

  	
  STOCK
  APPRECIATION RIGHTS

  	
  20

  
	
   

  	
   

  	
   

  
	
  ARTICLE 8.

  	
  RESTRICTED
  STOCK

  	
  23

  
	
   

  	
   

  	
   

  
	
  ARTICLE 9.

  	
  RESTRICTED
  STOCK UNITS AND PERFORMANCE SHARES

  	
  25

  
	
   

  	
   

  	
   

  
	
  ARTICLE 10.

  	
  OTHER AWARDS

  	
  28

  
	
   

  	
   

  	
   

  
	
  ARTICLE 11.

  	
  PERFORMANCE
  MEASURES

  	
  29

  
	
   

  	
   

  	
   

  
	
  ARTICLE 12.

  	
  BENEFICIARY
  DESIGNATION

  	
  32

  
	
   

  	
   

  	
   

  
	
  ARTICLE 13.

  	
  DEFERRALS

  	
  33

  
	
   

  	
   

  	
   

  
	
  ARTICLE 14.

  	
  RIGHTS OF
  PARTICIPANTS

  	
  33

  
	
   

  	
   

  	
   

  
	
  ARTICLE 15.

  	
  CHANGE IN
  CONTROL

  	
  34

  
	
   

  	
   

  	
   

  
	
  ARTICLE 16.

  	
  AMENDMENT,
  MODIFICATION, AND TERMINATION

  	
  35

  
	
   

  	
   

  	
   

  
	
  ARTICLE 17.

  	
  TAX AND
  WITHHOLDING

  	
  36

  
	
   

  	
   

  	
   

  
	
  ARTICLE 18.

  	
  INDEMNIFICATION

  	
  37

  
	
   

  	
   

  	
   

  
	
  ARTICLE 19.

  	
  SUCCESSORS

  	
  38

  
	
   

  	
   

  	
   

  
	
  ARTICLE 20.

  	
  LEGAL
  CONSTRUCTION

  	
  38

  

 

 

CastlePoint Holdings, Ltd.

2006 Long Term Equity Compensation Plan

 

Article 1.                                            Establishment,
Objectives, and Duration

 

1.1.         Establishment of the Plan. CastlePoint Holdings, Ltd., a Bermuda
exempted company (the “Company”), hereby establishes an incentive compensation
plan to be known as the “CastlePoint Holdings, Ltd. 2006 Long Term Equity
Compensation Plan” (the “Plan”), as set forth in this document and individual
Award Agreements setting forth certain terms and conditions applicable to
Awards. The Plan permits the granting of Nonqualified Stock Options, Incentive
Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock
Units, Performance Shares and other awards.

 

The Plan shall
become effective February 27, 2006 (the “Effective Date”), subject to shareholder
approval, and shall remain in effect as provided in Section 1.3 herein.

 

1.2.         Objectives of the Plan. The objectives of the Plan are to
optimize the profitability and growth of the Company through incentives which
are consistent with the Company’s goals and which link the personal interests
of Participants to those of the Company’s shareholders.

 

The Plan is further intended to provide flexibility to the Company in
its ability to motivate, attract, and retain the services of Participants who
make or are expected to make significant contributions to the Company’s success
and to allow Participants to share in the success of the Company.

 

 

1.3.         Duration of the Plan. The Plan shall commence on the
Effective Date, as described in Section 1.1 herein, and shall remain in effect,
subject to the right of the Board to amend or terminate the Plan in accordance
with the provisions of Article 16 herein, until all Shares subject to it shall
have been purchased or acquired according to the Plan’s provisions. However, in
no event may an Incentive Stock Option be granted under the Plan on or after
the tenth anniversary of the Effective Date.

 

Article 2.                                            Definitions

 

The following
terms, when capitalized, shall have the meanings set forth below:

 

2.1.         “Award” means, individually or collectively,
Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights,
Restricted Stock, Restricted Stock Units, Performance Shares and other awards
granted under the Plan.

 

2.2.         “Award Agreement” means an agreement entered into by the
Company and a Participant setting forth the terms and provisions applicable to
an Award.

 

2.3.         “Board” means the Board of Directors of the
Company.

 

2.4.         “Change in Control” means the occurrence of any of the
following events:

 

(a)                                  any Person (other
than the Company, any trustee or other fiduciary holding securities under an
employee benefit plan of the Company, any corporation owned directly or
indirectly by the shareholders of the Company in substantially the same
proportion as the ownership of Shares of the Company) that is not on the
Effective Date the “beneficial owner” (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly,

 

2

 

of securities of the
Company representing more than 35% of the combined voting power of the Company’s
then outstanding securities (prior to the application of any Bye-Law provisions
that would reduce the vote of such securities) becomes after the Effective Date
the beneficial owner, directly or indirectly, of securities of the Company
representing more than 35% of the combined voting power of the Company’s then
outstanding securities (prior to the application of any Bye-Law provisions that
would reduce the vote of such securities);

 

(b)                                  individuals who,
as of the Effective Date, constitute the Board (the “Incumbent Board”) cease
for any reason to constitute at least a majority of the Board of the Company,
provided that any person becoming a director subsequent to the date hereof
whose election, or nomination for election by the Company’s shareholders, was
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board (other than an election or nomination of an individual whose
initial assumption of office is in connection with an actual or threatened
election contest relating to the election of the directors of the Company)
shall be, for purposes of this definition, considered as though such person
were a member of the Incumbent Board;

 

(c)                                  consummation
of a merger, amalgamation, consolidation, reorganization, share exchange or
similar transaction (a “Transaction”) of the Company with any other entity,
other than (i) a Transaction that would result in the voting securities of the
Company outstanding immediately prior thereto

 

3

 

directly or indirectly
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity or a parent company) more than
80% of the combined voting power of the voting securities of the Company (prior
to the application of any Bye-Law provisions that would reduce the vote of such
securities) or such surviving entity or parent company outstanding immediately
after such Transaction or (ii) a Transaction effected to implement a
recapitalization of the Company (or similar transaction) in which no Person
acquires more than 35% of the combined voting power (prior to the application
of any Bye-Law provisions that would reduce the vote of such securities) of the
Company’s then outstanding securities;

 

(d)                                  the sale,
transfer or other disposition (in one transaction or a series of related
transactions) of more than 50% of the operating assets of the Company; or

 

(e)                                  the approval
by the shareholders of a plan or proposal for the liquidation or dissolution of
the Company.

 

Notwithstanding anything to the contrary contained herein, (i) the
transaction contemplated on the date that this Plan is adopted whereby the
Company proposes to make a private placement of the Company’s securities with
net proceeds to the Company of at least $100 million, (ii) an initial public
offering of the Company’s Shares, or (iii) any transaction with Tower Group,
Inc. or any of its affiliates shall not constitute a Change in Control for
purposes of this Plan. To the extent deemed necessary or advisable by the
Committee to comply with the

 

4

 

provisions of Section 409A of the Code, the Committee is authorized to
use the definition of “change in the ownership or effective control of a
corporation or a change in the ownership of a substantial portion of the assets
of the corporation” in Section 409A(a)(2)(A)(v) of the Code and the regulations
thereunder in lieu of the definition of “change in control” in this Section 2.4
with respect to all or a portion of Awards outstanding under the Plan and each
Award Agreement shall be deemed to include the right of the Committee to use
such alternative definition with respect to such Award.

 

2.5.         “Code” means the Internal Revenue Code of 1986,
as amended from time to time.

 

2.6.         “Committee” means the Committee, as specified in
Section 3.1 herein, appointed by the Board to administer the Plan.

 

2.7.         “Company” means CastlePoint Holdings, Ltd., a
Bermuda exempted company, and any successor thereto as provided in Article 19
herein.

 

2.8.         “Consultant” means any consultant or advisor to the
Company or a Subsidiary.

 

2.9.         “Director” means any individual who is a member of
the Board of Directors of the Company or a Subsidiary.

 

2.10.       “Dividend Equivalent” means, with respect to Shares subject to
an Award, a right to be paid an amount equal to the dividends declared on an
equal number of outstanding Shares.

 

5

 

2.11.       “Effective Date” shall have the meaning ascribed to such
term in Section 1.1 herein.

 

2.12.       “Employee” means any employee of the Company or a
Subsidiary.

 

2.13.       “Exchange Act” means the Securities Exchange Act of
1934, as amended from time to time.

 

2.14.       “Exercise Price” means the price at which a Share may be
purchased by a Participant pursuant to an Option.

 

2.15.       “Fair Market Value” means the fair
market value of a Share as determined in good faith by the Committee using such
valuation methods as determined by the Committee in its discretion. If the
Shares are traded on an established securities market, fair market value means the
average of the high and low sale prices of a Share as reported in the
consolidated transaction reporting system, or, if there was no such sale on the
relevant date, then on the last previous day on which a sale was reported. Fair
market value relating to the exercise price of an option or grant price of a
SAR shall conform to the requirements of Section 409A of the Code.

 

2.16.       “Freestanding SAR” means an SAR that is granted
independently of any Options, as described in Article 7 herein.

 

2.17.       “Incentive Stock Option” or “ISO”
means an Option that is intended to meet the requirements of Code
Section 422.

 

6

 

2.18.       “Named Executive Officer” means a Participant who is one of the
group of “covered employees,” as defined in the regulations promulgated under
Code Section 162(m) to the extent applicable.

 

2.19.       “Nonqualified Stock Option” or “NQSO”
means an Option to purchase Shares granted under Article 6 herein
and that is not intended to meet the requirements of Code Section 422.

 

2.20.       “Option” means an Incentive Stock Option or a
Nonqualified Stock Option, as described in Article 6 herein.

 

2.21.       “Participant” means a current or former Employee,
Director or Consultant who has outstanding an Award granted under the Plan.

 

2.22.       “Performance-Based Exception” means the
performance-based exception from the tax deductibility limitations of Code
Section 162(m).

 

2.23.       “Performance Period” means the period during which a
performance goal must be met.

 

2.24.       “Performance Share” means an Award granted to a Participant,
as described in Article 9 herein.

 

2.25.       “Period of Restriction” means the period during which Restricted
Stock or Restricted Stock Units are subject to a substantial risk of forfeiture
(based on the passage of time, the achievement of performance measures, or upon
the occurrence of other events as determined by the Committee, at its
discretion), as provided in Articles 8 and 9 herein.

 

7

 

2.26.       “Person” shall have the meaning ascribed to such
term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and
14(d) thereof, including a “group” as defined in Section 13(d) thereof.

 

2.27.       “Restricted Stock” means an Award granted to a Participant,
as described in Article 8 herein.

 

2.28.       “Restricted Stock Unit” means an Award granted to a Participant,
as described in Article 9 herein.

 

2.29.       “Share” means a common share of the Company, par
value $0.01 per share, subject to adjustment pursuant to Section 4.3 herein and
any other equity securities of the Company that may be substituted for Shares
pursuant to Section 4.3. The expression “delivery of Shares” and its cognates
may refer to any or all of the following depending on the relevant circumstance
(as determined by the Committee and as necessary or appropriate under
applicable law): delivery of share certificates and other instruments, the
actual issue of Shares and the relevant recording in the company’s register of
shareholders.

 

2.30.       “Stock Appreciation Right” or “SAR”
means an Award granted to a Participant, either alone or in
connection with a related Option, as described in Article 7 herein.

 

2.31.       “Subsidiary” means any company or corporation (other
than the Company) in an unbroken chain of corporations beginning with the
Company if each of the corporations other than the last corporation in the
chain owns stock possessing fifty percent or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain,
as determined under Code Section 424(f).

 

8

 

2.32.       “Tandem SAR” means an SAR that is granted in
connection with a related Option, as described in Article 7 herein.

 

2.33.       “Ten Percent Shareholder” means, with respect to an ISO, a
Participant who, at the time the ISO is granted, owns stock possessing more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or of any parent corporation (as that term is defined in
Code Section 424(e)) or Subsidiary.

 

Article 3.                                            Administration

 

3.1.         The Committee. The
Plan shall be administered by the Compensation Committee of the Board (the “Committee”),
the composition and governance of which is established in the Committee’s
Charter as approved from time to time by the Board and subject to the rules and
regulations of any stock exchange or quotation system on which the Shares are
traded, and other corporate governance documents of the Company. No action of
the Committee shall be void or deemed to be without authority due to the
failure of any member, at the time the action was taken, to meet any
qualification standard set forth in the Committee Charter or the Plan. To the
extent that a Compensation Committee shall not be in office, the Committee
shall be the full Board. To the extent applicable, the Committee shall consist
of such number of non-employee directors as may be required and each such
non-employee director shall satisfy such requirements as may be necessary to
qualify for exemptions under Rule 16b-3 of the Securities Exchange Act of 1934
or qualifying Awards under Code Section 162(m) for the Performance-Based Exception
and to comply with the rules and regulations of any stock exchange or quotation
system on which the Shares are traded. The members of the Committee shall be
appointed from time to time by, and shall serve at the discretion of, the
Board.

 

9

 

3.2.         Authority of the Committee.
Except as limited by law or by the Company’s Bye-Laws or Committee Charter (as
the same may be amended and/or restated from time to time), and subject to the
provisions herein, the Committee shall have full discretionary authority and power
to select the Employees, Directors and Consultants who shall participate in the
Plan; determine the sizes and types of Awards; determine the terms and
conditions of Awards in a manner consistent with the Plan; construe and
interpret the Plan and any Award Agreement or other agreement or instrument
entered into under the Plan any doubtful or disputed terms in the Plan or an
Award Agreement; establish, amend, or waive rules and regulations for the Plan’s
administration; and (subject to the provisions of Sections 16.3 herein) amend
the terms and conditions of any outstanding Award. Further, the Committee shall
make all other determinations which may be necessary or advisable for the
administration of the Plan. As permitted by law, the Committee may delegate its
authority as identified herein.

 

3.3.         Manner of Exercise of Committee
Authority. The express grant of any specific power
to the Committee, and the taking of any action by the Committee, shall not be
construed as limiting any power or authority of the Committee. The Committee
may act through subcommittees, including for purposes of perfecting exemptions
under Rule 16b-3 or qualifying Awards for the Performance-Based Exception, in
which case the subcommittee shall be subject to and have authority under the
charter applicable to the Committee, and the acts of the subcommittee shall be
deemed to be acts of the Committee hereunder. The Committee may establish from
time to time such regulations, provisions, proceedings and conditions which the
Committee determines may be advisable for the administration of the Plan. A
majority of the Committee (or subcommittee where appointed) shall constitute a
quorum and subject to Section 3.2 of the Plan, the acts of a majority present
at any meeting at which a quorum is present, or acts

 

10

 

approved in writing by all Committee
members, shall be acts of the Committee as a whole. The Committee may delegate
the administration of the Plan to one or more officers or employees of the
Company, and such administrator(s) may have the authority to execute and
distribute Award agreements or other documents evidencing or relating to Awards
granted by the Committee under this Plan, to maintain records relating to
Awards, to process or oversee the issuance of Stock under Awards, to interpret
and administer the terms of Awards and to take such other actions as may be
necessary or appropriate for the administration of the Plan and of Awards under
the Plan, provided that in no case shall any such administrator(s) be
authorized (i) to grant Awards under the Plan, (ii) to take any action that
would result in the loss of an exemption under Rule 16b-3 for Awards granted to
or held by Participants who at the time are subject to Section 16 of the
Exchange Act in respect of the Company or that would cause Awards intended to
qualify for the Performance-Based Exception under Code Section 162(m) to fail
to so qualify, (iii) to take any action inconsistent with the Bermuda Companies
Act 1981, as amended, or (iv) to make any applicable determination required to
be made by the Committee under the rules of any stock exchange or quotation
system on which the Shares are traded. Any action by any such administrator(s)
within the scope of its delegation shall be deemed for all purposes to have
been taken by the Committee and, except as otherwise specifically provided,
references in this Plan to the Committee shall include any such
administrator(s). The Committee (and, to the extent it so provides, any
subcommittee) shall have sole authority to determine whether to review any
actions and/or interpretations of any such administrator(s), and if the
Committee shall decide to conduct such a review, any such actions and/or
interpretations of any such administrator(s) shall be subject to approval,
disapproval or modification by the Committee.

 

11

 

3.4.         Decisions Binding. All determinations and decisions made
by the Committee pursuant to the provisions of the Plan and all related orders
and resolutions of the Board shall be final, conclusive and binding on all
persons, including the Company, its Subsidiaries, its shareholders, Directors,
Employees, Consultants and their estates and beneficiaries.

 

3.5.         Limitation of Liability.
The Committee and each member thereof, and any person acting pursuant to
authority delegated by the Committee, shall be entitled, in good faith, to rely
or act upon any report or other information furnished by any executive officer,
other officer or employee of the Company or a subsidiary or affiliate, the
Company’s independent auditors, consultants or any other agents assisting in
the administration of the Plan. Members of the Committee, any person acting
pursuant to authority delegated by the Committee, and any officer or employee
of the Company or a subsidiary or affiliate acting at the direction or on
behalf of the Committee or a delegee shall not be personally liable for any
action or determination taken or made in good faith with respect to the Plan,
and shall, to the extent permitted by law, be fully indemnified and protected
by the Company with respect to any such action or determination as provided in
Article 18 hereof.

 

Article 4.                                            Shares
Subject to the Plan; Individual Limits; and Anti-Dilution Adjustment

 

4.1.         Shares Available for Grants.

 

(a)                                  Subject to
adjustment as provided in Section 4.3 herein, the maximum number of Shares that
may be delivered pursuant to Awards under the Plan shall be 1,735,021.

 

12

 

(b)                                  Subject to
adjustment as provided in Section 4.3 herein, the aggregate number of Shares
that may be delivered pursuant to Awards of (i) Restricted Stock, Restricted
Stock Units, Performance Shares and other awards that may be granted under the
Plan may not exceed 1,500,000 Shares and (ii) Incentive Stock Options may not
exceed 1,500,000 Shares.

 

(c)                                  If an Award
is not settled in Shares or is forfeited, expires or is canceled without delivery
of Shares or by delivery of fewer Shares than the number underlying the Award, is
settled in cash or is otherwise terminated without delivery of all or a portion
of the Shares underlying the Award, the Shares not issued by the Company shall
again be available for Awards under the Plan. Shares that are withheld from an
Award or are surrendered by the Participant in payment of any exercise price or
taxes relating to such Award shall be deemed to constitute Shares not delivered
to the Participant and will again be available under the Plan. The Committee
may adopt reasonable counting procedures to ensure appropriate counting and
avoid double counting (as for example, in the case of tandem or substitute
awards). Shares shall be counted against those reserved to the extent such Shares
have been delivered and are no longer subject to a substantial risk of
forfeiture. Shares granted pursuant to the Plan may be authorized but unissued
Shares.

 

4.2.         Individual Limits. Subject to adjustment as provided in
Section 4.3 herein, the following rules shall apply with respect to Awards and
any related dividends or Dividend Equivalents intended to qualify for the
Performance-Based Exception:

 

13

 

(a)                                  Options: 
The maximum aggregate number of Shares with respect to which Options may
be granted in any one fiscal year to any one Participant shall be 500,000.

 

(b)                                  SARs: 
The maximum aggregate number of Shares with respect to which Stock
Appreciation Rights may be granted in any one fiscal year to any one
Participant shall be 500,000.

 

(c)                                  Restricted Stock: 
The maximum aggregate number of Shares of Restricted Stock that may be
granted in any one fiscal year to any one Participant shall be 500,000.

 

(d)                                  Restricted Stock Units. The maximum aggregate number of
Restricted Stock Units that may be granted in any one fiscal year to any one
Participant shall be 250,000.

 

(e)                                  Performance Shares: 
The maximum aggregate number of Performance Shares that may be granted
in any one fiscal year to any one Participant shall be 250,000.

 

(f)                                    Other Awards. The maximum number of Shares that may be
awarded in any one year to any one Participant pursuant to an Award under
Article 10 shall be 250,000 Shares and the maximum cash Award
that may be awarded in any one year to any one Participant pursuant to an Award
under Article 10 shall be $5,000,000.

 

14

 

(g)                                 Dividends and Dividend Equivalents:  The maximum dividend or Dividend Equivalents
that may be paid in any one fiscal year to any one Participant shall be $300,000.

 

4.3.         Adjustments in Authorized Shares.
In the event of any merger, amalgamation, reorganization, consolidation,
recapitalization, liquidation, share dividend, split-up, spin-off, share split,
reverse share split, share combination, share exchange or other change in the
corporate structure of the Company affecting the Shares, such adjustment shall
be made in the number and kind of Shares that may be delivered under the Plan,
the individual limits set forth in Section 4.2 herein, and in the number and
kind of and/or price of Shares subject to outstanding Awards, as may be
determined to be appropriate and equitable by the Committee, in its sole
discretion, to prevent dilution or enlargement of rights; provided, however,
that the number of Shares subject to an Award shall always be rounded down to a
whole number. In addition, the Committee is authorized to make adjustments in
the terms and conditions of, and the criteria included in, Awards (including
performance-based Awards and performance goals and any hypothetical funding
pool relating thereto) in recognition of unusual or nonrecurring events
(including, without limitation, events described in the preceding sentence, as
well as acquisitions and dispositions of businesses and assets, or in response
to changes in applicable laws, regulations, or accounting principles) affecting
any performance conditions; provided that no such adjustment shall be
authorized or made if and to the extent that the existence of such authority
(i) would cause Options, SARs, or Performance Based Awards granted under the
Plan to Participants designated by the Committee as Named Executive Officers
and intended to qualify for the Performance-Based Exception to otherwise fail to
qualify for the Performance-Based Exception or (ii) would cause the Committee
to be deemed to have authority to change the

 

15

 

targets, within the meaning of Treasury
Regulation 1.162-27(e)(4)(vi), under the performance goals relating to Options
or SARs granted to Named Executive Officers and intended to qualify for the
Performance-Based Exception. Adjustments made under this Section 4.3 shall also
meet the requirements of Section 409A of the Code and regulations promulgated
thereunder to the extent applicable.

 

Article 5.                                            Eligibility
and Participation

 

5.1.         Eligibility. Persons eligible to participate in the
Plan include all Employees, Directors and Consultants, including persons
offered employment by the Company, provided that a prospective employee may not
receive any payment or exercise any right relating to an Award until such
person has commenced employment.

 

5.2.         Actual Participation. Subject to the provisions of the Plan,
the Committee may, from time to time, select from all eligible Employees,
Directors and Consultants, those to whom Awards shall be granted and shall
determine the nature and amount of each Award.

 

Article 6.                                            Options

 

6.1.         Grant of Options. Subject to the terms and provisions of
the Plan, Options may be granted to Participants in such number, and upon such
terms, and at any time and from time to time, as shall be determined by the
Committee.

 

6.2.         Award Agreement. Each Option grant shall be evidenced by
an Award Agreement that shall specify the Exercise Price, the duration of the
Option, the number of Shares to which the Option pertains, and such other
provisions as the Committee shall determine. The Award Agreement also shall
specify whether the Option is intended to be an ISO or an NQSO.

 

16

 

6.3.         Exercise Price. The Exercise Price for each grant of an
Option under the Plan shall be at least equal to one hundred percent (100%) of
the Fair Market Value of a Share on the date the Option is granted (or, if
greater, the par value of a Share). The Exercise Price of an ISO granted to a
Ten Percent Shareholder (prior to the application of any Bye-Law provisions
that would reduce such shareholder’s vote) shall be at least equal to one
hundred and ten percent (110%) of the Fair Market Value of a Share on the date
the ISO is granted (or, if greater, the par value of a Share).

 

6.4.         Duration of Options. Each Option granted to a Participant
shall expire at such time as the Committee shall determine at the time of
grant; provided, however, that no Option shall be exercisable later than the
tenth (10th) anniversary date of its grant and no ISO granted to a Ten Percent
Shareholder (prior to the application of any Bye-Law provisions that would
reduce such shareholder’s vote) shall be exercisable later than the fifth (5th)
anniversary date of its grant.

 

6.5.         Exercise of Options. Options granted under this Article 6
shall be exercisable at such times and be subject to such restrictions and
conditions as set forth in the Award Agreement and as the Committee shall in
each instance approve, which need not be the same for each grant or for each
Participant. Options which are intended to be ISOs shall be subject to the
$100,000 annual vesting limitation set forth in Code Section 422(d).

 

6.6.         Payment. Options granted under this Article 6
shall be exercised by the delivery of a written notice of exercise to the
Company, setting forth the number of Shares with respect to which the Option is
to be exercised, accompanied by provisions for full payment for the Shares. The
Exercise Price of an Option shall be
payable as follows, in each case subject to such

 

17

 

restrictions as the Committee may impose
and subject to applicable law: (a) in cash or its equivalent, (b) by tendering,
or attesting to the ownership of, previously acquired Shares having an
aggregate Fair Market Value at the time of exercise equal to the total Exercise
Price (provided that the Shares, other than Shares purchased by the Participant
on the open market, which are tendered must have been held by the Participant
for such minimum holding period, if any, as may be necessary to avoid a charge
to the Company’s earnings under applicable financial accounting rules), (c) by
broker-assisted cashless exercise, (d) by any other method approved by the
Committee or (e) by a combination of (a), (b), (c) and/or (d). The Committee
may limit any method of payment, other than that specified under (a), for
administrative convenience, to comply with applicable law, or for any other
reason. Subject to any governing rules or regulations, as soon as
practicable after receipt of a written notification of exercise and full
payment, the Company shall deliver or cause to be delivered Shares in an
appropriate amount based upon the number of Shares purchased under the
Option(s).

 

6.7.         Restrictions on Share Transferability. The
Committee may impose such restrictions on any Shares acquired pursuant to the
exercise of an Option granted under this Article 6 as it may deem advisable,
including, without limitation, restrictions under applicable federal securities
laws, under the requirements of any stock exchange or market upon which such
Shares are then listed and/or traded, and under any blue sky or state
securities laws applicable to such Shares.

 

6.8.         Dividend Equivalents. At the discretion of the Committee, a Participant
may be awarded in an agreement separate from the Option Award Agreement the
right to receive Dividend Equivalents, which may be paid currently or credited
to an account for the Participant, and may be settled in cash and/or Shares, as
determined by the Committee in its sole discretion,

 

18

 

subject
in each case to such terms and conditions as the Committee shall establish in
such separate agreement. Without limiting the generality of the preceding
sentence, if it is intended that an Award of Options and/or the Dividend
Equivalents comply with the requirements of the Performance-Based Exception,
the Committee may apply any restrictions it deems appropriate to the payment of
Dividend Equivalents awarded with respect to such Options, such that the
Options and/or Dividend Equivalents maintain eligibility for the
Performance-Based Exception.

 

6.9.         Termination of Employment or Service. Each
Participant’s Option Award Agreement shall set forth the extent to which the
Participant shall have the right to exercise the Option following termination
of the Participant’s employment or, if the Participant is a Director or
Consultant, service with the Company and its Subsidiaries. Such provisions
shall be determined in the sole discretion of the Committee, need not be
uniform among all Options, and may reflect distinctions based on the reasons
for termination of employment or service.

 

6.10.       Nontransferability of Options.

 

(a)                                  Incentive Stock Options. ISOs may not be sold, transferred,
pledged, assigned, or otherwise alienated or hypothecated, other than by will
or by the laws of descent and distribution, and shall be exercisable during a
Participant’s lifetime only by such Participant.

 

(b)                                  Nonqualified Stock Options. Except as otherwise provided in a
Participant’s Award Agreement, NQSOs may not be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated, other than by will or by the
laws of descent and distribution, and shall be exercisable during a Participant’s
lifetime only by such Participant.

 

19

 

6.11.       No Repricing. Without the
approval of shareholders, the Committee will not amend or replace previously
granted Options in a transaction that constitutes a “repricing,” as such term
is used in Section 303A.08 of the Listed Company Manual of the New York Stock
Exchange (a “Repricing”).

 

Article 7.                                            Stock
Appreciation Rights

 

7.1.         Grant of SARs. Subject
to the terms and provisions of the Plan, SARs may be granted to Participants at
any time and from time to time as shall be determined by the Committee. The
Committee may grant Freestanding SARs, Tandem SARs, or any combination of these
forms of SARs.

 

The Committee
shall have complete discretion in determining the number of SARs granted to
each Participant (subject to Article 4 herein) and, consistent with the
provisions of the Plan, in determining the terms and conditions pertaining to
such SARs.

 

The grant
price of a Freestanding SAR shall equal the Fair Market Value of a Share on the
date of grant of the SAR. The grant price of a Tandem SAR shall equal the
Exercise Price of the related Option.

 

7.2.         Exercise of Tandem SARs. A Tandem SAR may be exercised only with
respect to the Shares for which its related Option is then exercisable. To the
extent exercisable, Tandem SARs may be exercised for all or part of the Shares
subject to the related Option. The exercise of all or part of a Tandem SAR
shall result in the forfeiture of the right to purchase a number of Shares
under the related Option equal to the number of Shares with respect to which
the SAR is exercised. Conversely, upon exercise of all or part of an Option
with respect to which a Tandem SAR has been granted, an equivalent portion of
the Tandem SAR shall similarly be forfeited.

 

20

 

Notwithstanding
any other provision of the Plan to the contrary, with respect to a Tandem SAR
granted in connection with an ISO: (i) the Tandem SAR will expire no later than
the expiration of the underlying ISO; (ii) the value of the payout with respect
to the Tandem SAR may be for no more than one hundred percent (100%) of the
difference between the Exercise Price of the underlying ISO and the Fair Market
Value of the Shares subject to the underlying ISO at the time the Tandem SAR is
exercised; and (iii) the Tandem SAR may be exercised only when the Fair Market
Value of the Shares subject to the ISO exceeds the Exercise Price of the ISO.

 

7.3.         Exercise of Freestanding SARs. Freestanding
SARs may be exercised upon whatever terms and conditions the Committee, in its
sole discretion, imposes upon them and sets forth in the Award Agreement.

 

7.4.         Award Agreement. Each SAR grant shall be evidenced by an
Award Agreement that shall specify the grant price, the term of the SAR, and
such other provisions as the Committee shall determine.

 

7.5.         Term of SARs. The term of an SAR granted under the
Plan shall be determined by the Committee, in its sole discretion; provided,
however, that such term shall not exceed ten (10) years.

 

7.6.         Payment of SAR Amount. Upon exercise of an SAR, a Participant
shall be entitled to receive payment from the Company in an amount determined
by multiplying:

 

(a)                                  the
difference between the Fair Market Value of a Share on the date of exercise
over the grant price; by

 

21

 

(b)                                  the number
of Shares with respect to which the SAR is exercised.

 

At the
discretion of the Committee, the payment upon SAR exercise may be in cash, in
Shares of equivalent value, or in some combination thereof.

 

7.7.         Dividend Equivalents. At the discretion of the Committee, the
Participant may be awarded in an agreement separate from the SAR Award
Agreement the right to receive Dividend Equivalents, which may be paid
currently or credited to an account for the Participant, and may be settled in
cash and/or Shares, as determined by the Committee in its sole discretion,
subject in each case to such terms and conditions as the Committee shall
establish. Without limiting the generality of the preceding sentence, if it is
intended that an Award of SARs and/or the Dividend Equivalents comply with the
requirements of the Performance-Based Exception, the Committee may apply any
restrictions it deems appropriate to the payment of Dividend Equivalents
awarded with respect to such SARs, such that the SARs and/or Dividend
Equivalents maintain eligibility for the Performance-Based Exception.

 

7.8.         Termination of Employment or Service. Each SAR
Award Agreement shall set forth the extent to which the Participant shall have
the right to exercise the SAR following termination of the Participant’s
employment or, if the Participant is a Director or Consultant, service with the
Company and its Subsidiaries. Such provisions shall be determined in the sole
discretion of the Committee, need not be uniform among all SARs, and may
reflect distinctions based on the reasons for termination of employment or
service.

 

7.9.         Nontransferability of SARs. Except as otherwise provided in a
Participant’s Award Agreement, SARs may not be sold, transferred, pledged,
assigned, or otherwise alienated

 

22

 

or
hypothecated, other than by will or by the laws of descent and distribution,
and shall be exercisable during a Participant’s lifetime only by such
Participant.

 

7.10.       No
Repricing. Without the approval of shareholders, the Committee will
not amend or replace previously granted SARs in a transaction that constitutes
a Repricing.

 

Article 8.                                            Restricted
Stock

 

8.1.         Grant of Restricted Stock. Subject to the terms and provisions of
the Plan, Restricted Stock may be granted to Participants in such amounts as
the Committee shall determine.

 

8.2.         Award Agreement. Each Restricted Stock grant shall be
evidenced by an Award Agreement that shall specify the Period(s) of
Restriction, the number of Shares of Restricted Stock granted, and such other
provisions as the Committee shall determine.

 

8.3.         Other Restrictions. The Committee shall impose such other
conditions and/or restrictions on any Shares of Restricted Stock granted
pursuant to the Plan as it may deem advisable including, without limitation, a
requirement that Participants pay a stipulated purchase price for each Share of
Restricted Stock, restrictions based upon the achievement of specific
performance goals, time-based restrictions on vesting following the attainment
of the performance goals, time-based restrictions, and/or restrictions under
applicable laws or under the requirements of any stock exchange or market upon
which such Shares are listed or traded, or holding requirements or sale
restrictions placed on the Shares by the Company upon vesting of such
Restricted Stock.

 

23

 

8.4.         Removal of Restrictions. Restricted Stock shall become freely
transferable by the Participant after the last day of the Period of Restriction
applicable thereto.

 

8.5.         Voting Rights. Unless otherwise determined by the
Committee and set forth in a Participant’s Award Agreement, to the extent
permitted or required by law, as determined by the Committee, Participants
holding Shares of Restricted Stock granted hereunder may be granted the right
to exercise full voting rights with respect to those Shares during the Period
of Restriction, subject to the application of any Bye-Law provisions that would
reduce the vote of such Shares.

 

8.6.         Dividends and Other Distributions. To the extent provided in an agreement
separate from a Participant’s Award Agreement, during the Period of
Restriction, Participants holding Shares of Restricted Stock shall receive all
regular cash dividends paid with respect to all Shares while they are so held,
and all other distributions paid with respect to such Restricted Stock shall be
credited to Participants subject to the same restrictions on transferability
and forfeitability as the Restricted Stock with respect to which they were paid
and shall be paid at such time following full vesting as are paid the Shares of
Restricted Stock with respect to which such distributions were made. Without
limiting the generality of the preceding sentence, if it is intended that an
Award of Restricted Stock and/or dividends comply with the requirements of the
Performance-Based Exception, the Committee may apply any restrictions it deems
appropriate to the payment of dividends declared with respect to such
Restricted Stock, such that the Restricted Stock and/or the dividends maintain
eligibility for the Performance-Based Exception.

 

8.7.         Termination of Employment or Service. Each Award
Agreement shall set forth the extent to which the Participant shall have the
right to receive unvested Restricted Stock

 

24

 

following
termination of the Participant’s employment or, if the Participant is a
Director or Consultant, service with the Company and its Subsidiaries. Such
provisions shall be determined in the sole discretion of the Committee, need
not be uniform among all Awards of Restricted Stock, and may reflect
distinctions based on the reasons for termination of employment or service. Except
as otherwise determined by the Committee, upon termination of employment or
service during the Period of Restriction, or at the end of a Performance
Period, Restricted Stock that is unvested shall be forfeited and re-acquired by
the Company, provided that the Committee may determine in an Award Agreement or
in an individual case that restrictions or forfeiture conditions relating to
Restricted Stock will be waived or otherwise lapse in whole or in part.

 

8.8.         Nontransferability of Restricted Stock. Except as
otherwise determined by the Committee, during the applicable Period of
Restriction, a Participant’s rights with respect to the Restricted Stock
granted under the Plan shall be available during the Participant’s lifetime
only to such Participant, and Restricted Stock may not be sold, transferred,
pledged, assigned, or otherwise alienated or hypothecated other than by will or
by the laws of descent and distribution.

 

Article 9.                                            Restricted
Stock Units and Performance Shares

 

9.1.         Grant of Restricted Stock
Units/Performance Shares. Subject to the terms and provisions of
the Plan, Restricted Stock Units and Performance Shares may be granted to
Participants in such amounts and upon such terms, and at any time and from time
to time, as shall be determined by the Committee and as shall be set forth in
the Award Agreement.

 

9.2.         Award Agreement. Each grant of Restricted Stock Units or
Performance Shares shall be evidenced by an Award Agreement that shall specify
the applicable Period(s) of Restriction or Performance Period(s) (as the case
may be), the number of Restricted Stock Units

 

25

 

or
Performance Shares granted, and such other provisions as the Committee shall
determine. The initial value of a Restricted Stock Unit or Performance Share
shall equal the Fair Market Value of a Share on the date of grant.

 

9.3.         Form and Timing of Payment.

 

(a)                                  Except as
otherwise provided in a Participant’s Award Agreement, payment of Restricted
Stock Units shall be made after the last day of the Period of Restriction
applicable thereto. The Committee, in its sole discretion, may pay Restricted
Stock Units in cash or in Shares (or in a combination thereof) that have an
aggregate Fair Market Value equal to the value of the earned Restricted Stock
Units.

 

(b)                                  Except as
otherwise provided in a Participant’s Award Agreement, after the applicable
Performance Period has ended, the holder of Performance Shares shall be
entitled to receive payout on the number of Performance Shares earned over the
Performance Period, to be determined as a function of the extent to which the
corresponding performance measures have been achieved. The Committee, in its
sole discretion, may pay Performance Shares in cash or in Shares (or in a
combination thereof) that have an aggregate Fair Market Value equal to the
value of the earned Performance Shares.

 

(c)                                  Notwithstanding
the foregoing, payments shall be made not later than the March 15 following the
year in which the Period of Restriction or Performance Period terminates to the
extent that such Awards are intended

 

26

 

to qualify for the “short-term
deferral” exception under Code Section 409A.

 

9.4.         Voting Rights. A Participant shall have no voting rights
with respect to any Restricted Stock Units or Performance Shares granted hereunder.

 

9.5.         Dividend Equivalents. At the discretion of the Committee, a
Participant may be awarded in an agreement separate from the Restricted Stock
Units or Performance Shares Award Agreement the right to receive Dividend
Equivalents, which may be paid currently or credited to an account for the
Participant, and may be settled in cash and/or Shares, as determined by the
Committee in its sole discretion, subject in each case to such terms and
conditions as the Committee shall establish. Without limiting the generality of
the preceding sentence, if it is intended that an Award of Restricted Stock
Units/Performance Shares and/or the Dividend Equivalents comply with the
requirements of the Performance-Based Exception, the Committee may apply any
restrictions it deems appropriate to the payment of Dividend Equivalents
awarded with respect to such Restricted Stock Units/Performance Shares, such
that the Restricted Stock Units/Performance Shares and/or Dividend Equivalents
maintain eligibility for the Performance-Based Exception.

 

9.6.         Termination of Employment or Service. Each Award
Agreement shall set forth the extent to which the Participant shall have the
right to receive a payout respecting an Award of Restricted Stock Units or
Performance Shares following termination of the Participant’s employment or, if
the Participant is a Director or Consultant, service with the Company and its
Subsidiaries. Such provisions shall be determined in the sole discretion of the
Committee, need not be uniform among all Restricted Stock Units or Performance
Shares, and may reflect

 

27

 

distinctions
based on the reasons for termination of employment or service. Except as
otherwise determined by the Committee, upon termination of employment or
service during the Period of Restriction, or at the end of the Performance
Period, Restricted Stock Units or Performance Shares that are unvested shall be
forfeited provided that the Committee may determine in an Award Agreement or in
an individual case that forfeiture or service conditions will be waived or
otherwise lapse in whole or in part.

 

9.7.         Nontransferability. Except as otherwise provided in a
Participant’s Award Agreement, Restricted Stock Units and Performance Shares
may not be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and distribution.

 

Article 10.                                     Other Awards

 

10.1.       Grant. The Committee shall have the right to
grant other Awards which may include, without limitation, the grant of deferred
Shares, Shares or cash based on attainment of performance or other goals
established by the Committee, or Shares in lieu of cash under other Company
incentive or bonus programs.

 

10.2.       Payment of Other Awards. Payment under or settlement of any such
Awards shall be made in such manner and at such times as the Committee may
determine. To the extent other Awards are intended to qualify for the “short-term
deferral” exception under regulations promulgated under Section 409A of the
Code, payment shall be made not later than the March 15 following the year in
which such Awards vest.

 

28

 

10.3.       Termination of Employment or Service. The
Committee shall determine the extent to which the Participant shall have the
right to receive amounts under Awards granted under this Article 10 following
termination of the Participant’s employment or, if the Participant is a
Director or Consultant, service with the Company and its Subsidiaries. Such
provisions shall be determined in the sole discretion of the Committee, such
provisions may be included in an agreement entered into with each Participant,
need not be uniform among all other Awards, and may reflect distinctions based
on the reasons for termination of employment or service.

 

10.4.       Nontransferability. Except as otherwise provided in a
Participant’s Award Agreement, Awards granted under this Article 10 may not be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than by will or by the laws of descent and distribution.

 

Article 11.                                     Performance
Measures

 

11.1.       Business
Criteria. Unless and until
the Company proposes for shareholder vote and shareholders approve a change in
the general performance measures set forth in this Article 11, the performance
goals to be used for Awards and any related dividends or Dividend Equivalents
that are designed to qualify for the Performance-Based Exception shall be
chosen from among the following performance measure(s): total revenue, premiums
collected, new annualized premiums, investment income, earnings per share,
economic value added, market share (actual or targeted growth), any earnings or
income measure, including earnings from operations, earnings before interest
and/or taxes and/or depreciation, statutory earnings, net income available to
shareholders, earnings per share (either basic or diluted),  net income (before or after taxes), operating
income, adjusted net income after capital charge, return on assets

 

29

 

(actual
or targeted growth), return on capital (actual or targeted growth), return on
equity (actual or targeted growth), return on investment (actual or targeted
growth), premiums written or earned (gross, net or direct), revenue (actual or
targeted growth), loss ratio (gross or net), expense ratio (gross or net),
combined ratio (gross or net), share price, share price growth, or total
shareholder return, and strategic
business criteria, consisting of one or more objectives based on meeting
specified market penetration, total market capitalization, business retention,
new product generation, geographic business expansion goals, cost targets
(including cost of capital), customer satisfaction, employee satisfaction, management
of employment practices and employee benefits, supervision of litigation and
information technology, and goals relating to acquisitions or divestitures of
subsidiaries, affiliates or joint ventures. The targeted level or levels
of performance with respect to such business criteria may be established at
such levels and in such terms as the Committee may determine, in its
discretion, including in absolute terms, on a per share basis (either basic or
diluted), as a goal relative to performance in prior periods, or as a goal
compared to the performance of one or more comparable companies or an index
covering multiple companies. Awards and any related dividends or Dividend
Equivalents that are not designed to qualify for the Performance-Based
Exception may be based on these or such other performance measures as the
Committee may determine.

 

11.2.       Performance Goals. The
performance goal for such Awards intended to qualify for the Performance-Based
Exception shall consist of one or more business criteria and a targeted level
or levels of performance with respect to each of such criteria, as specified by
the Committee consistent with this Article 11. The performance goal shall be
objective and shall otherwise meet the requirements of Code Section 162(m) and regulations
thereunder, including the requirement that the level or levels of performance
targeted by the Committee result in the

 

30

 

achievement of performance goals being “substantially
uncertain.” The Committee may determine that such awards shall be granted,
exercised and/or settled upon achievement of any one performance goal or that
two or more of the performance goals must be achieved as a condition to grant,
exercise and/or settlement of such awards. Performance goals may differ for awards
granted to any one Participant or to different Participants.

 

11.3.       Performance Period; Timing for
Establishing Performance Goals. Achievement of performance goals in
respect of an Award shall be measured over a performance period of up to one
year or more than one year, as specified by the Committee. A performance goal
shall be established not later than the earlier of (A) 90 days after the
beginning of any Performance Period applicable to such award or (B) the time 25%
of such Performance Period has elapsed.

 

11.4.       Settlement of Awards; Other Terms. Settlement
of Awards shall be in cash, Shares, other Awards or other property, in the
discretion of the Committee. The Committee may, in its discretion, increase or
reduce the amount of a settlement otherwise to be made in connection with such Awards,
but may not exercise discretion to increase any such amount payable to a Named
Executive Officer. Any settlement which changes the form of payment from that
originally specified shall be implemented in a manner such that the Award and
other related Awards do not, solely for that reason, fail to qualify as Performance-Based
Compensation. The Committee shall specify the circumstances in which such Awards
shall be paid or forfeited in the event of termination of employment by the
Participant or other event (including a Change in Control) prior to the end of
a Performance Period or settlement of such Awards.

 

31

 

11.5.       Written Determinations. Determinations
by the Committee as to the establishment of performance goals, the amount
potentially payable in respect of Awards, and the level of actual achievement
of the specified performance goals shall be recorded in writing in the case of Awards
intended to qualify for the Performance-Based Exception. Specifically, the
Committee shall certify in writing, in a manner conforming to applicable
regulations under Section 162(m), prior to settlement of each such Award
granted to a Named Executive Officer, that the performance objective relating
to the Award and other material terms of the Award upon which settlement of the
Award was conditioned have been satisfied.

 

11.6.       Section 162(m) Compliance.
If any provision of the Plan or any Award document relating to an Award that is
intended to qualify for the Performance-Based Exception does not comply or is
inconsistent with the requirements of Code Section 162(m) or regulations
thereunder, such provision shall be construed or deemed amended to the extent
necessary to conform to such requirements, and no provision shall be deemed to
confer upon the Committee or any other person discretion to increase the amount
of compensation otherwise payable in connection with any such Award upon
attainment of the applicable performance objectives.

 

Article 12.                                     Beneficiary
Designation

 

Each
Participant under the Plan may, from time to time, name any beneficiary or
beneficiaries (who may be named contingently or successively) to whom any
benefit under the Plan is to be paid in case of his or her death before he or
she receives any or all of such benefit. Each such designation shall revoke all
prior designations by the same Participant, shall be in a form prescribed by
the Committee, and will be effective only when filed by the Participant in
writing

 

32

 

during the
Participant’s lifetime with the Committee. In the absence of any such
designation, benefits remaining unpaid at the Participant’s death shall be paid
to the Participant’s estate.

 

Article 13.                                     Deferrals

 

If permitted
by the Committee, a Participant may defer receipt of amounts that would
otherwise be provided to such Participant with respect to an Award. If
permitted, such deferral (and the required deferral election) shall be made in
accordance with, and shall be subject to, the terms and conditions of the
applicable nonqualified deferred compensation plan under which such deferral is
made, the rules and regulations under Code Section 409A, and such other terms
and conditions as the Committee may prescribe.

 

Article 14.                                     Rights of
Participants

 

14.1.       Continued Service. Nothing in the Plan shall:

 

(a)                                  interfere
with or limit in any way the right of the Company or a Subsidiary to terminate
any Participant’s employment or service at any time,

 

(b)                                  confer upon
any Participant any right to continue in the employ or service of the Company
or any of its Subsidiaries, nor

 

(c)                                  confer on
any Director any right to continue to serve on the Board of Directors of the
Company or any of its Subsidiaries.

 

14.2.       Participation. No Employee, Director or Consultant
shall have the right to be selected to receive an Award under the Plan, or,
having been so selected, to be selected to receive future Awards.

 

33

 

14.3.       Right of Setoff.
The Company or any Subsidiary or affiliate may, to the extent permitted by
applicable law, deduct from and set off against any amounts the Company or a Subsidiary
or affiliate may owe to the Participant from time to time (including amounts
payable in connection with any Award, owed as wages, fringe benefits, or other
compensation owed to the Participant), such amounts as may be owed by the
Participant to the Company, although the Participant shall remain liable for any
part of the Participant’s payment obligation not satisfied through such
deduction and setoff. By accepting any Award granted hereunder, the Participant
agrees to any deduction or setoff under this Section 14.3.

 

Article 15.                                     Change in
Control.

 

Except as
otherwise provided in a Participant’s Award Agreement, upon the occurrence of a
Change in Control:

 

(a)                                  any and all
outstanding Options and SARs granted hereunder shall become immediately
exercisable;

 

(b)                                  any Period
of Restriction or other restriction imposed on any Restricted Stock, Restricted
Stock Unit or other Award shall lapse; and

 

(c)                                  any and all
Performance Shares and other Awards (if performance-based) shall be deemed
earned at the target level (or if no target level is specified, the maximum level)
with respect to all open Performance Periods.

 

Unless a
Participant’s Award Agreement expressly provides otherwise, if a Participant’s
employment or, if the Participant is a Director or Consultant, service with the
Company and its Subsidiaries is terminated following a Change in Control, any
of the Participant’s Options or

 

34

 

SARs that were
outstanding on the date of the Change in Control and that were vested as of the
date of termination of employment or service shall remain exercisable for a
period ending not before the earlier of the first anniversary of the
termination of the Participant’s employment or service or the expiration of the
stated term of the Award.

 

Article 16.                                     Amendment,
Modification, and Termination

 

16.1.       Amendment, Modification, and Termination. The Board
may at any time and from time to time, alter, amend, suspend or terminate the
Plan in whole or in part; provided, however, that no amendment which requires
shareholder approval in order for the Plan to comply with any applicable stock
exchange listing standards or any rule promulgated by the United States
Securities and Exchange Commission shall be effective unless such amendment
shall be approved by the requisite vote of shareholders of the Company entitled
to vote thereon.

 

16.2.       Adjustment of Awards Upon the Occurrence of Certain Unusual or
Nonrecurring Events. The Committee may make adjustments in
the terms and conditions of, and the criteria included in, Awards in
recognition of unusual or nonrecurring events (including, without limitation,
the events described in Section 4.3 herein) affecting the Company or the
financial statements of the Company or of changes in applicable laws,
regulations, or accounting principles, whenever the Committee determines that
such adjustments are appropriate in order to prevent dilution or enlargement of
the benefits or potential benefits intended to be made available under the Plan.
With respect to any Awards intended to comply with the Performance-Based
Exception, any such exception shall be specified when the performance goals are
established.

 

35

 

16.3.       Awards Previously Granted. No termination, amendment or
modification of the Plan or of any Award shall adversely affect in any material
way any Award previously granted under the Plan without the written consent of
the Participant holding such Award, unless such termination, modification or
amendment is required by applicable law and except as otherwise provided
herein.

 

Article 17.                                     Tax and Withholding

 

17.1.       Tax Withholding. The Company shall have the power and
the right to deduct or withhold, or require a Participant to remit to the
Company, an amount sufficient to satisfy minimum federal, state, and local
taxes, domestic or foreign, required by law or regulation to be withheld with
respect to any taxable event arising as a result of the Plan.

 

17.2.       Use of Shares to Satisfy Withholding Obligation. With
respect to withholding required upon the exercise of Options or SARs, upon the
vesting of Restricted Stock, Restricted Stock Units or Performance Shares, or
upon any other taxable event arising as a result of Awards granted hereunder,
Participants may elect that the withholding requirement be satisfied, in whole
or in part, by having the Company withhold, or by tendering to the Company,
Shares having a Fair Market Value equal to the minimum statutory withholding
(based on minimum applicable withholding rates for federal, state and local tax
purposes, including payroll taxes) that could be imposed on the transaction. Any
such elections by a Participant shall be irrevocable, made in writing and
signed by the Participant.

 

17.3.       Limitations on Awards to Ensure Compliance with Code Section 409A. Other provisions
of the Plan notwithstanding, the terms of any Award subject to Code Section
409A, including any authority of the Company and rights of the Participant with
respect to the

 

36

 

Award, shall be limited to those terms
permitted under Code Section 409A and the regulations thereunder, and any terms
not permitted under Code Section 409A shall be automatically modified and
limited to the extent necessary to conform with Section 409A. For this purpose,
distribution subject to Code Section 409A(a)(2)(A)(i) (separation from service)
to a “key employee” as defined under Section 409A(a)(2)(B)(i), shall not occur
earlier than the earliest time permitted under Section 409A(a)(2)(B)(i). A
Participant shall be solely responsible for any adverse tax consequences or
penalties that may arise in connection with an Award under Section 409A.

 

Article 18.                                     Indemnification.

 

Each person who is or shall have been a member of the Committee, or of
the Board, shall be indemnified and held harmless by the Company to the fullest
extent permitted by applicable law against and from any loss, cost, liability,
or expense that may be imposed upon or reasonably incurred by him or her in
connection with or resulting from any claim, action, suit, or proceeding to
which he or she may be a party or in which he or she may be involved by reason
of any action taken or failure to act under the Plan and against and from any
and all amounts paid by him or her in settlement thereof, with the Company’s
approval, or paid by him or her in satisfaction of any judgment in any such
action, suit, or proceeding against him or her, provided he or she shall give
the Company an opportunity, at its own expense, to handle and defend the same
before he or she undertakes to handle and defend it on his or her own behalf. The
foregoing right of indemnification is subject to the person having been
successful in the legal proceedings or having acted in good faith and what is
reasonably believed to be a lawful manner in the Company’s best interests. The
foregoing right of indemnification shall not be exclusive of any other rights
of indemnification to which such persons may be entitled under the Company’s Bye-

 

37

 

Laws (as the same may be amended and/or restated from time to time), as
a matter of law, or otherwise, or any power that the Company may have to
indemnify them or hold them harmless.

 

Article 19.                                     Successors

 

All obligations of the Company under the Plan and with respect to Awards
shall be binding on any successor to the Company, whether the existence of such
successor is the result of a direct or indirect purchase, merger,
consolidation, amalgamation or other event, or a sale or disposition of all or
substantially all of the business and/or assets of the Company.

 

Article 20.                                     Legal
Construction

 

20.1.       Gender, Number and References. Except
where otherwise indicated by the context, any masculine term used herein also
shall include the feminine; the plural shall include the singular and the
singular shall include the plural. Any reference in the Plan to an act or code
or to any section thereof or rule or regulation thereunder shall be deemed to
refer to such act, code, section, rule or regulation, as may be amended from
time to time, or to any successor act, code, section, rule or regulation.

 

20.2.       Severability. In the event any provision of the Plan
shall be held illegal or invalid for any reason, the illegality or invalidity
shall not affect the remaining parts of the Plan, and the Plan shall be
construed and enforced as if the illegal or invalid provision had not been
included.

 

20.3.       Requirements of Law. The granting of Awards and the issuance
of Shares under the Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges or quotation systems as may be required.

 

38

 

20.4.       Governing Law. To the extent
not preempted by federal law, the Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the state of New York,
without giving effect to any conflicts or choice of law rule or principle that
might otherwise refer construction of the Plan and/or any agreements under the
Plan to the substantive law of another jurisdiction.

 

20.5.       Awards to Participants Outside the
United States. The Committee
may modify the terms of any Award under the Plan or may adopt a sub-plan or
annex containing rules and regulations with respect to an Award made to or held
by a Participant who is then resident or primarily employed outside of the
United States in any manner deemed by the Committee to be necessary or
appropriate in order that such Award shall conform to laws, regulations, and
customs of the country in which the Participant is then resident or primarily
employed, or so that the value and other benefits of the Award to the
Participant, as affected by foreign tax laws and other restrictions applicable
as a result of the Participant’s residence or employment abroad shall be
comparable to the value of such an Award to a Participant who is resident or
primarily employed in the United States. An Award may be modified under this
Section 20.5 in a manner that is inconsistent with the express terms of the
Plan without the consent of a Participant, so long as such modifications will
not contravene any applicable law or regulation or result in liability of a
Participant under any applicable law or regulation for the Participant whose
Award is modified.

 

39EXHIBIT
10.5

 

[Form
of Option Agreement For Executive Employees]

 

CastlePoint
Holdings, Ltd.

2006 Long Term Equity Compensation Plan

 

Stock
Option Agreement

 

SECTION 1.        
GRANT OF OPTION

 

(a)          
Option. On the terms and
conditions set forth in the Notice of Stock Option Grant and this Stock Option
Agreement (together, the “Agreement”), the Company grants to the Grantee on the
Grant Date the Option to purchase at the Exercise Price the number of Shares
set forth in the Notice of Stock Option Grant.

 

(b)          
Plan and Defined
Terms. The Option is granted pursuant to the Plan, a copy of which the Grantee
acknowledges having received. All terms and conditions applicable to the Option
set forth in the Plan and not set forth herein are hereby incorporated herein
by reference. To the extent any provision hereof is inconsistent with a
provision of the Plan, the provision of the Plan will govern. All capitalized
terms that are used in this Agreement and not otherwise defined therein shall
have the meanings ascribed to them in the Plan.

 

SECTION 2.        
EXERCISE OF THE
OPTION

 

The Option may be
exercised only to the extent it is vested. The Option shall vest in accordance
with the vesting schedule set forth in the Notice of Stock Option Grant. The
Option shall be exercised by written notice to the Committee, specifying the
number of Shares the Grantee desires to purchase together with provision for
payment of the Exercise Price. The Company may require the Grantee to furnish
or execute such other documents as the Company shall reasonably deem necessary
(i) to evidence such exercise and (ii) to comply with or satisfy the
requirements of the Securities Act of 1933, as amended, the Exchange Act,
applicable state or non-U.S. securities laws or any other law.

 

SECTION 3.        
TERM AND EXPIRATION

 

(a)          
Basic Term. Subject to earlier
termination pursuant to the terms hereof, the Option shall expire on the
expiration date set forth in the Notice of Stock Option Grant.

 

(b)          
Termination of
Employment. If the Grantee’s employment is terminated, the vested
portion of the Option shall expire on the earliest of the following to occur:

 

(i)           
The
expiration date set forth in the Notice of Stock Option Grant;

 

(ii)          
The
date three months following the termination of the Grantee’s employment if the
termination is as the result of a voluntary termination by Grantee or a Good
Reason termination by Grantee, a termination in connection with a Change of
Control as provided in Grantee’s employment agreement, or for any reason other
than Cause, death, Disability or Retirement;

 

 

1

 

(iii)         
The
date three years following the termination of the Grantee’s employment if the
termination is due to death or Disability;

 

(iv)         
The
date of termination of the Grantee’s employment if the termination is for
Cause; or

 

(v)          
The expiration date
set forth in the Notice of Stock Option Grant if the termination is for Retirement.

 

Except as provided in this Section 3, upon termination
of the Grantee’s employment, the Option shall expire immediately with respect
to the number of Shares for which the Option was not then vested.
Notwithstanding the foregoing, if the Grantee’s employment is terminated in
connection with a Change of Control as provided in Grantee’s employment
agreement, or if Grantee’s employment terminates as the result of Retirement or
if Grantee terminates employment as the result of death or Disability, all
outstanding Options shall become immediately vested. If the Grantee dies after
termination of employment, but before the expiration of any part of the Option,
the Option (or portion thereof) may be exercised (prior to expiration) by the
personal representative of the Grantee or by any person who has acquired this
Option directly from the Grantee by will, bequest or inheritance, but only to
the extent that the Option was vested at the time of the termination of the
Grantee’s employment.

 

(c)          
Definition of
“Cause.”  If the Grantee has an employment agreement with the Company or a
Subsidiary, the term “Cause” shall have the meaning ascribed to such term in
the Grantee’s employment agreement. If the Grantee’s employment agreement does
not define the term “Cause,” or if the Grantee does not have an employment
agreement with the Company or a Subsidiary, the term “Cause” shall mean (i) the
willful engaging by the Grantee in misconduct that is injurious to the Company
or a Subsidiary (monetarily or otherwise), (ii) the Grantee’s conviction of, or
pleading guilty or nolo contendere to, a crime involving moral turpitude or a
felony, (iii) any serious or continuing breach by the Grantee of any material
term of any agreement with the Company or Subsidiary or any confidentiality,
non-solicitation, or non-competition covenant to which the Grantee is subject,
or (iv) the Grantee’s failure to perform, in a timely, professional and
competent manner, (A) the orders or requests of the Board; (B) the
orders or requests of the CEO or the Grantee’s direct supervisor; or
(C) any material duties under any agreement with the Company or a
Subsidiary.

 

(d)          
Definition of
“Disability.”  The Grantee’s employment shall be deemed to have
terminated due to the Grantee’s Disability if the Grantee is entitled to
long-term disability benefits under the Company’s long-term disability plan or
policy, as in effect on the date of termination of Grantee’s employment.

 

(e)          
Definition of
“Retirement” and “Good Reason”. If the Grantee has an employment
agreement with the Company or a Subsidiary, the terms “Retirement” and “Good
Reason” shall have the meaning ascribed to such term in the Grantee’s
employment agreement. If the Grantee’s employment agreement does not define the
term “Retirement” or Good Reason” or if the Grantee does not have an employment
agreement with the Company or a Subsidiary, the

 

 

2

 

provisions of this Agreement
concerning “Retirement” or “Good Reason” shall not be applicable to Grantee.

 

(f)           
Definition of “Change
in Control”. If the Grantee has an employment agreement with the Company
or a Subsidiary, the term “Change in Control” shall have the meaning ascribed
to such term in the Grantee’s employment agreement. If the Grantee’s employment
agreement does not define the term “Change in Control” or if the Grantee does
not define the term “Change in Control” or if the Grantee does not have an
employment agreement with the Company or a Subsidiary, the term “Change of
Control” shall have the meaning ascribed to such term in the Plan.

 

(g)          
Employment Agreement.
Notwithstanding
the foregoing, if the terms of any employment agreement between the Grantee and
the Company or a Subsidiary provides more favorable terms concerning the impact
of the Grantee’s termination of employment on the Grantee’s stock option
awards, such terms of the Employment Agreement shall govern.

 

SECTION 4.        
TRANSFERABILITY OF
OPTION

 

(a)          
Generally. Except as provided in
Section 4(b) herein, the Option shall not be transferable by the Grantee other
than by will or the laws of descent and distribution, and the Option shall be
exercisable during the Grantee’s lifetime only by the Grantee or on his or her
behalf by the Grantee’s guardian or legal representative.

 

(b)          
Transfers to Family
Members. Notwithstanding Section 4(a) herein, if the Option is a Nonqualified
Stock Option, subject to the Grantee’s advance written notice of the intent to
transfer the Option and the Committee’s consent to such transfer, the Grantee
may transfer the Option for no consideration to or for the benefit of a Family
Member, subject to such limits or conditions as the Committee may establish.
The transferee shall be subject to all the terms and conditions applicable to
the Option in the event of such transfer. The Option may not be transferred by
any such transferee other than by will or the laws of descent and distribution.

 

(c)          
Definition of “Family
Member.”  For purposes of this Agreement, the term “Family Member” shall
mean any child, stepchild, grandchild, parent, stepparent, grandparent, spouse,
former spouse, sibling, niece, nephew, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law, or sister-in-law of the Grantee
(including adoptive relationships), any person sharing the same household as
the Grantee (other than a tenant or employee), a trust in which the above
persons have more than fifty percent of the beneficial interests, a foundation
in which the Grantee or the above persons control the management of assets, and
any other entity in which the Grantee or the above persons own more than fifty
percent of the voting interests.

 

SECTION 5.        
MISCELLANEOUS
PROVISIONS

 

(a)          
Tax Withholding. In accordance with
Article 17 of the Plan, the Committee shall have the power and the right to
deduct or withhold, or require the Grantee to remit to the Company, an amount
sufficient to satisfy any federal, state and local taxes (including the
Grantee’s FICA obligations) required by law to be withheld with respect to this
Award.

 

 

3

 

(b)          
Ratification of
Actions. By accepting this Agreement, the Grantee and each person claiming under
or through the Grantee shall be conclusively deemed to have indicated the
Grantee’s acceptance and ratification of, and consent to, any action taken
under the Plan or this Agreement by the Company, the Board, the Committee or
any designee thereof.

 

(c)          
Notice Concerning
Disqualifying Dispositions. If the Option is an Incentive Stock Option, the
Grantee shall notify the Company of any disposition of Shares issued pursuant
to the exercise of the Option if the disposition constitutes a “disqualifying
disposition” within the meaning of Sections 421 and 422 of the Code (or any
successor provision of the Code then in effect relating to disqualifying
dispositions). Such notice shall be provided by the Grantee to the Committee in
writing within 10 days of any such disqualifying disposition.

 

(d)          
Rights as a
Stockholder. Neither the Grantee nor the Grantee’s transferee or
representative shall have any rights as a stockholder with respect to any
Shares subject to this Option until the Option has been exercised and Share
certificates have been issued to the Grantee, transferee or representative, as
the case may be.

 

(e)          
Notice. Any notice to be
served hereunder shall be given personally in writing to the Grantee or to the
Secretary of the Company (as the case may be) or shall be couriered or posted
by registered mail to the Company (to the attention of its Secretary) at its
principal executive office or to the Grantee at the address that he most
recently provided in writing to the Company. Any such notice sent by post shall
be deemed served three days after it is posted, and, in proving such service,
it shall be sufficient to prove that the notice was properly addressed and put
in the post or couriered.

 

(f)           
Choice of Law. This Agreement shall
be governed by, and construed in accordance with, the laws of the State of New
York, as such laws are applied to contracts entered into and performed in such
jurisdiction, without giving effect to conflicts of law principles.

 

(g)          
Counterparts. This Agreement may be
executed in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.

 

(h)          
Modification or
Amendment. This Agreement may only be modified or amended by written agreement
executed by the parties hereto; provided, however, that the adjustments
permitted pursuant to Section 4.3 of the Plan may be made without such written
agreement.

 

(i)           
Severability. In the event any
provision of this Agreement shall be held illegal or invalid for any reason,
the illegality or invalidity shall not affect the remaining provisions of this
Agreement, and this Agreement shall be construed and enforced as if such
illegal or invalid provision had not been included.

 

(j)           
References to Plan. All references to the
Plan shall be deemed references to the Plan as may be amended from time to
time.

 

 

4

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