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HealthMarkets, Inc. (Name of Registrant as Specified in its Charter)

 

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INFORMATION STATEMENT

 

 

April 20, 2011

 

Dear Fellow Stockholder:

 

I cordially invite you to attend the 2011 Annual Meeting of Stockholders of HealthMarkets, Inc. The meeting this year will be held at 10:00 a.m., Central Daylight Time, on Monday, May 23, 2011, at the offices of HealthMarkets, Inc., 9151 Boulevard 26, North Richland Hills, Texas. The attached notice of Annual Meeting and Information Statement describes the items currently anticipated to be acted upon by the stockholders at the Annual Meeting. Please note that the Board of Directors is not soliciting proxies from the holders of the Class A-2 shares in connection with the Annual Meeting.

 

One of the purposes of the Information Statement is to give you important information regarding HealthMarkets’ Board of Directors and executive management. We urge you to read the Information Statement carefully.

 

On behalf of the management and directors of HealthMarkets, Inc., I want to thank you for your continued support and confidence in HealthMarkets. We look forward to seeing you at the 2011 Annual Meeting.

 

Sincerely,

 

KENNETH J. FASOLA

President and Chief Executive Officer

HEALTHMARKETS, INC.
9151 BOULEVARD 26
NORTH RICHLAND HILLS, TEXAS 76180

 

NOTICE OF ANNUAL MEETING

 

Dear Stockholder:

 

You are cordially invited to attend the 2011 Annual Meeting of Stockholders of HealthMarkets, Inc. to be held on Monday, May 23, 2011 at 10:00 a.m., Central Daylight Time, at the Company’s offices located at 9151 Boulevard 26, North Richland Hills, Texas 76180.

 

This Information Statement is being delivered in connection with the following matters:

 

1. To elect nine (9) directors to serve until our next annual stockholders’ meeting;

 

2. To approve a Certificate of Amendment to the Certificate of Incorporation of HealthMarkets, Inc. that would amend the process by which the directors designated by the Company’s private equity investor groups approve certain specified corporate actions;

 

3. To ratify the appointment of KPMG LLP to serve as HealthMarkets’ independent registered public accounting firm; and

 

4. Any other matters that may properly come before the Annual Meeting or any postponements or adjournments thereof.

 

Members of HealthMarkets’ Board of Directors and stockholders holding approximately 89% of our outstanding Common Stock as of March 31, 2011, have indicated that they intend to vote in favor of electing the proposed slate of directors, approving the Certificate of Amendment to the Certificate of Incorporation of HealthMarkets, Inc., and ratifying the appointment of the Company’s independent registered public accounting firm. Therefore, the proposals will be assured of receiving the required vote and will be approved at the Annual Meeting and will become effective immediately following the Annual Meeting.

 

By Order of the Board of Directors,

 

PEGGY G. SIMPSON

Corporate Secretary

 

Date: April 20, 2011

 

WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY.

 

INFORMATION STATEMENT FOR THE 2011 ANNUAL MEETING
OF STOCKHOLDERS TO BE HELD MAY 23, 2011

 

General

 

This Information Statement is being distributed in connection with the 2011 Annual Meeting of Stockholders (the “Annual Meeting”) of HealthMarkets, Inc., a Delaware corporation (“we”, “our”, “us” or other words of similar import), to be held at our offices located at 9151 Boulevard 26, North Richland Hills, Texas on May 23, 2011, at 10:00 a.m., Central Daylight Time.

 

This Information Statement includes information relating to the proposals to be voted on at the Annual Meeting, the voting process, compensation of directors and our most highly paid officers, and other required information.

 

This Information Statement is being furnished to our stockholders for informational purposes only, and we will bear all of the costs of the preparation and dissemination of this Information Statement. Each person who is receiving this Information Statement also is receiving a copy of our Annual Report on Form 10-K for the year ended December 31, 2010. We intend to commence distribution of this Information Statement, together with the notice and any accompanying materials, on or about April 20, 2011.

 

Our Board of Directors has approved, and has recommended that the stockholders approve, the following proposals (collectively, the “Proposals”):

 

1. The election of the slate of nine (9) directors proposed by our Nominating Committee to serve until the next annual meeting of stockholders and until their respective successors are chosen and qualified;

 

2. The approval of a Certificate of Amendment to the Certificate of Incorporation of HealthMarkets, Inc. that would amend the process by which the directors designated by the Company’s private equity investor groups approve certain specified corporate actions;

 

3. The ratification of the selection of KPMG LLP as the Company’s independent registered public accounting firm to audit the accounts of the Company for the fiscal year ending December 31, 2011; and

 

4. Such other business as may properly come before the Annual Meeting or any postponements or adjournments thereof.

 

Important Notice Regarding the Availability of Information Statement Materials for the Annual Meeting of Stockholders to be Held on May 23, 2011.

 

1. This Information Statement and our Annual Report on Form 10-K for the year ended December 31, 2010 is available on the Financial Information page of the Company’s website (http://www.healthmarketsinc.com).

 

2. The following materials are available on the Financial Information page of the Company’s website (http://www.healthmarketsinc.com):

 

a. Notice of Annual Meeting

 

b. Information Statement

 

c. Annual Report on Form 10-K

 

3. If you do not have access to the Internet or have not received a copy of our Annual Report, you may request a copy of it or any exhibits thereto without charge by writing to our Corporate Secretary, at HealthMarkets, Inc., 9151 Boulevard 26, North Richland Hills, Texas 76180.

 

4. If you wish to attend the Annual Meeting and need directions, please contact us at (817) 255-5200.

Merger

 

On April 5, 2006, HealthMarkets, Inc. completed its merger (the “Merger”) providing for the acquisition of the Company by affiliates of a group of private equity investors, including The Blackstone Group, Goldman Sachs Capital Partners and DLJ Merchant Banking Partners. The stock ownership of each of these private equity firms is set forth below under the caption “Security Ownership of Certain Beneficial Owners and Management.” As a result of the Merger, holders of record on April 5, 2006 of HealthMarkets common shares (other than shares held by certain members of management and shares held through HealthMarkets’ agent stock accumulation plans) received $37.00 in cash per share.

 

In the transaction, Health-Markets’ public shareholders received aggregate consideration of approximately $1.6 billion, of which approximately $985.0 million was contributed as equity by the private equity investors. The balance of the Merger consideration was financed with the proceeds of a $500.0 million term loan facility extended by a group of banks, the proceeds of $100.0 million of trust preferred securities issued in a private placement, and Company cash on hand in the amount of approximately $42.8 million.

 

Voting

 

The Board of Directors has selected the close of business on March 31, 2011 (the “Record Date”) as the time for determining the holders of record of our Class A-1 Common Stock, par value $0.01 per share, and Class A-2 Common Stock, par value $0.01 per share (collectively, “Common Stock”), entitled to notice of, and to vote at, the Annual Meeting or any adjournment or postponement thereof. Shares of Common Stock outstanding on the record date are the only securities that entitle holders to vote at the Annual Meeting or any adjournment or postponement thereof. Each share of Class A-1 Common Stock and Class A-2 Common Stock is entitled to one vote per share on all matters to be presented at the Annual Meeting.

 

Members of the Board of Directors, members of management and other significant holders of our Class A-1 Common Stock (collectively, the “Consenting Stockholders”) own a total of 28,064,320.6216 shares, or approximately 89% of our total voting power. Because the Consenting Stockholders have indicated that they will vote in favor of all of the Proposals and because such Consenting Stockholders control more than a majority of the voting power, the Proposals are assured of receiving the required vote and being adopted and, thus, we are not soliciting any proxies from holders of the Class A-2 Common Stock.

 

Stockholders attending the Annual Meeting are welcome to vote at the Annual Meeting and may address any matters that may properly come before the Annual Meeting.

 

How Many Shares of HealthMarkets Common Stock Were Outstanding as of the Record Date?

 

As of March 31, 2011, our record date, 32,480,335.6216 shares of our Common Stock were issued and 31,437,713.6216 shares were outstanding, consisting of 28,397,175.6216 shares of Class A-1 Common Stock and 3,040,538.0000 shares of Class A-2 Common Stock. Each share owned entitles the holder to one vote for each share so held. A list of our Stockholders entitled to vote is available at our executive offices at 9151 Boulevard 26, North Richland Hills, Texas 76180. The telephone number of our executive offices is (817) 255-5200.

 

How Many Shares Are Needed to Constitute a Quorum at the Meeting?

 

The presence, in person or by proxy, of stockholders holding at least a majority of the voting power are necessary to constitute a quorum at the Annual Meeting. However, the stockholders present at the Annual Meeting may adjourn the Annual Meeting despite the absence of a quorum.

 

What Vote is Required to Approve the Proposals?

 

A plurality of the votes cast is required to elect directors. For all of the other Proposals, the affirmative vote of the holders of a majority of the voting power of the shares present or represented by proxy is required to approve the other Proposals. Abstentions will have the same effect as votes against the Proposals, although abstentions will count toward the presence of a quorum.

Why Isn’t HealthMarkets Required to Solicit Proxies for the Proposals?

 

As indicated above, the Consenting Stockholders have indicated they will vote in favor of the Proposals, thereby ensuring that such Proposals will be adopted. Therefore, the solicitation of proxies is not necessary and, in order to eliminate the costs and management time involved, our Board of Directors has decided not to solicit proxies.

 

When Will Each Proposal Become Effective?

 

The Proposals will be effective immediately following the completion of the Annual Meeting, which is at least 20 days after the mailing of this Information Statement. We are mailing this Statement on or about April 20, 2011 and will hold our Annual Meeting on May 23, 2011.

 

How Can Stockholders Participate in the Meeting?

 

Each stockholder of record as of the record date can participate in the Annual Meeting personally or through another person or persons designated to act for such stockholder by proxy.

 

How Will Our Stockholders Know When the Proposals are Effective?

 

Those stockholders that attend the Annual Meeting will be notified then of the effectiveness of the Proposals. In addition, we will notify our stockholders of the effective dates of the Proposals described in this Information Statement when we file our Form 10-Q for the quarter ended June 30, 2011, which will be the first Quarterly Report on Form 10-Q following the Annual Meeting.

 

Who Will Pay for the Costs Associated with this Information Statement?

 

HealthMarkets will pay all costs associated with distributing this Information Statement, including the costs of printing and mailing.

 

No additional action is required by you in connection with the Proposals. However, Section 14(c) of the Securities Exchange Act of 1934 requires the mailing to our stockholders of the information set forth in this Information Statement at least twenty (20) days prior to the earliest date on which the corporate action may be taken.

 

PROPOSAL 1

 

ELECTION OF DIRECTORS

 

Election of Directors

 

Nine (9) directors will be elected at the Annual Meeting, each of whom is expected to serve until our next annual meeting of stockholders and until his successor has been duly elected and qualified. All of the nominees are currently directors of the Company, and each nominee has consented to being named as a nominee and to serve, if elected.

 

In connection with the Merger, we entered into a stockholders agreement with various investment affiliates of The Blackstone Group, Goldman Sachs Capital Partners and DLJ Merchant Banking (the “Private Equity Investors”), as well as certain management stockholders. The Stockholders Agreement provides that the Board of Directors of the Company consist of the following:

 

 

 

The allocation of board representation to the Private Equity Investor Groups will be reduced as the ownership interest of Class A-1 Common Stock of such Private Equity Investor Group is reduced. The Blackstone Investor Group will have the ability to designate a majority of the directors for so long as it holds a majority of the shares of Class A-1 Common Stock issued to the Private Equity Investors in the Merger. Each Private Equity Investor Group will lose its right to designate directors entirely when its ownership of shares of Class A-1 Common Stock is less than the greater of (i) five percent of the shares of Class A-1 Common Stock issued to the Private Equity Investors in the Merger and (ii) three percent of the then-outstanding shares of Class A-1 Common Stock.

 

Generally, each director will have one vote. However, if the Blackstone Investor Group nominates or designates fewer than the maximum number of directors to which it is entitled, then the Blackstone Investor Group’s directors will have aggregate voting power on board matters equal to the maximum number of directors that the Blackstone Investor Group is entitled to nominate or designate divided by the number of directors they have actually nominated or designated.

 

The Blackstone Investor Group has designated Chinh E. Chu, Jason K. Giordano and David K. McVeigh for nomination as directors. The GS Investor Group has designated Adrian M. Jones for nomination as a director. The DLJ Investor Group has designated R. Neal Pomroy for nomination as a director. Kenneth J. Fasola has been designated as the Management Director. Phillip J. Hildebrand, Mural R. Josephson and Steven J. Shulman have been designated as Additional Directors.

 

THE BOARD OF DIRECTORS HAS NOMINATED THE FOLLOWING SLATE OF DIRECTORS TO HEALTHMARKETS’ BOARD AND HAS RECOMMENDED APPROVAL OF THEIR ELECTION TO SERVE UNTIL THE NEXT ANNUAL MEETING OF ITS STOCKHOLDERS IN 2012 OR UNTIL THEIR RESPECTIVE SUCCESSORS ARE ELECTED AND QUALIFIED. IF A NOMINEE IS UNAVAILABLE FOR ELECTION, THE BOARD MAY REDUCE THE NUMBER OF DIRECTORS TO BE ELECTED AT THE ANNUAL MEETING.

 

INFORMATION ABOUT THE BOARD OF DIRECTORS

 

Director Compensation for the 2010 Fiscal Year

 

The following table shows the compensation paid to our directors for their services during the fiscal year ended December 31, 2010. Directors who are our employees do not receive additional compensation for their services as directors. Accordingly, during 2010, Messrs. Hildebrand and Fasola received no compensation for their services as a director. Messrs. Chu, Giordano, Jones, McVeigh, Pomroy and Rajpal, members of our Board designated by the Private Equity Investors, are not considered to be independent and therefore also do not receive compensation for their services. We provide our independent directors with an annual retainer for Board and Committee membership and have, historically, awarded stock option grants to our independent directors. We did not award stock option grants to our independent directors in 2010. We reimburse all directors for travel and lodging expenses they incur in connection with their attendance at directors’ meetings and meetings of the stockholders of the Company.

 

 

 

 

Background and Experience of Directors

 

As discussed above, pursuant to the terms of the Company’s Stockholders Agreement, all directors of the Company other than Mr. Fasola (our Management Director), Mr. Hildebrand (our non-management Chairman) and Messrs. Josephson and Shulman (our independent directors) are nominated or designated by investment affiliates of the Private Equity Investor Groups. We believe that our directors provide an appropriate mix of experience and

skills relevant to the size and nature of the Company’s business. In particular, Messrs. Chu, Giordano and McVeigh (designated by the Blackstone Investor Group), Mr. Jones (designated by the GS Investor Group) and Mr. Pomroy (designated by the DLJ Investor Group) have played active roles in overseeing the business of numerous portfolio companies of the Private Equity Investor Groups and have significant financial, investment and strategic business planning experience. Mr. Hildebrand, our Chairman, has extensive management experience in the insurance industry, having served as a director and CEO of HealthMarkets, Inc. from 2008 to 2011 and, prior to that, for many years in senior management roles and as a director for New York Life Insurance Company or its subsidiaries. Mr. Fasola, our President and Chief Executive Officer, has extensive successful experience in the health insurance industry, honing his skills over a 25-year career that includes senior executive roles with two of the nation’s leading health insurance carriers, Humana Inc. and UnitedHealth Group. Our independent directors bring extensive management, financial and/or accounting experience from the insurance and health care industries. Specifically, Mr. Josephson, the Chairman of our Audit Committee, is an “audit committee financial expert”, as that term is defined under applicable Securities Exchange Act rules, by virtue of his years of experience with a major independent public accounting firm, as well as in various senior management and board positions. Mr. Shulman brings extensive experience as a founder, chairman, chief executive officer and/or director of a number of businesses in the health services and insurance industries.

 

Board Leadership Structure

 

Mr. Chu, who is a representative of The Blackstone Group, our majority stockholder, led the Company as Chairman of the Board until April 1, 2011, at which time Mr. Hildebrand was appointed Chairman of the Board. The Chief Executive Officer position is separate from the Chairman position. We believe that the separation of the Chairman and the Chief Executive Officer positions is appropriate for our business and delineates the separate roles of management and directors. In his capacity as Chief Executive Officer, Mr. Fasola provides the day-to-day leadership of the Company. As our Chairman, Mr. Hildebrand is the principal representative of the Board of Directors and leads the Board in the performance of its duties, including presiding over all Board meetings he attends.

 

Role of Board in Risk Oversight

 

The Company is exposed to a number of risks, including, among others, economic, financial, operational and regulatory risks. The Company’s management is responsible for the day-to-day management of these risks, while the Board as a whole is responsible for the oversight of such risk. The Audit, Executive Compensation, Compliance & Governance and Investment Committees each play an important role in assisting the Board to carry out its oversight responsibilities. The Audit Committee regularly meets with management, members of the Company’s internal audit department and the Company’s independent registered public accounting firm to address any significant financial risk exposure, including disclosure controls and procedures and internal control over financial reporting. The Executive Compensation Committee assists the Board with risk oversight by administering and evaluating the Company’s compensation programs and practices for its highest paid executives, so that these compensation practices meet the Company’s objectives and do not encourage employees to take excessive risks. In addition to the evaluation of compensation for the highest paid executives undertaken by the Executive Compensation Committee, a group of management personnel, including representatives from the finance, human resources, internal audit and legal functions, undertake a more comprehensive analysis of all compensation programs for employees of the Company and evaluate whether such compensation programs (after taking into account potential likelihood and impact) present inherent risk and whether, after taking into account mitigating factors (for example, vesting periods, duration of arrangement and number of participants), these compensation programs present any residual risk. The management group conducted this analysis utilizing an online tool to capture the risk assessments for each compensation program. The group then met to review the assessments provided by the online tool and made any necessary adjustments. After conducting this analysis and discussing the results as a group, the management group determined that, consistent with the Executive Compensation Committee’s approach to compensation for the Company’s highest paid executives, the Company’s compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on the Company. This analysis was provided to the Executive Compensation Committee and the Committee had the opportunity to review and discuss with members of management.

The Compliance & Governance Committee assists with risk oversight by overseeing the evaluation of the Board and management, as well as the Company’s compliance and regulatory functions, including oversight of the integrity of the Company’s compliance with legal and regulatory requirements and overall compliance program. The Investment Committee coordinates with the Investment/Finance Committee of the Company’s insurance subsidiaries in supervising and implementing investments by the Company and these subsidiaries, to ensure that these investments do not present excessive risk to the Company.

 

Director Independence

 

The Board has determined that Messrs. Josephson and Shulman are “independent,” as that term is defined under the listing standards of the New York Stock Exchange. Mr. Fasola is not “independent” due to his affiliation with the Company and Mr. Hildebrand is not “independent” due to his employment with the Company that ended on April 1, 2011. Messrs. Chu, Giordano, Jones, McVeigh, and Pomroy are not “independent” due to their respective affiliations with the Private Equity Investors.

 

Annual Meeting Attendance

 

We encourage but do not require our directors to attend the Annual Meeting of Stockholders. One (1) of the Company’s then directors attended the Annual Stockholder Meeting held May 27, 2010.

 

Stockholder Communication with Our Board

 

All current members of the Company’s Board are listed under the heading “About HealthMarkets, Inc.” on the Company’s website (http://www.healthmarketsinc.com). Stockholders may communicate directly with the HealthMarkets Board of Directors, including the Chairman of the Audit Committee, the Chairman of the Nominating Committee and/or the non-Management Directors individually or as a group. All communications should be directed to our Corporate Secretary at HealthMarkets, Inc., 9151 Boulevard 26, North Richland Hills, TX 76180. In addition, we maintain contact information, both telephone and email, on our website under the heading “Contact Us.” The envelope should clearly indicate the person or persons to whom the Corporate Secretary should forward the communication. Communications will be distributed to the Board, or to any individual director or directors as appropriate, depending on the facts and circumstances outlined in the communications, with the exception of spam, business solicitations and advertisements, product inquiries and suggestions, resumes and other forms of job inquiries, surveys, and obvious “junk” and mass mailings.

 

Board Meetings, Attendance, and Executive Sessions

 

During the fiscal year ended December 31, 2010, the Board of Directors met thirteen (13) times and took action on other occasions by unanimous written consent of its members. Each member of the Board of Directors who held such position in 2010 attended at least 75% in the aggregate of all meetings of the Board and any committee on which such director served. The Board met in executive session during all regularly scheduled meetings, without management present, and plans to continue that practice going forward.

Board Committees

 

To assist the Board in the discharge of its responsibilities, the Company has established a standing Audit Committee, Executive Committee, Investment Committee, Compliance & Governance Committee, Nominating Committee, and Executive Compensation Committee. The following chart shows the current composition of the committees.

 

 

 

 

The functions and composition of these Board committees are described below:

 

Audit Committee, Financial Expert

 

The Audit Committee assists the Board of Directors in fulfilling its oversight responsibilities by assessing the processes related to the Company’s risks and control environment, overseeing the integrity of the Company’s financial statements and financial reporting and compliance with legal and regulatory requirements and evaluating the Company’s audit processes. The Audit Committee confers with the Company’s independent registered public accounting firm and internal auditors regarding audit procedures, including proposed scope of examination, audit results and related management letters. The Audit Committee reviews the services performed by the independent registered public accounting firm in connection with determining their independence, reviews the reports of the independent registered public accounting firm and internal auditors, and reviews recommendations about internal controls. The Committee selects and appoints the Company’s independent registered public accounting firm and approves any significant non-audit relationship with the independent registered public accounting firm.

 

KPMG LLP, the Company’s independent registered public accounting firm, has direct access to the Audit Committee and may discuss any matters that arise in connection with their audits, the maintenance of internal controls, and any other matters relating to the Company’s financial affairs. The Audit Committee may authorize the independent registered public accounting firm to investigate any matters that the Audit Committee deems appropriate and may present its recommendations and conclusions to the Board.

 

Since joining the Board in May 2003, Mr. Josephson has served as the Audit Committee Chairman. The Board of Directors has determined that Mr. Josephson, who is independent of management of the Company, is an “audit committee financial expert”, as that term is defined under applicable Securities Exchange Act rules. Following his retirement in October 2002 as Senior Vice President and Chief Financial Officer of Lumbermens Mutual Casualty Company (the lead company of Kemper Insurance Companies), Mr. Josephson has served as a consultant to various financial institutions. In July 1998, Mr. Josephson retired as a partner with KPMG LLP after 28 years with the firm. Mr. Josephson was a licensed Certified Public Accountant in Illinois for 30 years, and is a member of the American Institute of Certified Public Accountants. In addition to Mr. Josephson, Mr. Shulman is an “independent” director and serves on the Audit Committee. The other members of the Audit Committee are not “independent.”

The Audit Committee operates under a written charter adopted by the Board of Directors. The charter is available for review on the Corporate Governance page of the Company’s website (http://www.healthmarketsinc.com). A copy of the charter is available in print to any stockholder who requests it. Requests for a copy of the charter should be directed to the Corporate Secretary, c/o HealthMarkets, Inc., 9151 Boulevard 26, North Richland Hills, TX 76180. The Committee reviews and assesses the adequacy of its charter on an annual basis.

 

The Audit Committee has adopted procedures governing the receipt, retention and handling of concerns regarding accounting, internal accounting controls or auditing matters that are reported by employees, stockholders and other persons. Employees may report such concerns confidentially and anonymously by utilizing a toll free hot line number (877-778-5463) or by accessing Report-It (http://www.reportit.net), a third party reporting service. All others may direct such concerns in writing to the Board of Directors, Audit Committee and/or the non-Management Directors, c/o our Corporate Secretary, HealthMarkets, Inc., 9151 Boulevard 26, North Richland Hills, TX 76180.

 

The Audit Committee’s Report appears elsewhere in this Information Statement.

 

Executive Committee

 

The Executive Committee has the authority of the full Board of Directors in the management and affairs of the Company, except that the Committee may not effect certain fundamental corporate actions, including (a) declaring a dividend, (b) amending the Certificate of Incorporation or Bylaws, (c) adopting an agreement of merger or consolidation, or (d) imposing a lien on substantially all of the assets of the Company. In practice, the Executive Committee meets infrequently and does not act except on matters that are not sufficiently important to require action by the full Board of Directors. Although the Committee had only one meeting during the Company’s 2010 fiscal year, the Committee took action on selected occasions by unanimous written consent of its members.

 

Investment Committee

 

The Investment Committee coordinates with the Investment/Finance Committees of the Company’s insurance subsidiaries in supervising and implementing the investments of the funds of the Company and its insurance subsidiaries. None of the members of the Investment Committee are “independent.”

 

Compliance & Governance Committee

 

The Compliance & Governance Committee was established by the Board of Directors on August 30, 2006. The Committee develops and recommends to the Board the Corporate Governance Guidelines applicable to the Company, oversees the evaluation of the Board and management, and reviews the succession plan of the Chief Executive Officer and other key officer positions. The Committee also oversees and monitors the Company’s compliance and regulatory functions, including the assessment on a periodic basis of the processes related to the Company’s risk and control environment, the oversight of the integrity of the Company’s compliance with legal and regulatory requirements and evaluation of the Company’s overall compliance program. The Committee also makes recommendations concerning the structure, size and membership of the various committees of the Board of Directors.

 

The Compliance & Governance Committee operates under a written charter adopted by the Board of Directors. The charter is available for review on the Corporate Governance page of the Company’s website (http://www.healthmarketsinc.com). A copy of the charter is available in print to any stockholder who requests it. Requests for a copy of the charter should be directed to the Corporate Secretary, c/o HealthMarkets, Inc., 9151 Boulevard 26, North Richland Hills, TX 76180.

 

Nominating Committee

 

The Nominating Committee identifies individuals qualified to become directors and recommends that the Board select the director nominees to be voted on at the next annual meeting of stockholders. None of the members of the Nominating Committee are “independent.”

As a result of the Merger and the terms of the Stockholders’ Agreement that provide for the designation of directors by the Private Equity Investor Groups, the Board of Directors has determined that it is not appropriate to establish specific qualifications for nominees or a formal process for identifying and evaluating such nominees for director, and has not established a specific diversity policy. However, it is the Board and the Nominating Committee’s practice to seek director candidates who will contribute to a diversity of perspectives. The Board and the Nominating Committee take into account a candidate’s specific background, training, knowledge, experience and other personal attributes, in an effort to provide a diverse mix of capabilities and viewpoints on the Board of Directors.

 

In carrying out its responsibilities to nominate directors, the Nominating Committee will consider candidates recommended by the Board of Directors and by stockholders of the Company. All suggestions by stockholders for nominees for director for 2012 must be made in writing and received by the Corporate Secretary of the Company, 9151 Boulevard 26, North Richland Hills, Texas 76180 no later than December 22, 2011 (see “Stockholder Proposals for the 2012 Annual Meeting”). The mailing envelope must contain a clear notation indicating that the enclosed letter is a “Director Nominee Recommendation.” The letter must identify the author as a stockholder and provide a brief summary of the candidate’s qualifications, as well as contact information for both the candidate and the stockholder. At a minimum, candidates for election to the Board must meet the independence requirements of Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Candidates should also have relevant business and financial experience, and must be able to read and understand fundamental financial statements. The Committee has not historically received director candidate recommendations from the Company’s stockholders but will consider all relevant qualifications as well as the needs of the Company in terms of compliance with the Securities and Exchange Commission rules.

 

The Nominating Committee operates under a written charter adopted by the Board of Directors, which is available for review on the Corporate Governance page of the Company’s website (http://www.healthmarketsinc.com). A copy of the charter is available in print to any stockholder who requests it. Requests for a copy of the charter should be directed to the Corporate Secretary, c/o HealthMarkets, Inc., 9151 Boulevard 26, North Richland Hills, TX 76180.

 

The Nominating Committee did not receive any recommendations from stockholders regarding candidates for election to the Board at the 2011 Annual Stockholder Meeting.

 

Executive Compensation Committee

 

The Executive Compensation Committee administers the Company’s compensation programs and remuneration arrangements for its highest-paid executives. The Committee is authorized to provide assistance to the Company’s directors in fulfilling their responsibility to shareholders to ensure that the Company’s officers, key executives and directors are compensated in accordance with the Company’s total compensation objectives and executive compensation policy. The Company is also authorized to advise, recommend, and approve compensation policies, strategies, and pay levels necessary to support organizational objectives. The Committee may form and delegate to subcommittees when appropriate.

 

The Executive Compensation Committee evaluates the CEO’s performance and sets the CEO’s compensation level based on this evaluation. The Committee meets in executive session without the CEO to determine his compensation. The Committee receives recommendations from the CEO as to compensation of other executive officers, and the CEO participates in Committee discussions regarding the compensation of such officers.

 

The Executive Compensation Committee also makes recommendations to the Board with respect to incentive-compensation plans and equity-based plans, evaluates, from time to time, the compensation to be paid to directors for their service on the Board or any committee thereof, and prepares a report on executive compensation as required by the Securities and Exchange Commission to be included in the Information Statement.

 

A subcommittee of the Executive Compensation Committee (the “Subcommittee”) consisting solely of two (2) outside directors (Mr. Josephson and Mr. Shulman) has been granted the sole authority to approve any compensation matters where such compensation is intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended.

The Executive Compensation Committee operates under a written charter adopted by the Board of Directors, which is available for review on the Corporate Governance page of the Company’s website (http://www.healthmarketsinc.com). Requests for a copy of the charter should be directed to the Corporate Secretary, c/o HealthMarkets, Inc., 9151 Boulevard 26, North Richland Hills, TX 76180.

 

Compensation Committee Interlocks and Insider Participation in Compensation Decisions

 

The Board has determined that Messrs. Chu and Jones are not “independent” as that term is defined under the listing standards of the New York Stock Exchange, due to their respective affiliations with the Private Equity Investors. During 2010, no Executive Compensation Committee member was an officer or employee of us or our subsidiaries, or formerly an officer, nor had any relationship otherwise requiring disclosure under the rules of the Securities and Exchange Commission. None of our executive officers served as a member of the Executive Compensation Committee or as a director of any company where an executive officer of that company is a member of our Executive Compensation Committee. The members of the Executive Compensation Committee thus do not have any compensation committee interlocks or insider participation. Certain relationships and related transactions that may indirectly involve our board members are described below under the caption “Certain Relationships and Related Party Transactions.”

 

Family Relationships

 

There are no family relationships between any of the directors or executive officers.

 

Involvement in Certain Legal Proceedings

 

During the past ten years, none of the directors or executive officers has been involved in any legal proceedings that are material to the evaluation of their ability or integrity.

 

Code of Ethics

 

The Company has a Code of Ethics that applies to all of the Company’s employees, including its Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer, and the Board. A copy of this Code is available for review on the Corporate Governance page of the Company’s website (http://www.healthmarketsinc.com). Requests for a copy of the charter should be directed to the Corporate Secretary, c/o HealthMarkets, Inc., 9151 Boulevard 26, North Richland Hills, TX 76180. The Company intends to disclose any changes in or waivers from its Code of Ethics by posting such information on its website or by filing a Form 8-K.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Overview of the Company’s Executive Compensation Program

 

Executive Summary

 

2010 was a year of transition for the Company and growth in the Company’s Insphere Insurance Solutions, Inc. (“Insphere”) business. We continued our efforts to concentrate on the core aspects of the business that are fundamental to our corporate strategy and long-term focus. We are now generally focused on business opportunities that allow us to maximize the value of our independent agent sales force, with particular focus on the sale of supplemental insurance products underwritten by the Company’s insurance subsidiaries, third-party health insurance products underwritten by non-affiliated insurance companies and association products. In 2010, we substantially increased the size of our sales team, created and launched a new association product, reduced our general and administrative expenses and developed outstanding relationships with third party insurance carrier partners. For a further discussion of our performance in 2010, see “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

 

In 2010, most of the Company’s significant compensation decisions related to the significant time and energy required to develop and grow Insphere — a wholly owned subsidiary of HealthMarkets, LLC. Insphere serves as an

authorized insurance agency in 50 states and the District of Columbia, specializing in the distribution of small business and middle-income market life, health, long-term care and retirement insurance. Insphere maintains marketing agreements for the distribution of health benefits plans with a number of non-affiliated insurance carriers as well as the Company’s own insurance subsidiaries. The non-affiliated carriers include, among others, United Healthcare’s Golden Rule Insurance Company, Humana and Aetna, for which Insphere distributes individual health insurance products. In the fourth quarter of 2010, Insphere entered into a marketing agreement with Humana for the sale of Medicare Advantage, Medicare Advantage with Prescription Drug Coverage, Prescription Drug and Medicare Supplement plans. Insphere also distributes supplemental insurance, life and annuity, long-term care and retirement insurance products for a variety of non-affiliated insurance carriers as well as the Company’s own insurance subsidiaries. These products are sold both on a stand-alone basis and to purchasers of health benefit plans underwritten by non-affiliated insurance companies or the Company’s insurance subsidiaries. In the fourth quarter of 2010, Insphere broadened its supplemental product portfolio to include several return of premium supplemental products, including a cancer product.

 

Historically, the Company maintained a dedicated agency sales force that distributed products underwritten exclusively by the Company’s own insurance subsidiaries. The development of Insphere as an independent career-agent distribution company, and the sale by Insphere agents of third party products, represents a significant shift in the Company’s corporate strategy. The creation and development of Insphere involved substantial efforts, including identification of appropriate organizational structure and leadership, completion of licensing and contracting requirements, development and maintenance of a technology platform, implementation of marketing arrangements with third party insurance carriers and maintenance of positive relationships with such third parties. Our highest paid executives were rewarded in 2010 for their efforts relating to the ongoing development and implementation of this corporate strategy, including the continued growth of Insphere in a difficult business environment.

 

2010 was also a transitional year for our management team. The Company hired Kenneth J. Fasola as President and Chief Operating Officer, with the intention of promoting him to Chief Executive Officer in the first half of 2011. Mr. Fasola was appointed Chief Executive Officer effective April 1, 2011. As contemplated by the transition agreement entered into by Mr. Hildebrand at the time the Company hired Mr. Fasola, upon the appointment of Mr. Fasola as Chief Executive Officer, Mr. Hildebrand stepped down as our Chief Executive Officer and was contemporaneously elected Chairman of the Company’s Board of Directors for a one year term. Mr. Fasola replaced Anurag Chandra as the Company’s Chief Operating Officer. Mr. Chandra stepped down as the Company’s Executive Vice President and Chief Operating Officer effective September 27, 2010 and remained employed through October 31, 2010, serving in an advisory capacity during the period between September 27 and October 31, 2010 in order to assist with the transition of his responsibilities to Mr. Fasola. In addition, during 2010 Steven P. Erwin stepped down as the Company’s Chief Financial Officer effective October 1, 2010 and was replaced as Chief Financial Officer by K. Alec Mahmood, who previously served as the Company’s Senior Vice President, Financial Planning & Analysis. Mr. Erwin remained employed by the Company through December 31, 2010 and, during the period between October 1 and December 31, 2010, served in an advisory capacity to ensure a smooth transition of services to Mr. Mahmood. Despite these changes, our management team continues to have significant experience in the insurance business and will continue to develop and implement the corporate strategy, building on our recent successes.

 

What are the Company’s compensation objectives?

 

The Company’s compensation objectives are to support the Company’s overall business strategy and goals, attract and retain the best possible executive talent, motivate executive officers to achieve the Company’s performance objectives, and reward individual performance and contributions. We intend that our executive compensation program will effectively and appropriately compensate our executives and will guide their activities in response to the targeted incentives we provide.

 

Who is responsible for evaluating and administering executive compensation?

 

The Executive Compensation Committee (the “Committee”) administers the Company’s compensation programs and remuneration arrangements for the Company’s Named Executive Officers (as defined below). As discussed in more detail above under the heading “Compensation Committee Interlocks and Insider Participation in

Compensation Decisions,” two of the four members of the Committee are not considered “independent.” A subcommittee of the Committee consisting solely of two (2) outside directors has been granted the sole authority to approve any compensation matters where such compensation is intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended.

 

Who are the Company’s Named Executive Officers?

 

For 2010, the seven executive officers included in the Summary Compensation Table on page 26, and which are referred to as “Named Executive Officers” throughout this section, were:

 

 

 

 

Does the Committee use an outside consultant for advice?

 

In 2010, the Committee did not retain an outside consultant to review the Company’s compensation plans or help determine executive compensation.

 

What role do Named Executive Officers play in setting compensation?

 

Mr. Hildebrand, our Chief Executive Officer through April 1, 2011, recommends bonuses and compensation adjustments for his direct reports including each of the other Named Executive Officers. The Committee then takes these recommendations into consideration in setting compensation for each of the other Named Executive Officers. Mr. Hildebrand does not make any recommendations with respect to his own compensation.

 

To what extent does the Committee use external data to compare executive compensation?

 

When making compensation decisions, the Committee does not engage in a formal peer group comparison or “benchmarking” process. However, the members of the Committee have extensive business experience and serve on the boards of directors of other companies including, for Committee members affiliated with the Company’s Private Equity Investors (Messrs. Chu and Jones), other portfolio companies of the Private Equity Investors. Their background and experience provides them with a perspective regarding executive compensation that helps them effectively evaluate the compensation of our Named Executive Officers.

 

How does the Company set compensation for its Named Executive Officers?

 

Compensation of the Named Executive Officers for 2010 is generally based on the terms of their employment agreements or related arrangements. The Company has previously entered into employment agreements or similar arrangements with all of the Named Executive Officers. In connection with the previously described transition within our senior management team, Mr. Hildebrand entered into a transition agreement with the Company on September 23, 2010 and Mr. Chandra’s employment with the Company ended on October 31, 2010, which in each case provided the executive with benefits consistent with their respective then current employment agreement. In

 

 

*  On March 16, 2011, as contemplated at the time of Mr. Fasola’s hiring, Mr. Fasola was appointed the Company’s Chief Executive Officer, effective April 1, 2011. In connection with the effectiveness of Mr. Fasola’s appointment as Chief Executive Officer, Mr. Hildebrand stepped down as the Company’s Chief Executive Officer and was elected Chairman of the Company’s Board of Directors.

addition, Mr. Westen entered into a new employment agreement with the Company on October 26, 2010, which became effective on January 1, 2011, following the end of the initial term of his prior employment agreement.

 

As more fully described below, the employment agreements and similar arrangements provide the compensation terms for Named Executive Officers, including in some cases guaranteed annual bonuses and other incentive opportunities.

 

What are the components of executive compensation?

 

We use a variety of compensation elements to reach our executive compensation program goals. These include base salary, annual bonus compensation, awards of stock options and restricted stock, long-term incentive plan awards, employee benefit plans, and termination and change of control provisions within employment agreements. We also offer limited perquisites to certain Named Executive Officers. Each component of compensation has been designed to complement the other components and, when considered together, to meet the Company’s overall compensation objectives; however, there is no pre-established policy or target for the allocation between either cash and non-cash or short-term and long-term incentive compensation.

 

Base Salaries

 

Base salary is the primary fixed portion of executive pay. It compensates executives for performing their day-to-day duties and responsibilities. The base salaries of the Named Executive Officers for 2010 were generally based on the terms of their respective employment agreements, as adjusted for subsequent increases. Base salaries of the Named Executive Officers who are direct reports of the Chief Executive Officer are evaluated annually by the Committee, generally by the end of the first quarter.

 

In July 2010, Mr. Mahmood’s base salary was increased from $350,000 to $400,000; however, he did not receive a further base salary increase upon being appointed Chief Financial Officer effective October 1, 2010. As a result of the Committee’s authorization of an additional bonus pool for 2009, there were no annual merit increases for Named Executive Officers in 2010. Mr. Westen’s base salary was decreased from $475,000 to $350,000 beginning January 1, 2011 in connection with a decrease in his required time commitment.

 

Annual Bonus Compensation

 

The Company has established an annual bonus compensation program for its management. For 2010, while performance goals were not established at the beginning of the performance period, the Committee took a holistic approach in considering the Company’s accomplishments for 2010 in determining the annual bonus compensation for the Company’s Named Executive Officers. The Committee believes this was appropriate due to significant change in strategic direction being implemented. In making its determinations regarding annual bonus compensation, the Committee considers Company performance but does not predetermine the applicable considerations, or quantify the weight given to any specific element, or otherwise follow a formulaic calculation. Rather, the Committee engages in an overall assessment of appropriate bonus levels based on a subjective interpretation of all the relevant criteria. The annual bonus compensation program is designed to achieve the Company’s objective of linking compensation to annual performance results, attracting, motivating and retaining high-caliber leadership, and aligning the interests of senior executives and stockholders.

 

The Named Executive Officers had the following bonus opportunities in 2010:

 

The bonus opportunities set forth above are generally based on the terms of the employment agreements or a similar arrangement with each Named Executive Officer and are established based on the officer’s position, skills, experience, responsibility, and potential impact on Company performance.

 

In connection with a retention program implemented by the Company in 2010, a portion of the annual bonus was guaranteed for each of the Named Executive Officers, except Mr. Fasola who received a guaranteed bonus under his employment agreement. The retention program provided that each of Messrs. Hildebrand, Erwin, Westen, Chandra, Heller and Mahmood were guaranteed 66.66% of their target bonus for 2010, provided they remained employed through December 31, 2010 (subject to earlier vesting in the case of a change of control and certain qualifying terminations of employment). While the annual bonus program generally requires that each Named Executive Officer remain employed through the end of the applicable fiscal year, portions of the guaranteed bonus are paid in equal pro rata installments on a quarterly basis (in some cases in advance of the end of the applicable fiscal year), but 75% of the gross amount of any annual bonus payment made prior to the end of the applicable fiscal year is subject to clawback by the Company based on specified termination events. The Company agreed to provide these guarantees as an incentive to retain the executives in light of the changing corporate strategy during the Company’s transitional period. The Company determined that providing the Named Executive Officers with some certainty with respect to annual bonus compensation was essential for maintaining focus during a challenging time for the Company and the industry. The retention program also provided that 50% of target bonus for each Named Executive Officer employed on December 31, 2011 would be guaranteed for 2011 and, with respect to Messrs. Heller and Mahmood, the same guaranteed bonus arrangement will be in place in 2012, subject to their continued employment through December 31, 2012 (unless, with respect to the guaranteed bonuses in 2011 and 2012, the bonuses are earlier vested in the case of a change of control and certain qualifying terminations of employment).

 

The non-guaranteed portions of each Named Executive Officer’s annual bonus compensation remain subject to annual performance criteria. At its meeting on January 19, 2011, the Committee evaluated the Company’s performance in 2010. In reviewing the Company’s 2010 performance, the Committee recognized management’s success in many key areas, including the first field force year-over-year increase since 2005, the association business exceeding budgeted expectations, significant reductions in general and administrative expenses, growth in agent productivity and cross-selling and significant growth in relationships with third party carriers. Based on the Company’s performance in 2010, the Committee determined that with respect to the non-guaranteed performance portion of the annual bonus, the aggregate bonus pool available would be set at 110% of target, with specific bonuses paid at levels below, at, or above 110% of target based on individual performance evaluations.

 

In adjusting individual performance, for each of the Named Executive Officers, except for Mr. Hildebrand and Mr. Fasola (whose annual bonus was guaranteed), the Committee was presented with an evaluation of the Named Executive Officers’ individual performance for 2010. For Messrs. Mahmood and Heller, the evaluation by Mr. Hildebrand included a review of competencies required to be an executive officer at the Company, including accountability, communication, drive for results, integrity, judgment and teamwork/collaboration. For Messrs. Erwin and Westen, Mr. Hildebrand presented to the Committee a more holistic view of their individual contributions to the Company and for Mr. Chandra, the Committee considered his situation to be unique because his employment with the company ended on October 31, 2010, so it determined to pay his annual bonus compensation at 100%. Finally, the Committee evaluated Mr. Hildebrand’s individual performance for 2010 and, while the Committee acknowledged that Mr. Hildebrand had an outstanding year, the Committee determined to pay his annual bonus at 110% of target, which was the same level as the executive vice presidents of the Company (other than Mr. Chandra).

As a result, the Named Executive Officers earned the following annual bonuses for 2010:

 

 

 

 

Retention Bonuses

 

Pursuant to employment agreements with Messrs. Hildebrand, Erwin, Chandra and Westen, each executive was eligible to receive a $1.0 million retention payment on December 31, 2010, subject to continued employment through such date (the “Retention Bonuses”), with earlier payments in the event of a change of control or certain qualifying terminations of employment. The Retention Bonuses for these executives were designed to increase the likelihood that the senior management team would remain in place during the development, implementation and initial growth stages of Insphere. All four executives, including Mr. Chandra, whose termination of employment was a qualifying termination under his employment agreement, were paid their respective Retention Bonuses.

 

In June 2010, Messrs. Heller and Mahmood were granted retention bonus awards of $1.2 million and $1.125 million, respectively. These retention bonus awards vest in three annual installments (25%, 25%, 50%), subject to continued employment through the applicable vesting date (with earlier vesting in the event of a change of control or certain qualifying terminations of employment). The first portion of the retention bonus vests on June 30, 2011 and the next two portions of the retention bonus will vest on June 30, 2012 and June 30, 2013, respectively. While the retention bonus payments are subject to vesting, they will be paid in equal pro rata installments on a quarterly basis (in some cases in advance of vesting), but 75% of the gross amount of any payment made prior to vesting is subject to clawback by the Company based on specified termination events. The Company granted these retention bonus awards, along with the guaranteed portion of annual bonus compensation (described above), in order to further incentivize key employees of the Company to remain motivated and focused during this transitional period.

 

Sign-On Bonus

 

Mr. Fasola received a $1.0 million bonus upon commencing his employment with the Company. Pursuant to the terms of his employment agreement, $750,000 of the sign-on bonus was paid in cash and the remaining $250,000, after adjustment for taxes, was paid in shares of the Company’s A-1 common stock. If Mr. Fasola’s employment is terminated for cause or he resigns without good reason during the eighteen-month period following his start date, he will be required to repay a pro-rated portion of his sign-on bonus award in cash. In the event of such a termination of employment during the two-year period following his start date, the portion of Mr. Fasola’s sign-on bonus awarded in shares of the Company’s A-1 common stock will be acquired by the Company at no cost to the Company.

 

Stock Options and Restricted Share Awards — 2006 Management Stock Option Plan

 

On May 8, 2006, the Board of Directors adopted the 2006 Management Stock Option Plan (as amended, the “2006 Plan”), in accordance with which options to purchase shares, restricted shares and restricted stock units of HealthMarkets’ Class A-1 Common Stock may be granted from time to time to officers, employees and non-

employee directors of HealthMarkets or any subsidiary. The purpose of the 2006 Plan is to attract and retain officers and other key employees for the Company and its subsidiaries and to provide to such persons incentives and rewards for superior performance. The Committee believes that the Company will be able to enhance the prospects for its business objectives and more closely align the interests of outside directors, officers and key employees with those of the Company’s stockholders by providing those individuals with the opportunity to increase their equity interests in the Company on meaningful terms.

 

Stock options granted to our Named Executive Officers are intended to provide a long-term incentive opportunity to the executives that also links the interests of the executive with those of the stockholders, as the options provide no value unless the value of the underlying shares increases. The number of stock options granted to a particular executive officer is based on the executive’s position and an evaluation of the executive’s ability to influence the long-term growth and profitability of the Company. The number of options previously granted to, and shares held by, an officer are not considered in determining the number of options granted to the officer. These options are included in the Grants of Plan Based Awards table on page 29 below. The Committee does not time the grant of stock options in consideration of the release of material non-public information.

 

In March 2010, the Company granted Messrs. Hildebrand and Chandra 43,264 and 13,283 restricted shares of the Company’s A-1 common stock, respectively. Pursuant to the applicable restricted share agreements, the restricted shares granted to Messrs. Hildebrand and Chandra vest in equal 20% installments on each of the first five anniversaries of the grant date, in each case subject to the executive’s continued employment through the applicable vesting date and the Company’s achievement of certain EBITDA goals prior to the first anniversary of the grant date (subject to earlier vesting in the case of certain qualifying terminations). In connection with Mr. Chandra’s separation of employment with the Company, he was entitled to the accelerated vesting of 65,593 restricted shares of the Company’s A-1 common stock upon the termination of his employment. Mr. Hildebrand’s transition agreement (as further described on page 24 below) provides that all of his outstanding equity awards that would have vested between April 1, 2011 (his resignation date) and June 4, 2012, including a portion of those granted in March 2010, will vest, and all of Mr. Hildebrand’s other unvested equity awards will be forfeited as of that date.

 

In June 2010, in connection with the retention program implemented by the Company, each of Messrs. Heller and Mahmood was granted options to purchase 150,000 shares of the Company’s Class A-1 common stock under the 2006 Plan. The options were granted with an exercise price of $7.00 and vest in equal 20% installments on each of the five anniversaries of the grant date, in each case subject to the executive’s continued employment through the applicable vesting date (subject to earlier vesting in the case of qualifying termination). Messrs. Heller and Mahmood were also granted 150,000 and 100,000 restricted shares of the Company’s A-1 common stock, respectively. The restricted shares vest on the same vesting schedule as the stock options granted to Messrs. Heller and Mahmood.

 

Pursuant to his employment agreement, Mr. Fasola was granted an option to purchase 375,000 shares of the Company’s Class A-1 common stock and 200,000 restricted shares upon commencing his employment with the Company. The option vests in quarterly installments beginning on the grant date and ending on September 30, 2015, subject to Mr. Fasola’s continued employment through the applicable vesting date (subject to earlier vesting in the case of certain terminations of employment or a change of control). The restricted shares vest based on the same schedule as the option, subject to continued employment through the applicable vesting date (subject to earlier vesting in the case of certain terminations of employment or a change of control) and the Company’s achievement of certain EBITDA goals prior to the first anniversary of the grant date.

 

Long-Term Incentive Plan Awards

 

The Company previously granted long term incentive awards (“LTIPs”) pursuant to the terms of the employment agreements (or any predecessor employment agreements) with each of Messrs. Hildebrand, Erwin, Chandra and Westen. The LTIPs are subject to achievement of the specified performance goals and continued employment with the Company through each applicable vesting date, and generally vest in three equal annual installments on each of the first, second and third anniversaries of the executive’s effective date of employment. The LTIP awards are intended to attract and retain key executives and to provide to such persons incentives and rewards for superior performance. The Committee believes that the LTIP awards help align the interests of key executives

with those of the Company’s stockholders by providing these executives with an opportunity to earn additional compensation based upon achievement of specific performance goals.

 

HealthMarkets 401(k) and Savings Plan

 

The Company maintains for the benefit of its and its subsidiaries’ employees the HealthMarkets 401(k) and Savings Plan (the “Employee Savings Plan”). The Employee Savings Plan enables eligible employees to make pre-tax contributions to the Employee Savings Plan (subject to overall limitations) and to direct the investment of such contributions among several investment options. The Employee Savings Plan, which is made available to all employees, is intended to assist in attracting and retaining employees by providing them with a tax-advantaged means to save a portion of their earnings for retirement purposes.

 

During 2010, the Company made certain matching contributions to participants’ accounts in cash. All contributions made on behalf of the Named Executive Officers were calculated using the same formula as is used for all other eligible employees. Pursuant to a partial plan termination in 2010, the Executive Compensation Committee approved the full vesting of all Plan Participants terminated during the 2010 plan year with the exception of those Participants terminated “for cause”. The Committee also approved the 100% vesting of all remaining active Participants effective January 1, 2011, including immediate full vesting for all new Plan Participants during 2011 not related to partial termination, returning to the graduated vesting schedule in prescribed increments over a six-year period in 2012 for all new Plan Participants.

 

Employee Benefit Plans

 

The Company offers benefit plans such as vacation, medical, prescription drug, vision, dental and term life insurance coverage to the Named Executive Officers on the same basis as offered to all employees. The Company offers these plans to attract, motivate and retain high-caliber employees.

 

The Company does not maintain a pension plan or non-qualified deferred compensation plan for the Named Executive Officers or its other employees.

 

Perquisites

 

Historically, the Company has not provided a broad array of perquisites and personal benefits to its Named Executive Officers. The Company has chosen to offer only a very limited number of perquisites to its executives as an incremental benefit to recognize their position within the Company and as an accommodation to certain executives who maintain a residence in states other than the location of their Company office or who might otherwise incur certain expenses associated with the commencement of their employment. In 2010, the Company provided a monthly car allowance for Messrs. Hildebrand and Erwin, reimbursement of certain relocation and/or housing expenses for Mr. Fasola and Mr. Westen and reimbursement of legal fees incurred in connection with the negotiation of employment agreements or similar arrangements with the Company for Messrs. Hildebrand and Fasola. The Company also maintains a club membership for use by Mr. Hildebrand for business development and entertainment purposes. Such perquisites were provided pursuant to employment agreements or similar arrangements with these executives. The Company furnished these executives with tax gross-ups for income attributable to certain of these payments. The Company believes that these payments enhanced its ability to attract and retain these executives. The Company chose to provide the tax gross-ups to preserve the level of benefits intended to be provided under these arrangements. The value of each of these perquisites is included in the “All Other Compensation” column of the Summary Compensation Table on page 26 below.

 

Other

 

Prior to his appointment as an officer of the Company in December 2006, Mr. Heller served as an independent agent of the Company’s insurance subsidiaries for approximately 15 years, 11 of which he spent as a “regional sales leader.” Pursuant to his agent contract with the insurance subsidiaries, Mr. Heller is entitled to ongoing commissions for sales production during this period. These amounts are included in the “All Other Compensation” column of the Summary Compensation Table on page 26 below. The Committee did not take Mr. Heller’s commissions income into account when setting his compensation for 2010.

Severance Provisions in Employment Agreements

 

Under the terms of their current employment agreements or similar arrangements with the Company, the Named Executive Officers are entitled to certain payments in the event of their termination in certain specified circumstances. The level of severance and other severance benefits are set forth on pages 31-35. These levels were determined to be necessary in order to attract and retain our Named Executive Officers and were provided as part of the negotiations with each executive. Each of the Named Executive Officers (other than Mr. Mahmood) has agreed to post-termination non-competition and non-solicitation covenants that remain in effect for a period of one (1) year following termination of the executive’s employment. As a condition of receiving severance benefits, Mr. Mahmood has agreed to execute a release in a form reasonably acceptable to the Company that would include, but not be limited to, a release of claims against the Company, confidentiality, non-disparagement and non-solicitation acknowledgments.

 

Each of the Named Executive Officers, except Mr. Mahmood and Mr. Chandra (who had a change of control parachute excise tax gross up in his employment agreement prior to his separation of employment with the Company), is entitled to change of control parachute excise tax gross up protection on all payments and benefits due to the executive in connection with a change of control, unless the parachute payments exceed the safe harbor by less than 10 percent in which case all payments will be reduced to the safe harbor. The Company agreed to provide the golden parachute excise tax gross up as a way of mitigating the often arbitrary adverse effects of the tax on the Named Executive Officers and to provide them with comfort that the value intended to be provided to them in connection with a transaction would not be diminished by the tax.

 

Other provisions addressing a change of control of the Company are contained in various Company plans applicable to the Named Executive Officers as well to other employees. We believe that these change of control arrangements benefit the Company and its stockholders by providing key employees with financial assurances so that they can perform their jobs with minimum distraction in the face of a pending change of control; by encouraging key employees to stay with the Company while a change of control is occurring; and by helping the Company recruit employees who may have similar agreements with other companies.

 

What tax and accounting rules does the Company take into account in designing its compensation programs?

 

Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended, limits the deductibility of compensation in excess of $1.0 million paid to the Company’s principal executive officer or to any of the Company’s three other highest-paid executive officers (other than the principal financial officer) unless certain specific and detailed criteria are satisfied. The Committee considers the anticipated tax treatment to the Company and its executive officers in its review and establishment of compensation programs and payments, but has determined that it will not necessarily seek to limit compensation to that amount otherwise deductible under Section 162(m).

 

Does the company have a policy for recouping performance-based compensation in the event of an earnings restatement?

 

The Company has no specific policies to adjust or recoup prior performance-based compensation. However, under Section 304 of Sarbanes-Oxley, if the Company is required to restate its financials due to material noncompliance with any financial reporting requirements as a result of misconduct, the Chief Executive Officer and Chief Financial Officer may be required to reimburse the Company for any bonus or other incentive-based or equity-based compensation received during the 12 months following the first public issuance of the non-complying document and any profits realized from the sale of securities of the Company during that twelve month period. In addition, the Company will comply with any statutory recoupment requirements under the Dodd-Frank Act.

 

COMPENSATION COMMITTEE REPORT

 

The Executive Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis appearing above. Based on the review and discussions referred to above, the Executive Compensation Committee recommends to the Company’s Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Information Statement on Schedule 14C.

 

EXECUTIVE COMPENSATION COMMITTEE
Chinh E. Chu (Chairman)
Adrian M. Jones
Mural R. Josephson
Steven J. Shulman

Employment Agreements

 

The Company is party to agreements with each of the Named Executive Officers.

 

Transition Agreement with Mr. Hildebrand

 

In connection with the transition of the senior management team, Mr. Hildebrand entered into a transition agreement with the Company in September 2010. The transition agreement provides that Mr. Hildebrand will continue to serve as the Company’s Chief Executive Officer until the earlier of (i) another employee of the Company being appointed Chief Executive Officer or (ii) June 1, 2011. The transition agreement also provided that Mr. Hildebrand will serve as Chairman of the Board for a one-year term beginning on the date that his term as the Company’s Chief Executive Officer concludes. As discussed above, Mr. Hildebrand’s term as the Company’s Chief Executive Officer concluded on April 1, 2011.

 

The transition agreement provides that Mr. Hildebrand will remain subject to the terms and conditions of his employment agreement with the Company until he resigns as the Company’s Chief Executive Officer. The severance benefits to be provided to Mr. Hildebrand under the transition agreement following his resignation date are substantially similar to those provided in the employment agreement (and are described on page 31). Pursuant to the terms of his existing employment agreement, Mr. Hildebrand receives an annual base salary of $1,200,000 and is entitled to a target bonus opportunity of 133.33% and a maximum bonus opportunity of 266.66% of his base salary for each year beginning fiscal year 2010. Mr. Hildebrand is also eligible to receive a retention bonus of $1.0 million, subject to the executive’s continued employment with the Company through the earlier of December 31, 2010 or a change of control of the Company.

 

Under the terms of his employment agreement, Mr. Hildebrand was granted both an initial long-term incentive award and a 2009 long-term incentive award. Mr. Hildebrand’s long-term incentive awards are generally earned based on the achievement of certain performance goals and vest based on continued employment and pay on fixed payment dates in the future; however, the vesting (and sometimes payment) may be accelerated on certain qualifying terminations of employment or a change of control of the Company.

 

Under the terms of his employment agreement, Mr. Hildebrand was granted an option to purchase 506,650 shares of the Company’s Class A-1 common stock and 506,650 restricted shares of the Company’s Class A-1 common stock. The Company also granted Mr. Hildebrand a special restricted share award in respect of 25,862 shares of the Company’s Class A-1 common stock. The options granted to Mr. Hildebrand vest in quarterly installments, through June 4, 2014, subject to Mr. Hildebrand’s continued employment through the applicable vesting date. Subject to the achievement of certain EBITDA goals by September 8, 2010 (which were achieved), the restricted shares granted to Mr. Hildebrand (other than the special restricted shares) vest on the same schedule as the stock options granted to him and the special restricted shares vest as to one-third of the shares subject to the grant on the date the award becomes effective, and will otherwise be subject to quarterly vesting through June 4, 2012, in each case, subject to Mr. Hildebrand’s continued employment through the applicable vesting date. The transition agreement also provides that Mr. Hildebrand continues to be eligible for a retention bonus of $1.0 million, subject to his continued employment with the Company through the earlier of December 31, 2010 or a change of control of the Company.

 

Mr. Hildebrand’s transition agreement also provides for the payment of an annual retainer of (i) $100,000 for his service as a member of the Company’s Board, (ii) $50,000 for his service as Chairman of the Board and (iii) $25,000 for each of the committee(s) of the Board that Mr. Hildebrand serves on.

 

Employment Agreement with Mr. Fasola

 

The company entered into an employment agreement with Mr. Fasola in September 2010, pursuant to which he is the President and Chief Operating Officer and subsequently the Company’s Chief Executive Officer. The agreement has an initial term of three years and will thereafter automatically renew for successive one-year terms unless either party notifies the other that it does not wish to renew the agreement. Mr. Fasola will initially receive an annual base salary of $700,000 and such annual base salary will be no less than $750,000 once he is appointed the Company’s Chief Executive Officer. Mr. Fasola will receive a guaranteed pro-rated annual bonus at target level, or

$184,110, for the Company’s 2010 fiscal year. For each subsequent fiscal year of the Company during the term of the agreement, Mr. Fasola will have a target bonus opportunity of 100% of his then current annual base salary and a maximum bonus opportunity of 200% of his then current annual base salary. The Company will withhold 1/2 of his annual bonus payments (after adjustment for taxes) to purchase Company common stock until such time as Mr. Fasola has acquired an additional $375,000 (after his initial investment of $375,000) in Company common stock at the fair market value of Company common stock on the date of that the Company common stock was acquired.

 

Under the terms of his employment agreement, Mr. Fasola was granted an option to purchase 375,000 shares of the Company’s Class A-1 common stock, as well as 200,000 restricted shares. The stock option granted to Mr. Fasola will vest in quarterly installments, through September 30, 2015, subject to the executive’s continued employment through the applicable vesting date (subject to earlier vesting in the case of certain qualifying terminations or a change of control) and, subject to achievement of certain EBITDA goals prior to the first anniversary of the grant date, the restricted shares granted to Mr. Fasola will vest on the same schedule as the stock options described above.

 

Mr. Fasola also received a $1.0 million sign-on bonus, $750,000 of which was paid in cash and the remaining $250,000 after adjustment for taxes was paid in shares of the Company’s A-1 common stock. In the event that Mr. Fasola’s employment is terminated by the Company for cause or he resigns without good reason during the 18-month period following the start date, Mr. Fasola will be required to repay a pro-rated portion of his sign-on bonus awarded in cash. If Mr. Fasola’s employment is terminated by the Company for cause or he resigns without good reason during the two-year period following the start date, the portion of Mr. Fasola’s sign-on bonus awarded in shares of Company common stock will be acquired by the Company at no cost to the Company.

 

Mr. Fasola’s employment also provides that, during the term of his employment, Mr. Fasola will be eligible to participate in the Company’s equity and any other incentive and deferred compensation plans and programs as well as any employee benefit plans and perquisite programs. In connection with Mr. Fasola’s commencement of employment with the Company, the Company agreed to provide him with relocation benefits pursuant to the Company’s relocation program and up to six months of temporary living expenses in the Dallas/Ft. Worth area.

 

Employment Agreements with Messrs. Erwin, Westen, Heller and Chandra

 

Each of the agreements with Messrs. Erwin, Westen and Chandra was effective as of September 8, 2009 and has a term through December 31, 2010 for Messrs. Erwin and Westen and through October 13, 2011 for Mr. Chandra. On October 26, 2010, the Company entered into a new employment agreement with Mr. Westen, effective January 1, 2011, which remains in effect through December 31, 2011. Mr. Heller’s agreement was initially effective as of December 18, 2006 and was amended effective as of September 10, 2009, had an original three-year term from the effective date and now has a year-to-year term. Other than Mr. Westen’s new employment agreement, which remains in effect through December 31, 2011, the agreements automatically renew for successive one-year terms unless either party notifies the other that it does not wish to renew the agreement. Mr. Chandra was employed by the Company through October 31, 2010 and he received severance benefits in accordance with the terms of his employment agreement, as further described on page 33.

 

The employment agreements provide for annual base salaries of $525,000, $475,000 and $400,000 for each of Messrs. Erwin, Westen and Heller, respectively. Each of Messrs. Erwin and Westen’s employment agreements provide for a target bonus opportunity of 100% and a maximum bonus opportunity of 200% of their respective base salaries for each year beginning fiscal year 2010. Mr. Heller’s agreement provides for a target bonus opportunity of 75% of Mr. Heller’s annual base salary.

 

Each of Messrs. Erwin, Westen and Chandra is eligible to receive a retention bonus of $1.0 million, subject to the executive’s continued employment with the Company through the earlier of December 31, 2010 or a change of control of the Company or certain qualifying terminations of employment. Each of Messrs. Erwin and Westen received his retention bonus in 2010. Mr. Chandra’s retention bonus was paid to him immediately following his separation of employment with the Company.

Under the terms of their prior employment agreements, each of Messrs. Erwin, Westen and Chandra were granted initial long-term incentive awards. Mr. Chandra was also granted an additional long-term incentive awards under the terms of his employment agreement. The long-term incentive awards are generally earned based on the achievement of certain performance goals and vest based on continued employment and pay on fixed payment dates in the future, however, the vesting (and sometimes payment) may be accelerated on certain qualifying terminations of employment or a change of control of the Company.

 

Under the terms of Mr. Chandra’s employment agreement, Mr. Chandra was granted an option to purchase 303,990 shares of the Company’s Class A-1 common stock and 303,990 restricted shares of the Company’s Class A-1 common stock. The option granted to Mr. Chandra vest in quarterly installments, through June 4, 2014, subject to the executive’s continued employment through the applicable vesting date. Subject to achievement of certain EBITDA goals by September 8, 2010 (which were achieved), the restricted shares granted to Mr. Chandra vest on the same schedule as the stock options granted to him.

 

Letter Agreement with Mr. Mahmood

 

Mr. Mahmood entered into a letter agreement with the Company on April 20, 2007 which sets forth his initial base salary, cash bonus and grant of stock options, as well as standard welfare benefits and severance on a termination of employment by the Company without cause or by Mr. Mahmood for good reason. More detail on the severance benefits are set forth on page 32 below.

 

SUMMARY COMPENSATION TABLE

 

The following table summarizes all compensation for services to us and our subsidiaries earned by or awarded or paid to the principal executive officer, any persons who served as principal financial officer in 2010, the three next most highly compensated executive officers of the Company serving as such at December 31, 2010 and a former executive officer who would have been one of the three next most highly compensation executive officers had he continued to serve as such at December 31, 2010:

 

 

 

 

 

NON-QUALIFIED DEFERRED COMPENSATION

 

The following table summarizes earned non-qualified deferred compensation for the Named Executive Officers during 2010.

 

 

 

 

Grants of Plan-Based Awards During Fiscal Year 2010

 

The following table sets forth information concerning each award granted to the Named Executive Officers in 2010:

 

 

 

 

 

Outstanding Equity Awards at Fiscal Year-End

 

The following table sets forth information concerning stock options held by the Named Executive Officers at December 31, 2010:

 

 

 

 

Option Exercises and Stock Vested

 

The following table summarizes exercises of stock options and vesting of restricted shares for the Named Executive Officers during 2010.

 

 

Benefits in Connection with Termination of Employment

 

The Company is party to agreements with each of Messrs. Hildebrand, Fasola, Heller, Mahmood, and Westen that provide severance benefits as of December 31, 2010. The agreements provide for the following benefits in connection with a termination of employment.

 

Pursuant to Mr. Hildebrand’s transition agreement, if his employment is terminated by the Company without Cause (as defined in each agreement) or by the executive for Good Reason (as defined in each agreement), subject to the executive’s execution and non-revocation of a release of claims, the executive will be entitled to the following payments and benefits:

 

 

If Mr. Fasola’s employment is terminated by the Company without Cause, by Mr. Fasola for Good Reason or due to death or Disability (as defined in Fasola’s employment agreement), subject to the executive’s execution and non-revocation of a release of claims, the executive will be entitled to the following payments and benefits:

 

 

In addition, if Mr. Fasola’s employment is terminated without Cause or for Good Reason (i) after a definitive agreement is entered into which will result in a change of control (provided such agreement results in a change of control) or (ii) within six months prior to a change of control, each outstanding equity award will be treated as if it had fully vested as of the date of the change of control.

 

If Mr. Heller’s employment is terminated by the Company without Cause or by the executive for Good Reason, subject to the executive’s execution and non-revocation of a release of claims, Mr. Heller will be entitled to an amount equal to the sum of (i) one years’ base salary and (ii) one times his target bonus for the year of termination, (iii) 12 months of continued health and life insurance benefits and (iv) a portion of his target bonus for the year of termination of employment in an amount equal to 100% of his target bonus on a pro-rata, payable in equal installments over a one year period. In addition, the portion of any outstanding equity awards which vests solely based on time/service that would have vested if Mr. Heller had remained employed through the first anniversary of the date of termination will vest on the date of termination and all vested options will remain exercisable until the earlier of the expiration of the original term or the first anniversary of the date of termination.

 

If Mr. Mahmood’s employment is terminated by Company without Cause or by the executive for Good Reason, subject to the executive’s execution and non-revocation of a release of claims, Mr. Mahmood will be entitled to a severance payment equal to the sum of (i) one years’ base salary and (ii) a portion of his target bonus for the year of termination of employment in an amount equal to 100% of his target bonus on a pro-rata basis, payable in 12 equal monthly installments. In addition, the portion of any outstanding equity awards which vests solely based on time/service that would have vested if Mr. Mahmood had remained employed through the first anniversary of the date of termination will vest on the date of termination and all vested options will remain exercisable until the earlier of the expiration of the original term or the first anniversary of the date of termination.

 

Mr. Westen’s employment agreement expired December 31, 2010; however, he entered into a new employment agreement, effective January 1, 2011, that provides for (i) a pro-rata bonus, a portion of which is guaranteed and a portion of which is based on achievement of the applicable performance goals, pro-rated based on the number of days that Mr. Westen was employed during the applicable performance period and (ii) a pro-rata portion of Mr. Westen’s quarterly retention payment that is provided under his new employment agreement, vested based on the number of days that Mr. Westen was employed during the applicable quarter.

 

Mr. Erwin’s employment agreement expired on December 31, 2010 and it provided for a pro-rata bonus, based upon the achievement of the applicable performance goals and the number of days the executive was employed in the applicable performance period upon separation from the Company. Mr. Erwin was employed with the Company

through December 31, 2010 and he is not entitled to any additional severance benefits in connection with his separation from the Company.

 

Mr. Chandra was employed through October 31, 2010 and, following his execution and non-revocation of a release of claims, he was entitled to the following benefits pursuant to the terms of his employment agreement:

 

 

Each of the executives, except for Mr. Mahmood and Mr. Chandra, is entitled to a gross-up for any taxes imposed under the so-called “golden parachute” excise tax of Section 4999 of the Code, unless the executive’s parachute payments do not exceed 110% of the executive’s “safe harbor” in which case the executive’s payments will be reduced such that the executive is not subject to the tax. In addition, while employed by the Company and for one year following his termination of employment, each of the executives is subject to certain non-competition and/or non-solicitation restrictions and will be subject to ongoing confidentiality restrictions. If the executives breach the non-compete, the non-solicitation or confidentiality covenants in the agreement, the Company will not be obligated to make additional payments of the cash severance described above or the pro-rata bonus and will not be obligated to provide him and his eligible dependents with any continued health and life insurance benefits and the executives will be required to pay back to the Company any cash severance amounts or pro-rata bonus amounts previously paid to them.

Potential Payments upon Termination or Change-in-Control

 

Assuming each Named Executive Officer was terminated on December 31, 2010 (except Mr. Chandra, whose employment ended on October 31, 2010) and that the fair market value of the Company’s Common Stock was $9.25 as of December 31, 2010, then these Named Executive Officers would be entitled to the following payments upon termination of employment or change of control: