Our by-laws are consistent with this statutory provision and provide that:
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| • | our board of directors shall annually appoint a nominating committee that shall consistconsists of not less than two directors who are not our officers or employees of any entity controlling, controlled byDonegal Mutual or under common control with us and who aredo not beneficial ownersown beneficially 10% or more of a controlling interest in us;our Class A or Class B common Stock; and |
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| • | the nominating committee shall, prior to each annual meeting of stockholders, determine and nominate candidates for election as directors by our stockholders. |
In accordance with these by-law provisions, on April 19, 200716, 2009, our board of directors appointed a nominating committee consisting of R. Richard Sherbahn and Philip H. Glatfelter, II. Neither Mr. Sherbahn nor Mr. Glatfelter is onean officer or employee of our executive officers named in the Summary Compensation TableDonegal Mutual or us or a beneficial owner of a controlling10% or greater interest in us.our Class A common stock or our Class B common stock.
Our Nominating Procedures
NominationsOur stockholders may nominate candidates for election as directors by our stockholders may be made at any annual meeting of our stockholders if timely notice in writing of any such nomination is given in accordanceprovided they comply with the advance notice procedures set forth in Section 2.3provisions of our by-laws. TheseWe describe those procedures are described under “Stockholder Proposals” in this proxy statement. Our nominating committee may also consider director candidates proposed by our management.management proposes. We havedo not utilized third-partyuse executive search firms to identify candidates for director.director candidates.
With the exception of applicable regulations of the SEC, the listing application standards of the NASDAQ Global Select Market, or NASDAQ, and the Holding Companies Act, our nominating committee does not have any specific, minimum qualifications for candidates for election to our boardthe nomination of directors, and ourdirector candidates. Our nominating committee may take into account such factors as it deems appropriate. Our nominating committee examines the specific attributes of candidates for election to our board of directorsappropriate, and also considersinclude the judgment, skill, diversity and business experience of the candidate, the interplay of the candidate’scandidate���s experience with the experience of the other members of our board of directors and the extent to which the candidate would contribute to the overall effectiveness and experience of our board of directors.
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Our nominating committee utilizesand our board of directors considers, at a minimum, the following processfactors in identifying and evaluating potential new board members, including any candidates for election as membersnominated by our stockholders, or the continued services of ourexisting board of directors:members:
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| • | Evaluation of the performance and qualifications of the members of our board of directors whose term of office will expire at the forthcoming annual meeting of stockholders and determination of whether theyA director is nominated based on his or her professional experience. He or she should be nominated for re-election.accomplished and have recognized achievements in his or her respective field. |
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| • | ConsiderationWhether the director serves as a member of the suitability of the candidates for election, including incumbent directors. |
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| • | Review of the qualifications of any candidates proposed by stockholders in accordance with our by-laws, candidates proposed by management and candidates proposed by individual members of ourDonegal Mutual’s board of directors. |
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| • | After such reviewA director should have relevant education, expertise and consideration, ourexperience, and be able to offer advice and guidance to the Chief Executive Officer based on that expertise and experience. |
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| • | A director should possess high personal and professional ethics, integrity and values. |
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| • | A director must be inquisitive and objective, have the ability to exercise practical and sound business judgment, and have an independent mind. |
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| • | A director must be willing to devote sufficient time and effort to carrying out his or her duties and responsibilities effectively. |
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| • | A director should have the ability to work effectively with others. |
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| • | We seek qualified individuals who, taken together, represent a diversity of skills, backgrounds and experience, including ethnic background, gender and professional experience. |
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| • | Our nominating committee meets and proposes a slateassesses which functional skills or areas of candidates for election atexpertise are needed to round out the forthcoming annual meetingexisting collective strengths of stockholders.the board as part of its director selection process. |
Since our formation in 1986 and because of Donegal Mutual’s voting control of us, our board has always had a meaningful number of directors who also serve as members of the board of directors of Donegal Mutual. This membership has ranged from six of eight directors in 1986 to five of 11 directors in 2010. It is our intent
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and the intent of Donegal Mutual to maintain a significant presence of Donegal Mutual directors on our board as long as Donegal Mutual owns more than a majority of the voting power of our common stock.
In nominating director candidates, our nominating committee takes into account the diversity of our policyholder and stockholder base. Our nominating committee does not discriminate against any director candidate on the basis of race, color, religion, sex, national origin, age, ancestry or disability.
Actions Taken byThe Role of Our Nominating Committee
Our nominating committee met on March 4, 2008 for the purpose of evaluatingFebruary 5, 2010 to evaluate the performance and qualifications of the Class C members of our board of directors and nominating candidates for election as Class A directors bywhose terms will expire at our stockholders at our2010 annual meeting. After considering the performance and qualifications of the Class C members of our board of directors during 2007,2009, our nominating committee nominated the personscandidates named below.below for election as Class C directors. On March 4, 2008,10, 2010, our board of directors accepted the report of our nominating committee and approved the nomination by our nominating committee of the three persons named below.below as candidates for election as Class C directors.
CandidatesOur Nominees for Election as Class C Directors
Our board of directors currently has 11 members, and consists of nine members. Eachfour Class A directors, four Class B directors and three Class C directors. We elect each director is elected for a three-year term and until the election of the director’s successor has been duly elected.successor. The current three-year terms of our directors expire in the years 2008, 20092010 (Class C), 2011 (Class A) and 2010,2012 (Class B), respectively.
ThreeWe will elect three Class AC directors are to be elected at our annual meeting. Unless otherwiseyou have marked your proxy card to the contrary, we have instructed the proxies solicited by our board of directors will be votednamed on your proxy card to vote for the election of the three nominees named below. Each nominee for election as a Class A nomineeC director is currently a Class C director.
If any of the named nominees becomes unavailable for any reason, the proxies intend to vote for a substitute nominee designated by our board of directors.directors will designate a substitute nominee. Our board of directors has no reason to believe the nominees namedbelieves each nominee will be unableable to serve if elected. Any vacancy occurring onA majority of our board of directors formay fill any reason may be filled by a majorityvacancy that arises in our board of our directors then in office until the expiration of the term of the class of directors in which the vacancy exists.occurs.
Our board of directors recommends a vote FOR the election of theour three nominees for Class A directorC directors named below.
The names of our three nominees for election as Class A director,C directors, and our Class BA directors and our Class CB directors who will continue in office after our annual meeting until the expiration of their respective terms and the election of their respective successors, together with certain information regarding them, are as follows:
Our Nominees for Election as Class AC Directors
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| | | | | Director
| | | Year Term
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Name | | Age | | | Since | | | Will Expire* | �� |
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Robert S. Bolinger | | | 71 | | | | 1986 | | | | 2011 | |
Patricia A. Gilmartin | | | 68 | | | | 1986 | | | | 2011 | |
Philip H. Glatfelter, II | | | 78 | | | | 1986 | | | | 2011 | |
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| | | | Director
| | Year Term
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Name | | Age | | Since | | Will Expire* |
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John J. Lyons | | | 70 | | | | 2001 | | | | 2013 | |
S. Trezevant Moore, Jr. | | | 56 | | | | 2006 | | | | 2013 | |
R. Richard Sherbahn | | | 80 | | | | 1986 | | | | 2013 | |
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* | | If elected at our annual meeting. |
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Our Directors ContinuingWho Will Continue in Office
Class A Directors
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| | | | Director
| | Year Term
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Name | | Age | | Since | | Will Expire |
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Robert S. Bolinger | | | 73 | | | | 1986 | | | | 2011 | |
Philip A. Garcia | | | 52 | | | | 2009 | | | | 2011 | |
Patricia A. Gilmartin | | | 70 | | | | 1986 | | | | 2011 | |
Philip H. Glatfelter, II | | | 80 | | | | 1986 | | | | 2011 | |
Class B Directors
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| | | | | Director
| | | Year Term
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Name | | Age | | | Since | | | Will Expire | |
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Jon M. Mahan | | | 38 | | | | 2006 | | | | 2009 | |
Donald H. Nikolaus | | | 65 | | | | 1986 | | | | 2009 | |
Richard D. Wampler, II | | | 66 | | | | 2004 | | | | 2009 | |
Class C Directors
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| | | | | Director
| | | Year Term
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Name | | Age | | | Since | | | Will Expire | |
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S. Trezevant Moore, Jr. | | | 54 | | | | 2006 | | | | 2010 | |
R. Richard Sherbahn | | | 78 | | | | 1986 | | | | 2010 | |
John J. Lyons | | | 68 | | | | 2001 | | | | 2010 | |
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| | | | Director
| | Year Term
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Name | | Age | | Since | | Will Expire |
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Kevin M. Kraft, Sr. | | | 57 | | | | 2009 | | | | 2012 | |
Jon M. Mahan | | | 40 | | | | 2006 | | | | 2012 | |
Donald H. Nikolaus | | | 67 | | | | 1986 | | | | 2012 | |
Richard D. Wampler, II | | | 68 | | | | 2004 | | | | 2012 | |
Mr. Bolinger retired in 2001 as Chairman and Chief Executive Officerchief executive officer of Susquehanna Bancshares, Inc., a position he held from 1982 to 2001. Susquehanna Bancshares, Inc. had approximately $14 billion in assets at December 31, 2009 and is one of the major financial institutions in the mid-Atlantic area where we conduct a majority of our business. From 2000 to 2002, Mr. Bolinger served as chairman of the board of Susquehanna Bancshares, Inc. Prior thereto, Mr. Bolinger was president and chief executive officer of Farmers First Bank from 1976 to 1997.
Mr. Garcia, who has served as a member of our board of directors since 1982.December 2009, served as executive vice president and chief financial officer of Erie Indemnity Company, or Erie, from 1981 to 2009 when he elected to take early retirement. Erie is the 21st largest property and casualty insurance company in the United States. Mr. Garcia is a certified public accountant. He has served as a member of the board of directors of Hamot Medical Center in Erie, Pennsylvania since 2000 and served as chairman of its board of directors from 2005 to 2008.
Mrs. Gilmartin has been an employee since 1969 of Associated Donegal Insurance Brokers, which has no affiliation with us, except that Associated Donegal Insurance Brokers receives insurance commissions in the ordinary course of business from our insurance subsidiaries and Donegal Mutual in accordance with their standard commission schedules and agency contracts. Mrs. Gilmartin has been a director of Donegal Mutual since 1979.director for 31 years and plays an important role in the relationship between Donegal Mutual and us. Mrs. Gilmartin, who has been a registered insurance agent for over 50 years, also helps provide us with insight into the concerns of agents.
Mr. Glatfelter, who has extensive banking experience, retired in 1989 as a Vice Presidentvice president of Meridian Bank, a position he held for more than five years prior to his retirement. Mr. Glatfelter has been a director of Donegal Mutual since 1981,for 29 years and has been instrumental in promoting the growth of Donegal Mutual and us. Mr. Glatfelter was Vice Chairman of the Board of Donegal Mutual from 1991 to 2001 and has been our Chairman of the Board and Chairman of the Board of Donegal Mutual since 2001. He also serves on the board of directors of Province Bank, our banking affiliate. Mr. Glatfelter is also a director of a Lancaster County-based water utility and has served as a director and chairman of several community-based non-profit entities.
Mr. Kraft has served as one of our directors since December 2009. Mr. Kraft has been the chief executive officer of Clyde W. Kraft Funeral Home, Columbia, Pennsylvania since 1995. Mr. Kraft served as a director of Central Savings and Loan Association in Columbia, Pennsylvania from 1980 to 1992. After Farmers First Bank acquired Central Savings and Loan Association, Mr. Kraft served as a member of the regional board of Farmers First Bank. Mr. Kraft currently serves on the board of directors of a Lancaster County-based water
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utility and Conestoga Title Insurance Company. Mr. Kraft is also registered as an insurance agent with the Commonwealth of Pennsylvania. Mr. Kraft has been a director of Donegal Mutual since 2003.
Mr. Lyons was President and Chief Operating Officerhas been president of Keefe Managers,Ventures, LLC, a manager of private investment funds from February 1999 to June 2007 whensince 2002. Mr. Lyons retired.was also president and portfolio manager for investment funds affiliated with Keefe Managers, Inc. from 1999 until 2007. Mr. Lyons ishas significant experience in the turnaround of troubled financial institutions, serving as president and chief executive officer ofGateway-American Bank, Ft. Lauderdale, Florida; Regent National Bank, Philadelphia, Pennsylvania; Monarch Savings Bank, Clark, New Jersey and Jupiter-Tequesta National Bank, Tequesta, Florida, for the period from 1990 to 1998. Mr. Lyons was vice chairman of the investment firm Advest, Inc., Hartford, Connecticut, subsequent to that firm’s purchase of his bank consulting practice in 1989. Mr. Lyons began his banking career as an examiner for the Federal Deposit Insurance Corporation in 1961. Mr. Lyons currently formingmanages a private investmentequity fund under the name ofcalled Keefe Ventures LLC.Fund, LP which invests in community banking organizations.
Mr. Mahan has been a Managing Directormanaging director in the Investment Banking Division of Stifel Nicolaus & Company, Incorporated, or Stifel Nicolaus, and, previously, Legg Mason Wood Walker, Incorporated, prior to the acquisition of the Legg Mason Capital Markets Division by Stifel Nicolaus on December 1, 2005. Mr. Mahan specializes in corporate finance for banks and insurance companies, and his expertise benefits our analysis of acquisition opportunities. Mr. Mahan joined Legg Mason in 1996 and served as a principal from 2001 to 2004.
Mr. Moore has been Presidentserved as a consultant from May 2008 to November 2008 to a medical malpractice insurance company. Mr. Moore is currently a principal at Huguenot Capital. Prior thereto, Mr. Moore was president and Chief Executive Officerchief executive officer of Luminent Mortgage Capital, Inc. since, or Luminent, from May 2007 to May 2008 and was Presidentpresident and Chief Operating Officerchief operating officer of Luminent from March 2005 to May 2007. Luminent Mortgage Capital, Inc. is a real estate investment trust whose shares are traded on the New York Stock Exchange. Prior thereto,From 2000 to 2005, Mr. Moore was Executive Vice President,executive vice president, Capital Markets, of Radian Guaranty, Inc. from 2000For five years prior to joining Luminent Mortgage Capital, Inc. in March 2005, and Managing Director, Prime Residential Mortgage Finance,Mr. Moore was the executive vice president of capital markets for Radian Guaranty Inc. Prior to his service at Radian, Mr. Moore held several senior level positions in the mortgage industry, including First Union National Bank from 1997 to 1999.2000, Nationsbanc Capital Markets from 1994 to 1997, Citicorp Securities from 1989 to 1994 and First Boston from 1984 to 1989.
Mr. Nikolaus has been Presidentpresident and Chief Executive Officerchief executive officer of Donegal Mutual since 1981 and a director of Donegal Mutual since 1972. He has been our Presidentpresident and Chief Executive Officerchief executive officer since 1986. Mr. Nikolaus also serves as the Chairmanchairman and Chief Executive Officerchief executive officer of Province Bank and as Chairmanchairman or Presidentpresident of each of our insurance subsidiaries. Prior to the formation of Province Bank, Mr. Nikolaus served as a director of several regional banks. Mr. Nikolaus has also served as chairman of the Insurance Federation of Pennsylvania. Mr. Nikolaus has been a partner in the law firm of Nikolaus & Hohenadel since 1972. Mr. Nikolaus also currently serves as an executive officer and director of several Lancaster County-based water utilities.
Mr. Sherbahn, haswho was a certified financial planner for many years, owned and operated Sherbahn Associates, Inc., a life insurance and financial planning firm, from 1974 to 2007 and has been a licensed insurance agent since 1974.1956. Mr. Sherbahn has been a director of Donegal Mutual since 1967.for 43 years. Mr. Sherbahn played a principal role in Donegal Mutual’s decision to form us.
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Richard D.Mr. Wampler II is a certified public accountant and isserved as a retired principal of the accounting firm of Brown Schultz Sheridan & Fritz, a position held from October 1, 1998 to June 30,until his retirement in 2005. For 28 years prior thereto, he was a partner in the accounting firm of KPMG LLP.LLP where his practice focused on property and casualty insurance companies. Mr. Wampler is also a member of the subscribers advisory committee of the third largest medical professional liability insurer in Pennsylvania. We believe his background brings expertise to our board of directors in understanding statutory accounting principles as well as generally accepted accounting principles and in analyzing and maintaining internal controls over financial reporting.
Of our nine11 directors, fivesix (Messrs. Bolinger, Garcia, Lyons, Mahan, Moore and Wampler) are independent.independent and have no affiliation with Donegal Mutual. Five of our 11 directors (Mrs. Gilmartin and Messrs. Glatfelter, Kraft, Nikolaus and Sherbahn) are affiliated with Donegal Mutual, our majority stockholder, with whom we have a variety of inter-company agreements providing for, among other things, the pooling of underwriting
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results, reinsurance and expense-sharing. See “Stock Ownership — Our Relationship with Donegal Mutual.” We believe our board membership appropriately represents our public stockholders, who collectively own about 33.7% of the voting power of our common stock, and Donegal Mutual, which owns 66.3% of the voting power of our common stock.
Corporate Governance
The SEC has adopted regulations and NASDAQ has adopted changes to its listing qualification standards that became effective in 2004 and that relate to our corporate governance. Our board of directors has adopted standards and practices in order to comply with those regulations that apply to us.
We are a “controlled company” as defined in Rule 4350(c)(3) of NASDAQ’s listing qualification standards becauseBecause Donegal Mutual owns and holds more than 50% of the combined voting power of our voting power. See “Stock Ownership.Class A common stock and our Class B common stock, applicable NASDAQ regulations classify us as a “controlled company.” Therefore,Because we are a controlled company, we are exempt from a number of NASDAQ corporate governance requirements. However, because we believe those principles represent sound corporate governance principles, we voluntarily comply with the NASDAQ requirements of Rule 4350(c) with respect to having:that:
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| • | the members of the nominating committee of our board of directors must be independent; |
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| • | the members of the compensation committee of our board of directors must be independent; and |
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| • | a majority of the members of our board of directors must be independent; |
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| • | our compensation and nominating committees being comprised solely of independent directors; |
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| • | the compensation of our executive officers being determined by a majority of our independent directors or a compensation committee comprised solely of independent directors; and |
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| • | director nominees being selected or recommended for selection by our board of directors, either by a majority of our independent directors or by a nominating committee comprised solely of independent directors.independent. |
Our Board of Directors and Its CommitteesCommittee Structure
Our board of directors met sixeight times in 2007.2009. Our board of directors has an executive committee, an audit committee, a nominating committee, a compensation committee and, together with Donegal Mutual, a four-member coordinating committee. Philip H. Glatfelter, II is the chairman of our board of directors.
Executive Committee
Our executive committee met nineseven times in 2007. Messrs. Nikolaus, Sherbahn and Glatfelter are the2009. The members of our executive committee.committee are Philip H. Glatfelter, II, Donald H. Nikolaus and R. Richard Sherbahn. Our executive committee has the authority to take all action that can be taken by our full board of directors can take, consistent with Delaware law,the DGCL, between meetings of our board of directors.
Audit Committee
Our audit committee which consistsmet 11 times in 2009. The members of Messrs.our audit committee are Robert S. Bolinger, John J. Lyons and Richard D. Wampler, met nine times in 2007.II. Each member of our audit committee is independent withinsatisfies the meaningindependence requirements of the rules of the SEC. ConsistentSEC and is in compliance with Section 1405(c)(4)applicable provisions of the Holding Companies Act and the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, our2002.
Our audit committee has responsibilityis responsible for:
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| • | the selection ofselecting our independent registered public accounting firm; |
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| • | reviewing the scope and results of our audit by our independent registered public accounting firm;firm’s audit of our financial statements; |
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| • | reviewing all of our periodic filings with the SEC and press releases; |
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| • | reviewing related party transactions;transactions other than those transactions subject to review by our coordinating committee; and |
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| • | reviewing the adequacy of our accounting, financial, internal and operating controls. |
Our audit committee operates pursuant tohas a written charter, thewhich we describe under “Report of Our Audit Committee.” The full text of whichour audit committee’s charter may be viewed on our website at:athttp://www.donegalgroup.com. Our audit committee reviews its charter annually.
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Nominating Committee
Our nominating committee themet twice in 2009. The members of which are Messrs. Sherbahn and Glatfelter, met once in 2007.
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Our by-laws are consistent with the Holding Companies Act and provide that our nominating committee has responsibilityare Philip H. Glatfelter, II and R. Richard Sherbahn.
Our nominating committee is responsible for:
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| • | identification ofidentifying individuals believed to be qualified to become members of our board of directors and to recommend to our board of directors nominees to stand for election as directors; |
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| • | identification of members of our board of directorsnominating committee believes are qualified to serve on the various committeesas members of our board of directors; |
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| • | evaluationrecommending nominees to stand for election as directors to our board of directors; |
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| • | considering candidates nominated by other members for election as directors to our board of directors; |
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| • | evaluating the procedures and processes by which the committeesself-evaluations each of our board of directors conduct a self-evaluation of their performance;committees prepares; and |
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| • | provision toproviding our board of directors ofwith an annual performance evaluation of our nominating committee. |
Our nominating committee operates pursuant tohas a written charter, the full text of whichcharter. You may be viewedview this charter on our website athttp://www.donegalgroup.com. Our nominating committee reviews its charter annually.
Compensation Committee
Our compensation committee consists of Messrs. Sherbahn and Glatfelter and met three times in 2007.2009. The members of our compensation committee are Philip H. Glatfelter, II and R. Richard Sherbahn. Because the employees who provide services to us are employees of Donegal Mutual consistsfor reasons of Messrs. Sherbahn, Glatfelterefficiency and Dreher. Because our employees are in fact employed by Donegal Mutualcost savings and because our insurance subsidiaries are members of our participation inthe Donegal Insurance Group along with Donegal Mutual, our compensation committee and the compensation committee of Donegal Mutual conduct joint meetings thatfrom time to time. The members of the Donegal Mutual compensation committee are followed by a meeting at which only the members ofFrederick W. Dreher, Philip H. Glatfelter, II and R. Richard Sherbahn. Following these joint meetings, our compensation committee are presentmeets and makemakes compensation determinations onwith respect to our behalf.executive officers and other employees.
Our by-laws are consistent with Section 1405(c)(4) of the Holding Companies Act and provide that our compensation committee has responsibilityis responsible for:
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| • | the annual review of the guidelines for compensation increases for all of our employees; |
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| • | the annual review of the compensation of our executive officers; |
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| • | the provision of annual compensation recommendations to our board of directors for all of our officers; |
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| • | the determination of employees who participate in our employee stock option plans and the provision of recommendationsfrom time to our board of directorstime as to individualgrants of stock option grants;options to employees; and |
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| • | the general oversight of ourthe employee benefit plans.plans we and Donegal Mutual maintain. |
Our compensation committee operates pursuant tohas a written charter. You may view the charter the full text of which may be viewedour compensation committee on our website athttp://www.donegalgroup.com. Our compensation committee reviews its charter annually.
See “Executive Compensation — Compensation Discussion and Analysis” for further information.
See “Our Relationship with Donegal Mutual — The Coordinating Committee” for a description of our coordinating committee.
Compensation Committee Interlocks and Insider Participation
No membersmember of our compensation committee areis a former or current officersofficer of ours,Donegal Mutual or DGI, nor does any member of our compensation committee have any other interlocking relationships, as defined by the SEC.
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ITEM 2 — RATIFICATION OF OUR AUDIT COMMITTEE’S SELECTION OF KPMG LLP
AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2010
Our audit committee has appointed KPMG LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2010. Although our by-laws do not require that we submit our audit committee’s appointment of KPMG LLP to our stockholders for ratification, we do so as a matter of good corporate governance.
Representatives of KPMG LLP will attend our annual meeting and will respond to appropriate questions. The KPMG LLP representatives will also be able to make a statement if they determine to do so.
Our board of directors recommends that you vote “FOR” the ratification of the appointment of KPMG LLP as our independent registered public accounting firm for 2010.
Even if our stockholders ratify the appointment, the audit committee in its discretion may select a different independent registered public accounting firm at any time during the year if it determines that such a change would be in our best interests and in the best interests of our stockholders.
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DIRECTOR — STOCKHOLDER COMMUNICATIONS
Our stockholders mayStockholders who wish to communicate with our board of directors through our corporate secretary. Stockholders who wish to communicateor with anyone or more individual members of our directorsboard may do so by sending their communication in writing addressed to a particular director or directors, or in the alternative, to “Non-management“Non-Management Directors” as a group,group. Please send your communication to the attention of our corporate secretary, Sheri O. Smith, at our headquarters,principal executive offices at 1195 River Road, Marietta, Pennsylvania 17547. All such communications that are received17547 or by oure-mail tosherismith@donegalgroup.com. Our corporate secretary will be promptly forwardedforward all such communications to the addressee or addressees set forth in the communication.
We encourage our directors to attend our annual meetings of stockholders because we believe director attendance at our annual meetings provides our stockholders with an opportunity to communicate with the members of our board of directors.stockholders. All of our directors attended our annual meeting of stockholders in 2007.2009.
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EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Introduction
The compensation committee of our board of directors, or ourOur compensation committee oversees our compensation and benefit plans and policies,policies. Its oversight of our compensation levels, includingprocess includes reviewing and approvingrecommending for approval by our board of directors equity awards to our executive officers and reviews and recommends annually for approval by our board of directors all compensation decisions relating to our executive officers.
Our compensation committee believesdetermined that the primary objectives of our compensation programs for our executive officers are to:
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| • | attractAttract and retain talented and dedicated executive officers who contribute to our growth, development and profitability and to encourage them to remain with us for many years;their retention. |
We believe we achieved this objective because three of our five named executive officers have worked with us since our formation in 1986, and our other two named executive officers have worked for us for 23 and 17 years, respectively.
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| • | motivateMotivate our executive officers to achieve our strategic business objectives and to reward them when they achieve those objectives; andobjectives. |
We believe we achieved this objective through our compound annual growth rate, which was 4.8% for the five years ended December 31, 2009, and through our compound rate of growth in our book value, which was 8.5% for the five years ended December 31, 2009.
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| • | provideProvide long-term compensation to our executive officers that rewards our executive officersthem for sustained financial and operating performance and leadership excellence. |
We believe we achieved this objective based on our combined ratio, which has outperformed the combined ratio of the property and casualty industry as a whole for the five years ended December 31, 2009 based on data prepared by A.M. Best Company. Our results demonstrate that our compensation systems do not reward the undue taking of risk.
To achieve these objectives, we compensate our executive officers through a combination of base salary, annual cash bonuses that are principally based on our underwriting income and long-term equity compensation.
Our compensation committee’s charter reflects these responsibilities, and theour compensation committee and our board of directors reviews theits charter annually.
Our Compensation Philosophy and ObjectivesRisk Considerations
The most significant componentRisk Management Considerations
Our compensation committee believes that our underwriting profitability-based bonus plan and our performance-based equity ownership programs create incentives that are designed to result in long-term
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stockholder value. We have designed the following elements of our compensation programs to promote the creation of long-term value and that we therefore believe discourages behavior that could lead to excessive risk:
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| • | The financial metrics we use to determine the bonuses of our executive officers are metrics our compensation committee believe promote long-term stockholder value. These measures include underwriting profitability, return on equity and growth in net written premium. Our compensation committee sets limits on these bonus payments that encourage success without encouraging excessive risk-taking that seeks short-term results. |
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| • | The stock options we grant vest in three equal annual installments and remain exercisable for up to five years from the date of grant, which our compensation committee believes encourages our executive officers to attain sustained long-term performance; |
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| • | If we become obligated to restate our financial results because one of our executive officers has violated the financial reporting requirements under the federal securities laws, applicable law permits us to recover incentive compensation from that executive officer, including profits the executive officer received from the sale of our securities. If such an event were to arise, our board of directors would exercise its business judgment to determine the action it believes appropriate at that time. Such action could include recovery or cancellation of any incentive payment made to an executive officer on the basis of meeting or exceeding performance targets if our board of directors determines that such recovery or cancellation is appropriate due to intentional misconduct by that executive officer that resulted in the achievement of performance targets that would not have been achieved absent such misconduct. |
Evaluation of Executive Performance in 2009 and Executive Compensation
Our compensation committee does not restrict its evaluation of the compensation policy administered by our compensation committee is that a substantial portion of the aggregate annual compensationperformance of our named executive officers should be basedto predetermined formulas or a limited set of criteria. Our compensation committee considered our progress during 2009 in achieving the short-term and long-term objectives described below:
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| • | Our continued achievement of underwriting results superior to the underwriting results of other property and casualty insurance companies on a long-term basis. |
We believe we achieved this objective in 2009 because, in spite of increased severe weather events, our statutory combined ratio for 2009 was 101.1%, compared to approximately 100.6% for the property and casualty industry combined ratio for 2009 as projected by A.M. Best Company. We believe our underwriting results were reasonable in light of a challenging underwriting environment.
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| • | Our achievement of a compound rate of revenue growth in excess of 4.0% over a five-year period. |
We believe we achieved this objective for the five years ended December 31, 2009 because our compound rate of revenue growth for that period was 4.8%.
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| • | Our status in being named as one of Ward’s top 50 performing insurance companies over a five-year period. |
We believe we achieved this goal in 2009 because we received this award for the fifth straight year.
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| • | Our continued geographic expansion. |
One measure of our achievement of this objective in 2009 was Donegal Mutual’s completion of a 100% quota-share reinsurance of the property and casualty insurance business of Southern Mutual Insurance Company in Georgia and South Carolina, which benefits us as a result of Atlantic States’ participation in the pooling agreement with Donegal Mutual.
| | |
| • | Our development of automated underwriting and policy issuance software that enables us to compete with national carriers. |
20
During 2009, we continued to expand the use of thisstate-of-the-art system to all of our subsidiaries. We also received the 2009 Interface Partner Award from Applied Systems, an insurance technology company, in recognition of our achievements in agency-carrier communications.
| | |
| • | Our achievement of book value growth over a five-year period. |
We believe we achieved this objective for the five years ended December 31, 2009 because our compound rate of book value growth for that period was 8.5%.
On an overall basis, our compensation committee believes that we made progress in achieving the targets established for these objectives at the start of 2009. Our performance and book value growth in 2009 were the basis of the decisions made by our compensation committee at its meetings in December 2009 and February 2010 with respect to adjustments to base salary and the allocation of our annual underwriting results,cash bonuses among our premium growthofficers, including our named executive officers.
The specific compensation decisions made for each of our named executive officers in 2009 appropriately reflect our financial and our return on equity.operational performance in 2009. Our compensation committee also evaluates the achievement by our named executive officers of our other corporate objectives, and the contribution of each of our named executive officerofficers to those achievements.
achievements in each such officer’s primary area of responsibility. We rely onuse our judgmentdiscretion in making compensation decisions after reviewing our performance and the objective performance of our named executives based on financial and operational objectives. We do not retain the services of any compensation consultants. Our named executive officersWe do not have any form of employment, severance orchange-of-control agreements. agreements with any of our named executive officers.
Our Cash Incentive Plan
For a number of years, we have maintainedhad a cash incentive compensation programplan for our officers, including our named executive officers. This program operates pursuantofficers, that is tied to a formula in which a formula-based percentage of ourthat is based on the annual underwriting profit is available for allocation for bonuses for our officers, including our named executive officers. The amountincome and other financial metrics of the allocationDonegal Insurance Group. The formula operates as follows:
| | |
| • | We first determine the base underwriting income of the Donegal Insurance Group for the year; |
|
| • | We then adjust the base underwriting income by adding back our accrual for bonuses to our officers, and make a formula-based adjustment to limit the impact of any catastrophe losses and guaranty fund assessments on our base underwriting income; |
|
| • | We then adjust the amount so determined as the plan specifies based on variable percentages of the growth in net written premium of Donegal Insurance Group for the year; |
|
| • | We then multiply the amount so determined by a percentage that is based on our return on equity for the year; and |
|
| • | We then multiply the amount so determined by a predetermined factor, and the resulting amount constitutes the executive incentive compensation pool for the applicable year, which is allocated by the compensation committee to our officers, including our named executive officers. |
If the Donegal Insurance Group’s surplus for the year is dependent upon our underwriting income, premium growth and return on equity. Ourbelow an amount the Plan specifies, we reduce the executive incentive compensation committee does not assign specific weights to these factors. For the five years ended December 31, 2007, the allocation to our officers incentive bonus pool has averaged 63% of the maximum amount that we could have allocated under the formula.by 50%.
The Compensation of Our Officers
Our officers all of whom are also officers of Donegal Mutual, receive the following compensation:
| | |
| • | Base Salary. TheWe establish the base salaries of our officers, including our named executive officers, are established based on the scope of their responsibilities and the recommendation of our chief executive officer to our compensation committee for other than his own compensation. Our compensation committee reviews the base salaries of our named executive officers annually, including our chief executive officer, and adjusts thoserecommends adjustments to base salaries annually after taking into account individual responsibilities, performance, |
1521
| | |
| | responsibilities, performance, length of service, with us, current salary, experience and compensation history as well as our results of operations. |
| | |
| • | Annual Cash Bonus. Our officers, including our named executive officers, receive annual cash bonuses based primarily on ourthe underwriting results premium growth and return on equity. Theof the Donegal Insurance Group. We determine the maximum aggregate amount available annually for our officers is determined by formula.formula as described above. Our compensation committee then recommends to our board of directors the percentage of the maximum amount to be allocatedwe should allocate among our officers, including our named executive officers, on a discretionary basis. Our chief executive officer submits recommended bonus allocationsrecommends the allocation of any earned bonuses for our officers, including our named executive officers other than himself, to our compensation committee. Our compensation committee which reviews hisour chief executive officer’s recommendations and then establishesrecommends the annual bonus allocationsbonuses for all of our executive officers, and reports its decisionsincluding our chief executive officer, to our board of directors. The annualWe pay the cash bonuses approved by our compensation committee are paid in a single installment following the completion of each fiscal year.payment. |
|
| • | Long-Term Equity Incentives. We believe that we can maximize our long-term performance best whenif we tie the performancevalue of the long-term benefits our officers is motivated by equity-based awards that provide value based onexecutives receive to our long-term performance. We have designeddesign our long-term equity compensation plans to provide all of the members of our management, including our named executive officers, with equity incentives to foster the alignment of thetheir interests of our officers with the interests of our stockholders. Our equity-based compensation plans provide the principal method by which our officers can acquire significant ownership of our common stock. |
The primary form of equity compensation that we have historically awarded to our officers, including our named executive officers, is stock options. Our compensation committee receives preliminary recommendations for periodic stock option grants from our chief executive officer for our officers other than himself. Our compensation committee then reviews his recommendations and recommends stock option grants for all of our officers, including our chief executive officer, for approval byto our board of directors.directors for approval.
We haveOur stock option plans that authorize us to grant options to purchase shares of our Class A common stock to our employees, officers and directors. We have consistently followed the practice of granting
In accordance with NASDAQ rules, we do not grant stock options at anthat have exercise prices below the fair market value of our Class A common stock on the date of grant.
We do not reduce the exercise price in excessof stock options because of the closingsubsequent decline of the price of our Class A common stock on NASDAQ onbelow the date of grant.exercise price, except in connection with adjustments to reflect recapitalizations, stock or extraordinary dividends, stock splits, mergers, spin-offs and similar events permitted by the applicable stock option plan unless we first obtain stockholder approval.
The Operation of Our Compensation Process
Our compensation committee recommends all compensation and equity awards to our executive officers for final discretionary action by our board of directors. Our compensation committee, in recommending the annual compensation of our officers, including our named executive officers, to be established by our board of directors, reviews the performance and compensation of our officers. In assessing the performance of our named executive officers in relation tolight of the objectives established by our board of directors establishes, our compensation committee reviews specific achievements associated with attainment of the objectives, the degree of difficulty of the objectives and the extent to which significant unforeseen obstacles or favorable circumstances affected their performance.
Our compensation committee recommends to our board of directors the base salaries, annual aggregate bonus pool amount and stock option grants to the members of our management. As part of its oversight of the compensation of our named executive officers, our compensation committee recommended the following compensation adjustments for 20072009 for our named executive officers:
| | |
| • | increases in base salaries of our named executive officers in 2007for 2009 that averaged 6%1.7%, which our compensation committee considered an adjustment consistent with publishedreasonable based on publicly available information about annual base salary increases in the propertyfrom companies we consider to be our informal peer group (EMC Insurance Group, Harleysville Group Inc., Mercer Insurance Group, State Auto Financial Corporation and casualty insurance industry in the United States in 2007;Selective Insurance Group); and |
|
| • | decreasesdue to the decrease in our underwriting profitability in 2009 compared to historical amounts, the individual allocations from our annualincentive bonus pool that represented an average decrease of 12% compared to our all-time high allocations in 2006. Thesenamed executives decreased. The decreases reflected slightwere based on factors including a rate of net written premium growth of less than 5.0%, and reductions in underwriting profitability and return on equity compared to historical averages. Our compensation committee regarded the individual allocations to our executive officers as appropriate recognition of the underwriting results, our return on equity and premium growth of our insurance subsidiaries in 2007 compared to 2006. Our2009. |
1622
compensation committee regarded the individual allocations to our executive officers as appropriate recognition of our underwriting profitability, our return on equity and our growth in 2007.
Tax Matters
Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code, generally does not allow us a deductionto deduct for federal income tax purposes to the extent thatannual compensation we pay annual compensation to any of our executive officers named in the Summary Compensation Table in this proxy statementbelow that is in excess of $1 million. However,million, unless such compensation paid to such an executive officer that is paid pursuant to a performance-based plan is generally not subject to the Section 162(m) limitation.
Although our compensation committee is aware of the Section 162(m) limitation, our compensation committee believes that it is equally important to maintain flexibility and the competitive effectiveness of the compensation of our named executive officers. Our compensation committee may, therefore, from time to time, authorize compensation that is not deductible for federal income tax purposes if our compensation committee believes it is in our best interests and the best interests of our stockholders to do so.
Summary Compensation Table
The following table shows the compensation we paid during 20062007, 2008 and 20072009 for services rendered in all capacities to our chief executive officer, our chief financial officer and our three other most highly compensated executive officers. We refer to these persons, who are named in the table below, as our named executive officers. We do not have employment agreements with any of our named executive officers, nor do we provide any of them with restricted stock awards, with the exception of two of our executive officers who receive an annual restricted stock award of 311 shares as part of their compensation as members of our board of directors and the Donegal Mutual board of directors, non-equity incentive plan compensation, deferred compensation or pension benefits.
Based on the compensation paid to our named executive officers in 2007,2009, their salaries accounted for 46.7%76.0% of their total compensation in 20072009 and their performance-based bonuses accounted for 48.3%16.3% of their total compensation in 2007.2009.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Stock
| | Option
| | | | |
| | | | | | | | | Awards
| | Awards
| | All
| | |
| | | | | | | | | at
| | at
| | Other
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Grant Date
| | Grant Date
| | Compen-
| | |
| | | | | | | | Stock
| | Option
| | All Other
| | | | | | | | | | Fair Value
| | Fair Value
| | sation
| | Total
|
Name and Principal Position | | Year | | Salary ($) | | Bonus ($) | | Awards ($) | | Awards ($)(1) | | Compensation ($)(2) | | Total ($) | | Year | | Salary($) | | Bonus($)(1) | | ($) | | ($)(2) | | ($)(3) | | ($) |
|
Donald H. Nikolaus, | | | 2007 | | | | 555,000 | | | | 840,000 | | | | 6,092 | | | | — | | | | 52,038 | | | | 1,453,130 | | | | 2009 | | | | 555,000 | | | | 150,000 | | | | 5,215 | | | | — | | | | 48,384 | | | | 758,599 | |
President and | | | 2006 | | | | 535,000 | | | | 970,000 | | | | 5,415 | | | | 293,155 | | | | 46,668 | | | | 1,850,238 | | |
Chief Executive Officer | | | | | | | | | | | | | | | | | | | | | | |
President and Chief | | | | 2008 | | | | 555,000 | | | | 360,000 | | | | 5,340 | | | | 360,500 | | | | 49,139 | | | | 1,329,979 | |
Executive Officer | | | | 2007 | | | | 555,000 | | | | 840,000 | | | | 6,092 | | | | — | | | | 52,038 | | | | 1,453,130 | |
Cyril J. Greenya, | | | 2007 | | | | 174,000 | | | | 125,000 | | | | 6,092 | | | | — | | | | 42,603 | | | | 347,695 | | | | 2009 | | | | 185,000 | | | | 34,000 | | | | 5,215 | | | | — | | | | 42,658 | | | | 266,873 | |
Senior Vice President and | | | 2006 | | | | 162,000 | | | | 138,000 | | | | — | | | | 43,007 | | | | 16,860 | | | | 359,867 | | | | 2008 | | | | 180,000 | | | | 58,000 | | | | 5,340 | | | | 82,400 | | | | 42,538 | | | | 368,278 | |
Chief Underwriting Officer | | | | | | | | | | | | | | | | | | | | | | | | 2007 | | | | 174,000 | | | | 125,000 | | | | 6,092 | | | | — | | | | 42,603 | | | | 347,695 | |
Jeffrey D. Miller, | | | 2007 | | | | 177,000 | | | | 132,000 | | | | — | | | | — | | | | 10,098 | | | | 319,098 | | | | 2009 | | | | 197,000 | | | | 38,000 | | | | — | | | | — | | | | 11,723 | | | | 246,723 | |
Senior Vice President and | | | 2006 | | | | 162,000 | | | | 145,000 | | | | — | | | | 43,007 | | | | 9,244 | | | | 359,251 | | | | 2008 | | | | 187,000 | | | | 62,000 | | | | — | | | | 92,700 | | | | 10,932 | | | | 352,632 | |
Chief Financial Officer | | | | | | | | | | | | | | | | | | | | | | | | 2007 | | | | 177,000 | | | | 132,000 | | | | — | | | | — | | | | 10,098 | | | | 319,098 | |
Robert G. Shenk, | | | 2007 | | | | 223,000 | | | | 125,000 | | | | — | | | | — | | | | 11,866 | | | | 359,866 | | | | 2009 | | | | 232,000 | | | | 34,000 | | | | — | | | | — | | | | 13,265 | | | | 279,265 | |
Senior Vice President, | | | 2006 | | | | 214,000 | | | | 138,000 | | | | — | | | | 50,255 | | | | 11,427 | | | | 413,682 | | | | 2008 | | | | 229,000 | | | | 58,000 | | | | — | | | | 82,400 | | | | 12,887 | | | | 382,287 | |
Claims | | | | | | | | | | | | | | | | | | | | | | | | 2007 | | | | 223,000 | | | | 125,000 | | | | — | | | | — | | | | 11,866 | | | | 359,866 | |
Daniel J. Wagner, | | | 2007 | | | | 174,000 | | | | 125,000 | | | | — | | | | — | | | | 10,126 | | | | 309,126 | | | | 2009 | | | | 185,000 | | | | 34,000 | | | | — | | | | — | | | | 11,642 | | | | 230,642 | |
Senior Vice President and | | | 2006 | | | | 162,000 | | | | 138,000 | | | | — | | | | 43,007 | | | | 9,244 | | | | 352,251 | | |
Treasurer | | | | | | | | | | | | | | | | | | | | | | |
Senior Vice President | | | | 2008 | | | | 180,000 | | | | 58,000 | | | | — | | | | 82,400 | | | | 11,147 | | | | 331,547 | |
and Treasurer | | | | 2007 | | | | 174,000 | | | | 125,000 | | | | — | | | | — | | | | 10,126 | | | | 309,126 | |
| | |
(1) | | Our executive officers participate in a cash incentive bonus plan. We refer you to “Executive Compensation — Our Cash Incentive Plan.” |
|
(2) | | Option awards are shown at an estimated grant date fair value, which we obtained by using an option pricing model. Further, the options are subject to a vesting schedule, and the estimated value obtained from the option pricing model does not represent actual value based upon trading prices of our Class A common stock at the grant date. See Note 1214 to our consolidated financial statements included in our 20072009 annual |
23
| | |
| | report to stockholders for information on the accounting treatment and calculation of the grant date fair value of these stock options. |
|
(2)(3) | | In the case of Mr. Nikolaus, the total shown includes directors and committee meeting fees of $33,000$31,750 and a matching 401(k) plan contribution of $10,656$11,452 paid during 2007.2009. In the case of Mr.Messrs. Shenk, Miller and Wagner, the total shown includes a matching 401(k) plan contribution of $10,704$11,000, $11,059 and $11,021, respectively, paid during 2007.2009. In the case of Mr. Greenya, the total shown includes directors fees of $30,500$30,000 and a matching 401(k) plan contribution of $11,021 paid during 2007.2009. |
Our President and Chief Executive Officer
Base Salary. Mr. Nikolaus received a base salary of $555,000 in 2009, 2008 and 2007. We did not increase the base salary of Mr. Nikolaus for these years at his request and also because Mr. Nikolaus prefers that a substantial portion of his compensation be performance-based.
Annual Cash Bonus. Mr. Nikolaus received a bonus of $150,000 in respect of 2009 and a bonus of $360,000 in respect of 2008, which represent allocations from our formula-based bonus plan tied to our underwriting profitability and a subjective analysis of the performance of Mr. Nikolaus in 2008 and 2009. The principal subjective factors in determining the allocations to Mr. Nikolaus were the leadership he provides us, his achievement of our objectives in 2008 and 2009 and our overall financial, strategic and operational performance in 2008 and 2009. Mr. Nikolaus received a 35% and 39% allocation from the bonus pool in 2009 and 2008, respectively.
Our Senior Vice President and Chief Underwriting Officer
Base Salary. Mr. Greenya received a base salary of $185,000 in 2009 compared to a base salary of $180,000 in 2008. This 2.8% increase reflected acost-of-living adjustment.
Annual Cash Bonus. Mr. Greenya received a bonus of $34,000 in respect of 2009 and a bonus of $58,000 in respect of 2008. This 41% decrease in his 2009 bonus was principally the result of our reduced underwriting profitability. The bonus reflected Mr. Greenya’s effective oversight of our underwriting operations and compliance function and his participation in negotiating cost-effective renewals of our reinsurance.
Our Senior Vice President and Chief Financial Officer
Base Salary. Mr. Miller received a base salary of $197,000 in 2009 compared to a base salary of $187,000 in 2008. The 5.3% increase reflected Mr. Miller’s successful performance of his responsibilities as our chief financial offer and acost-of-living adjustment. The principal reason for the increase was Mr. Miller’s meeting of objective and subjective performance criteria we established.
Annual Cash Bonus. Mr. Miller received a bonus of $38,000 in respect of 2009 and a bonus of $62,000 in respect of 2008. This 39% decrease in his 2009 bonus was principally the result of our reduced underwriting profitability. The bonus reflected Mr. Miller’s effective oversight of our financial reporting and our systems of internal control.
Our Senior Vice President of Claims
Base Salary. Mr. Shenk received a base salary of $232,000 in 2009 compared to $229,000 in 2008. The 1.3% increase represented acost-of-living adjustment.
Annual Cash Bonus. Mr. Shenk received a bonus of $34,000 in respect of 2009 and a bonus of $58,000 in respect of 2008. This 41% decrease in his 2009 bonus was principally the result of our reduced underwriting profitability. The bonus reflected Mr. Shenk’s effective leadership of our claims function and the quality and promptness of our claims service.
1724
Our Senior Vice President and Treasurer
Base Salary. Mr. Wagner received a base salary of $185,000 in 2009 compared to a base salary of $180,000 in 2008. This 2.8% increase reflected acost-of-living adjustment.
Annual Cash Bonus. Mr. Wagner received a bonus of $34,000 in respect of 2009 and a bonus of $58,000 in respect of 2008. This 41% decrease in his 2009 bonus was principally the result of our reduced underwriting profitability. The bonus reflected Mr. Wagner’s effective supervision of our billing, cash management and treasury functions.
Grants of Plan-Based Awards
We did not grant any stock options to our named executive officers during 2007.2009.
During 2008, we granted non-qualified options to purchase shares of our Class A common stock at an exercise price of $17.50 per share, which options vest in three equal installments on March 1, 2009, March 1, 2010 and March 1, 2011, respectively, as follows:
| | | | |
| | Number of Shares
|
Name | | Subject to Option |
|
Donald H. Nikolaus | | | 175,000 | |
Cyril J. Greenya | | | 40,000 | |
Jeffrey D. Miller | | | 45,000 | |
Robert G. Shenk | | | 40,000 | |
Daniel J. Wagner | | | 40,000 | |
Stock Incentive Plans
We have an equity incentive plan for employees and an equity incentive plan for our directors. Under these plans, our board of directors, upon the recommendation of our compensation committee, may grant options to purchase our Class A common stock and, in the case of our directors, restricted stock awards as well as stock options, can be granted upon the recommendation of our compensation committee and approval by our board of directors.options. Grants under the plans can take the form of incentive stock options, non-qualified stock options, stock appreciation rights, stock units and other stock-based awards. With the exception of an annual fixed restricted stock award to our directors, all of our incentive compensation grants have been stock options. The purpose of the plans is to provide long-term incentive awards to our employees and directors as a means to attract, motivate, retain and reward talented persons.
As of December 31, 2007,2009, we had 3,479,500reserved 2,338,500 shares of our Class A common stock reserved and available for grants under our equity incentive plan for employees and 400,000284,170 shares of our Class A common stock reserved and available for grants under our equity incentive plan for directors. If shares covered by an option cease to be issuable for any reason, that number of shareswe may again be the subject ofgrant options granted under the plans.to purchase those shares.
TheOur board of directors may adjust the number and kind of shares available for grants and options under our plans and the exercise price of outstanding options are subject to adjustment by our board of directors in the event of a merger, consolidation, reorganization, stock split, stock dividend or other event affecting the number of outstanding shares of our common stock. Unless otherwise provided in individual option agreements, unvested options do not automatically accelerate in the event of a business combination or in the event of the sale of all or substantially all of our assets.
Our board of directors, upon the recommendation of our compensation committee, has:
| | |
| • | the authority to determine the persons eligible to be granted options, the number of shares subject to each option, the exercise price of each option, the vesting schedule, the circumstances in which the vesting of options is accelerated and any extension of the period for exercise; and |
|
| • | full discretionary authority to determine any matter relating to options granted under our plans. |
Our board of directors has the authority to suspend, amend or terminate our plans, except as would adversely affect the rights of persons holding outstanding awards without the consent of such persons.
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Outstanding Equity Awards at Fiscal Year End
The following table summarizes the outstanding equity awards held by our named executive officers and our directors at December 31, 2007:2009:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Option Awards | | Stock Awards |
| | Number of Securities
| | | | | | Number of
| | Market Value
|
| | Underlying
| | | | | | Shares or
| | of Shares or
|
| | Unexercised Options | | Option
| | Option
| | Units of Stock
| | Units of Stock
|
| | (#)
| | (#)
| | Exercise
| | Expiration
| | That Have Not
| | That Have Not
|
Name | | Exercisable | | Unexercisable | | Price ($) | | Date | | Vested (#) | | Vested ($) |
|
Donald H. Nikolaus | | | 233,333 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 175,000 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 58,333 | | | | 116,667 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Cyril J. Greenya | | | 33,333 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 30,000 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 13,333 | | | | 26,667 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Jeffrey D. Miller | | | 33,333 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | — | | | | — | |
| | | 30,000 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 15,000 | | | | 30,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Robert G. Shenk | | | 40,000 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | — | | | | — | |
| | | 30,000 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 13,333 | | | | 26,667 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Daniel J. Wagner | | | 33,333 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | — | | | | — | |
| | | 30,000 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 13,333 | | | | 26,667 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
26
The following table summarizes the outstanding equity awards held by our directors as of December 31, 2009:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Option Awards | | Stock Awards |
| | Number of Securities
| | | | | | Number of
| | Market Value
|
| | Underlying
| | | | | | Shares or
| | of Shares or
|
| | Unexercised Options | | Option
| | | | Units of Stock
| | Units of Stock
|
| | (#)
| | (#)
| | Exercise
| | Option
| | That Have Not
| | That Have Not
|
Name | | Exercisable | | Unexercisable | | Price ($) | | Expiration Date | | Vested (#) | | Vested ($) |
|
Donald H. Nikolaus | | | 116,667 | | | | — | | | | 6.75 | | | | 4/17/2008 | | | | 311 | | | | 5,340 | |
| | | 233,333 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | | | | | | |
| | | 58,333 | | | | 116,667 | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
Cyril J. Greenya | | | 33,333 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 5,340 | |
| | | 10,000 | | | | 20,000 | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
Jeffrey D. Miller | | | 33,333 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | — | | | | — | |
| | | 10,000 | | | | 20,000 | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
Robert G. Shenk | | | 40,000 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | — | | | | — | |
| | | 10,000 | | | | 20,000 | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
Daniel J. Wagner | | | 33,333 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | — | | | | — | |
| | | 10,000 | | | | 20,000 | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Option Awards | | Stock Awards |
| | Number of Securities
| | | | | | Number of
| | Market Value
|
| | Underlying
| | | | | | Shares or
| | of Shares or
|
| | Unexercised Options | | Option
| | | | Units of Stock
| | Units of Stock
|
| | (#)
| | (#)
| | Exercise
| | Option
| | That Have Not
| | That Have Not
|
Name | | Exercisable | | Unexercisable | | Price ($) | | Expiration Date | | Vested (#) | | Vested ($) |
|
Robert S. Bolinger | | | 10,000 | | | | — | | | $ | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Patricia A. Gilmartin | | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | 311 | | | | 4,833 | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Philip H. Glatfelter, II | | | 10,000 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Kevin M. Kraft, Sr. | | | 10,000 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
John J. Lyons | | | 10,000 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Jon M. Mahan | | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | 311 | | | | 4,833 | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
S. Trezevant Moore, Jr. | | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | 311 | | | | 4,833 | |
R. Richard Sherbahn | | | 10,000 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Richard D. Wampler, II | | | 10,000 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Option Exercises and Stock Vested
The following table summarizes stock options exercised by our named executive officers and, in the case of our named executive officers who are also directors, restricted stock awards vested, during 2007:2009:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Option Exercises and Stock Vested | | | | | Option Exercises and Stock Vested |
| | Option Awards | | Stock Awards | | | | | Option Awards | | Stock Awards |
| | Number of Shares
| | Value Realized
| | Number of Shares
| | Value Realized
| | | | | Number of Shares
| | Value Realized
| | Number of Shares
| | Value Realized
|
Name | | Acquired on Exercise (#) | | on Exercise ($)(1) | | Acquired on Vesting (#) | | on Vesting ($)(1) | | | | | Acquired on Exercise (#) | | on Exercise ($)(1) | | Acquired on Vesting (#) | | on Vesting ($)(1) |
|
Donald H. Nikolaus | | | 75,000 | | | | 797,800 | | | | 311 | | | | 5,340 | | | | | | | | — | | | | — | | | | 311 | | | | 4,833 | |
Cyril J. Greenya | | | 31,106 | | | | 322,338 | | | | 311 | | | | 5,340 | | | | | | | | — | | | | — | | | | 311 | | | | 4,833 | |
Jeffrey D. Miller | | | — | | | | — | | | | — | | | | — | | | | | | | | — | | | | — | | | | — | | | | — | |
Robert G. Shenk | | | 23,333 | | | | 253,010 | | | | — | | | | — | | | | | | | | — | | | | — | | | | — | | | | — | |
Daniel J. Wagner | | | — | | | | — | | | | — | | | | — | | | | | | | | — | | | | — | | | | — | | | | — | |
| | |
(1) | | Value realized is based upon the closing price of our common stock on NASDAQ on the date of exercise or vesting minus the exercise price of the option awards. |
Pension Benefits
None of our named executive officers participated in or had an account balance in qualified or non-qualified defined benefit plans that we sponsored in 20062007, 2008 or 2007,2009, and none is contemplated for 2008.2010.
27
Non-Qualified Deferred Compensation
None of our named executive officers participated in or had account balances in non-qualified deferred compensation plans or other deferred compensation plans that we maintained in 20062007, 2008 or 2007,2009, and none is contemplated for 2008.2010.
Director Compensation
Our directors and the directors of Donegal Mutual received an annual retainer of $30,000 in 2007.2009. A person who serves both on our board of directors and the board of directors of Donegal Mutual receives only one annual retainer. Members of the committees of our board of directors and of the board of directors of Donegal Mutual received a fee of $250 for each committee meeting attended in 2007,2009, with the exception of their Audit Committees.meetings of the audit committees. Members of their Audit Committeesthe audit committees received a fee of $500 for each meeting attended in 2007. A person who
19
serves on our board2009. Since March 1, 2008, we allocate 20% of directors as well as the board of directors of Donegal Mutual receives only one annual retainer, which retainer is allocated 20%director compensation to Donegal Mutual and 80% to us effective March 1, 2008.us.
Under our equity incentive plan for directors, each of our directors and each director of Donegal Mutual who is not also one of our directors receives an annual restricted stock award of 311 shares of our Class A common stock as of the first business day of each year, provided the director served as a member of our board of directors or the board of directors of Donegal Mutual during any portion of the preceding calendar year. Each of our directors and each of the directors of Donegal Mutual is also eligible to receive non-qualified options to purchase shares of our Class A common stock in an amount determined by our board of directors from time to time. Donegal Mutual reimburses us for the options and restricted stock awards granted to those directors of Donegal Mutual who are not also members of our board of directors.
The following table sets forth a summary of the compensation we paid to our non-officer directors during 2007.2009.
| | | | | | | | | | | | | | | | | | | | | |
| | | | Fees Earned
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | or Paid in
| | Stock
| | Option
| | | | | Fees Earned
| | Stock
| | Option
| | |
Name | | Year | | Cash ($) | | Awards ($) | | Awards ($) | | Total ($) | | | or Paid in Cash ($) | | Awards ($) | | Awards ($) | | Total ($) |
|
Robert S. Bolinger | | | 2007 | | | | 35,750 | | | | 5,340 | | | | — | | | | 41,090 | | | | 36,000 | | | | 4,833 | | | | — | | | | 40,833 | |
Philip A. Garcia | | | | 900 | | | | — | | | | — | | | | 900 | |
Patricia A. Gilmartin | | | 2007 | | | | 31,000 | | | | 5,340 | | | | — | | | | 36,340 | | | | 30,000 | | | | 4,833 | | | | — | | | | 34,833 | |
Philip H. Glatfelter, II | | | 2007 | | | | 82,000 | | | | 5,340 | | | | — | | | | 87,340 | | | | 81,000 | | | | 4,833 | | | | — | | | | 85,833 | |
Kevin M. Kraft, Sr. | | | | 30,750 | | | | 4,833 | | | | — | | | | 35,583 | |
John J. Lyons | | | 2007 | | | | 35,750 | | | | 5,340 | | | | — | | | | 41,090 | | | | 36,000 | | | | 4,833 | | | | — | | | | 40,833 | |
John M. Mahan | | | 2007 | | | | 31,000 | | | | 5,340 | | | | — | | | | 36,340 | | | | 30,500 | | | | 4,833 | | | | — | | | | 35,333 | |
S. Trezevant Moore, Jr. | | | 2007 | | | | 30,500 | | | | 5,340 | | | | — | | | | 35,840 | | | | 30,000 | | | | 4,833 | | | | — | | | | 34,833 | |
R. Richard Sherbahn | | | 2007 | | | | 33,500 | | | | 5,340 | | | | — | | | | 38,840 | | | | 32,250 | | | | 4,833 | | | | — | | | | 37,083 | |
Richard D. Wampler, II | | | 2007 | | | | 35,500 | | | | 5,340 | | | | — | | | | 40,840 | | | | 35,500 | | | | 4,833 | | | | — | | | | 40,333 | |
Related Person Transactions
We have adopted a policy formalizing the manner in which we deal with a proposed transaction between us and a related person other than Donegal Mutual because we recognize that related person transactions present a heightened risk of conflicts of interest and can create the appearance of a conflict of interest. Under our policy, all proposed related person transactions must receive the prior approval of the audit committee of our board of directors before we can enter into the transaction, and, if the transaction continues for more than one year, the continuation must be approved annually by the audit committee of our board of directors. Our transactions with Donegal Mutual require the prior approval of our coordinating committee. See “Our Relationship with Donegal Mutual — The Coordinating Committee.”
Donald H. Nikolaus, our President and a director and the President and a director of Donegal Mutual, is also a partner in the law firm of Nikolaus & Hohenadel. Such firm has served as general counsel to Donegal Mutual since 1970 and to us since 1986, principally in connection with the defense of claims litigation arising in Lancaster, Dauphin and York counties of Pennsylvania. Such firm is paid its customary fees for such services. Those fees were $395,197 in 2006 and $372,926 in 2007.
Patricia A. Gilmartin, a director and a director of Donegal Mutual, is an employee of Associated Donegal Insurance Brokers, which has no affiliation with us except that Associated Donegal Insurance Brokers receives insurance commissions in the ordinary course of business from our subsidiaries and Donegal Mutual in accordance with their standard commission schedules and agency contracts.
Frederick W. Dreher, a director of Donegal Mutual, is a partner in the law firm of Duane Morris LLP, which represents us and Donegal Mutual in certain legal matters. Such firm is paid its customary fees for such services. Those fees were $1,090,614 in 2006 and $1,013,913 in 2007.
Four of our nine directors are affiliated with Donegal Mutual, our majority stockholder, with whom we have a variety of inter-company agreements providing for, among other things, the pooling of underwriting results and reinsurance and expense sharing. See “Stock Ownership — Our Relationship with Donegal Mutual.”
20
Limitation of LiabilityOur Senior Vice President and IndemnificationTreasurer
Our certificateBase Salary. Mr. Wagner received a base salary of incorporation includes$185,000 in 2009 compared to a provision that limits,base salary of $180,000 in 2008. This 2.8% increase reflected acost-of-living adjustment.
Annual Cash Bonus. Mr. Wagner received a bonus of $34,000 in respect of 2009 and a bonus of $58,000 in respect of 2008. This 41% decrease in his 2009 bonus was principally the result of our reduced underwriting profitability. The bonus reflected Mr. Wagner’s effective supervision of our billing, cash management and treasury functions.
Grants of Plan-Based Awards
We did not grant any stock options to our named executive officers during 2009.
During 2008, we granted non-qualified options to purchase shares of our Class A common stock at an exercise price of $17.50 per share, which options vest in three equal installments on March 1, 2009, March 1, 2010 and March 1, 2011, respectively, as follows:
| | | | |
| | Number of Shares
|
Name | | Subject to Option |
|
Donald H. Nikolaus | | | 175,000 | |
Cyril J. Greenya | | | 40,000 | |
Jeffrey D. Miller | | | 45,000 | |
Robert G. Shenk | | | 40,000 | |
Daniel J. Wagner | | | 40,000 | |
Stock Incentive Plans
We have an equity incentive plan for employees and an equity incentive plan for our directors. Under these plans, our board of directors, upon the maximum extent permitted by Delaware law,recommendation of our compensation committee, may grant options to purchase our Class A common stock and, in the liabilitycase of our directors, restricted stock awards as well as stock options. Grants under the plans can take the form of incentive stock options, non-qualified stock options, stock appreciation rights, stock units and officers to us andother stock-based awards. With the exception of an annual fixed restricted stock award to our stockholdersdirectors, all of our incentive compensation grants have been stock options. The purpose of the plans is to provide long-term incentive awards to our employees and directors as a means to attract, motivate, retain and reward talented persons.
As of December 31, 2009, we had reserved 2,338,500 shares of our Class A common stock for money damages exceptgrants under our equity incentive plan for liability resulting from:employees and 284,170 shares of our Class A common stock for grants under our equity incentive plan for directors. If shares covered by an option cease to be issuable for any reason, we may again grant options to purchase those shares.
Our board of directors may adjust the number and kind of shares available for grants and options under our plans and the exercise price of outstanding options in the event of a merger, consolidation, reorganization, stock split, stock dividend or other event affecting the number of outstanding shares of our common stock. Unless otherwise provided in individual option agreements, unvested options do not automatically accelerate in the event of a business combination or in the event of the sale of all or substantially all of our assets.
Our board of directors, upon the recommendation of our compensation committee, has:
| | |
| • | actual receiptthe authority to determine the persons eligible to be granted options, the number of an improper benefit or profitshares subject to each option, the exercise price of each option, the vesting schedule, the circumstances in money, property or services; or |
|
| • | activewhich the vesting of options is accelerated and deliberate dishonesty established by a final judgment as being material to the cause of action. |
This limitation does not, however, apply to violationsany extension of the federal securities laws, nor does it limit the availability of non-monetary relief in any action or proceeding.
Our certificate of incorporation and by-laws obligate us, to the maximum extent permitted by Delaware law, to indemnify any person who is or was a party to, or is threatened to be made a party to, any threatened or pending action, suit or proceeding by reason of the fact that such person is or was one of our directors or officers, or, while one of our directors or officers, is or was serving, at our request, as a director or officer of another entity. Insofar as indemnification for liabilities arising under the federal securities laws may be permitted to our officers and directors pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in such laws and is unenforceable.
In addition, our certificate of incorporation and by-laws permit us, at our expense, to purchase and maintain insurance to protect us and any director, officer or employee against any liability of any character asserted against or incurred by us or any such director, officer or employee, or arising out of any such person’s corporate status, whether or not we would have the power to indemnify such person against such liability under Delaware law. We also have and intend to maintain directors’ and officers’ liability insurance.
Evaluation of Executive Performance in 2007 and Executive Compensation
Our compensation committee does not restrict its evaluation of the performance of our named executive officers to predetermined formulas or a limited set of criteria. Our compensation committee considered our progress during 2007 in achieving the short-term and long-term objectives described below:
| | |
| • | our continued achievement of underwriting results superior to the underwriting results of other property and casualty insurance companies on a long-term basis; |
|
| • | our achievement of a compound rate of revenue growth in excess of 12% over a five-year period; |
|
| • | our status in being named as one of Ward’s top 50 performing insurance companies over a five-year period for the third straight year; |
|
| • | our recognition in National Underwriter magazine as ranking 18th nationally for underwriting profitability as measured by our combined ratio over a six-year period among all personal lines property and casualty insurance companies; |
|
| • | our continued geographic expansion; |
|
| • | our development of automated underwriting and policy issuance software that enables us to compete with the national carriers; |
|
| • | Donegal Mutual’s establishment of an affiliation with Sheboygan Falls Mutual Insurance Company and its development of a strategy for its demutualization and acquisition by us during 2008; |
|
| • | enhancing our personnel and their skills;exercise; and |
|
| • | full discretionary authority to determine any matter relating to options granted under our realization of operational and expense synergies on a continuing basis.plans. |
On an overall basis,Our board of directors has the authority to suspend, amend or terminate our compensation committee believes thatplans, except as would adversely affect the rights of persons holding outstanding awards without the consent of such persons.
25
Outstanding Equity Awards at Fiscal Year End
The following table summarizes the outstanding equity awards held by our progress in the achievement of these objectives exceeded the targets established for these objectivesnamed executive officers and our directors at the start of 2007 with emphasis given to our underwriting profit of $27.1 million in 2007, which is the third highest in our history. This progress was theDecember 31, 2009:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Option Awards | | Stock Awards |
| | Number of Securities
| | | | | | Number of
| | Market Value
|
| | Underlying
| | | | | | Shares or
| | of Shares or
|
| | Unexercised Options | | Option
| | Option
| | Units of Stock
| | Units of Stock
|
| | (#)
| | (#)
| | Exercise
| | Expiration
| | That Have Not
| | That Have Not
|
Name | | Exercisable | | Unexercisable | | Price ($) | | Date | | Vested (#) | | Vested ($) |
|
Donald H. Nikolaus | | | 233,333 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 175,000 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 58,333 | | | | 116,667 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Cyril J. Greenya | | | 33,333 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 30,000 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 13,333 | | | | 26,667 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Jeffrey D. Miller | | | 33,333 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | — | | | | — | |
| | | 30,000 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 15,000 | | | | 30,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Robert G. Shenk | | | 40,000 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | — | | | | — | |
| | | 30,000 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 13,333 | | | | 26,667 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Daniel J. Wagner | | | 33,333 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | — | | | | — | |
| | | 30,000 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 13,333 | | | | 26,667 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
2126
basis ofThe following table summarizes the decisions madeoutstanding equity awards held by our compensation committee at its meetings indirectors as of December 200731, 2009:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Option Awards | | Stock Awards |
| | Number of Securities
| | | | | | Number of
| | Market Value
|
| | Underlying
| | | | | | Shares or
| | of Shares or
|
| | Unexercised Options | | Option
| | | | Units of Stock
| | Units of Stock
|
| | (#)
| | (#)
| | Exercise
| | Option
| | That Have Not
| | That Have Not
|
Name | | Exercisable | | Unexercisable | | Price ($) | | Expiration Date | | Vested (#) | | Vested ($) |
|
Robert S. Bolinger | | | 10,000 | | | | — | | | $ | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Patricia A. Gilmartin | | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | 311 | | | | 4,833 | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Philip H. Glatfelter, II | | | 10,000 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Kevin M. Kraft, Sr. | | | 10,000 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
John J. Lyons | | | 10,000 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Jon M. Mahan | | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | 311 | | | | 4,833 | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
S. Trezevant Moore, Jr. | | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | 311 | | | | 4,833 | |
R. Richard Sherbahn | | | 10,000 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Richard D. Wampler, II | | | 10,000 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Option Exercises and February 2008 with respect to adjustments to base salary and the allocation of our annual cash bonuses forStock Vested
The following table summarizes stock options exercised by our named executive officers.
Our philosophyofficers and, that of our compensation committee is founded on performance and profitability, so thatin the major portion of the compensationcase of our named executive officers arises from annual bonuses andwho are also directors, restricted stock options that will have their greatest value only when our performance and profitability is at a high level. The compensation recommendationsawards vested, during 2009:
| | | | | | | | | | | | | | | | |
| | Option Exercises and Stock Vested |
| | Option Awards | | Stock Awards |
| | Number of Shares
| | Value Realized
| | Number of Shares
| | Value Realized
|
Name | | Acquired on Exercise (#) | | on Exercise ($)(1) | | Acquired on Vesting (#) | | on Vesting ($)(1) |
|
Donald H. Nikolaus | | | — | | | | — | | | | 311 | | | | 4,833 | |
Cyril J. Greenya | | | — | | | | — | | | | 311 | | | | 4,833 | |
Jeffrey D. Miller | | | — | | | | — | | | | — | | | | — | |
Robert G. Shenk | | | — | | | | — | | | | — | | | | — | |
Daniel J. Wagner | | | — | | | | — | | | | — | | | | — | |
| | |
(1) | | Value realized is based upon the closing price of our common stock on NASDAQ on the date of exercise or vesting minus the exercise price of the option awards. |
Pension Benefits
None of our named executive officers participated in or had an account balance in qualified or non-qualified defined benefit plans that we sponsored in 2007, 2008 or 2009, and none is contemplated for 2010.
27
Non-Qualified Deferred Compensation
None of our named executive officers participated in or had account balances in non-qualified deferred compensation committee toplans or other deferred compensation plans that we maintained in 2007, 2008 or 2009, and none is contemplated for 2010.
Director Compensation
Our directors and the directors of Donegal Mutual received an annual retainer of $30,000 in 2009. A person who serves both on our board of directors and the compensation determinationsboard of directors of Donegal Mutual receives only one annual retainer. Members of the committees of our board of directors asand of the board of directors of Donegal Mutual received a fee of $250 for each committee meeting attended in 2009, with the exception of meetings of the audit committees. Members of the audit committees received a fee of $500 for each meeting attended in 2009. Since March 1, 2008, we allocate 20% of director compensation to Donegal Mutual and 80% to us.
Under our equity incentive plan for directors, each of our named executive officersdirectors and each director of Donegal Mutual who is discussed belownot also one of our directors receives an annual restricted stock award of 311 shares of our Class A common stock as of the first business day of each year, provided the director served as a member of our board of directors or the board of directors of Donegal Mutual during any portion of the preceding year. Each of our directors and were based on the policies and procedures described earlier in this proxy statement and the factors and criteria described below. The specific compensation decisions made for each of the directors of Donegal Mutual is also eligible to receive non-qualified options to purchase shares of our named executive officersClass A common stock in 2007 reflectsan amount determined by our strong financial and operational performance in 2007.board of directors from time to time. Donegal Mutual reimburses us for the restricted stock awards granted to those directors of Donegal Mutual who are not also members of our board of directors.
Our President and Chief Executive OfficerThe following table sets forth a summary of the compensation we paid to our non-officer directors during 2009.
| | | | | | | | | | | | | | | | |
| | Fees Earned
| | Stock
| | Option
| | |
Name | | or Paid in Cash ($) | | Awards ($) | | Awards ($) | | Total ($) |
|
Robert S. Bolinger | | | 36,000 | | | | 4,833 | | | | — | | | | 40,833 | |
Philip A. Garcia | | | 900 | | | | — | | | | — | | | | 900 | |
Patricia A. Gilmartin | | | 30,000 | | | | 4,833 | | | | — | | | | 34,833 | |
Philip H. Glatfelter, II | | | 81,000 | | | | 4,833 | | | | — | | | | 85,833 | |
Kevin M. Kraft, Sr. | | | 30,750 | | | | 4,833 | | | | — | | | | 35,583 | |
John J. Lyons | | | 36,000 | | | | 4,833 | | | | — | | | | 40,833 | |
John M. Mahan | | | 30,500 | | | | 4,833 | | | | — | | | | 35,333 | |
S. Trezevant Moore, Jr. | | | 30,000 | | | | 4,833 | | | | — | | | | 34,833 | |
R. Richard Sherbahn | | | 32,250 | | | | 4,833 | | | | — | | | | 37,083 | |
Richard D. Wampler, II | | | 35,500 | | | | 4,833 | | | | — | | | | 40,333 | |
Base Salary. Mr. Nikolaus received a base salary of $555,000 in 2007 compared to a base salary of $535,000 in 2006. We limited the amount of the increase in the base salary of Mr. Nikolaus at his request and also because Mr. Nikolaus prefers that a substantial portion of his compensation be performance-based.
Annual Cash Bonus. Mr. Nikolaus received a bonus of $840,000 in respect of 2007 and a bonus of $970,000 in respect of 2006, which represent allocations from our formula-based bonus plan tied to our underwriting profitability and a subjective analysis of the performance of Mr. Nikolaus in 2007 and 2006 with respect to his participation in the bonus pool allocations. The principal subjective factors in determining the allocations to Mr. Nikolaus were the leadership he provides us, his achievement of our objectives in 2007 and 2006 and our overall financial, strategic and operational performance in 2007 and 2006. Mr. Nikolaus received the same percentage allocation from the bonus pool (40%) in 2007 and in 2006.
Our Senior Vice President and Chief Financial Officer
Base Salary. Mr. Miller received a base salary of $177,000 in 2007 compared to a base salary of $162,000 in 2006. The 9.3% increase reflected Mr. Miller’s successful performance of his responsibilities as our chief financial offer and a cost-of-living adjustment. The principal reason for the increase was Mr. Miller’s meeting of objective and subjective performance criteria we established plus our continuing record of strong financial performance.
Annual Cash Bonus. Mr. Miller received a bonus of $132,000 in respect of 2007 and a bonus of $145,000 in respect of 2006. This 9% decrease in his 2007 bonus was principally the result of our reduced level of underwriting profitability. The bonus reflected Mr. Miller’s effective oversight of our financial reporting and our systems of internal control.
Our Senior Vice President of Claims
Base Salary. Mr. Shenk received a base salary of $223,000 in 2007 compared to $214,000 in 2006. The 4.2% increase represented a cost-of-living adjustment.
Annual Cash Bonus. Mr. Shenk received a bonus of $125,000 in respect of 2007 and a bonus of $138,000 in respect of 2006. This 9% decrease in his 2007 bonus was principally the result of our reduced level of underwriting profitability. The bonus reflected our substantially lower than industry average combined ratio and Mr. Shenk’s leadership in maintaining the quality and promptness of our claims service.
Our Senior Vice President and Chief Underwriting Officer
Base Salary. Mr. Greenya received a base salary of $174,000 in 2007 compared to a base salary of $162,000 in 2006. This 7.4% increase reflected Mr. Greenya’s successful assumption of the responsibilities of serving as our chief underwriting officer and a cost-of-living adjustment.
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Annual Cash Bonus. Mr. Greenya received a bonus of $125,000 in respect of 2007 and a bonus of $138,000 in respect of 2006. This 9% decrease in his 2007 bonus was principally the result of our reduced level of underwriting profitability. The bonus reflected Mr. Greenya’s effective oversight of our underwriting operations and his participation in negotiating cost-effective renewals of our reinsurance.
Our Senior Vice President and Treasurer
Base Salary. Mr. Wagner received a base salary of $174,000$185,000 in 20072009 compared to a base salary of $162,000$180,000 in 2006.2008. This 7.4%2.8% increase reflected Mr. Wagner’s successful role in maintaining effective expense management controls and acost-of-living adjustment.
Annual Cash Bonus. Mr. Wagner received a bonus of $125,000$34,000 in respect of 20072009 and a bonus of $138,000$58,000 in respect of 2006.2008. This 9%41% decrease in his 20072009 bonus was principally the result of our reduced level of underwriting profitability. Mr. Wagner’sThe bonus reflected hisMr. Wagner’s effective supervision of our billing, cash management and treasury functions.
Grants of Plan-Based Awards
We did not grant any stock options to our named executive officers during 2009.
During 2008, we granted non-qualified options to purchase shares of our Class A common stock at an exercise price of $17.50 per share, which options vest in three equal installments on March 1, 2009, March 1, 2010 and March 1, 2011, respectively, as follows:
| | | | |
| | Number of Shares
|
Name | | Subject to Option |
|
Donald H. Nikolaus | | | 175,000 | |
Cyril J. Greenya | | | 40,000 | |
Jeffrey D. Miller | | | 45,000 | |
Robert G. Shenk | | | 40,000 | |
Daniel J. Wagner | | | 40,000 | |
Stock Incentive Plans
We have an equity incentive plan for employees and an equity incentive plan for our directors. Under these plans, our board of directors, upon the recommendation of our compensation committee, may grant options to purchase our Class A common stock and, in the case of our directors, restricted stock awards as well as stock options. Grants under the plans can take the form of incentive stock options, non-qualified stock options, stock appreciation rights, stock units and other stock-based awards. With the exception of an annual fixed restricted stock award to our directors, all of our incentive compensation grants have been stock options. The purpose of the plans is to provide long-term incentive awards to our employees and directors as a means to attract, motivate, retain and reward talented persons.
As of December 31, 2009, we had reserved 2,338,500 shares of our Class A common stock for grants under our equity incentive plan for employees and 284,170 shares of our Class A common stock for grants under our equity incentive plan for directors. If shares covered by an option cease to be issuable for any reason, we may again grant options to purchase those shares.
Our board of directors may adjust the number and kind of shares available for grants and options under our plans and the exercise price of outstanding options in the event of a merger, consolidation, reorganization, stock split, stock dividend or other event affecting the number of outstanding shares of our common stock. Unless otherwise provided in individual option agreements, unvested options do not automatically accelerate in the event of a business combination or in the event of the sale of all or substantially all of our assets.
Our board of directors, upon the recommendation of our compensation committee, has:
| | |
| • | the authority to determine the persons eligible to be granted options, the number of shares subject to each option, the exercise price of each option, the vesting schedule, the circumstances in which the vesting of options is accelerated and any extension of the period for exercise; and |
|
| • | full discretionary authority to determine any matter relating to options granted under our plans. |
Our board of directors has the authority to suspend, amend or terminate our plans, except as would adversely affect the rights of persons holding outstanding awards without the consent of such persons.
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Outstanding Equity Awards at Fiscal Year End
The following table summarizes the outstanding equity awards held by our named executive officers and our directors at December 31, 2009:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Option Awards | | Stock Awards |
| | Number of Securities
| | | | | | Number of
| | Market Value
|
| | Underlying
| | | | | | Shares or
| | of Shares or
|
| | Unexercised Options | | Option
| | Option
| | Units of Stock
| | Units of Stock
|
| | (#)
| | (#)
| | Exercise
| | Expiration
| | That Have Not
| | That Have Not
|
Name | | Exercisable | | Unexercisable | | Price ($) | | Date | | Vested (#) | | Vested ($) |
|
Donald H. Nikolaus | | | 233,333 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 175,000 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 58,333 | | | | 116,667 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Cyril J. Greenya | | | 33,333 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 30,000 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 13,333 | | | | 26,667 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Jeffrey D. Miller | | | 33,333 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | — | | | | — | |
| | | 30,000 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 15,000 | | | | 30,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Robert G. Shenk | | | 40,000 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | — | | | | — | |
| | | 30,000 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 13,333 | | | | 26,667 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Daniel J. Wagner | | | 33,333 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | — | | | | — | |
| | | 30,000 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 13,333 | | | | 26,667 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
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The following table summarizes the outstanding equity awards held by our directors as of December 31, 2009:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Option Awards | | Stock Awards |
| | Number of Securities
| | | | | | Number of
| | Market Value
|
| | Underlying
| | | | | | Shares or
| | of Shares or
|
| | Unexercised Options | | Option
| | | | Units of Stock
| | Units of Stock
|
| | (#)
| | (#)
| | Exercise
| | Option
| | That Have Not
| | That Have Not
|
Name | | Exercisable | | Unexercisable | | Price ($) | | Expiration Date | | Vested (#) | | Vested ($) |
|
Robert S. Bolinger | | | 10,000 | | | | — | | | $ | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Patricia A. Gilmartin | | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | 311 | | | | 4,833 | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Philip H. Glatfelter, II | | | 10,000 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Kevin M. Kraft, Sr. | | | 10,000 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
John J. Lyons | | | 10,000 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Jon M. Mahan | | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | 311 | | | | 4,833 | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
S. Trezevant Moore, Jr. | | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | 311 | | | | 4,833 | |
R. Richard Sherbahn | | | 10,000 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Richard D. Wampler, II | | | 10,000 | | | | — | | | | 15.75 | | | | 7/21/2010 | | | | 311 | | | | 4,833 | |
| | | 7,500 | | | | — | | | | 21.00 | | | | 10/19/2011 | | | | | | | | | |
| | | 2,500 | | | | 5,000 | | | | 17.50 | | | | 7/17/2013 | | | | | | | | | |
Option Exercises and Stock Vested
The following table summarizes stock options exercised by our named executive officers and, in the case of our named executive officers who are also directors, restricted stock awards vested, during 2009:
| | | | | | | | | | | | | | | | |
| | Option Exercises and Stock Vested |
| | Option Awards | | Stock Awards |
| | Number of Shares
| | Value Realized
| | Number of Shares
| | Value Realized
|
Name | | Acquired on Exercise (#) | | on Exercise ($)(1) | | Acquired on Vesting (#) | | on Vesting ($)(1) |
|
Donald H. Nikolaus | | | — | | | | — | | | | 311 | | | | 4,833 | |
Cyril J. Greenya | | | — | | | | — | | | | 311 | | | | 4,833 | |
Jeffrey D. Miller | | | — | | | | — | | | | — | | | | — | |
Robert G. Shenk | | | — | | | | — | | | | — | | | | — | |
Daniel J. Wagner | | | — | | | | — | | | | — | | | | — | |
| | |
(1) | | Value realized is based upon the closing price of our common stock on NASDAQ on the date of exercise or vesting minus the exercise price of the option awards. |
Pension Benefits
None of our named executive officers participated in or had an account balance in qualified or non-qualified defined benefit plans that we sponsored in 2007, 2008 or 2009, and none is contemplated for 2010.
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Non-Qualified Deferred Compensation
None of our named executive officers participated in or had account balances in non-qualified deferred compensation plans or other deferred compensation plans that we maintained in 2007, 2008 or 2009, and none is contemplated for 2010.
Director Compensation
Our directors and the directors of Donegal Mutual received an annual retainer of $30,000 in 2009. A person who serves both on our board of directors and the board of directors of Donegal Mutual receives only one annual retainer. Members of the committees of our board of directors and of the board of directors of Donegal Mutual received a fee of $250 for each committee meeting attended in 2009, with the exception of meetings of the audit committees. Members of the audit committees received a fee of $500 for each meeting attended in 2009. Since March 1, 2008, we allocate 20% of director compensation to Donegal Mutual and 80% to us.
Under our equity incentive plan for directors, each of our directors and each director of Donegal Mutual who is not also one of our directors receives an annual restricted stock award of 311 shares of our Class A common stock as of the first business day of each year, provided the director served as a member of our board of directors or the board of directors of Donegal Mutual during any portion of the preceding year. Each of our directors and each of the directors of Donegal Mutual is also eligible to receive non-qualified options to purchase shares of our Class A common stock in an amount determined by our board of directors from time to time. Donegal Mutual reimburses us for the restricted stock awards granted to those directors of Donegal Mutual who are not also members of our board of directors.
The following table sets forth a summary of the compensation we paid to our non-officer directors during 2009.
| | | | | | | | | | | | | | | | |
| | Fees Earned
| | Stock
| | Option
| | |
Name | | or Paid in Cash ($) | | Awards ($) | | Awards ($) | | Total ($) |
|
Robert S. Bolinger | | | 36,000 | | | | 4,833 | | | | — | | | | 40,833 | |
Philip A. Garcia | | | 900 | | | | — | | | | — | | | | 900 | |
Patricia A. Gilmartin | | | 30,000 | | | | 4,833 | | | | — | | | | 34,833 | |
Philip H. Glatfelter, II | | | 81,000 | | | | 4,833 | | | | — | | | | 85,833 | |
Kevin M. Kraft, Sr. | | | 30,750 | | | | 4,833 | | | | — | | | | 35,583 | |
John J. Lyons | | | 36,000 | | | | 4,833 | | | | — | | | | 40,833 | |
John M. Mahan | | | 30,500 | | | | 4,833 | | | | — | | | | 35,333 | |
S. Trezevant Moore, Jr. | | | 30,000 | | | | 4,833 | | | | — | | | | 34,833 | |
R. Richard Sherbahn | | | 32,250 | | | | 4,833 | | | | — | | | | 37,083 | |
Richard D. Wampler, II | | | 35,500 | | | | 4,833 | | | | — | | | | 40,333 | |
Limitation of Liability and Indemnification
Our certificate of incorporation includes a provision that limits, to the maximum extent permitted by Delaware law, the liability of our directors and officers to us and to our stockholders for money damages except for liability resulting from:
| | |
| • | actual receipt of an improper benefit or profit in money, property or services; or |
|
| • | active and deliberate dishonesty established by a final judgment as being material to the cause of action. |
This limitation does not, however, apply to violations of the federal securities laws, nor does it limit the availability of non-monetary relief in any action or proceeding.
Our certificate of incorporation and by-laws obligate us, to the maximum extent permitted by Delaware law, to indemnify any person who is or was a party to, or is threatened to be made a party to, any threatened
28
or pending action, suit or proceeding by reason of the fact that such person is or was one of our directors or officers, or, while one of our directors or officers, is or was serving, at our request, as a director or officer of another entity. Insofar as indemnification for liabilities arising under the federal securities laws may be permitted to our officers and directors pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in such laws and is unenforceable.
In addition, our certificate of incorporation and by-laws permit us, at our expense, to purchase and maintain insurance to protect us and any director, officer or employee against any liability of any character asserted against or incurred by us or any such director, officer or employee, or arising out of any such person’s corporate status, whether or not we would have the power to indemnify such person against such liability under Delaware law. We also have and intend to maintain directors’ and officers’ liability insurance.
Report of Our Compensation Committee
The following report of our compensation committee does not constitute proxy solicitation material and shall not be deemed filed or incorporated by reference into any of our filings under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate this compensation committee report by reference therein.
Our compensation committee held a joint meeting with the compensation committee of the board of directors of Donegal Mutual. The compensation committees reviewed and discussed the compensation discussion and analysis that appears under the caption “Executive Compensation” with management.
Based on the review and discussion by our compensation committee with management and the joint meeting with the members of the compensation committee of Donegal Mutual, the members of our compensation committee then held a separate meeting at which theyour compensation committee reviewed our success in meeting our corporate objectives for 2009 and the individual performance of our named executive officers and then recommended to our board of directors that our board of directors approve the inclusion of the compensation discussion and analysis set forth in this proxy statement under the caption “Executive Compensation” for filing with the SEC and the incorporation by reference of such compensation discussion and analysis in our annual report onForm 10-K for the year ended December 31, 20072009 for filing with the SEC.
MEMBERS OF THE COMPENSATION COMMITTEES
OF DONEGAL GROUP INC. AND DONEGAL
MUTUAL INSURANCE COMPANY
Frederick W. Dreher
Philip H. Glatfelter, II
R. Richard Sherbahn
Frederick W. Dreher
March 4, 200810, 2010
2329
Equity Compensation Plan Information
The following table sets forth information regarding our equity compensation plans:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Number of Securities
| | | | | | | Number of Securities
|
| | | | | | (Class) Remaining
| | | | | | | (by Class) Remaining
|
| | Number of Securities
| | | | Available for Future
| | | Number of Securities
| | | | Available for Future
|
| | (Class) to be Issued
| | Weighted-Average
| | Issuance Under Equity
| | | (by Class) to be Issued
| | Weighted-Average
| | Issuance Under Equity
|
| | Upon Exercise of
| | Exercise Price of
| | Compensation Plans
| | | Upon Exercise of
| | Exercise Price of
| | Compensation Plans
|
| | Outstanding Options,
| | Outstanding Options,
| | (Excluding Securities
| | | Outstanding Options,
| | Outstanding Options,
| | (Excluding Securities
|
Plan category | | Warrants and Rights | | Warrants and Rights | | Reflected in Column (a)) | | | Warrants and Rights | | Warrants and Rights | | Reflected in Column (a)) |
| | (a) | | (b) | | (c) | | | (a) | | (b) | | (c) |
|
Equity compensation plans approved by | | | 2,384,722 | (Class A) | | $ | 17.36 | (Class A) | | | 3,879,500 | (Class A) | | | 3,290,099 | (Class A) | | $ | 17.98 | (Class A) | | | 2,622,670 | (Class A) |
securityholders | | | — | (Class B) | | | — | (Class B) | | | — | (Class B) | | | — | (Class B) | | | — | (Class B) | | | — | (Class B) |
Equity compensation plans not approved by securityholders | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | |
Total | | | 2,384,722 | | | $ | 17.36 | | | | 3,879,500 | | | | 3,290,099 | | | $ | 17.98 | | | | 2,622,670 | |
| | | | | | | | | | | | | | |
2430
AUDIT AND NON-AUDIT FEES
Our audit committee approves the fees and other significant compensation to be paidwe pay to our independent registered public accounting firm for the purposepreparation and issuance of preparing or issuing an audit report or related work.work incidental to the opinion. Our audit committee also pre-approvesapproves all auditing services and permitted non-audit services, including the fees and terms thereof, to be performed for us by our independent registered public accounting firm, subject to the de minimis exceptions for non-audit services described in the Exchange Act. Our audit committee delegates to our audit committee Chair preapprovalchairman pre-approval authority for non-audit services up to $25,000 subject to subsequent approval by the full audit committee at its next scheduled meeting.
Our audit committee reviewed and discussed with KPMG LLP the following fees for services KPMG LLP rendered for our 2007to us during 2009 fiscal year and considered the compatibility of non-audit services with KPMG LLP’s independence.
Audit Fees. The fees of KPMG LLP, our independent registered public accounting firm, in the aggregate for the fiscal years ended December 31, 2006 and 2007 were $725,000 and $680,000, respectively, in connection with (i) the audit of our annual consolidated and statutory financial statements for those fiscal years, (ii) the reviews of our consolidated financial statements included in ourForm 10-Q quarterly reports and (iii) services performed in connection with filings of registration statements and offerings.
Audit-Related Fees. We paid audit-related fees of $10,000 to KPMG LLP during 2007 for the SEC and general accounting matters. We did not pay any audit-related fees to KPMG LLP during 2006.
Tax Fees. We did not pay any tax fees to KPMG LLP during 2006 or 2007.
All Other Fees. KPMG LLP’s aggregate fees for other services during our fiscal years ended December 31, 2006 and 2007 were $58,000 and $61,000, respectively.
| | |
| • | Audit Fees. The fees of KPMG LLP we incurred in connection with the audit of our annual consolidated and statutory financial statements for those fiscal years, the reviews of our consolidated financial statements included in ourForm 10-Q quarterly reports and services performed in connection with filings of registration statements and offerings for our fiscal years ended December 31, 2008 and 2009 were $715,000 and $765,000, respectively. |
|
| • | Audit-Related Fees. We did not pay any audit-related fees to KPMG LLP during 2008 and 2009. |
|
| • | Tax Fees. We did not pay any tax fees to KPMG LLP during 2008 or 2009. |
|
| • | All Other Fees. We paid KPMG LLP aggregate fees for other services during our fiscal years ended December 31, 2008 and 2009 of $63,500 and $-0-, respectively. |
Report of Our Audit Committee
The following report of ourOur audit committee does not constitute soliciting material and shall not be deemed filed or incorporated by reference into any other filing by us under the Securities Act orperforms its responsibilities in accordance with the Exchange Act, except to the extent we specifically incorporate this report by reference therein.
Our audit committee was established in accordance with Section 3(a)(58)(A) of the Exchange Act. Eachand each of our audit committee members satisfies the independence requirements of Exchange ActRule 10A-3and complies with the financial literacy requirements thereof.under applicable Exchange Act rules. Our board of directors has determined that all three members of our audit committee, Messrs.Robert S. Bolinger, John J. Lyons and Richard D. Wampler, II, satisfy the financial expertise requirements and have the requisite experience as defined by the SEC’s rules. TheOur audit committee operates pursuant to a written charter, the full text of our audit committee charter as currently in effect canwhich may be viewed on our website athttp://www.donegalgroup.com.www.donegalgroup.com. Our audit committee reviews and reassesses the adequacy of its charter on an annual basis.
The charter of ourOur audit committee specifies thatundertakes the purpose of our audit committee is to assist our board of directors in:following primary responsibilities:
| | |
| • | the selection, appointment, determination of funding for, compensation, retention and oversight of the work of our independent registered public accounting firm and the review of its qualifications and independence; |
|
| • | the approval, in advance, of all auditing services and all non-audit services to be performed by our independent registered public accounting firm; |
|
| • | the oversight of our accounting and financial reporting processes, andincluding the auditsoverview of our financial statements;reports and our internal audit function; |
|
| • | the preparationestablishment of procedures for the annual reportreceipt, retention and treatment of our audit committee required by the disclosure rules of the SEC; |
|
| • | the oversight of the integrity of our financial statements; |
|
| • | our compliance with legal and regulatory requirements; |
|
| • | the qualifications and independence of our independent registered publiccomplaints we receive regarding accounting, firm; |
|
| • | the retention of our independent registered publicinternal accounting firm; |
|
| • | the adequacy of our system of internal controls;controls or auditing matters; and |
|
| • | the performanceresponsibility for reviewing reports and disclosures of all related person transactions, subject to the approval of the audit committee and the process set forth in our independent registered public accounting firm and of our internal audit function.by-laws relating to the coordinating committee. |
25
In carrying out these responsibilities, our audit committee, among other things:
| | |
| • | monitors preparation of quarterly and annual financial reports by our management; |
31
| | |
| • | supervises the relationship between us and our independent registered public accounting firm, including having direct responsibility for its appointment, compensation and retention;retention, reviewing the scope of its audit services;services, approving audit and non-audit services and confirming the independence of our independent registered public accounting firm; and |
|
| • | oversees management’s implementation and maintenance of effective systems of internal and disclosure controls, including review of our policies relating to legal and regulatory compliance, ethics and conflicts of interest and review of our internal audit program. |
Our audit committee met nine11 times during 2007.2009. Our audit committee schedules its meetings in order to have sufficient time to devote appropriate attention to all of its responsibilities. When it deems it appropriate, our audit committee holds meetings with our independent registered public accounting firm and with our internal auditors in executive sessions at which our management is not present.
As part of its oversight of our financial reporting process, our audit committee reviews all annual and quarterly financial statements and discusses them with our independent registered public accounting firm and with management prior to the issuance of the statements. During 2007,2009, management and our independent registered public accounting firm advised our audit committee that each of ourthese financial statements had been prepared in accordance with generally accepted accounting principles, and they reviewed significant accounting and disclosure issues with our audit committee. These reviews included discussion with our independent registered public accounting firm as to the matters required to be discussed pursuant to Statement ofon Auditing Standards No. 11461 (The Auditor’s Communication With Those Charged With Governance), as adopted by the Public Company Accounting Oversight Board, or PCAOB, in Rule 3200T, including the accounting principles we employ, the reasonableness of significant judgments made by management and the adequacy of the disclosures in our financial statements. Our audit committee discussed with KPMG LLP matters relating to its independence, including a review of audit and non-audit fees andhas received the written disclosures and the letter from KPMG LLP tothe independent registered public accounting firm required by applicable requirements of the PCAOB regarding the independent registered public accounting firm’s communications with our audit committee pursuant to Independence Standards Board Standard No. 1 (Independence Discussionsconcerning independence and has discussed with Audit Committees).the independent registered public accounting firm its independence.
Our audit committee also reviewed methods of enhancing the effectiveness of our internal and disclosure control system.systems. Our audit committee, as part of this process, analyzed steps taken to implement recommended improvements in our internal control procedures.
Based on our audit committee’s reviews and discussions as described above, the members of our audit committee recommended to our board of directors that our board of directors approve the inclusion of our audited financial statements in our Annual Report onForm 10-K for the year ended December 31, 20072009 for filing with the SEC.
Submitted by:
Audit Committee
Robert S. Bolinger
John J. Lyons
Richard D. Wampler, II
March 13, 2008
ITEM 2 — RATIFICATION OF OUR AUDIT COMMITTEE’S SELECTION OF KPMG LLP
AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2008
Our audit committee has appointed KPMG LLP as our independent registered public accounting firm for the year ending December 31, 2008. We are asking our stockholders to ratify our audit committee’s selection of KPMG LLP as our independent registered public accounting firm for 2008. Although ratification is not10, 2010
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required by our by-laws or otherwise, we are submitting the selection of KPMG LLP to our stockholders for ratification as a matter of good corporate practice.
Representatives of KPMG LLP will be present at our annual meeting to respond to appropriate questions and to make such statements as they may desire.
Our board of directors recommends that our stockholders vote “FOR” the ratification of the appointment of KPMG LLP as our independent registered public accounting firm for fiscal 2008.
In the event our stockholders do not ratify the appointment, our audit committee and our board of directors will reconsider the appointment. Even if our stockholders ratify the appointment, the audit committee in its discretion may select a different independent registered public accounting firm at any time during the year if it determines that such a change would be in our best interests and in the best interests of our stockholders.
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STOCKHOLDER PROPOSALS
Any stockholder who, in accordance with and subject to the provisions ofRule 14a-8 of the proxy rules of the SEC, wishes to submit a proposal for inclusion in our proxy statement for our 20092011 annual meeting of stockholders must deliver such proposal in writing to our Secretarycorporate secretary at our principal executive offices at 1195 River Road, Marietta, Pennsylvania 17547, not later than November 14, 2008.2010.
Pursuant to Section 2.3 of our by-laws, if a stockholder wishes to present at our 20092011 annual meeting of stockholders (i) nominations of persons for election to our board of directors or (ii) an item of business to be transacted by our stockholders otherwise than pursuant toRule 14a-8 of the proxy rules of the SEC, the stockholder must comply with the provisions relating to stockholder proposals set forth in our by-laws, which are summarizedwe summarize below. WrittenOur corporate secretary must receive written notice of any such proposal containing the information required under our by-laws require, as describedsummarized herein, must be received by our corporate secretary, at our principal executive offices at 1195 River Road, Marietta, Pennsylvania 17547, during the period commencingthat begins on November 14, 20082010 and endingthat ends on December 15, 2008.14, 2010.
A written proposal of nomination for a director must set forth:
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| • | the name and address of the stockholder, as the same appears on our books, who intends to make the nomination (the “Proposing Stockholder”); |
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| • | as to each person whom the Proposing Stockholder nominates for election or reelection as a director, all information relating to such person as would be required to be disclosed in a solicitation of proxies for election of such nominees as directors pursuant to the proxy rules under the Exchange Act;Act would require to be disclosed; |
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| • | the principal occupation or employment for the past five years of each person whose nomination the Proposing Stockholder intends to make; |
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| • | a description of any arrangement or understanding between each person whose nomination is proposedthe Proposing Stockholder proposes and the Proposing Stockholder with respect to such person’s nomination for election as a director and actions to be proposed or taken by such person if elected as a director;proposes to take; |
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| • | the written consent of each person so nominated to serve as a director if elected as a director; and |
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| • | as to any other business thatthe number of shares of our Class A common stock and Class B common stock the Proposing Stockholder intends to bring before our 2009beneficially owns within the meaning of SECRule 13d-3 and of record. |
As to any other business that the Proposing Stockholder intends to bring before our 2011 annual meeting of stockholders, the written proposal must set forth:
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| • | a brief description of such business, business; |
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| • | the Proposing Stockholder’s reasons for presenting such business at our 20092011 annual meeting of stockholders and stockholders; |
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| • | any material interest of the Proposing Stockholder in such business; |
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| • | the name and address of the Proposing Stockholder; and |
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| • | the number of shares of our Class A common stock and our Class B common stock the Proposing Stockholder beneficially ownedowns within the meaning of SECRule13d-3 and of record by the Proposing Stockholder.record. |
Only candidates nominated by stockholders for election as a member of our board of directors in accordance with our by-law provisions as summarized herein will be eligible for election as a member of our board of directors at our 20092011 annual meeting of stockholders. A written proposal relating to a matter other than a nomination for election as a director must set forth information regarding the matter equivalent to the information that would be required under the proxy rules of the SEC if proxies were solicited for stockholder consideration of the matter at a meeting of stockholders.
Only such business may be conducted at our 20092011 annual meeting of stockholders as shall have been brought before our annual meeting in accordance with the procedures set forth in our by-law provisions as
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summarized herein. The chairman of our 20092011 annual meeting of stockholders will have the discretion to determine if a nomination or an item of business has been proposed in accordance with the procedures set forth in our by-laws as summarized herein. Only stockholder proposals submitted in accordance with the by-law provisions summarized above will be eligible for presentation at our 20092011 annual meeting of stockholders, and any matter not submitted to our board of directors in accordance with such provisions will not be considered or acted upon at our 20092011 annual meeting of stockholders.
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OTHER MATTERS
Our board of directors does not know of any matters to be presented for consideration at our annual meeting other than the matters described in the notice of annual meeting, but if any matters are properly presented, proxies in the enclosed form returned to us will be voted in accordance with the recommendation of our board of directors or, in the absence of such a recommendation, in accordance with the judgment of the proxy holder.
By order of our board of directors,
Donald H. Nikolaus,
President and Chief Executive Officer
March 17, 200815, 2010
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Electronic Voting Instructions You can vote by Internet or telephone! Available 24 hours a day, 7 days a week! Instead of mailing your proxy, you may choose one of the two voting methods outlined below to vote your proxy. VALIDATION DETAILS ARE LOCATED BELOW IN THE TITLE BAR. Proxies submitted by the Internet or telephone must be received by 12:00 a.m., Eastern Time, on April 15, 2010. Vote by Internet• Log on to the Internet and go to www.investorvote.com/DGIC• Follow the steps outlined on the secured website. Vote by telephone• Call toll free 1-800-652-VOTE (8683) within the USA, US territories & Canada any time on a touch tone telephone. There is NO CHARGE to you for the call. Using ablack ink pen, mark your votes with anXas shown in | | |
• Follow the instructions provided by the recorded message. this example. Please do not write outside the designated areas. | | x |
Annual Meeting Proxy CardPLEASE FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE.
A Proposals — The Board of Directors recommends a vote FOR each nominee listed in Proposal 1 and FOR Proposal 2.
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X Annual Meeting Proxy Card IF YOU HAVE NOT VOTED VIA THE INTERNETOR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. A Proposals — The Board of Directors recommends a vote FOR each nominee listed in Proposal 1 and FOR Proposal 2. 1. Election of Class AC Directors: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | For | | Withhold | | | | | | | | | | | | For | | Withhold | | | | | | For | | Withhold | | |
01 - Robert— John J. Lyons 02 — S. Bolinger | | o | | o | | | | 02 - Patricia A. Gilmartin | | | | o | | o | | | | Trezevant Moore, Jr. 03 - Philip H. Glatfelter, II | | o | | o | | |
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| | | | | | | | — R. Richard Sherbahn For | | Against | | Abstain | | | | | | | | | | | | | | | | |
2. Ratification of KPMG LLP as the Company’s independent registered public accounting firm for 2008. | | | | o | | o | | o | | | | | | | | | | | | | | | | |
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2010. 3. In their discretion, the proxies are authorized to vote upon such other business as may properly come before the Company’s annual meeting and any adjournment or postponement thereof. | | | | | | | | | | | | | | | | |
B Non-Voting Items
Change of Address —Please print your new address below.
C Authorized Signatures — This section must be completed for your vote to be counted. — Date and Sign Below
Please sign exactly as name(s) appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, corporate officer, trustee, guardian, or custodian, please give full title.
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B Non-Voting Items Change of Address — Please print new address below. C Authorized Signatures — This section must be completed for your vote to be counted. — Date and Sign Below Please sign exactly as name(s) appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, corporate officer, trustee, guardian, or custodian, please give full title. Date (mm/dd/yyyy) –— Please print date below. | | Signature 1 -— Please keep signature within the box | | box. Signature 2 -— Please keep signature within the box |
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| | | | box. 31A V 0158TB |
PLEASE FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE.![](https://capedge.com/proxy/DEF 14A/0000950123-10-024465/w77615w7761502.gif)
Proxy — DONEGAL GROUP INC.Annual Meeting of Stockholders TO BE HELD APRIL 17, 2008
This Proxy Solicited on behalf of the Board of Directors
The undersigned hereby appoints Daniel J. Wagner and Jeffrey D. Miller, and each or either of them, proxies of the undersigned, with full power of substitution, to vote all of the shares of Class A common stock and Class B common stock of Donegal Group Inc. (the “Company”) that the undersigned may be entitled to vote at the Annual Meeting of Stockholders of the Company to be held at the Company’s offices, 1195 River Road, Marietta, Pennsylvania 17547, on April 17, 2008 at 10:00 a.m., and at any adjournment or postponement thereof, as set forth on the reverse side of this proxy card.
You are encouraged to specify your choices by marking the appropriate boxes, SEE REVERSE SIDE, but you need not mark any boxes if you wish to vote in accordance with our board of directors’ recommendations.
IF YOU HAVE NOT VOTED VIA THE INTERNETOR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. Proxy — DONEGAL GROUP INC. ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 15, 2010 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints Daniel J. Wagner and Jeffrey D. Miller, and each or either of them, proxies of the undersigned, with full power of substitution, to vote all of the shares of Class A common stock and Class B common stock of Donegal Group Inc. (the “Company”) that the undersigned may be entitled to vote at the Annual Meeting of Stockholders of the Company to be held at the Company’s offices, 1195 River Road, Marietta, Pennsylvania 17547, on April 15, 2010 at 10:00 a.m., and at any adjournment or postponement thereof, as set forth on the reverse side of this proxy card. You are encouraged to specify your choices by marking the appropriate boxes, SEE REVERSE SIDE, but you need not mark any boxes if you wish to vote in accordance with our board of directors’ recommendations. |