SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities
Exchange Act of 1934 (Amendment
(Amendment No. )
Filed by the Registrantþx
Filed by a Party other than the Registranto¨
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| x | Definitive Proxy Statement |
| ¨ | Definitive Additional Materials |
| ¨ | Soliciting Material Pursuant to §240.14a-12 |
Donegal Group Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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WE WILL HOLD ON APRIL 19, 2012
To the Stockholders of
DONEGAL GROUP INC.:
We will hold our 2012 annual meeting of stockholders at 10:00 a.m., local time, on Thursday, April 16, 2009,19, 2012, at our offices, 1195 Riverthe Heritage Hotel Lancaster, 500 Centerville Road, Marietta,Lancaster, Pennsylvania 17547.17601. At our 2012 annual meeting of stockholders, our stockholders will act on the following matters:
The election of the threefour nominees for Class B directors namedwe name in theour accompanying proxy statement, each for a term of three years and until the election of his or her respective successor;successor takes office; and
The ratification of our audit committee’s selectionthe appointment of KPMG LLP as our independent registered public accounting firm for 2009;2012.
The advance notice by-laws we have had in effect for many years require our stockholders to submit to us in a timely manner specific information regarding any stockholder nomination of a candidate for election as a director or any other proposed item of stockholder business. Therefore, under applicable law:
no stockholder may validly present any nomination of a candidate for election as a Class B director other than the nominees for election as Class B directors we name in our accompanying proxy statement or propose any other item of stockholder business at our 2012 annual meeting of stockholders other than those we list in this notice of annual meeting; and
we will not conduct a vote of our stockholders on any item of stockholder business at our 2012 annual meeting of stockholders other matter that properly comes before ourthan those items of stockholder business we list in this notice of annual meeting.
Our board of directors has established the close of business on February 27, 2009March 2, 2012 as the record date for the determination of the holders of our Class A common stock and the holders of our Class B common stock entitled to notice of, and to vote at, our 2012 annual meeting of stockholders.
We include our 2011 annual report to stockholders and our proxy statement relating to our 2012 annual meeting of stockholders with this notice of our 2012 annual meeting of stockholders. We also enclose a proxy card for you to sign, date and return in the postage-prepaid envelope.
Please return your completed and duly signed proxy card, whether or not you expect to attend our 2012 annual meeting of stockholders in person, by mail, or vote by telephone or via the internet as we describe on the accompanying proxy card.
| By order of our board of directors, |
 |
| Donald H. Nikolaus, |
| President and Chief Executive Officer |
March 19, 2012
Marietta, Pennsylvania
Important Notice Regarding the Availability of the Proxy Materials for Our Annual Meeting of
Stockholders To Be Held on April 19, 2012
We enclose a printed copy of the proxy statement for our 2012 annual meeting of stockholders and our 2011 annual report to stockholders with this notice of annual meeting. You may also view each of these documents on the internet atwww.proxyvote.com. No information on the website other than the proxy statement for our 2012 annual meeting of stockholders and our 2011 annual report to stockholders constitutes a part of the proxy solicitation materials for our 2012 annual meeting of stockholders or part of our 2011 annual report to stockholders.
DONEGAL GROUP INC.
PROXY STATEMENT
This proxy statement contains information relating to our 2012 annual meeting of stockholders. We will hold our 2012 annual meeting of stockholders on Thursday, April 19, 2012, at 10:00 a.m., local time, at the Heritage Hotel Lancaster, 500 Centerville Road, Lancaster, Pennsylvania 17601.
On March 19, 2012, we mailed to our stockholders of record at the close of business on March 2, 2012 this proxy statement, the accompanying form of proxy card and our 2011 annual report to stockholders. The mailing also included a postage-prepaid envelope for your convenience in returning your duly executed proxy card to us, unless you prefer to vote by telephone or via the internet.
We will bear all of the costs of preparing and mailing our proxy materials to our stockholders for our 2012 annual meeting of stockholders and making those materials available for our stockholders to view on the internet. We will, upon request, reimburse brokers, nominees, fiduciaries, custodians and other record holders for their reasonable expenses in forwarding our proxy materials for our 2012 annual meeting of stockholders to the beneficial owners of our Class A common stock and to the beneficial owners of our Class B common stock for whom such persons serve as record holders.
We use the following defined terms relating to our subsidiaries and affiliates in this proxy statement:
“Atlantic States” means Atlantic States Insurance Company;
“DFSC” means Donegal Financial Services Corporation;
“DGI,” “we,” “us” or “our” mean Donegal Group Inc.;
“Donegal Mutual” means Donegal Mutual Insurance Company;
“Le Mars” means Le Mars Insurance Company;
“MICO” means Michigan Insurance Company;
“Peninsula” means The Peninsula Insurance Group;
“Sheboygan” means Sheboygan Falls Insurance Company;
“Southern” means Southern Insurance Company of Virginia; and
“UCB” means Union Community Bank FSB.
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Unless we otherwise expressly indicate, all of the information we include or incorporate by reference in this proxy statement for our 2012 annual meeting of stockholders relates to our 2011 fiscal year. Our 2011 fiscal year began on January 1, 2011 and ended on December 31, 2011.
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OUR 2012 ANNUAL MEETING OF STOCKHOLDERS
Our board of directors solicits proxies through this proxy statement from our stockholders for use in connection with our 2012 annual meeting of stockholders and any adjournment or postponement of that annual meeting. We will hold our 2012 annual meeting of stockholders at the Heritage Hotel Lancaster, 500 Centerville Road, Lancaster, Pennsylvania 17601 at 10:00 a.m., local time, on April 19, 2012.
What is the agenda for our 2012 annual meeting of stockholders?
At our 2012 annual meeting of stockholders, our stockholders will act upon:
the election of the four nominees for Class B directors we name as our nominees in this proxy statement; and
the ratification of the appointment of KPMG LLP as our independent registered public accounting firm for 2012.
What is the effect of our advance notice by-laws?
As is the case with many publicly-owned companies, we have had “advance notice” by-laws in effect for many years. Our advance notice by-laws require that a stockholder provide us with prior notice of that stockholder’s intention to nominate a candidate for election as a director at our 2012 annual meeting of stockholders or to propose any other item of stockholder business for stockholder action at our 2012 annual meeting of stockholders. The purpose of our advance notice by-laws is to ensure that we can include in this proxy statement, for the information of all of our stockholders, all of the actions we or others propose to present for stockholder consideration at our 2012 annual meeting of stockholders.
No stockholder has nominated a candidate for election as a Class B director at our 2012 annual meeting of stockholders or validly proposed the transaction of any other item of stockholder business at our 2012 annual meeting of stockholders within the time limits our advance notice by-laws specify. Accordingly, no business other than the two items of stockholder business we describe in our notice of our 2012 annual meeting of stockholders may properly come before our 2012 annual meeting of stockholders. Further, we will not submit any other item of stockholder business, other than procedural matters related to the conduct of our 2012 annual meeting of stockholders, to a vote of our stockholders at our 2012 annual meeting of stockholders.
We are a Delaware corporation. Therefore, the Delaware General Corporation Law, or the DGCL, our certificate of incorporation and our by-laws govern the conduct of business at our 2012 annual meeting of stockholders, our relationships with our stockholders and the rights, powers, duties and obligations of our stockholders, directors, officers and employees. The effect of these provisions is to provide Donald H. Nikolaus, as the person our board of directors named to preside at our 2012 annual meeting of stockholders and who is our president and chief executive officer, with broad discretion in conducting our 2012 annual meeting of stockholders.
What will constitute a quorum at our 2012 annual meeting of stockholders?
Our by-laws provide that the presence, in person or by proxy, of not less than a majority of the aggregate voting power of our outstanding shares of Class A common stock and our outstanding shares of Class B common stock as of the record date will constitute a quorum at our 2012 annual meeting of stockholders. Because Donegal Mutual owned approximately 66% of the aggregate voting power of our outstanding Class A common stock and our outstanding Class B common stock on the record date and because Donegal Mutual will vote all of its shares of Class A common stock and Class B common stock in person at our 2012 annual meeting of stockholders, the presence of Donegal Mutual at our 2012 annual meeting of stockholders will ensure the presence of a quorum at our 2012 annual meeting of stockholders. As a result, our stockholders will be lawfully able to conduct the items of stockholder business at our 2012 annual meeting of stockholders that we describe in the notice of our 2012 annual meeting of stockholders.
What will the order of business be at our 2012 annual meeting of stockholders?
Our by-laws and applicable provisions of the DGCL govern the organization and conduct of business at our 2012 annual meeting of stockholders. Our board of directors named Donald H. Nikolaus, our president and chief executive officer, as the chair of our 2012 annual meeting of stockholders. Applicable law limits the items of business we will conduct at our 2012 annual meeting of stockholders to the items of business we list in our notice of our 2012 annual meeting of stockholders. Mr. Nikolaus will call our 2012 annual meeting of stockholders to order and will conduct the transaction of the items of stockholder business we list in our notice of annual meeting at our 2012 annual meeting of stockholders. Mr. Nikolaus will determine, as chair of our 2012 annual meeting of stockholders, in his broad discretion, the order of the business our stockholders will conduct at our 2012 annual meeting of stockholders and the procedural manner in which we will conduct our 2012 annual meeting of stockholders.
We have historically conducted the voting on the proposals we submit for stockholder action at our annual meetings of stockholders as the first items of business. We intend to follow the same procedure at our 2012 annual meeting of stockholders. Mr. Nikolaus, our president and chief executive officer, will then discuss our results of operations for 2011 and our outlook for 2012. After Mr. Nikolaus completes his remarks, he will entertain questions and comments from stockholders as Mr. Nikolaus, in his discretion, deems appropriate.
Who may attend and who may vote at our 2012 annual meeting of stockholders?
Our board of directors established the close of business on March 2, 2012 as the record date for the determination of the holders of our Class A common stock and the holders of our Class B common stock who are entitled to notice of, and to vote at, our 2012 annual meeting and any adjournment or postponement of our annual meeting.
We reserve the right to request photographic identification, such as a currently valid driver’s license, before we permit a stockholder of record, or a proxy whether or not you expectfor a stockholder of record, to attend our 2012 annual meeting in person. Ifof stockholders. Even if you currently plan to attend our annual meeting and wish to vote in person, you may withdraw your proxy and vote in person.
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You are a stockholder of record if your name appears on the list of our stockholders as you direct. Ifof the record date that our independent transfer agent prepares in connection with our 2012 annual meeting of stockholders. For example, you are a registered stockholder and attendof record if you received the proxy materials for our 2012 annual meeting of stockholders directly from us and not from a record holder of the shares you beneficially own, such as a bank or a brokerage firm. During the ten days that precede our 2012 annual meeting of stockholders, you may, deliver your completed proxy cardupon written request to our chief financial officer that we determine, in person. “Street name”our sole discretion, is proper and legally relevant to our 2012 annual meeting of stockholders, who wish to voteinspect during normal business hours at our annual meeting will need to obtain a signed proxy from the nomineeprincipal executive offices in whose name their shares are registered.
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If a total of 5,576,775 votes at our annual meeting, resultingbank or broker holds your shares in a total of 7,565,225 votes that may be cast at our annual meeting.
What percentage of the aggregate voting power of our outstanding Class A common stock and 4,153,666 shares, or 74.5%, of our outstanding Class B common stock and, therefore,is required to approve the items of business on which our stockholders will have the right to cast 65.9% of the votes entitled to be castvote at our 2012 annual meeting. Donegal Mutual has advised us that it will vote its sharesmeeting of stockholders?
Election of Class B Directors. The four nominees our board of directors nominated for the election of Jon M. Mahan, Donald H. Nikolaus and Richard D. Wampler, II as Class B directors andare the only nominees eligible for the ratification of our audit committee’s selection of KPMG LLP as our independent registered public accounting firm for 2009. Therefore, Jon M. Mahan, Donald H. Nikolaus and Richard D. Wampler, II will be electedelection as Class B directors andat our audit committee’s selection of KPMG LLP as our independent registered public accounting firm for 2009 will be ratified, irrespective of the votes cast by our stockholders other than Donegal Mutual.
stockholders and any adjournment or are unable to attend,postponement of our annual meeting.
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If you properly executedsubmit your proxy card markedand markWithhold Authority, the proxies will not be votedvote your shares with respect to the nominee or nominees as to which you so indicated, although the votes represented by the proxyindicate, but we will be counted for the purposescount your shares as present at our 2012 annual meeting of stockholders in determining whether a quorum is present. exists.
Our certificate of incorporation and by-laws do not authorize cumulative voting in the election of our directors.
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Although we will consider abstentions and broker non-votes as outstanding shares entitled to vote at our 2012 annual meeting of stockholders and count those shares in determining the number of votes necessary to constitute a quorum at our 2012 annual meeting of stockholders, a quorum will be cast bypresent at our 2012 annual meeting of stockholders, because the holderspresence at our 2012 annual meeting of stockholders of the shares of our Class A common stock and the shares of our Class B common stock whoseDonegal Mutual owns will ensure the presence of a quorum. Broker non-votes are shares are represented at our annual meeting in person or by proxy, voting together as a single class. Abstentions and shares held by brokers or nominees as tohold in their name for which voting instructionswe have not been received voting instructions from the beneficial owner of, or person otherwise entitled to vote, thethose shares, and as to which shares the broker or nominee does not have discretionary voting power, i.e., broker non-votes,power.
What are consideredthe voting rights of our stockholders?
At March 2, 2012, we had outstanding:
19,998,596 shares of our Class A common stock, each of which entitles its holder to cast one-tenth of a vote with respect to each matter we submit for a stockholder vote at our 2012 annual meeting of stockholders; and
5,576,775 shares of our Class B common stock, each of which entitles its holder to cast one vote with respect to each matter we submit for a stockholder vote at our 2012 annual meeting of stockholders.
Therefore, the holders of all of our outstanding shares of Class A common stock may cast a total of 1,999,859 votes on each matter we submit to a vote of our stockholders at our 2012 annual meeting of stockholders, and entitledthe holders of all of our outstanding shares of Class B common stock may cast a total of 5,576,775 votes on each matter we submit for a vote of our stockholders at our 2012 annual meeting of stockholders.
At the close of business on March 2, 2012, Donegal Mutual owned 7,755,953 shares, or 38.8%, of our outstanding Class A common stock and 4,199,239 shares, or 75.3%, of our outstanding Class B common stock. Donegal Mutual therefore has the right to vote and are counted in determiningcast approximately two-thirds of the total number of votes necessarythat may be cast at our 2012 annual meeting of stockholders on all matters we submit for a majority. An abstention or broker non-votevote of our stockholders at our 2012 annual meeting of stockholders.
Donegal Mutual has advised us that it will therefore, havevote all of its shares of our Class A common stock and our Class B common stock as follows:
for the practical effectelection of voting against approvalKevin M. Kraft, Sr., Jon M. Mahan, Donald H. Nikolaus and Richard D. Wampler, II as Class B directors to serve for a term of three years and until their respective successors take office; and
for the ratification of the selectionour audit committee’s appointment of KPMG LLP as our independent registered public accounting firm for 2009 because each abstention and broker non-vote will represent one fewer vote for approval of the ratification.2012.
Therefore, based on the advance notice provisionsvotes Donegal Mutual will cast at our 2012 annual meeting of stockholders, our by-lawsstockholders will:
elect Kevin M. Kraft, Sr., Jon M. Mahan, Donald H. Nikolaus and applicable provisions of Delaware law, no matter other than the election of threeRichard D. Wampler, II as Class B directors to serve for a term of three years and the ratification ofuntil their respective successors take office; and
ratify our audit committee’s selectionappointment of KPMG LLP as our independent registered public accounting firm for 2009 can be properly brought before2012.
How do you vote the DGI shares registered in your name?
If the certified list of the holders of our Class A common stock and our Class B common stock as of the record date that our independent transfer agent prepared includes your name, you are a stockholder of record and you may attend our 2012 annual meeting.
You may vote by proxy by using one of the three following methods:
Vote by telephone — use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a week. Have your proxy card available when you call. When requested, enter the control numbers listed on your proxy card and then follow the prompts. The telephone number is 1-800-690-6903.
Vote by mail — mark, sign and date the proxy card we have mailed to you and return it in the postage-prepaid envelope we have provided.
Vote via the internet — use the internet to vote your proxy 24 hours a day, 7 days a week. Have your proxy card available when you access the website. When requested, enter the control numbers listed on your proxy card and then create and submit your ballot over the internet. The website address for voting via the internet iswww.proxyvote.com.
If a broker, bank or other nominee is the holder of record of your shares, see “How do you vote the DGI shares you hold in street name?” below.
If you are not a stockholder of record, but you are a “beneficial owner” at the close of business on March 2, 2012, which means that the list of our stockholders of record at the close of business on March 2, 2012 our independent transfer agent prepared does not include your name or the name of the designee you have selected, you must either direct the holder of record of your shares to vote your shares on the matters our stockholders will payconsider and vote upon at our 2012 annual meeting of stockholders or you must obtain a form of proxy from your holder of record that you may then vote as if you were a holder of record. Your broker does not have the costsdiscretion to vote your shares on non-routine matters, including the election of preparingdirectors.
How do you vote the DGI shares you hold in your 401(k) plan?
If you participate in Donegal Mutual’s 401(k) plan, you may vote the shares of Class A common stock and mailing this proxy statementClass B common stock credited to your 401(k) plan account at the close of business on behalf ofMarch 2, 2012 by telephone, by mail or via the internet. Please see “How do you vote the DGI shares registered in your name?” for instructions as to how to vote the shares you hold in your 401(k) plan.
How does our board of directors. In additiondirectors recommend stockholders vote at our 2012 annual meeting of stockholders?
Our board of directors unanimously recommends that you vote as follows:
| • | FOR the election of the four nominees for Class B directors we name in this proxy statement; and |
| • | FOR the ratification of the appointment of KPMG LLP as our independent registered public accounting firm for 2012. |
Unless you mark your proxy card to mailingthe contrary, the proxies our board of directors has appointed will vote your shares for the election of the four nominees for Class B directors we name in this proxy statement and related materials,for the ratification of the appointment of KPMG LLP as our regular officers and employees, who will not receiveindependent registered public accounting firm for our fiscal year ending December 31, 2012.
May you change your vote before our 2012 annual meeting of stockholders?
You may revoke your proxy at any special compensation for doing so,time prior to the time during our 2012 annual meeting of stockholders when the proxies cast their votes. If you are a stockholder of record, you may solicit proxiesrevoke your proxy by:
submitting a written notice of revocation to our chief financial officer;
submitting a later dated proxy by telephone, via the internet or by mail; or
voting in person by telephoneat our 2012 annual meeting of stockholders if you properly identify yourself to our judges of election.
However, if you attend our 2012 annual meeting of stockholders in person and do not submit a ballot, our proxies will vote the proxy you most recently submitted to them in accordance with the instructions you provided on your proxy.
If a bank, broker, nominee or overother person is the internet. Upon request, we will reimburse brokers, nominees, fiduciaries, custodiansholder of record of the shares you own, you should follow the instructions of the bank, broker, nominee or other holder of record as to how you may revoke your proxy.
If you have any questions about our 2012 annual meeting of stockholders or voting your shares, please call Jeffrey D. Miller, our senior vice president and other persons holding shares in their nameschief financial officer, at 1-800-877-0600 or in the names of nominees for their reasonable expenses in sending our proxy materials to beneficial owners of our stock.
The Our Principal Stockholdersfollowing table identifiesbelow lists each person whom we know ownsbelieve beneficially owned 5% or more than 5%of the outstanding shares of our Class A common stock or 5% or more of the outstanding shares of our Class B common stock and statesat the percentageclose of total votes entitled to be cast by each. All information is as of February 27, 2009. Class A Percent of Class B Percent of Shares Class A Shares Class B Name of Individual or Beneficially Common Beneficially Common Percent of Identity of Group Owned Stock Owned Stock Total Votes Donegal Mutual Insurance Company
1195 River Road
Marietta, PA 17547 8,355,184 42.0 % 4,153,666 74.5 % 65.9 % Dimensional Fund Advisors LP(1)
1299 Ocean Avenue
Santa Monica, CA 90401 1,601,941 8.1 237,391 4.3 5.3
Name of Individual or Identity of Group | Class A Shares Beneficially Owned | Percent of Class A Common Stock | Class B Shares Beneficially Owned | Percent of Class B Common Stock | ||||||||||||
Donegal Mutual Insurance Company 1195 River Road Marietta, PA 17547 | 7,755,953 | 38.8 | 4,199,239 | 75.3 | ||||||||||||
Gregory M. Shepard(1) 7028 Portmarnock Place Bradenton, FL 34202 | 3,602,900 | 18.0 | 397,100 | 7.1 | ||||||||||||
Dimensional Fund Advisors LP(2) 1299 Ocean Avenue Santa Monica, CA 90401 | 1,410,683 | 7.1 | — | — | ||||||||||||
| (1) |
| (2) | Dimensional Fund Advisors LP |
The following table shows the amount and percentage of our outstanding Class A common stock and our outstanding Class B common stock The Stock Ownership of Our Directors and Executive Officersbeneficially owned bythat each director, each nomineeof our directors and nominees for director, each of our named executive officer named in the Summary Compensation Tableofficers and all of our executive officers, nominees for director and directors as a group asowned beneficially at the close of4
Name of Individual or Identity of Group | Class A Shares Beneficially Owned | Percent of Class A Common Stock | Class B Shares Beneficially Owned | Percent of Class B Common Stock | ||||||||||||
Directors and Nominees for Director: | ||||||||||||||||
Donald H. Nikolaus(1) | 809,230 | 4.0 | % | 186,375 | 3.3 | % | ||||||||||
Robert S. Bolinger | 24,577 | — | 1,450 | — | ||||||||||||
Patricia A. Gilmartin | 24,196 | — | — | — | ||||||||||||
Philip H. Glatfelter, II | 28,996 | — | 3,276 | — | ||||||||||||
Jack L. Hess | 18,241 | — | — | — | ||||||||||||
Kevin M. Kraft, Sr. | 23,303 | — | — | — | ||||||||||||
John J. Lyons | 62,973 | — | 1,776 | — | ||||||||||||
Jon M. Mahan | 21,455 | — | — | — | ||||||||||||
S. Trezevant Moore, Jr. | 20,122 | — | 1,000 | — | ||||||||||||
R. Richard Sherbahn | 24,235 | — | 677 | — | ||||||||||||
Richard D. Wampler, II | 22,290 | — | — | — | ||||||||||||
Executive Officers: | ||||||||||||||||
Kevin G. Burke | 98,333 | — | — | — | ||||||||||||
Cyril J. Greenya | 102,838 | — | 820 | — | ||||||||||||
Jeffrey D. Miller | 122,884 | — | 582 | — | ||||||||||||
Robert G. Shenk | 114,763 | — | — | — | ||||||||||||
Daniel J. Wagner | 127,974 | — | 166 | — | ||||||||||||
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All directors and executive officers as a group | 1,646,410 | 7.8 | % | 196,122 | 3.5 | % | ||||||||||
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| Percent of | Class B | Percent of | ||||||||||||||||||
| Class A Shares | Class A | Shares | Class B | |||||||||||||||||
| Beneficially | Common | Beneficially | Common | Percent of | ||||||||||||||||
Name of Individual or Identity of Group | Owned(1)(2) | Stock(3) | Owned(1) | Stock(3) | Total Votes | |||||||||||||||
Directors: | ||||||||||||||||||||
| Donald H. Nikolaus(4) | 756,412 | 3.8 | % | 186,375 | 3.3 | % | 3.5 | % | ||||||||||||
| Robert S. Bolinger | 20,077 | — | 1,450 | — | — | |||||||||||||||
| Patricia A. Gilmartin | 9,696 | — | — | — | — | |||||||||||||||
| Philip H. Glatfelter, II | 24,189 | — | 3,276 | — | — | |||||||||||||||
| John J. Lyons | 57,473 | — | 1,776 | — | — | |||||||||||||||
| Jon M. Mahan | 6,955 | — | — | — | — | |||||||||||||||
| S. Trezevant Moore, Jr. | 622 | — | 1,000 | — | — | |||||||||||||||
| R. Richard Sherbahn | 18,922 | — | 677 | — | — | |||||||||||||||
| Richard D. Wampler, II | 17,632 | — | — | — | — | |||||||||||||||
Executive Officers: | ||||||||||||||||||||
| Cyril J. Greenya | 56,119 | — | 820 | — | — | |||||||||||||||
| Jeffrey D. Miller | 60,868 | — | 582 | — | — | |||||||||||||||
| Robert G. Shenk | 75,660 | — | 5,450 | — | — | |||||||||||||||
| Daniel J. Wagner | 53,960 | — | 166 | — | — | |||||||||||||||
| All directors and executive officers as a group (13 persons) | 1,158,585 | 5.8 | % | 201,572 | 3.6 | % | 4.2 | % | ||||||||||||
| (1) | ||
| Includes |
Section 16(a) ofSection 16(a) Beneficial Ownership Reporting Compliance the Securities Exchange Act of 1934, or the Exchange Act requires that each of our executive officers, each of our directors and directors, as well as persons who owneach holder of 10% or more of a classour Class A common stock or 10% or more of our equity securities, file reports of theirClass B common stock report such person’s ownership of our securities, as well asClass A common stock and our Class B common stock to the SEC. Such persons also must file statements of changes in such ownership with the SEC within two days of a change in such person’s ownership of our Class A common stock or our Class B common stock. Our executive officers and directors have advised us and the SEC. Based upon written representations we received from our officers, directors and 10%in writing that each of them made all of his or greater stockholders and our review of the statements of beneficial ownership changes our officers, directors and 10% or greater stockholders filed with us during 2008, we believe that all suchher required filings required during 2008 were made on a timely basis.5basis during 2011.
THE RELATIONSHIP OF DONEGAL MUTUAL AND DGI
A group of local residents and business owners in Lancaster County, Pennsylvania formed Donegal Mutual’sMutual in 1889 to provide property and casualty insurance. Now, 123 years later, Donegal Mutual has succeeded and grown to have approximately $334.0 million in total assets and surplus would increase over time as the value of itsapproximately $176.0 million. In addition, Donegal Mutual has a two-thirds ownership interest in us increased.
Since 1986, we have completed three public offerings. A major purpose of these offerings was to provide additional capital for Atlantic States and our other insurance subsidiaries and to fund acquisitions. As the capital of Atlantic States has increased, its underwriting capacity has increased proportionately. Thus, as originally planned in the mid-1980s, Atlantic States has had access to the capital necessary to support the growth of its direct business and increases in the amount and percentage of business it assumes from the underwriting pool with Donegal Mutual. As a result, the participation ofestablished Atlantic States in the underwriting pool has increased over the years from its initial participation of 35% in 1986, to its current participation of 80%, and the size of the underwriting pool has increased substantially.
In addition, as the Donegal Insurance Group, Donegal Mutual and our insurance subsidiaries haveshare a combined business plan to achieve market penetration and underwriting profitability objectives. The products offered by Donegal Mutual and our insurance subsidiaries offer are generally complementary, thereby allowingwhich permits the Donegal Insurance Group to offer a broaderbroad range of products toin a given market and to expand the Donegal Insurance Group’s ability to service an entire personal lines or commercial lines account. Distinctions within the products of Donegal Mutual and our insurance subsidiaries offer generally relate to the specific risk profiles targeted within similar classes of business, such as preferred tier products compared toversus standard tier products, butproducts. Donegal Mutual and we do not allocate all of the standard risk gradients are allocated to one of the companies. Therefore,company. As a result, the underwriting profitability of the business the individual companies write directly written by each of Donegal Mutual and Atlantic States will vary. However, since the underwriting pool homogenizes the risk characteristics of all business writtenDonegal Mutual and our insurance subsidiaries write directly, by Donegal Mutual and Atlantic States are homogenized within the underwriting pool and each of Donegal Mutual and Atlantic States sharesshare the underwriting results in proportion to itstheir respective participation in the underwriting pool. We realizereceive 80% of the underwriting results of the underwriting pool because Atlantic States has an 80% participation in the pool. The business Atlantic States derives from the pool represents a significant percentage of our total revenues. However, that percentage has gradually decreased over the past few years as we have acquired a number of other companies in other jurisdictions that do not participate in the underwriting pool.
Since 1986, Donegal Mutual and our insurance company subsidiaries have conducted business together as the Donegal Insurance Group. During 2011, A.M. Best Company reported that the Donegal Insurance Group ranked as the 103rd largest property and casualty insurance group in the United States based on 2010 net premiums written. In addition, in 2011 A.M. Best Company affirmed the Donegal Insurance Group A.M. Best rating of A (Excellent).
From time to time, the board of directors of Donegal Mutual and our board of directors review our structure and relationships. As a result of the foregoing actions, both boards of directors believe, as of the date of this proxy statement, that the Donegal Mutual-DGI structure continues to be appropriate for our respective businesses and operations.
In the mid-1980s, Donegal Mutual recognized the desirability, as a mutual insurance company, of developing additional sources of capital and surplus so it could remain competitive and have the surplus to expand its business and ensure its long-term viability. Donegal Mutual determined to implement a downstream holding company structure as one of its business strategies. Accordingly, in 1986, Donegal Mutual formed us as a downstream holding company. Initially, Donegal Mutual owned all of our outstanding common stock. We in turn formed Atlantic States as our wholly owned property and casualty insurance company subsidiary. We subsequently effected a public offering in September 1986 to provide the surplus necessary to support the business Atlantic States began to receive on October 1, 1986 as its share under a proportional reinsurance agreement, or the pooling agreement, between Donegal Mutual and Atlantic States that became effective on that date.
Under the pooling agreement, Donegal Mutual and Atlantic States pool substantially all of their respective premiums, losses and loss expenses. Donegal Mutual then cedes 80% of the pooled business to Atlantic States. Our insurance subsidiaries pay dividends to us annually. During the year ended December 31, 2011, our insurance subsidiaries paid a total of $16.0 million in dividends to us. These dividends are the major source of the funds we utilize to pay quarterly cash dividends to our stockholders. Donegal Mutual received $5.6 million in dividends from us during the year ended December 31, 2011.
As the capital of Atlantic States and our other insurance subsidiaries has increased, the underwriting capacity of our insurance subsidiaries, including Atlantic States, has proportionately increased. The size of the underwriting pool has increased substantially. Therefore, as we originally planned in the mid-1980s, Atlantic States has successfully raised the capital necessary to support the growth of its direct business as well as accept increases in its allocation of business from the underwriting pool. Atlantic States’ allocation of the pooled business has increased from an initial allocation of 35% in 1986 to an 80% allocation since March 1, 2008. We do not anticipate any further change in the pooling agreement between Atlantic States and Donegal Mutual in the foreseeable future, including any change in the participation of Atlantic States in the underwriting pool. The business Atlantic States derives from the underwriting pool represents the predominant percentage of our total revenues.
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We completed thiseffected our recapitalization because we believedbelieve a capital structure that has more than one class of publicly traded securities offeredoffers us a number of benefits. The principal benefit wasfrom our recapitalization is our ability after the recapitalization to issue our Class A common stock or securities convertible into or exchangeable for our Class A common stock for financing, acquisition and compensation purposes without materially adversely affecting the percentagerelative voting power of any stockholder,of our stockholders, including Donegal Mutual. At the time of theour recapitalization, our
board of directors recognized that theour recapitalization tendedwas likely to favor longer-term investors, including Donegal Mutual, and wouldcould discourage attempts to takeacquire us, over, which our board of directors believed to be remote in any event because Donegal Mutual has owned more than a majority of the voting power of our common stock since our formation in 1986.
Every holder of our Class A common stock and our Class B common stock has invested in our Class A common stock and our Class B common stock with the prior knowledge and consistent disclosure that Donegal Mutual had, since our formation, greater-than-majority voting control of us.
We believe our relationshiprelationships with Donegal Mutual providessince 1986 have made a substantial contribution to our growth, financial condition and success in the property and casualty insurance industry and will continue to be a benefit to us, to our stockholders and to the policyholders of our insurance subsidiaries for the long-term future. These relationships provide us and our insurance subsidiaries with a number of competitivemany advantages. We believe these advantages includinginclude the following:
enabling our stable management, the consistent underwriting discipline of our insurance subsidiaries, external growth, long-term profitability and financial strength;
creating operational and expense synergies from the combination of resources and integrated operations of Donegal Mutual and our insurance subsidiaries;
enhancing our opportunities to expand by acquisition because of the ability of Donegal Mutual to affiliate with and acquire control of other mutual insurance companies and, thereafter, demutualize them and combine them with us;
producing more stable and uniform underwriting results for our insurance subsidiaries over extended periods of time than we could achieve without our relationship with Donegal Mutual;
providing opportunities for growth because of the ability of Donegal Mutual to enter into reinsurance agreements with other mutual insurance companies and place the business it assumes into the pooling agreement; and
providing Atlantic States with a significantly larger underwriting capacity because of the underwriting pool Donegal Mutual and Atlantic States have maintained since 1986.
In the latter portion of the fourth quarter of 2011 and the first quarter of 2012, the board of directors of Donegal Mutual undertook a review of the relationships between Donegal Mutual and DGI and determined that continuing the current relationships and the current corporate structure of Donegal Mutual and DGI is in the best interest of Donegal Mutual and its various constituencies.
We refer to our Form 10-K Annual Report for the fiscal year ended December 31, 2011 for a discussion of our business strategy.
Donegal Mutual and we have maintained a coordinating committee since our formation in 1986. The coordinating committee consists of two members of our board of directors, Any new agreement between Donegal Mutual and us a new agreement or a change to an existing agreement both of our members both of Donegal Mutual’s members The Coordinating CommitteeWe and who are not also membersneither of whom is a member of Donegal Mutual’s board of directors, and two members of Donegal Mutual’s board of directors, who are not also membersneither of whom is a member of our board of directors.Under our by-laws The purpose of the coordinating committee is to establish and maintain a process for an ongoing evaluation of the by-laws oftransactions between Donegal Mutual, anyour insurance subsidiaries and us.andor one of our insurance subsidiaries, or any proposed change to an existing agreement between Donegal Mutual and us must first be submittedor one of our insurance subsidiaries, is also subject to the applicable provisions of the Pennsylvania Insurance Company Law of 1921, as amended, and the Pennsylvania Insurance Holding Company Act, or the PHCA. The coordinating committee for approval. In determiningutilizes the following process in considering whether to approve a new agreement between Donegal Mutual and us or one of our insurance subsidiaries or a change in an existing agreement between Donegal Mutual and us or one of our insurance subsidiaries:between Donegal Mutual and us,must receive coordinating committee approval. The coordinating committee will only approve a new agreement or a change in an existing agreement if:ofon the coordinating committee will not approvedetermine that the new agreement or the change in an existing agreement between Donegal Mutual and us unless both of our members believe the new agreement or the change in an existing agreement between Donegal Mutual and us is fair and equitable to us and in the best interests of our stockholders.stockholders; andofon the coordinating committee will not approve the new agreement or a change in an existing agreement between Donegal Mutual and us unless both Donegal Mutual members believe the new agreement or the change in an existing agreement between Donegal Mutual and us is fair and equitable to Donegal Mutual and is in the best interests of its policyholders. If the coordinating committee unanimously approves the new agreement or the change in an existing agreement between Donegal Mutual and us,determine that the new agreement or the change in an existing agreement is then submittedfair and equitable to our board of directors and to the board of directors of Donegal Mutual for their separate consideration. The new agreement or the change in an7
the new agreement or the change in an existing agreement betweenis approved by our board of directors; and
the new agreement or the change in an existing agreement is approved by Donegal Mutual and us.Mutual’s board of directors.
The coordinating committee also meets annually to review each existing agreement and transaction between Donegal Mutual and us or our insurance subsidiaries, including a number of reinsurance agreements between Donegal Mutual and our insurance subsidiaries. The purpose of this annual review is to examine the results of the reinsurance agreements over the immediately preceding year and for the five preceding years and to determine if the termsresults of the existing agreements between Donegal Mutual and us remain fair and equitable to us and our stockholders and fair and equitable to Donegal Mutual and its policyholders or if Donegal Mutual and we should mutually agree to certain adjustments. In the case of these reinsurance agreements, the adjustments should be made.typically relate to the reinsurance premiums, losses and reinstatement premiums. These agreements are ongoing in nature and will continue in effect throughout 20092012 in the ordinary course of business.
Robert S. Bolinger and John J. Lyons.Lyons serve as our members of the coordinating committee. See “Item“Proposal 1 — Election of Directors” for certain information about Messrs. Bolinger and Lyons. Dennis J. Bixenman and John E. Hiestand serve as Donegal Mutual’s members of the coordinating committee are John E.committee. Certain information about Messrs. Bixenman and Hiestand is as follows:
Mr. Bixenman, age 65, has been a director of Donegal Mutual since 2007 and Frederick W. Dreher.
Mr. Hiestand, age 70,73, has been a director of Donegal Mutual since 1983 and has been a self-employed provider of insurance administrative services for more than the past fiveover 20 years. Mr. Hiestand served as a director of Central Savings and Loan Association in Columbia, Pennsylvania from 1982 to 1992. Mr. Hiestand beneficially owns 5,2396,326 shares of our Class A common stock and 157 shares of our Class B common stock. In 2008,As director compensation in 2011, Donegal Mutual paid directorsMr. Hiestand cash fees of $34,500 in cash to Mr. Hiestand$38,250 and granted him a restricted stock award ofissued 311 shares as director compensation.
Donegal Mutual provides thefacilities, personnel for five ofand other services to us and our six insurance subsidiaries, Atlantic States, Southern, Le Mars and the two Peninsula companies. Under the terms of an inter-company services agreement, we allocatesubsidiaries. Donegal Mutual allocates certain related expenses to Southern, Le Mars and Peninsula according to a time allocation and estimated usage agreement and to Atlantic States in relation toaccordance with the relative participation of Donegal Mutual and Atlantic States in the underwriting pool described below.pooling agreement. Our insurance subsidiaries other than Atlantic States reimburse Donegal Mutual for their respective personnel costs and bear their proportionate share of information services costs based on their written insurance premiums compared to the total written insurance premiums of the Donegal Insurance Group. Charges for these services totalled $58,564,903totaled $64.7 million in 2008.
We lease office equipment and automobiles to Donegal Mutual.Mutual and Southern. Donegal Mutual and Southern made total lease payments to us of $926,690$957,353 in 2008.
Donegal Mutual and Atlantic States participate in an underwriting pool, whereby bothpool. Both companies cede substantially all of their business to the underwriting poolrespective premiums, losses and thenloss expenses and receive an allocation of a givenallocated percentage of thetheir combined underwriting results of the underwriting pool.results. The underwriting pool excludes certain intercompany reinsurance assumed by Donegal Mutual assumes from our insurance subsidiaries. Since March 1, 2008, Atlantic States has had an 80% participation inshare of the results of the underwriting pool and Donegal Mutual has had a 20% participation inshare of the results of the underwriting pool. Donegal Mutual and Atlantic States pro rate all premiums, losses, loss adjustment expenses and other underwriting expenses between themselves on the basis of their respective participation in the underwriting pool.
Donegal Mutual and Atlantic States may amend or terminate the pooling agreement at the end of any calendar year by mutual agreement, of the parties, subject to approval by the boards of directors of Donegal Mutual and Atlantic States and by the coordinating committee. Donegal Mutual and Atlantic States base the pool participation percentages on their respective relative amounts of capital and surplus, expectations of future relative amounts of capital and surplus and our ability to provide capital to Atlantic States. Our 20082011 annual report to stockholders contains additional information describing the underwriting pool.
In addition to the underwriting poolpooling agreement and third-party reinsurance agreements, our insurance subsidiaries have various on-goingongoing reinsurance agreements with Donegal Mutual. These agreements include:
Donegal Mutual and Peninsula have a quota-share reinsurance agreement under which Peninsula transfers to Donegal Mutual 100% of the premiums and losses related to the workers’ compensation product line Peninsula writes in certain states. Peninsula offers workers’ compensation insurance in those states in order to provide the Donegal Insurance Group with an additional pricing tier because any one insurance company may only offer a single pricing tier in that state.
Donegal Mutual and Southern maintain a quota-share reinsurance agreement that transfers to Southern 100% of the premiums and losses related to certain personal lines products Donegal Mutual offers in Virginia through the use of Donegal Mutual’s automated policy quotation and policy issuance system.
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Donegal Mutual and Le Mars have a quota-share reinsurance agreement under which Donegal Mutual transfers to Le Mars 100% of the premiums and losses related to certain products Donegal Mutual offers in certain Midwest states. This reinsurance facilitates the offering of additional complementary products to Le Mars’ commercial accounts.
Donegal Mutual also maintains 100% retrocessional reinsurance agreements with Southern and Le Mars. The original purpose of these agreements was to permit Southern and Le Mars to share Donegal Mutual’s A.M. Best rating of A (Excellent). The retrocessional reinsurance agreements do not otherwise provide for pooling or reinsurance with or by Donegal Mutual and do not transfer insurance risk to Donegal Mutual for financial and accounting purposes. In addition, Donegal Mutual and we have a capital support agreement with Sheboygan that permits Sheboygan to share Donegal Mutual’s A.M. Best rating of A (Excellent).
Donegal Mutual and MICO maintain a quota-share reinsurance agreement that transfers 25% of MICO’s business to Donegal Mutual. Because of the reinsurance pooling agreement between Donegal Mutual and us, we receive an 80% allocation, or 20%, of the MICO business Donegal Mutual reinsures.
The coordinating committee annually reviews each of the agreements and transactions we describe above between Donegal Mutual and our insurance subsidiaries and the results thereof to each of Donegal Mutual and us for the most recent year and for the past five years. In February 2012, the coordinating committee reviewed the terms of such agreements and certain amendments to the premiums payable and retentions involved. As so amended, the coordinating committee approved the agreements and determined that the agreements and transactions were fair and equitable to us and our stockholders and fair and equitable to Donegal Mutual and its policyholders. Accordingly, the coordinating committee unanimously approved the terms of such agreements and transactions for 2012.
We own 48.2% and Donegal Mutual owns 51.8% of Donegal Financial Services Corporation, or DFSC. Each of Donegal Mutual, DGI and DFSC constitute grandfathered unitary savings and loan holding companies under the federal banking laws. On May 6, 2011, Union National Financial Corporation, or UNNF, a bank holding company forheadquartered in Lancaster, Pennsylvania, merged with and into DFSC, with DFSC as the surviving corporation. On the same date, Union National Community Bank, a national banking association headquartered in Lancaster, Pennsylvania and a subsidiary of UNNF, merged with and into Province Bank FSB, or Province Bank, a federal savings bank with officesand a subsidiary of DFSC. Upon the merger, Province Bank FSB changed its name to Union Community Bank FSB and continued its status as a federal savings bank. UCB is currently in Marietta, Columbia and Lancaster, Pennsylvania. We andthe process of converting to a Pennsylvania-chartered stock savings bank. Donegal Mutual and we believe such a conversion would be beneficial. At December 31, 2011, UCB had total assets of $533.2 million, total deposits of $454.9 million and total loans of $342.9 million. Donegal Mutual and we conduct routine banking operations in the ordinary course of business with Province Bank.
Donegal Mutual and Province Bank are parties to a lease whereby Province Bank leases 3,600 square feet in one ofa Donegal Mutual’s buildings locatedMutual-owned building in Marietta, Pennsylvania.Pennsylvania to UCB. In addition, Province BankUCB leases 3,000 square feet of space in a building in Lancaster, Pennsylvania from DFSC. Both leases provide for an annual rent based on an independent appraisal. Donegal Mutual and Province BankUCB are also parties to an administrative services agreement whereby Donegal Mutual provides various human resources services, principally payroll and employee benefits administration, administrative support, facility and equipment maintenance services and purchasing, to Province Bank,UCB, subject to the overall limitation that the costs Donegal Mutual charges to UCB may not exceed the costs of independent vendors for similar services and further subject to annual maximum cost limitations specified in the administrative services agreement.
The coordinatingRisk Management Committee
Donegal Mutual and we maintain a risk management committee. The risk management committee annually reviews eachconsists of 14 officers of Donegal Mutual, seven of whom are also executive officers of DGI. The purpose of the agreementsrisk management committee is to assess and transactions described abovemonitor the major strategic, operational, regulatory, informational and in January 2009 approvedexternal risks that affect the termsbusiness Donegal Mutual and we transact and Donegal Mutual’s and our internal and external resources for assessing and controlling such risk.
The responsibilities of the risk management committee include:
evaluating the effectiveness of our assessment and management of risk;
developing and recommending policies and procedures relating to risk assessment, risk management and risk reporting;
assessing our risk management, compliance and control activities and the adequacy of such agreementsactivities in identifying our risks; and transactions for 2009.
reporting periodically to our respective boards of directors.
Our risk management committee meets quarterly and annually evaluates its performance of its responsibilities.
CORPORATE GOVERNANCEHOUSEHOLDINGWe may, unless we receive contrary instructions from you, send a single copyOur board of directors has adopted corporate governance guidelines to assist the committees of our annual report, proxy statementboard of directors in the discharge of their respective responsibilities. Each committee of our board of directors has a written charter that sets forth the purposes, goals and notice of annual or special meeting to any household at which two or more stockholders reside if we believe the stockholders are membersresponsibilities of the same family.If you would likecommittee as well as the qualifications for committee membership, procedures for the appointment and removal of committee members, committee structure and operations and committee reporting to receive your own copiesour board of directors. You may view the charters of our annual disclosure documents in future years or if you share an address with another stockholder and together both of you would like to receive only a single set ofexecutive committee, our annual disclosure documents, follow these instructions:If your shares are registered in your own name, please contact our transfer agent and inform it of your request to revoke or institute householding by calling Computershare Trust Company at(800) 317-4445 or writing to Computershare Trust Company, N.A., at P.O. Box 43069, Providence, Rhode Island02940-3078. Within 30 days of a request, we will comply with your request.If a bank, broker, nominee or other holder of record holds your shares, please contact your bank, broker, nominee or other holder of record directly.9
The Composition of Our Board of Directors
Our by-laws provide the number of members of our board of directors cannot be less than seven nor more than twelve. Our board of directors fixes the size of our board of directors within these limits and may increase or decrease the size of our board of directors from time to time. Currently, our board of directors has fixed the number of directors at 11. Our board of directors has three classes, with terms expiring at successive annual meetings.
Because Donegal Mutual owns more than a majority of the nomination of candidates for election as directors by the holderscombined voting power of our outstanding shares of Class A common stock and our outstanding shares of Class B common stock.
The Holding Companies Act providescomposition of our board of directors is, however, subject to the corporate governance rules of the PHCA. The PHCA requires that the board of directors of a Pennsylvania insurerPennsylvania-domiciled insurance company or a company controllingthat controls a Pennsylvania insurer, whichPennsylvania-domiciled insurance company, such as we are, shall establish onedo, maintain a committee or more committees comprisedthat undertake certain corporate governance responsibilities. The PHCA further requires that the members of these committees be solely of directors who are not officers or employees of the insurerPennsylvania-domiciled insurance company or of any entity controlling, controlled by or under common control with the insurerits holding company and who aredo not beneficial owners ofown beneficially a controlling10% or greater interest in the voting stock of such insurance company or its holding company. We maintain an audit committee, a compensation committee and a nominating committee that comply with the insurer or any such entity, and that such committee or committees shall have responsibility for recommending the selectionrequirements of the insurer’sPHCA.
Pursuant to the PHCA, the committees of our board of directors annually discharge each of the following responsibilities:
recommend the appointment of an independent registered public accounting firm reviewingfor our insurance company subsidiaries;
review the insurer’s financial condition of our insurance company subsidiaries;
review the scope and results of the independent audit and any internal audit of our insurance company subsidiaries;
nominate candidates for election as directors by stockholders; and
evaluate the performance of the principal officers of our insurance company subsidiaries and recommend to their boards of directors the selection and compensation of their principal officers.
The Committees of Our Board of Directors
We expect our directors to attend meetings of our board of directors, meetings of the committees of our board of directors on which they serve and meetings of our stockholders. We expect our directors to devote the time necessary to fulfill their responsibilities as directors. During 2011, each of our directors attended 75% or
more of the meetings of our board of directors and of the meetings of the committees of our board of directors on which that director serves. All of the members of our board of directors attended our 2011 annual meeting of stockholders. Each of the committees of our board of directors has a written charter that stockholders may view on our website. Our website address iswww.donegalgroup.com. Each of the committees of our board of directors reviews its charter annually. On March 5, 2012, the compensation committee adopted certain non-substantive changes to its charter.
Our board of directors has delegated some of its authority to the following four committees of our board of directors:
the executive committee;
the audit committee;
the nominating committee; and
the compensation committee.
In addition, together with Donegal Mutual, we jointly maintain a coordinating committee. We refer you to “The Relationship of Donegal Mutual and DGI — The Coordinating Committee.”
The following table shows the number of meetings each committee of our board of directors held in 2011 and the attendance of the members of those committees at their meetings. Mrs. Gilmartin and Mr. Moore are not currently serving as a member of any of the committees of our board of directors.
| Executive | Audit | Nominating | Compensation | |||||||||||||
Number of Meetings Held in 2011 | 11 | 11 | 1 | 7 | ||||||||||||
Robert S. Bolinger | — | 11 | — | — | ||||||||||||
Philip H. Glatfelter, II | 11 | — | 1 | 7 | ||||||||||||
Jack L. Hess(1) | — | 8 | — | — | ||||||||||||
Kevin M. Kraft(2) | — | — | — | — | ||||||||||||
John J. Lyons(3) | — | 11 | — | 4 | ||||||||||||
Jon M. Mahan | — | — | 1 | — | ||||||||||||
Donald H. Nikolaus | 11 | — | — | — | ||||||||||||
R. Richard Sherbahn | 11 | — | 1 | 7 | ||||||||||||
Richard D. Wampler, II(3) | — | 11 | — | 4 | ||||||||||||
| (1) | Mr. Hess has attended all meetings since becoming a member of the audit committee during 2011. |
| (2) | Mr. Kraft became a member of the nominating committee on April 21, 2011 after the nominating committee already held its meeting on February 23, 2011. |
| (3) | Messrs. Lyons and Wampler have each attended all meetings since becoming members of the compensation committee during 2011. |
The Executive Committee of Our Board of Directors
Members: Messrs. Glatfelter, Nikolaus (Chairperson) and Sherbahn. The executive committee has the authority to take all action that our full board of directors can take, consistent with the DGCL, our certificate of incorporation and our by-laws, between meetings of our board of directors.
The responsibilities of the executive committee include:
exercising all powers and authority of our board of directors between meetings of our board of directors to the extent consistent with the DGCL and our governing documents;
consulting with and advising management on our general business, operational, administrative and legal affairs;
consulting with and advising management on the development of our company policies;
considering other matters which management may bring to the executive committee from time to time; and
performing such other functions as our board of directors may specifically delegate to the executive committee from time to time.
The Audit Committee of Our Board of Directors
Members: Messrs. Bolinger, Hess, Lyons and Wampler (Chairperson). Each member of our audit committee satisfies the independence requirements of the SEC and the PHCA and is in compliance with applicable provisions of the PHCA and the Sarbanes-Oxley Act of 2002. Mr. Wampler, who is a certified public accountant, serves as the financial expert member of our audit committee.
The responsibilities of the audit committee include:
appointing our independent registered public accounting firm;
reviewing the scope and results of the insurer’saudit of our financial statements by our independent auditregistered public accounting firm and any internal audit, nominating candidates for election as directorsaudit;
reviewing all of our periodic filings with the SEC and press releases;
reviewing related party transactions other than those transactions subject to review by stockholders, evaluatingour coordinating committee; and
reviewing the performanceadequacy of officers deemed to be principal officersour accounting, financial, internal and operating controls.
The Nominating Committee of Our Board of Directors
Members: Messrs. Glatfelter (Chairperson), Kraft, Mahan and Sherbahn.
The responsibilities of the insurer and recommendingnominating committee include:
identifying individuals the nominating committee believes are qualified to the insurer’s boardserve as members of directors the selection and compensation of the insurer’s principal officers.
recommending nominees to identify candidates for election as directors.
considering candidates for election to our board of directors and also considers the judgment, skill, diversity, business experience, the interplay of the candidate’s experience with the experience of thenominated by other members of our board of directors and the extent to which the candidate would contribute to the overall effectiveness of our board of directors.
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evaluating the performance and qualificationsself-evaluations each of the memberscommittees of our board of directors whose termssubmit to us annually; and
providing our board of directors with an annual performance evaluation of our nominating committee.
The Compensation Committee of Our Board of Directors
Members: Messrs. Glatfelter, Lyons (Chairperson), Sherbahn and Wampler. Because the employees who provide services to us are expiringemployees of Donegal Mutual, for reasons of efficiency and cost savings and because our insurance subsidiaries are members of the Donegal Insurance Group along with Donegal Mutual, our compensation committee and the compensation committee of Donegal Mutual conduct joint meetings from time to nominate candidatestime. The members of the Donegal Mutual compensation committee, as of the date of this proxy statement, are Scott A. Berlucchi (Chairperson), Philip H. Glatfelter, II, Jack L. Hess and R. Richard Sherbahn. Following these joint meetings, our compensation committee meets and makes compensation determinations with respect to our executive officers and other employees.
The responsibilities of the compensation committee include:
the annual review of the guidelines for electioncompensation increases for all of our employees;
the annual review of the compensation of our executive officers;
recommendations to our board of directors from time to time as to grants of stock options to employees; and
the oversight of the employee benefit plans Donegal Mutual and we maintain.
See “Executive Compensation Discussion and Analysis” for further information.
Compensation Committee Interlocks and Insider Participation
No member of the compensation committee is a former or current officer of Donegal Mutual or us, nor does any member of the compensation committee have any other interlocking relationships, based on current SEC rules and regulations.
We have a written related person policy regarding the review, approval or ratification of transactions between us and our executive officers, directors and 10% or greater stockholders. SEC rules and regulations require us to disclose specified information reporting any related person transactions in this proxy statement and certain other filings we submit to the SEC. This policy applies, in our case, to any transactions with related parties with the exception of those transactions between Donegal Mutual and us or our insurance subsidiaries that require the prior approval of our coordinating committee. See “The Relationship of Donegal Mutual and DGI — The Coordinating Committee.” Our related person policy establishes procedures for our approval of transactions between us and related persons because we recognize that related person transactions can present a heightened risk of a conflict of interest and can create the appearance of impropriety. Applicable SEC regulations define a “related person” as including our directors, our executive officers, holders of 5% or more of our Class A common stock or our Class B directors by our stockholders at our annual meeting. After considering the performancecommon stock and qualificationseach of the immediate family members of those persons. Our policy requires that all proposed related person transactions must receive the approval of our audit committee before we can enter into the transaction. In addition, if the transaction continues for more than one year, our audit committee must annually approve the continuation of the transaction.
Donald H. Nikolaus, our president and a member of our board of directors during 2008,and the president and a director of Donegal Mutual, is a partner in the law firm of Nikolaus & Hohenadel. Such firm has served as general counsel to Donegal Mutual since 1970 and as our nominating committee nominatedgeneral counsel since 1986, principally in connection with the persons named below. On March 11, 2009, our boarddefense of directors accepted the reportclaims litigation arising in Lancaster, Dauphin and York counties of our nominating committeePennsylvania. We pay such firm its customary fees for such services. We paid Nikolaus & Hohenadel legal fees of $420,760 in 2010 and approved the nomination by our nominating committee of the three persons named below as candidates for election as Class B directors.
Patricia A. Gilmartin, one of our directors expire in 2009, 2010 and 2011, respectively.
| Director | Year Term | |||||||||||
Name | Age | Since | Will Expire* | |||||||||
| Jon M. Mahan | 39 | 2006 | 2012 | |||||||||
| Donald H. Nikolaus | 66 | 1986 | 2012 | |||||||||
| Richard D. Wampler, II | 67 | 2004 | 2012 | |||||||||
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| Director | Year Term | |||||||||||
Name | Age | Since | Will Expire | |||||||||
| S. Trezevant Moore, Jr. | 55 | 2006 | 2010 | |||||||||
| R. Richard Sherbahn | 79 | 1986 | 2010 | |||||||||
| John J. Lyons | 69 | 2001 | 2010 | |||||||||
| Director | Year Term | |||||||||||
Name | Age | Since | Will Expire | |||||||||
| Robert S. Bolinger | 72 | 1986 | 2011 | |||||||||
| Patricia A. Gilmartin | 69 | 1986 | 2011 | |||||||||
| Philip H. Glatfelter, II | 79 | 1986 | 2011 | |||||||||
Frederick W. Dreher, a director of Donegal Mutual since 1979.
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Our objectives for our voting power, NASDAQ regulations treat us as a “controlled company.” Therefore, wedirector compensation program are not required to comply with the following NASDAQ requirements:
Compensation Type | Amount | Form of Payment | ||||||
Annual Retainer | Base Retainer | $ | 41,000 | $35,000 in cash and an annual grant of 400 restricted shares of Class A common stock with an estimated value of $6,000 | ||||
| Additional retainer amount for each committee meeting attended | $ | 250 | Cash | |||||
| Additional retainer amount for each audit committee meeting attended | $ | 500 | Cash | |||||
Periodic Equity Grant | When we grant options to our executive personnel, we typically also grant options to our directors exercisable for ten years at a price not less than the closing market price on the date of grant | — | Non-qualified stock options | |||||
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. In 2012, we increased the amount of the above NASDAQ criteria.
The following table sets forth a summary of the compensation we paid to our non-officer directors consistentduring 2011.
Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Option Awards ($) | Total ($) | ||||||||||||
Robert S. Bolinger | 45,000 | 4,503 | 22,800 | 72,303 | ||||||||||||
Patricia A. Gilmartin | 38,500 | 4,503 | 22,800 | 65,803 | ||||||||||||
Philip H. Glatfelter, II | 94,950 | 4,503 | 22,800 | 122,253 | ||||||||||||
Jack L. Hess | 43,000 | 4,503 | 22,800 | 70,303 | ||||||||||||
Kevin M. Kraft, Sr. | 40,000 | 4,503 | 22,800 | 67,303 | ||||||||||||
John J. Lyons | 45,750 | 4,503 | 22,800 | 73,053 | ||||||||||||
Jon M. Mahan | 39,750 | 4,503 | 22,800 | 67,053 | ||||||||||||
S. Trezevant Moore, Jr. | 39,500 | 4,503 | 22,800 | 66,803 | ||||||||||||
R. Richard Sherbahn | 45,450 | 4,503 | 22,800 | 72,753 | ||||||||||||
Richard D. Wampler, II | 45,750 | 4,503 | 22,800 | 73,053 | ||||||||||||
The following table summarizes the outstanding equity awards our directors held at December 31, 2011, excluding the awards our chief executive officer, Mr. Nikolaus, holds, which we report elsewhere in this proxy statement:
| Option Awards | Stock Awards | |||||||||||||||||||||||
| Number of Securities Underlying Unexercised Options | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($) | ||||||||||||||||||||
Name | (#) Exercisable | (#) Unexercisable | ||||||||||||||||||||||
Robert S. Bolinger | 7,500 | — | 17.50 | 7/17/2013 | 311 | 4,404 | ||||||||||||||||||
| 3,333 | 6,667 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| — | 12,000 | 12.50 | 7/27/2021 | |||||||||||||||||||||
Patricia A. Gilmartin | 7,500 | — | 17.50 | 7/17/2013 | 311 | 4,404 | ||||||||||||||||||
| 3,333 | 6,667 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| — | 12,000 | 12.50 | 7/27/2021 | |||||||||||||||||||||
Philip H. Glatfelter, II | 7,500 | — | 17.50 | 7/17/2013 | 311 | 4,404 | ||||||||||||||||||
| 3,333 | 6,667 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| — | 12,000 | 12.50 | 7/27/2021 | |||||||||||||||||||||
Jack L. Hess | 3,333 | 6,667 | 14.00 | 7/15/2015 | 311 | 4,404 | ||||||||||||||||||
| — | 12,000 | 12.50 | 7/27/2021 | |||||||||||||||||||||
Kevin M. Kraft, Sr. | 7,500 | — | 17.50 | 7/17/2013 | 311 | 4,404 | ||||||||||||||||||
| 3,333 | 6,667 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| — | 12,000 | 12.50 | 7/27/2021 | |||||||||||||||||||||
John J. Lyons | 7,500 | — | 17.50 | 7/17/2013 | 311 | 4,404 | ||||||||||||||||||
| 3,333 | 6,667 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| — | 12,000 | 12.50 | 7/27/2021 | |||||||||||||||||||||
Jon M. Mahan | 7,500 | — | 17.50 | 7/17/2013 | 311 | 4,404 | ||||||||||||||||||
| 3,333 | 6,667 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| — | 12,000 | 12.50 | 7/27/2021 | |||||||||||||||||||||
S. Trezevant Moore, Jr. | 7,500 | — | 17.50 | 7/17/2013 | 311 | 4,404 | ||||||||||||||||||
| 3,333 | 6,667 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| — | 12,000 | 12.50 | 7/27/2021 | |||||||||||||||||||||
R. Richard Sherbahn | 7,500 | — | 17.50 | 7/17/2013 | 311 | 4,404 | ||||||||||||||||||
| 3,333 | 6,667 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| — | 12,000 | 12.50 | 7/27/2021 | |||||||||||||||||||||
Richard D. Wampler, II | 7,500 | — | 17.50 | 7/17/2013 | 311 | 4,404 | ||||||||||||||||||
| 3,333 | 6,667 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| — | 12,000 | 12.50 | 7/27/2021 | |||||||||||||||||||||
In addition to the compensation we describe above, we reimburse our directors for expenses they incur in connection with Delaware law, betweenattendance at meetings of our board of directors.
We operate pursuant to our code of business conduct and ethics because it is important to us to conduct our business with integrity and with the trust of the people with whom we do business. Our code of business conduct and ethics provides guidance to our employees and independent agents who deal with the legal and ethical issues that arise in our business dealings with others. You may view our code of business conduct and ethics on our website atwww.donegalgroup.com.
We also maintain an internal audit department that evaluates our business and financial processes and controls and reports regularly to the audit committee which consists of Messrs. Bolinger, Lyons and Wampler, met 10 times in 2008. Each member of our audit committee satisfiesboard of directors.
EXECUTIVE COMPENSATION DISCUSSION AND ANALYSIS
2011 Performance Review
In a year marked by an unusual frequency of severe storms, intense competition and a poor economic climate in the independence requirementsUnited States, our results of operations for 2011 were below our historical expectations, as were our results of operations for 2010. We did, however, maintain our strong financial condition in 2011. The following table illustrates our net revenues and our results of operations for the year ended December 31, 2011 and the price of our Class A common stock at December 31, 2011 compared to the same data at December 31, 2010.
| 2011 | 2010 | % Change | ||||||||||
Total revenues | $ | 475.0 million | $ | 408.5 million | 16.3 | % | ||||||
Net income | 453,000 | 11.5 million | -96.1 | |||||||||
Class A stock price at year end | 14.16 | 14.48 | -2.2 | |||||||||
Stock Option Grants
On July 27, 2011, our board of directors granted stock options to our named executive officers and to our directors; each stock option vests in three equal installments during the first three years. Each stock option has a term of ten years and is exercisable at a price not less than the closing price of our Class A common stock on the date of grant:
Name of Grantee | Number of Shares Purchasable | Exercise Price | ||||||
Donald H. Nikolaus | 200,000 | $ | 12.50 | |||||
Each other named executive officer | 75,000 | 12.50 | ||||||
Each director other than Mr. Nikolaus | 12,000 | 12.50 | ||||||
Summary of the SEC. Consistent with applicable provisions2011 Compensation of Our Named Executive Officers
The compensation of our named executive officers in 2011 consisted of two principal elements:
a base salary; and
long-term incentive compensation in the Holding Companies Actform of stock options.
We paid no incentive bonuses in 2011 to our named executive officers because our formula did not call for such payments. Our named executive officers did participate in our 401(k) plan to which we make contributions on a formula basis. Our named executive officers also participate in our health and the Sarbanes-Oxley Actother insurance programs available to all of 2002, our audit committee has responsibility for:
2011 Total Direct Compensation of Our Named Executive Officers
Annual Compensation | Key Factors | Purpose | 2011 Actions | |||
Base Salary | Compensation committee reviews and recommends adjustments to base salary annually based on performance and prevailing salaries within our peer group | Provides fixed amount of cash on which named executive officers may rely | Cash increase in 2011 at an average of 2.5% to reflect salaries generally prevailing in the property and casualty industry | |||
Annual Incentive Plan (Cash Incentive | Compensation committee determines funding level on a formula basis Chief executive officer recommends the | Motivates named executives to achieve individual officers’ performance goals Reinforces pay for performance Focuses entire organization on achieving key business objectives | We did not pay any bonuses for 2011 because the formula we use to calculate these bonuses is based on our underwriting profitability and we had an underwriting loss in 2011 | |||
Long-Term Incentive Compensation | Stock options that vest in three equal annual installments | Stock options support our growth, provide a link between the compensation of our Supports pay for performance because options have substantial value only if stock price increases | ||||
Because we had an underwriting loss in 2011, we paid no cash incentive awards under the bonus portion of the compensation of our named executive officers in 2011. Our auditannual incentive program reinforces our pay for performance compensation philosophy for our named executive officers.
Our 2011 compensation programs for our named executive officers reflect best practices, and we have designed those programs to balance risk and reward in our overall business strategy. The above description of compensation programs serves to emphasize that we tie a significant percentage of the total compensation of our named executive officers directly to our underwriting results. In addition, our annual incentive bonus based on our underwriting profitability causes our named executive officers to evaluate carefully the taking of excessive risk because a reduction in underwriting profitability would adversely affect their compensation. Finally, our compensation programs for our named executive officers do not have the practical effect of providing guaranteed compensation to our named executive officers as the compensation of our named executive officers in 2011 demonstrates.
We believe that our compensation programs described above establish that we have the appropriate programs to align effectively the interests of our named executive officers with the interests of our stockholders and constitute an incentive for the enhancement of our long-term value.
Evaluation of Our Executive Performance in 2011 and Our Executive Compensation
The compensation committee operates pursuantdoes not restrict its evaluation of the performance of our named executive officers to predetermined formulas or a written charter,limited set of criteria. The compensation committee considered our results of operations during 2011 in achieving the short-term and long-term objectives we describe below:
Objective:
Achieve underwriting results superior to the underwriting results of other property and casualty insurance companies on a long-term basis.
We believe we have continued to achieve this objective in 2011, notwithstanding increased severe weather events and prevailing economic conditions and our underwriting loss in 2011. We have taken a number of steps to address this weather issue, including reinspection of properties, more stringent underwriting standards and increases in premium rates. Our statutory combined ratio for 2011 was 107.9%, compared to the property and casualty industry combined ratio of 107.5% for 2011 projected by A.M. Best Company. We believe our underwriting results were reasonable in light of a challenging underwriting environment, intense competition in a soft market and unexpectedly adverse weather conditions.
Objective:
Achieve consistent revenue growth over a five-year period.
We believe we achieved this objective for the five years ended December 31, 2011 because our compound rate of revenue growth for that period was 7.6% despite a soft insurance market and intense competition.
We also achieved revenue growth in 2011 by acquiring UCB and having ownership of MICO for a full textyear, both of which may be viewed onhave provided meaningful enhancements.
Objective:
Develop automated underwriting and policy issuance software that enables us to compete with national carriers.
During 2011, we continued to expand the use of our website atadvanced systems to all of our subsidiaries and affiliates. We also received the 2011 Interface Partner Award from Applied Systems, an insurance technology company, in recognition of our achievements in electronically-based agency-company communications.
http://www.donegalgroup.comObjective:
Achieve book value growth over a five-year period.
We believe we achieved this objective for the five years ended December 31, 2011 because our compound rate of book value growth for that period was 3.6%. Our audit
The compensation committee reviews its charter annually.
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The compensation of our chief executive officer is higher than the compensation of our other named executive officers because of our chief executive officer’s breadth of executive and operating responsibilities for
the Donegal Insurance Group. The relationship between the compensation of our chief executive officer and the compensation of our other named executive officers is also influenced by the fact that we do not have a chief operating officer. The compensation committee also considers individual fulfillment of duties, teamwork, development, time in position, expenses and internal equity among our nominatingnamed executive officers and their ability to collaborate and communicate effectively with our other executive officers.
On an overall basis, our compensation committee has responsibility for:
We believe the full textspecific compensation decisions we made for each of which may be viewed on our website athttp://www.donegalgroup.com. Our nominating committee reviews its charter annually.
Employment and met four times in 2008. The compensation committeeChange of Control Agreements
On July 29, 2011, Donegal Mutual consists of Messrs. Sherbahn, Glatfelter and Dreher. Becausewe entered into employment agreements with our employees are employees ofexecutive officers, including Donald H. Nikolaus, president and chief executive officer, Kevin G. Burke, senior vice president, human resources, Cyril J. Greenya, senior vice president and chief underwriting officer, Jeffrey D. Miller, senior vice president and chief financial officer, Robert G. Shenk, senior vice president, claims, and Daniel J. Wagner, senior vice president and treasurer. Donegal Mutual and we also entered into a consulting agreement with Mr. Nikolaus that will become effective automatically upon the expiration or termination of his employment agreement under certain conditions we describe in this proxy statement. Although the roster of our named executive officers and our other executive officers has been stable for reasonsmany years, we decided to enter into employment agreements with all of efficiencyour executive officers to provide employment security to these executive officers. Donegal Mutual and cost savingswe allocate the compensation of our executive officers pursuant to the employment agreements in the same manner in which we allocate our business pursuant to the pooling agreement.
Employment and because our insurance subsidiaries are membersChange of Control Agreement with Mr. Nikolaus
The employment and change of control agreement Donegal Mutual and we have with Mr. Nikolaus provides for an initial term of five years. On each anniversary of the Donegal Insurance Group,effective date of the employment agreement, the term automatically extends for an additional one-year period, so that on each extension date the employment agreement will have a remaining term of five years unless either Mr. Nikolaus or our board of directors provides not less than six months advance notice that the automatic extension will terminate as of the next succeeding anniversary of the effective date.
A summary of the other principal terms of the employment agreement with Mr. Nikolaus is as follows:
Mr. Nikolaus receives an annual base salary of: (a) $575,000 or (b) such greater amount, if any, as our compensation committee and the compensation committee of Donegal Mutual conduct joint meetings followed by a meetingjointly recommend and as their boards of directors approve, from time to time.
Mr. Nikolaus participates in our annual executive incentive plans and the benefit plans in which only the membersall of our compensation committee attendother executive officers participate.
Subject to any required stockholder approval, Mr. Nikolaus receives an annual grant of non-qualified stock options to purchase not less than 150,000 shares of our Class A common stock at a price per share
equal to the closing price of our Class A common stock on the day before the date of each annual grant. Each option vests in three equal installments on the nine-month and the second and third anniversaries of the grant date and remains exercisable for a term of ten years from the date of grant. |
The employment agreement includes customary provisions relating to vacations, illness, death, indemnification, confidentiality and make compensation determinationsnon-competition.
The employment agreement includes certain rights to terminate the agreement and, upon the occurrence of certain events such as a change of control, the right to receive severance payments as provided in the employment agreement.
Consulting Agreement with respectMr. Nikolaus
Upon Mr. Nikolaus’ retirement or termination of his employment under the employment agreement for other than cause, his death, his permanent disability or his termination of the employment agreement for good reason, as the employment agreement defines those terms, the term of the consulting agreement Donegal Mutual and we have with Mr. Nikolaus will commence and continue for a period of five years.
A summary of the principal terms of the consulting agreement with Mr. Nikolaus is as follows:
Donegal Mutual and we will retain Mr. Nikolaus to provide consulting services to us and our respective boards of directors in connection with our general operations, our merger and acquisition activities, participation in meetings and other activities of the Insurance Federation of Pennsylvania and such other projects and assignments as Mr. Nikolaus, Donegal Mutual and we mutually agree from time to time.
Mr. Nikolaus’ status under the consulting agreement will be that of an employee of Donegal Mutual and us.
The consulting agreement provides that Mr. Nikolaus will receive all benefits we provide to our senior executive officers and such benefits as became fully vested while Mr. Nikolaus served as our president and chief executive officer pursuant to his employment agreement with Donegal Mutual and us.
Under the consulting agreement, we will pay Mr. Nikolaus annual compensation in an amount equal to 50% of his base salary, as defined in his employment agreement, for our last completed fiscal year before the year in which the consulting agreement becomes effective, but in no event less than $600,000 per year, plus such discretionary incentive payments as our respective boards of directors may jointly authorize from time to time.
The consulting agreement includes customary provisions relating to indemnification, confidentiality and non-competition.
The consulting agreement includes certain rights for either Mr. Nikolaus or us to terminate the consulting agreement and for Mr. Nikolaus to receive certain payments upon termination, as provided in the consulting agreement.
Employment and Change of Control Agreements with Our Named Executive Officers Other Than Mr. Nikolaus
The respective employment agreements among Donegal Mutual, us and Messrs. Burke, Greenya, Miller, Shenk and Wagner, who collectively constitute our other employees.
The initial term of the employment agreements is three years; however, such term automatically extends on each anniversary of the effective date of the employment agreements for an additional one-year period, so that on each anniversary date the employment agreements will each have a remaining term of three years unless either the named executive officer or the respective boards of directors of Donegal Mutual or us provide not less than 90 days advance notice that our compensation committee has responsibility for:the automatic extension will terminate upon the next succeeding extension date.
We have agreed to pay each of these executive officers an annual base salary as follows:
Mr. Burke, $195,000;
Mr. Greenya, $195,000;
Mr. Miller, $217,000;
Mr. Shenk, $241,000; and
Mr. Wagner, $195,000;
| or |
| (b) | such greater amount, if any, as the compensation committees of | |
The employment agreements provide customary provisions relating to vacation, illness, death, indemnification and confidentiality.
The employment agreements include certain rights to terminate the agreements and, upon the occurrence of certain events such as a change of control, the right to receive severance payments, as the respective employment agreements provide.
Our Compensation Philosophy and Risk Management Considerations
Our compensation committee, operates pursuant to a written charter,meeting separately and on occasion jointly with the full text of which may be viewed on our website athttp://www.donegalgroup.com. Our compensation committee reviews its charter annually.
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The compensation committee determined that the primary objectives of our compensation programs for our executive officers are to:
Attract and retain talented and dedicated executive officers who contribute to our growth, development and profitability and encourage their retention.
We believe we achieved this objective because three of the six executive officers we name in our summary compensation table have worked continuously with us since our formation in 1986, and our other three named executive officers have worked for us for 24, 18 and 11 years, respectively.
Motivate our executive officers to achieve our strategic business objectives and reward them upon their achievement of those objectives.
We believe we achieved this objective through the compound rate of growth in our total revenues, which was 7.6% for the five years ended December 31, 2011, and through the compound rate of growth in our book value, which was 3.6% for the five years ended December 31, 2011.
Provide long-term compensation to our executive officers that rewards them for sustained financial and operating performance and leadership excellence.
We believe, based upon the advice of our compensation analysts, Towers, that our historical stock option grants did not provide the benefits we intended to provide, and in 2011, we modified the terms of our stock option grants.
To achieve thesethe above objectives, we compensate our executive officers through a combination of base salary, annual cash bonuses, principally based on our underwriting results, and long-term equity compensation.
The compensation committee believes that our underwriting results-based bonus plan and our performance-based equity ownership programs create incentives, as revised during 2011, that will result in the creation of long-term stockholder value. We have designed the following elements of our compensation programs to promote the creation of long-term value without creating conditions that could lead to the taking of excessive risk:
The financial measures we use to determine the bonuses of our executive officers are metrics the compensation committee reviews its charter annually.
Until 2011, the stock options we granted vested in three equal annual installments and remained exercisable for up to five years from the date of grant. In addition, the exercise price of the compensation policy our compensation committee administers is that a substantial portion ofoptions we granted prior to 2011 was generally higher than the aggregate annual compensationclosing price of our named executive officers should beClass A common stock on the date we awarded the grant. Beginning in 2011, based on the annual underwriting results and premium growthadvice of our insurance subsidiaries andcompensation analysts, we are now granting stock options that are exercisable for up to ten years at an exercise price that approximates the closing price of our returnClass A common stock on equity.the date of grant. Our compensation committee also evaluates the achievement ofbelieves such stock options encourage our other corporate objectives and the contribution of each named executive officer to those achievements.
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We have consistently followeddo not reduce the practiceexercise price of granting stock options to purchase our Class A common stock at an exercise price that is in excess ofif the closing price of our Class A common stock on NASDAQ onsubsequently declines below the dateexercise price unless we grantfirst obtain stockholder approval. However, we do adjust the exercise price of previously granted stock options.options to reflect recapitalizations, stock or extraordinary dividends, stock splits, mergers, spin-offs and similar events as the applicable stock option plan permits.
At our 2011 annual meeting of Our Compensation Process
The Recommendations of the Compensation Analysts We Retained
Towers presented its compensation program analysis to our board of directors reviewsat our regular quarterly meeting on July 20, 2011. The Towers analysis addressed the competitiveness of our compensation programs for key executive positions compared with the property and casualty insurance markets in general, as adjusted to reflect our relation to the other property and casualty insurance companies referenced in the survey.
The principal findings and recommendations of the Towers survey were as follows:
| • | Our base executive officer salaries are at the 50th percentile of the companies included in the survey. |
Our annual incentive payment has varied substantially from the survey group from $0 in 2011 and 2010, when we had negative underwriting income, to $424,000 in 2009 and $922,000 in 2008.
Other companies in the survey group consider measures of performance besides underwriting income including the combined ratio, the return on average assets, the return on average equity and business strategies.
Our long-term incentive compensation has historically been below the long-term incentive compensation of the survey group because we have followed the practice of granting options that are exercisable for a term of five years compared to ten years and because we have historically made our officers. stock options exercisable at a price higher than the fair market value of a share of our Class A common stock on the date of grant.
Our 401(k) plan has been consistent with industry practice.
Since Towers presented its compensation program analysis, we have taken action that we believe appropriately addresses the recommendations expressed in the Towers compensation analysis.
In assessing the performance of our named executive officers in light of the objectives our board of directors establishes, ourthe compensation committee reviews specific achievements associated with attainment of thethose objectives, the degree of difficulty of the objectives and the extent to which significant unforeseen obstacles or favorable circumstances affected their performance.
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increases in the base salaries of our named executive officers for 2011 that averaged 2.5%, which our compensation committee considered reasonable based on publicly available information from companies we informally consider our peer group (EMC Insurance Group, Harleysville Group Inc., State Auto Financial Corporation and Selective Insurance Group) as well as the compensation analysis we received from Towers; and
due to our underwriting loss in 2011, we made no incentive bonus payments to our named executive officers in 2011.
Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code, generally does not allow us Although For a number of years, we have had a cash incentive bonus plan for our officers, including our named executive officers. We determine the amount, if any, available for the award of these bonuses pursuant to a formula that is based on our annual underwriting income and other financial measurements of Donegal Mutual and us. The formula operates as follows: We first determine the base underwriting income, if any, of Donegal Mutual and us for the year; We then adjust the base underwriting income, if any, by adding back the amount we accrued during the year for bonuses to our officers, and make a formula-based adjustment to limit the impact of any catastrophe losses and guaranty fund assessments on the base underwriting income, if any, of Donegal Mutual and us for the year; 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; 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; and Our compensation committee then allocates that executive incentive compensation amount among our officers, including our named executive officers, on a discretionary basis. If the surplus of Donegal Mutual and our insurance subsidiaries for the year is below the amount our cash incentive bonus plan specifies, we reduce the executive incentive compensation pool by 50%. Other Aspects of Our Compensation Philosophy We provide our named executive officers with the same employee benefits that all of our other employees receive under our broad-based benefit plans. These plans provide for health benefits, life insurance and other customary welfare benefits. Perquisites We do not provide our named executive officers with any retirement or welfare plan benefits that we do not provide to all of our other employees. The following table shows the compensation we paid during Based on the compensation we paid to our named executive officers in Name and Principal Position Donald H. Nikolaus, 2010 2009 565,000 555,000 — 150,000 4,833 5,215 220,500 — 50,439 48,384 840,772 758,599 Kevin G. Burke, 2010 2009 190,000 185,000 — 34,000 — — 63,000 — 11,661 11,435 264,661 230,435 Cyril J. Greenya, 2010 2009 190,000 185,000 — 34,000 4,833 5,215 63,000 — 45,772 42,658 303,605 266,873 Jeffrey D. Miller, 2010 2009 207,000 197,000 — 38,000 — — 69,300 — 11,711 11,723 288,011 246,723 Robert G. Shenk, 2010 2009 236,000 232,000 — 34,000 — — 63,000 — 13,362 13,265 312,362 279,265 Daniel J. Wagner, 2010 2009 190,000 185,000 — 34,000 — — 63,000 — 12,002 11,642 265,002 230,642 During 2011, we granted non-qualified options to purchase shares of our Name Donald H. Nikolaus Kevin G. Burke Cyril J. Greenya Jeffrey D. Miller Robert G. Shenk Daniel J. Wagner We have an equity incentive plan for our employees and an equity incentive plan for our directors. Under these plans, our board of directors, upon the recommendation of At December 31, If the number and kind of shares available for grants and options under our plans and the exercise price of outstanding options Our board of directors, upon the recommendation of the authority to determine the persons eligible to receive an option grant, 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 may accelerate and any extension of the period for exercise; and full discretionary authority to determine any matter relating to options granted under our stock incentive plans. Our board of directors has the authority to suspend, amend or terminate our stock incentive plans, except as would adversely affect the rights of persons holding outstanding awards without the consent of such persons. The following table summarizes the outstanding equity awards Name Donald H. Nikolaus 58,333 — 116,667 200,000 14.00 12.50 7/15/2015 7/27/2021 Kevin G. Burke 16,666 — 33,334 75,000 14.00 12.50 7/15/2015 7/27/2021 Cyril J. Greenya 16,666 — 33,334 75,000 14.00 12.50 7/15/2015 7/27/2021 Jeffrey D. Miller 18,333 — 36,667 75,000 14.00 12.50 7/15/2015 7/27/2021 Robert G. Shenk 16,666 — 33,334 75,000 14.00 12.50 7/15/2015 7/27/2021 Daniel J. Wagner 16,666 — 33,334 75,000 14.00 12.50 7/15/2015 7/27/2021 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 Name Donald H. Nikolaus Kevin G. Burke Cyril J. Greenya Jeffrey D. Miller Robert G. Shenk Daniel J. Wagner 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 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 Our certificate of incorporation includes a provision that limits, to the maximum extent 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. 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 The compensation committee Based on the review and discussion by MEMBERS OF THE COMPENSATION COMMITTEES OF DONEGAL GROUP INC. AND DONEGAL MUTUAL INSURANCE COMPANY Scott A. Berlucchi Philip H. Glatfelter, II Jack L. Hess John J. Lyons R. Richard Sherbahn Richard D. Wampler, II March The following table sets forth information regarding our equity compensation plans: Plan category Equity compensation plans approved by securityholders Equity compensation plans not approved by securityholders Total PROPOSAL 1 The DGCL, the PHCA and our by-laws govern the election of our directors by our stockholders. Because Donegal Mutual has owned more than a majority of the aggregate voting power of our two outstanding classes of common stock since our inception, Donegal Mutual has always had the ability to control the election of all of our directors. The following discussion summarizes these governance provisions and describes the process the nominating committee follows in connection with the nomination of candidates for election as directors by our stockholders. Our by-laws provide that: our board of directors shall annually appoint a nominating committee that consists of not less than two directors who are not officers or employees of Donegal Mutual or us and who do not own beneficially 10% or more of our Class A common stock or our Class B common stock; and our nominating committee shall, prior to each annual meeting of stockholders, determine and nominate candidates for election as directors by our stockholders. In accordance with our by-laws, on April 21, 2011, 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 an officer or employee of Donegal Mutual or us or a beneficial owner of a 10% or greater interest in our Class A common stock or our Class B common stock. Our stockholders may nominate candidates for election as director at any annual meeting of our stockholders provided the stockholders comply with the advance notice provisions of our by-laws. We describe those procedures under “Stockholder Proposals” in this proxy statement. The nominating committee may also consider candidates our management proposes. We do not use executive search firms to identify director candidates. With the exception of applicable regulations of the SEC, the listing application standards of NASDAQ and the PHCA, the nominating committee does not have any specific, minimum qualifications for the nomination of candidates for election as our directors. The nominating committee may take into account such factors as it deems appropriate. These factors include the judgment, skill, diversity and business experience of the candidate, the interplay of the candidate’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. The nominating committee and our board of directors considers, at a minimum, the following factors in identifying and evaluating potential new director candidates, including any stockholder nominee, or the continued services of our current directors: We will nominate a candidate for election as a director based on a candidate’s professional experience. The candidate should have a record of accomplishments and have recognized achievements in the candidate’s respective field. Whether a nominee serves as a member of Donegal Mutual’s board of directors. A nominee should have relevant education, expertise and experience, and be able to offer advice and guidance to our chief executive officer based on that expertise and experience. A nominee should possess high personal and professional ethics, integrity and values. A nominee should be inquisitive and objective, have the ability to exercise practical and sound business judgment and have an independent mind. A nominee should be willing to devote sufficient time and effort to carrying out his or her duties and responsibilities effectively. A nominee should be able to work effectively with others. We seek qualified individuals who, taken together, represent a diversity of skills, backgrounds and experience, including ethnic background, gender and professional experience. The nominating committee assesses the areas of expertise and functional skills that would assist us in rounding out the existing collective strengths of our board of directors. Since our formation in 1986, and because Donegal Mutual has had a greater than majority voting control of us since our inception in 1986, our board has always included a meaningful number of directors who also serve as members of the board of directors of Donegal Mutual. The Donegal Mutual representation on our board of directors has ranged from six of eight directors in 1986 to six of 11 directors in 2011. This membership will remain at six of 11 directors following our 2012 annual meeting of stockholders if our board of directors’ nominees for election as Class B directors receive a plurality of the votes cast at our 2012 annual meeting of stockholders. It is our intent and the intent of Donegal Mutual to maintain a significant presence of Donegal Mutual directors on our board of directors as long as Donegal Mutual continues to own more than a majority of the aggregate voting power of our two outstanding classes of common stock. In nominating candidates for election as directors, the nominating committee takes into account the relative diversity of our policyholders and our stockholders. The nominating committee does not discriminate against any director candidate on the basis of race, color, religion, sex, national origin, age, ancestry or disability. The nominating committee met on February 27, 2012 to evaluate the performance and qualifications of the four Class B members of our board of directors whose terms will expire upon the election of their successors at our 2012 annual meeting of stockholders. After considering the performance and qualifications of the four Class B members of our board of directors during the past three years, the nominating committee nominated each of the incumbent Class B directors named below for reelection to a new term as Class B directors. On March 5, 2012, our board of directors accepted the report of the nominating committee and approved the nomination by the nominating committee of the four incumbent Class B directors as candidates for election as Class B directors at our 2012 annual meeting of stockholders. Our Nominees for Election as Class B Directors Our board of directors currently has 11 members and consists of four Class A directors, four Class B directors and three Class C directors. We elect each director for a three-year term and until the director’s successor takes office. The current three-year terms of our Class A directors next expire at our 2014 annual meeting of stockholders and when their successors take office and the current three-year term of our Class C directors next expire at our 2013 annual meeting of stockholders and when their successors take office. We will elect four Class B directors at our 2012 annual meeting of stockholders. Unless you have marked your proxy card to the contrary, we have instructed the proxies named on your proxy card to vote for the election of the four nominees for Class B directors we name in this proxy statement. Each nominee for election as a Class B director is currently serving as a Class B director. If any of the named nominees for Class B director become unavailable for any reason, our board of directors will designate a substitute nominee. Our board of directors believes each nominee will be able to serve if elected. A majority of our board of directors may fill any vacancy that occurs in our board of directors for any reason until the expiration of the term of the class of directors in which the vacancy has occurred. The names of our four nominees for election as Class B directors, and our Class A directors and our Class C directors who will continue in office after our 2012 annual meeting of stockholders until the expiration of their respective terms and their respective successors take office, together with certain information regarding them, are as follows: Class B Directors Name Kevin M. Kraft, Sr. Jon M. Mahan Donald H. Nikolaus Richard D. Wampler, II Our board of directors recommends you vote FOR the election of the four nominees for Class B directors we name above. Our Class A Directors and Class C Directors Who Will Continue in Office Class A Directors Name Robert S. Bolinger Patricia A. Gilmartin Philip H. Glatfelter, II Jack L. Hess Class C Directors Name John J. Lyons S. Trezevant Moore, Jr. R. Richard Sherbahn Mr. Bolinger retired in 2001 as chief 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, 2011 and is one of the major financial institutions in the Mid-Atlantic area where we conduct a substantial portion of our business. From 2000 to 2002, Mr. Bolinger served as chairman of the board of directors of Susquehanna Bancshares, Inc. We believe Mr. Bolinger’s experience as the chief executive officer of a major financial institution qualifies him to serve on our board of directors. Mrs. Gilmartin has been an employee of Associated Donegal Insurance Brokers since 1969. That agency 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 Donegal Mutual director for 32 years and provides valuable input to maintain and enhance the relationships between Donegal Mutual and us and our respective insurance agents. Mrs. Gilmartin, who has been a registered insurance agent for over 50 years, helps provide us and our insurance subsidiaries with insight into the concerns of agents. We believe the long experience of Mrs. Gilmartin as an insurance agent and her long association as one of our directors qualifies her to serve on our board of directors. Mr. Glatfelter, who has extensive banking experience, retired in 1989 as a vice 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 for 30 years and has been instrumental in promoting the growth of Donegal Mutual and us. Mr. Glatfelter was vice chairman of the board of directors of Donegal Mutual from 1991 to 2001 and has been chairman of our board of directors and chairman of the board of directors of Donegal Mutual since 2001. He also serves on the board of directors of UCB, 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. We believe Mr. Glatfelter’s extensive experience with financial institutions and his long service on our board of directors qualifies him to continue to serve on our board of directors. Mr. Hess has been a certified public accountant for more than 30 years. He became a partner in Hess & Hess, certified public accountants, in 1982 and was the managing partner of that firm from 1998 to 2010. Effective January 1, 2011, Hess & Hess merged with Bertz & Co. and operates under the name Bertz, Hess & Co., LLP. Mr. Hess has been a director of Donegal Mutual since 2009, a director of DGI since 2011 and a director of Conestoga Title Insurance Company, a subsidiary of Donegal Mutual, since 2006. Mr. Hess’ background brings significant auditing and tax expertise to our board of directors as well as experienced business management skills and significant standing in the Lancaster business community, which we believe qualifies Mr. Hess to serve as one of our directors. Mr. Kraft has served as a director 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 utility, Conestoga Title Insurance Company and UCB. 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. We believe Mr. Kraft’s experience with financial institutions qualifies him to continue to serve as a member of our board of directors. Mr. Lyons has been president of Keefe Ventures, LLC, a manager of private investment funds, since 2002. Mr. Lyons was also president and portfolio manager for investment funds affiliated with Keefe Managers, Inc. from 1999 until 2007. Mr. Lyons has significant experience in the turnaround of troubled financial institutions, serving as president and chief executive officer of Gateway-American Bank, Ft. Lauderdale, Florida; Regent National Bank, Philadelphia, Pennsylvania; Monarch Savings Bank, Clark, New Jersey; and Jupiter-Tequesta National Bank, Tequesta, Florida, 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 manages a private equity fund, Keefe Ventures Fund, LP, which invests in community banking organizations. Mr. Lyons has been a director of UCB since the inception of its predecessor, Province, in 2001. The extensive investment banking and commercial banking experience of Mr. Lyons and his services as a senior executive officer of a major financial institution demonstrates his qualifications to serve on our board of directors. Mr. Mahan has been a managing 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 joined Legg Mason in 1996 and served as a principal from 2001 to 2004. Mr. Mahan specializes in corporate finance with a focus on mergers and acquisitions, and has experience with a variety of corporate transactions involving mergers and acquisitions. Mr. Mahan’s expertise benefits our analysis of acquisition opportunities and makes him a desirable member of our board of directors. Mr. Moore has been serving as Senior Vice President, Strategic Investment Group, of The Federal Home Loan Mortgage Corporation since March 2010. From May 2008 to November 2008, Mr. Moore served as a consultant to a medical malpractice insurance company. From November 2008 to March 2010, Mr. Moore served as a consultant to an interest rate risk management company. Prior thereto, Mr. Moore was president and chief executive officer of Luminent Mortgage Capital, Inc., or Luminent, from May 2007 to May 2008 and was president and chief operating officer of Luminent from March 2005 to May 2007. From 2000 to 2005, Mr. Moore was executive vice president, Capital Markets, of Radian Guaranty, Inc., or Radian. Prior to his service at Radian, Mr. Moore held several senior level positions in the mortgage industry, including at First Union National Bank from 1997 to 2000. We believe the experience of Mr. Moore in mortgage securities and financial businesses amply qualifies him to serve as a member of our board of directors. Mr. Nikolaus has been president and chief executive officer of Donegal Mutual since 1981 and a director of Donegal Mutual since 1972. He has been our president and chief executive officer since 1986. Mr. Nikolaus also serves as the chairman of the board of directors of UCB and as chairman or president of each of our insurance subsidiaries. Prior to the formation of the predecessor to UCB, 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. The leadership and accomplishments of Mr. Nikolaus as our chief executive officer for over 25 years provides a strong foundation for the continuation of Mr. Nikolaus as a member of our board of directors. Mr. Sherbahn, who 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 1956. Mr. Sherbahn has been a director of Donegal Mutual for 43 years. Mr. Sherbahn played a principal role in Donegal Mutual’s decision to form a downstream insurance holding company structure and his long-term association with Donegal Mutual and us supports the continuation of Mr. Sherbahn as one of our directors. Mr. Wampler is a certified public accountant and served as a principal of the accounting firm of Brown Schultz Sheridan & Fritz from 1998 to 2005. For 28 prior years, Mr. Wampler was a partner in the accounting firm of KPMG LLP. 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 Mr. Wampler’s background and financial expertise qualifies Mr. Wampler to serve on our board of directors and assist us in our analysis of statutory accounting principles as well as generally accepted accounting principles and in analyzing and maintaining internal controls over financial reporting. Six of our 11 current directors also serve as directors of Donegal Mutual with whom we have a variety of inter-company agreements providing for, among other things, the pooling of underwriting results, reinsurance and expense-sharing. See “Stock Ownership — The Relationship of Donegal Mutual and DGI.” After the election of the nominees for Class B directors named in this proxy statement, six of our 11 directors will continue to serve as directors of Donegal Mutual. We believe our board membership appropriately represents our public stockholders, who collectively owned approximately one-third of the aggregate voting power of our Class A common stock and our Class B common stock at March 2, 2012, and Donegal Mutual, which owned approximately two-thirds of the aggregate voting power of our Class A common stock and our Class B common stock at March 2, 2012. RATIFICATION OF OUR AUDIT COMMITTEE’S APPOINTMENT OF KPMG LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2012 Our audit committee has appointed KPMG LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2012. 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 2012 annual meeting of stockholders and will respond to appropriate questions. The KPMG LLP representatives will also be able to make a statement if any of them 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 2012. Even if our stockholders ratify the appointment of KPMG LLP, the audit committee, in its discretion, may appoint a different independent registered public accounting firm at any time during 2012 if it determines that such a change would be in our best interests and in the best interests of our stockholders. Our audit committee approves the fees and other significant compensation Our audit committee reviewed and discussed with KPMG LLP the following fees for services KPMG LLP rendered Audit Fees. The fees of KPMG LLP we incurred in connection with Audit-Related Fees. We did not pay KPMG LLP any audit-related fees during our fiscal years ended December 31, 2010 or 2011. Tax Fees. We did not pay any tax fees to KPMG LLP during our fiscal years ended December 31, 2010 or 2011. All Other Fees. We did not pay KPMG LLP any fees for other services during our fiscal years ended December 31, 2010 and 2011. The As provided in its charter, the audit committee undertakes the following primary responsibilities: the selection of, appointment of, determination of funding for, compensation of, retention of 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, including the overview of our financial reports and our internal audit function; the establishment of procedures for the receipt, retention and treatment of complaints we receive regarding accounting, internal accounting controls or auditing matters; and the responsibility for reviewing reports and disclosures of all related person transactions, subject to the approval of the audit committee The audit committee monitors preparation of quarterly and annual financial reports by our management; supervises the relationship between us and our independent registered public accounting firm, including having direct responsibility for its appointment, compensation and retention, reviewing the scope of its audit 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 senior executive officers who have primary responsibility for the accuracy and completeness of our financial statements and our reporting processes, including our system of internal control, have advised the members of the audit committee The audit committee met The members of the audit committee rely, without independent verification, on the information and representations our senior executive officers provide to them and on the representations our independent registered public accounting firm makes to them. As a result, you should not construe the oversight the audit committee provides as establishing an independent basis for a determination that our senior executive officers have established and maintain appropriate internal controls over financial reporting, that we have prepared our financial statements in accordance with GAAP or that our independent registered public accountants conduct their audit of our financial statements in accordance with generally accepted auditing standards in the United States. As part of The audit committee also reviewed methods of enhancing the effectiveness of our internal and disclosure control systems. Based on Submitted by: Audit Committee Robert S. Bolinger Jack L. Hess John J. Lyons Richard D. Wampler, II March 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 Section 2.3 of our by-laws provides that if a stockholder wishes to present at our A written proposal of nomination of a candidate for election as a director must set forth: the name and address of the proposing stockholder, as the same appears on our books, who intends to make the nomination, the proponent; as to each person whom the proponent nominates for election or reelection as a director, the proponent must disclose all information relating to such person that the proxy rules under the Exchange Act require to be disclosed in a solicitation of proxies for the election of directors; the principal occupation or employment for the past five years of each person whose nomination the proponent intends to make; a description of any arrangement or understanding between each person whose nomination the proponent proposes and the proponent with respect to such person’s nomination for election as a director and actions such person proposes to take; the written consent of each person so nominated to serve as a director if elected as a director; and the number of shares of our Class A common stock and our Class B common stock the proponent beneficially owns within the meaning of SEC Rule 13d-3 and owns of record. As to any other business that the a brief description of such business; the proponent’s reasons for presenting such business at our 2013 annual meeting of stockholders; any material interest of the proponent in such business; the name and address of the proponent; and the number of shares of our Class A common stock and our Class B common stock the proponent beneficially owns within the meaning of SEC Rule 13d-3 and owns of record. Only candidates nominated by stockholders for election as a member of our board of directors in accordance with our by-law provisions as At our We may, unless we receive contrary instructions from you, send a single copy of our annual report, proxy statement and notice of annual or special meeting to any household at which two or more stockholders reside if we believe the stockholders are members of the same family. If you would like to receive our annual disclosure documents directly in future years rather than from your broker or other nominee holder, or if you and another stockholder share an address and you and the other stockholder would like to receive individual copies of our annual disclosure documents, you should follow these instructions: If your shares are registered in your own name, please contact our transfer agent and inform it of your request to revoke or institute householding by calling Computershare Trust Company, N.A. at (800) 317-4445 or writing to Computershare Trust Company, N.A., at P.O. Box 43069, Providence, Rhode Island 02940-3078. Computershare Trust Company, N.A. will respond to your request within 30 days. If a bank, broker, nominee or other holder of record holds your shares, please contact your bank, broker, nominee or other holder of record directly. DIRECTOR — STOCKHOLDER COMMUNICATIONS Stockholders who wish to communicate with our board of directors or with one or more individual members of our board may do so by sending their communication in We encourage our directors to attend our annual meetings of stockholders. All of our directors attended our annual meeting of Our board of directors does not know of any matters to be presented for consideration at our 2012 annual meeting of stockholders other than the matters we have described in the notice of annual meeting March 19, 2012 DONEGAL GROUP INC. ATTN: JEFFREY D. MILLER 1195 RIVER RD, P.O. BOX 302 MARIETTA, PA 17547 VOTE BY INTERNET - www.proxyvote.com Use the Internet VOTE BY PHONE - 1-800-690-6903 Use any touch-tone telephone to VOTE BY MAIL Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717. TO VOTE, MARK BLOCKS BELOW IN THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED. To withhold authority to vote for any individual nominee(s), mark “For All Except” and 1. Election of Nominees 01 2. Ratification of the appointment of KPMG LLP as Please sign exactly as your name(s) appear(s) hereon. When signing as Signature [PLEASE SIGN WITHIN BOX] Signature (Joint Owners) Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting:The Notice & Proxy Statement, Annual Report is/ are available atwww.proxyvote.com. DONEGAL GROUP INC. Annual Meeting of Stockholders April 19, 2012 10:00 AM This proxy is solicited by 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 Heritage Hotel Lancaster, 500 Centerville Road, Lancaster, Pennsylvania 17601, on April 19, 2012 at 10:00 a.m., and at any adjournment or postponement thereof, as set forth on the reverse side of this proxy card. Continued and to be signed on reverse sideTax MattersLimitations on the Deductibility of Compensationa deduction for federal income tax purposes to the extent thatdeduct annual compensation we pay annual compensation to any of our named executive officers named in the Summary Compensation Table in this proxy statement that is in excess of $1 million.million for federal income tax purposes. However, 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.ourthe 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. OurThe compensation committee may, therefore, from time to time, authorize compensation agreements or plans that iswould not be deductible for federal income tax purposes if ourthe compensation committee believes it is in our best interests and in the best interests of our stockholders to do so.17Other BenefitsSummary Compensation Table2006, 20072009, 2010 and 20082011 for services rendered in all capacities to our chief executive officer, our chief financial officer and our threefour other most highly compensated executive officers. We refer to these persons, who are namedofficers, whom we name in the table below, as our named executive officers. As we describe earlier in this proxy statement, during 2011 we entered into employment agreements with all of our executive officers, including our named executive officers. We do not have employment agreements withprovide any of our named executive officers nor do we provide any of them with restricted stock awards, non-equity incentive plan compensation, deferred compensation or pension benefits.benefits with the exception of two of our executive officers who receive an annual restricted stock award as part of their compensation as members of our board of directors and the Donegal Mutual board of directors.2008,2011, their salaries accounted for 48%56.2% of their total compensation in 20082011 and theirnone of them received any performance-based bonuses accounted for 22% of their total compensation in 2008. All Other Stock Option Compen- Awards Awards sation Total Name and Principal Position Year Salary($) Bonus($) ($) ($)(1) ($)(2) ($) Donald H. Nikolaus, 2008 555,000 360,000 5,340 360,500 49,139 1,329,979 President and Chief 2007 555,000 840,000 6,092 — 52,038 1,453,130 Executive Officer 2006 535,000 970,000 5,415 293,155 46,668 1,850,238 Cyril J. Greenya, 2008 180,000 58,000 5,340 82,400 42,538 368,278 Senior Vice President and 2007 174,000 125,000 6,092 — 42,603 347,695 Chief Underwriting Officer 2006 162,000 138,000 — 43,007 16,860 359,867 Jeffrey D. Miller, 2008 187,000 62,000 — 92,700 10,932 352,632 Senior Vice President and 2007 177,000 132,000 — — 10,098 319,098 Chief Financial Officer 2006 162,000 145,000 — 43,007 9,244 359,251 Robert G. Shenk, 2008 229,000 58,000 — 82,400 12,887 382,287 Senior Vice President, 2007 223,000 125,000 — — 11,866 359,866 Claims 2006 214,000 138,000 — 50,255 11,427 413,682 Daniel J. Wagner, 2008 180,000 58,000 — 82,400 11,147 331,547 Senior Vice President 2007 174,000 125,000 — — 10,126 309,126 and Treasurer 2006 162,000 138,000 — 43,007 9,244 352,251 Year Salary($) Bonus($)(1) Stock
Awards
at
Grant Date
Fair Value
($)Option
Awards
at
Grant Date
Fair Value
($)(2)All
Other
Compen-
sation
($)(3)Total
($)Option
President and Chief
Executive Officer2011 575,000 — 4,404 380,000 61,161 1,020,565
Senior Vice President,
Human Resources2011 195,000 — — 142,500 11,718 349,218
Senior Vice President and
Chief Underwriting Officer2011 195,000 — 4,404 142,500 51,910 393,814
Senior Vice President and
Chief Financial Officer2011 217,000 — — 142,500 11,737 371,237
Senior Vice President,
Claims2011 241,000 — — 142,500 13,387 396,887
Senior Vice President
and Treasurer2011 195,000 — — 142,500 12,068 349,568 (1) Our executive officers are eligible to participate in a cash incentive bonus plan, although we did not pay any bonuses in 2010 or 2011 because of our underwriting results of operations. We refer you to “Executive Compensation Discussion and Analysis — Our Cash Incentive Bonus Plan.” (2) We show the option awards are shown at an estimated grant date fair value, which we obtainedcalculated 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 14 of the notes to our consolidated financial statements included in our 20082011 annual 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 $32,750$44,450 and a matching 401(k) plan contribution of $11,207$11,529 paid during 2008.2011. In the case of Messrs. Burke, Shenk, Miller and Wagner, the total shown includes a matching 401(k) plan contribution of $10,653, $10,513$11,061, $11,029, $11,001 and $10,544,$11,061, respectively, paid during 2008.2011. In the case of Mr. Greenya, the total shown includes directors fees of $30,500$37,500 and a matching 401(k) plan contribution of $9,885$11,061 paid during 2008.2011.18Grants of Plan-Based AwardsOur compensation committee recommendedboardClass A common stock at an exercise price of directors, and our board of directors approved, the following stock option grants$12.50 per share to our named executive officers during 2008:2008 Grantsas set forth in the table below. On the date we granted the options, the closing market price of Plan-Based Awards All Other Stock Option Awards: Exercise Grant Date Number of or Base Closing Fair Value Securities Price of Price on of Stock Underlying Option Grant and Option Grant Approval Options Awards Date Awards Name Date Date (#) ($/Sh) ($/Sh) ($)(1) Donald H. Nikolaus(2) 7/17/2008 7/17/2008 175,000 17.50 17.10 360,500 Cyril J. Greenya(3) 7/17/2008 7/17/2008 40,000 17.50 17.10 82,400 Jeffrey D. Miller(4) 7/17/2008 7/17/2008 45,000 17.50 17.10 92,700 Robert G. Shenk(5) 7/17/2008 7/17/2008 40,000 17.50 17.10 82,400 Daniel J. Wagner(6) 7/17/2008 7/17/2008 40,000 17.50 17.10 82,400 (1)Based on the Black-Scholes options pricing model, we used the following assumptions in calculating the grant date present value:• Stock volatility — 20.6%.• Stock dividend yield — 2.46%.• Length of option term — 3 years.• Annualized risk-free interest rate — 2.3%.
our Class A common stock was $11.79.(2)During 2008, we granted Mr. Nikolaus a non-qualified option to purchase 175,000 shares of our Class A common stock at an exercise price of $17.50 per share. These options vest in three equal installments on March 1, 2009, March 1, 2010 and March 1, 2011, respectively.(3)During 2008, we granted Mr. Greenya a non-qualified option to purchase 40,000 shares of our Class A common stock at an exercise price of $17.50 per share. These options vest in three equal installments on March 1, 2009, March 1, 2010 and March 1, 2011, respectively.(4)During 2008, we granted Mr. Miller a non-qualified option to purchase 45,000 shares of our Class A common stock at an exercise price of $17.50 per share. These options vest in three equal installments on March 1, 2009, March 1, 2010 and March 1, 2011, respectively.(5)During 2008, we granted Mr. Shenk a non-qualified option to purchase 40,000 shares of our Class A common stock at an exercise price of $17.50 per share. These options vest in three equal installments on March 1, 2009, March 1, 2010 and March 1, 2011, respectively.(6)During 2008, we granted Mr. Wagner a non-qualified option to purchase 40,000 shares of our Class A common stock at an exercise price of $17.50 per share. These options vest in three equal installments on March 1, 2009, March 1, 2010 and March 1, 2011, respectively. Grant Date Number of Shares
Subject to Option Exercise or Base
Price of Option
Awards ($) Grant Date
Fair Value of
Option Awards ($) 7/27/11 200,000 12.50 380,000 7/27/11 75,000 12.50 142,500 7/27/11 75,000 12.50 142,500 7/27/11 75,000 12.50 142,500 7/27/11 75,000 12.50 142,500 7/27/11 75,000 12.50 142,500 Stock Incentive Plansourthe 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 we issue to our directors, all of our incentive compensation grants have been stock options.19The 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 of2008,2011, we had reserved 2,275,0001,410,000 shares of our Class A common stock for future grants under our 2011 equity incentive plan for employees and 288,835175,000 shares of our Class A common stock for future grants under our 2011 equity incentive plan for directors. If shares covered by an option cease to beare not issuable for any reason, we may again grant options to purchase those shares.Our board of directors may adjustin the eventchange by reason of a merger, consolidation, reorganization, stock split, stock dividend or other event affecting the number of outstanding shares of our Class A common stock.stock, the kinds of shares and the price per share shall be automatically adjusted to reflect any increase or decrease in the number of, change in kind of or change in value of shares to preclude the enlargement or dilution of rights and benefits under the plans. Unless otherwise provided in individual option or employment 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.2011:ourthe 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.Outstanding Equity Awards at Fiscal Year EndDecember 31, 2011held by our named executive officers held at December 31, 2008: 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 ($) Donald H. Nikolaus 233,333 — 15.75 7/21/2010 311 5,215 116,667 58,333 21.00 10/19/2011 — 175,000 17.50 7/17/2013 Cyril J. Greenya 33,333 — 15.75 7/21/2010 311 5,215 20,000 10,000 21.00 10/19/2011 — 40,000 17.50 7/17/2013 Jeffrey D. Miller 33,333 — 15.75 7/21/2010 — — 20,000 10,000 21.00 10/19/2011 — 45,000 17.50 7/17/2013 Robert G. Shenk 33,333 — 15.75 7/21/2010 — — 20,000 10,000 21.00 10/19/2011 — 40,000 17.50 7/17/2013 Daniel J. Wagner 33,333 — 15.75 7/21/2010 — — 20,000 10,000 21.00 10/19/2011 — 40,000 17.50 7/17/2013 20 Option Awards Stock Awards Number of Securities
Underlying
Unexercised Options Option
Exercise
Price ($) Option
Expiration Date Number of
Shares or
Units of Stock
That Have Not
Vested (#) Market Value
of Shares or
Units of Stock
That Have Not
Vested ($) (#)
Exercisable (#)
Unexercisable 175,000 — 17.50 7/17/2013 311 4,404 40,000 — 17.50 7/17/2013 40,000 — 17.50 7/17/2013 311 4,404 45,000 — 17.50 7/17/2013 40,000 — 17.50 7/17/2013 40,000 — 17.50 7/17/2013 Option Exercises and Stock Vested2008: Option Exercises and Stock Vested Option Awards Stock Awards Number of Shares Value Realized Number of Shares Value Realized Name Acquired on Exercise (#) on Exercise ($)(1) Acquired on Vesting (#) on Vesting ($)(1) Donald H. Nikolaus 116,667 1,220,504 311 5,215 Cyril J. Greenya — — 311 5,215 Jeffrey D. Miller — — — — Robert G. Shenk — — — — Daniel J. Wagner — — — — Option Exercises and Stock Vested Option Awards Stock Awards Number of Shares
Acquired on Exercise (#) Value Realized
on Exercise ($)(1) Number of Shares
Acquired on Vesting (#) Value Realized
on Vesting ($)(1) — — 311 4,404 — — — — — — 311 4,404 — — — — — — — — — — — — (1) Value realized is based upon the closing price of our Class A common stock on NASDAQ on the date of exercise or vesting minus the exercise price of the option awards. 2012. However, our compensation analysts, Towers, are currently evaluating types of pension benefits as part of its review of our compensation structure.2006, 20072010 or 2008,2011, and we contemplate none is contemplated for 2009.Non-Qualified Deferred Compensation2006, 20072009, 2010 or 2008,2011, and we contemplate none is contemplated for 2009.Director CompensationOur directors and the directors of Donegal Mutual received an annual retainer of $30,000 in 2008. 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 2008, with the exception of meetings of the audit committees. Members of the audit committees received a fee of $500 for each meeting attended in 2008. A person who serves on our board of directors2012. However, as well as the board of directors of Donegal Mutual receives only one annual retainer. Since March 1, 2008,noted above, we have allocated 20% of that retainer to Donegal Mutual and 80% to us.Under our equity incentive plan for directors, each of our directors and each director of Donegal Mutual who is not also one of our directors receives an annual restricted stock award of 311 shares of our Class A common stock as of the first business day of each year, provided the director served as a member of our board of directors or the board of directors of Donegal Mutual during any portion of the preceding calendar year. Each of our directors and each of the directors of Donegal Mutual is also eligibleexpect to receive advice from our compensation analysts and that advice may include some form of non-qualified options to purchase shares of our Class A common stock in an amount determined by our board of directors from time to time. Donegal Mutual reimburses us for the options and restricted stock awards granted to those directors of Donegal Mutual who are not also members of our board of directors.21The following table sets forth a summary of thedeferred compensation we paid to our non-officer directors during 2008. Fees Earned Stock Option Name or Paid in Cash ($) Awards ($) Awards ($) Total ($) Robert S. Bolinger 38,250 5,215 15,450 58,915 Patricia A. Gilmartin 31,000 5,215 15,450 51,665 Philip H. Glatfelter, II 78,708 5,215 15,450 99,373 John J. Lyons 37,750 5,215 15,450 58,415 John M. Mahan 32,000 5,215 15,450 52,665 S. Trezevant Moore, Jr. 31,000 5,215 15,450 51,665 R. Richard Sherbahn 34,000 5,215 15,450 54,665 Richard D. Wampler, II 37,500 5,215 15,450 58,165 Related Person TransactionsWe 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 a conflict 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 our audit committee before we can enter into the transaction, and, if the transaction continues for more than one year, the continuation must be approved annually by our audit committee. Our transactions with Donegal Mutual require the prior approval of the coordinating committee. See “Our Relationship with Donegal Mutual — The Coordinating Committee.”Donald H. Nikolaus, our President and a director of us and the President and a director of Donegal Mutual, is also a partnerplans 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. We pay such firm its customary fees for such services. Those fees were $372,926 in 2007 and $369,372 in 2008.Patricia A. Gilmartin, a director of us 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 insurance 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. We pay such firm its customary fees for such services. Those fees were $1,013,913 in 2007 and $1,226,249 in 2008.future.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, reinsurance and expense sharing. See “Stock Ownership — Our Relationship with Donegal Mutual.”Limitation of Liability and Indemnificationpermitted by Delaware law permits, 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.22Our certificate of incorporation and by-laws obligate us, to the maximum extent permitted by Delaware law permits, 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.havemaintain and intend to continue to maintain directors’ and officers’ liability insurance.EvaluationReport of Executive Performance in 2008 and Executivethe Compensation CommitteeOur 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 2008 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 6.5% 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 fourth straight year;• 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 completion of the conversion of Sheboygan Mutual Insurance Company into a stock insurance company and our acquisition of that stock insurance company on December 1, 2008;• enhancing our personnel and their skills; and• our realization of operational and expense synergies on a continuing basis.On an overall basis, our compensation committee believes that our progress in the achievement of these objectives met or exceeded the targets established for these objectives at the start of 2008 with emphasis given to our underwriting profit of $9.7 million in 2008. This underwriting profit was the basis of the decisions made by our compensation committee at its meetings in December 2008 and February 2009 with respect to adjustments to base salary and the allocation of our annual cash bonuses for our named executive officers.Our philosophy and that of our compensation committee is founded on performance and profitability, so that the major portion of the compensation of our named executive officers arises from annual bonuses and stock options that will have their greatest value only when our performance and profitability is at a high level. The compensation recommendations of our compensation committee to our board of directors and the compensation determinations of our board of directors as to each of our named executive officers is discussed below 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 our named executive officers in 2008 reflect our strong financial and operational performance in 2008.23Our President and Chief Executive OfficerBase Salary. Mr. Nikolaus received a base salary of $555,000 in 2008 and 2007. We did not increase 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 $360,000 in respect of 2008 and a bonus of $840,000 in respect of 2007, 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 2008. 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 2008 and our overall financial, strategic and operational performance in 2007 and 2008. Mr. Nikolaus received a 39% and 40% allocation from the bonus pool in 2008 and 2007, respectively.Our Senior Vice President and Chief Financial OfficerBase Salary. Mr. Miller received a base salary of $187,000 in 2008 compared to a base salary of $177,000 in 2007. The 5.6% 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 $62,000 in respect of 2008 and a bonus of $132,000 in respect of 2007. This 53% decrease in his 2008 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 ClaimsBase Salary. Mr. Shenk received a base salary of $229,000 in 2008 compared to $223,000 in 2007. The 2.7% increase represented a cost-of-living adjustment.Annual Cash Bonus. Mr. Shenk received a bonus of $58,000 in respect of 2008 and a bonus of $125,000 in respect of 2007. This 54% decrease in his 2008 bonus was principally the result of our reduced 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 OfficerBase Salary. Mr. Greenya received a base salary of $180,000 in 2008 compared to a base salary of $174,000 in 2007. This 3.4% increase reflected a cost-of-living adjustment.Annual Cash Bonus. Mr. Greenya received a bonus of $58,000 in respect of 2008 and a bonus of $125,000 in respect of 2007. This 54% decrease in his 2008 bonus was principally the result of our reduced 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 TreasurerBase Salary. Mr. Wagner received a base salary of $180,000 in 2008 compared to a base salary of $174,000 in 2007. This 3.4% increase reflected a cost-of-living adjustment.Annual Cash Bonus. Mr. Wagner received a bonus of $58,000 in respect of 2008 and a bonus of $125,000 in respect of 2007. This 54% decrease in his 2008 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.24Report of Our Compensation CommitteeThe 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.Compensation Discussion and Analysis.”ourthe 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 theythe compensation committee reviewed our success in meeting our corporate objectives for 2011. Our compensation committee then reviewed the individual performance of our named executive officers. Our compensation committee 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”Compensation Discussion and Analysis” 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, 20082011 for filing with the SEC.MEMBERS OF THE COMPENSATION COMMITTEESOF DONEGAL GROUP INC. AND DONEGALMUTUAL INSURANCE COMPANYPhilip H. Glatfelter, IIR. Richard SherbahnFrederick W. Dreher1, 201211, 2009Equity Compensation Plan Information Number of securities
(by class) to be issued
upon exercise of
outstanding options,
warrants and rights Weighted-average
exercise price of
outstanding options,
warrants and rights Number of securities
(by class) remaining
available for future
issuance under equity
compensation plans
(excluding securities
reflected in column (a)) (a) (b) (c) 5,309,000 (Class A) $ 14.18 (Class A) 1,582,000 (Class A) — — — 5,309,000 $ 14.18 1,582,000 Number of Securities (by Class) Remaining Number of Securities Available for Future (by Class) to be Issued Weighted-Average Issuance Under Equity Upon Exercise of Exercise Price of Compensation Plans Outstanding Options, Outstanding Options, (Excluding Securities Plan category Warrants and Rights Warrants and Rights Reflected in Column (a)) (a) (b) (c) Equity compensation plans
approved by 3,422,432 (Class A) $ 17.98 (ClassA) 2,563,835 (Class A) securityholders — (Class B) — (Class B) — (Class B) Equity compensation plans not approved by securityholders — — — Total 3,422,432 $ 17.98 2,563,835 25The Role of the Nominating Committee Age Director
Since Year Term
Will Expire* 59 2009 2015 42 2006 2015 69 1986 2015 70 2004 2015 * If elected at our 2012 annual meeting of stockholders. Age Director
Since Year Term
Will Expire 75 1986 2014 72 1986 2014 82 1986 2014 64 2011 2014 Age Director
Since Year Term
Will Expire 72 2001 2013 58 2007 2013 82 1986 2013 to be paidwe pay to our independent registered public accounting firm for the purposepreparation and issuance of preparing and 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,for such services, 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 chairman 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.forto us during our 20082011 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, 2007 and 2008 were $680,000 and $715,000, respectively,• (i) the audit of our annual consolidated and statutory financial statements for those fiscal years, (ii) the reviews of our annual consolidated and statutory financial statements for those fiscal years, the reviews of the consolidated financial statements included in our Form 10-Q quarterly reports and the services performed in connection with filings of registration statements and offerings for our fiscal years ended December 31, 2010 and 2011 were $915,000 and $755,000, respectively.• • • Form 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 and $-0-, respectively, to KPMG LLP during 2007 and 2008 for SEC and general accounting matters.Tax Fees. We did not pay any tax fees to KPMG LLP during 2007 or 2008.All Other Fees. KPMG LLP’s aggregate fees for other services during our fiscal years ended December 31, 2007 and 2008 were $61,000 and $63,500, respectively.Report of Ourthe Audit Committee following report of our 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 or the Exchange Act, except to the extent we specifically incorporate this report by reference therein.Our audit committee performs its responsibilities in accordance with Section 3(a)(58)(A) of the Exchange Act. Each of ourthe 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 determinedbelieves that all threefour members of ourthe audit committee, Messrs.Robert S. Bolinger, Jack L. Hess, 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. Ourrules establish. The audit committee operates pursuant to a written charter,charter. You may view the full text of which may be viewedour audit committee’s charter on our website athttp://www.donegalgroup.com.www.donegalgroup.com Our. The audit committee reviews and reassesses the adequacy of its charter on an annual basis.The charterspecifies thatand the purpose ofprocess set forth in our by-laws relating to the coordinating committee.is to assistof our board of directors, in:• the oversight of our accounting and financial reporting processes and the audits of our financial statements;• the preparation of the annual report 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 public accounting firm;• the retention of our independent registered public accounting firm;• the adequacy of our systems of internal controls; and26• the performance of our independent registered public accounting firm and of our internal audit function.Inin carrying out these responsibilities, performs many functions, including the following:among other things:• monitors preparation of quarterly and annual financial reports by our management;• supervises the relationship between us and our independent registered public accounting firm, including having direct responsibility for its appointment, compensation and retention, reviewing the scope of its audit 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.Ourthat our financial statements were prepared in accordance with accounting principles generally accepted in the United States, or GAAP.1011 times during 2008. Our2011. The 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, ourthe audit committee holds meetings with our independent registered public accounting firm and with our internal auditors in executive sessions at which our management issenior executive officers are not present.itsthe audit committee’s oversight of our financial reporting process, ourthe audit committee reviews all annual and quarterly financial statements and discusses them with our independent registered public accounting firm and with managementour senior executive officers prior to the issuance of the financial statements. During 2008, management and2011, our independent registered public accounting firmsenior executive officers advised ourthe audit committee that we had prepared each of these financial statements had been prepared in accordance with generally acceptedGAAP, and our senior executive officers and representatives of our independent public accounting principles, and theyfirm reviewed significant accounting and disclosure issues with ourthe 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, AU Section 380 (SAS No. 61 (The Auditor’s61) (Interim Financial Information and Rule 2.07 of Regulation S-X, Communication With Those Charged With Governance), including the accounting principles we employ, the reasonableness of significant judgments made by management and the adequacy of the disclosures in our financial statements. Ourwith Audit Committees, as amended); Statement on Auditing Standards, AU Section 772 (SAS No. 100). The audit committee has received the written disclosures and the letter from the independent registered public accounting firm required bythe applicable requirementsprovisions of the Public Company Accounting Oversight Board requires regarding the independent registered public accounting firm’s communications with ourthe audit committee concerning independence and the audit committee has discussed with the independentindependence of our registered public accounting firm its independence.Ourfirm.OurThe audit committee, as part of this process, analyzed steps we have taken to implement recommended improvements ina continuing analysis of the improvement and efficiency of our internal control procedures. our audit committee’s reviews and discussions as describedby the audit committee that we describe 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-Kfor the year ended December 31, 20082011 in our 2011 Annual Report on Form 10-K for filing with the SEC.Submitted by:Audit CommitteeRobert S. BolingerJohn J. LyonsRichard D. Wampler, II11, 2009271, 2012ITEM 2 — RATIFICATION OF OUR AUDIT COMMITTEE’S SELECTION OF KPMG LLPAS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2009Our audit committee has appointed KPMG LLP as our independent registered public accounting firm for the year ending December 31, 2009. We are asking our stockholders to ratify our audit committee’s selection of KPMG LLP as our independent registered public accounting firm for 2009. Although ratification is not 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 2009.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.28STOCKHOLDER PROPOSALS FOR OUR 2013 ANNUAL MEETING OF STOCKHOLDERSourthe proxy statement for our 20102013 annual meeting of stockholders must deliver such proposal and an appropriate supporting statement in writing to our corporate secretary at our principal executive offices at 1195 River Road, Marietta, Pennsylvania 17547, not later than November 16, 2009.Pursuant to 19, 2012.20102013 annual meeting of stockholders (i)either nominations of persons as candidates for election to our board of directors or (ii) an item of business to be transacted by our stockholders otherwisefor stockholder action other 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 summarizedby-laws. We summarize these by-law provisions below. WrittenWe must receive written notice of any such proposal containingthat includes all of the information required under our by-laws as described herein, must be received byrequire, to the attention of our corporate secretary, Sheri O. Smith, at our principal executive offices at 1195 River Road, Marietta, Pennsylvania 17547, during the period commencingthat begins on November 16, 200919, 2012 and endingthat ends on December 16, 2009.19, 2012.• the name and address of the stockholder, as the same appears on our books, who intends to make the nomination (the “Proposing Stockholder”);• 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;• the principal occupation or employment for the past five years of each person whose nomination the Proposing Stockholder intends to make;• a description of any arrangement or understanding between each person whose nomination is proposed 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;• the written consent of each person so nominated to serve as a director if elected as a director; and• the number of shares of our Class A common stock and Class B common stock beneficially owned within the meaning of SECRule 13d-3 and of record by the Proposing Stockholder.Proposing Stockholderproponent intends to bring before our 20102013 annual meeting of stockholders, the written proposal must set forth:• a brief description of such business;• the Proposing Stockholder’s reasons for presenting such business at our 2010 annual meeting of stockholders;• any material interest of the Proposing Stockholder in such business;• the name and address of the Proposing Stockholder; and• the number of shares of our Class A common stock and our Class B common stock beneficially owned within the meaning of SEC Rule13d-3 and of record by the Proposing Stockholder.summarized hereinwe summarize those provisions in this proxy statement will be eligible for election as a member of our board of directors at our 20102013 annual meeting of stockholders. A written proposal relating to astockholder approval of any matter other than a nomination for election as a director must set forthinclude information regarding the matter the stockholder proposes for stockholder action equivalent to the information that would be required under the proxy rules of the SEC if the proponent was to solicit proxies were solicited for stockholder consideration approval of the matterproposed action at a meeting of stockholders.Only such business may be conducted at20102013 annual meeting of stockholders we will only transact such business as shall have been brought before our 2013 annual meeting of stockholders in accordance with the procedures set forth in our by-law provisions establish, as29card.stockholders in 2011.summarized herein. we summarize in this proxy statement. The chairman of our 20102013 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.in this proxy statement. Only stockholder proposals submitted in accordance with the by-law provisions summarized abovewe previously summarize in this proxy statement will be eligible for presentation at our 20102013 annual meeting of stockholders, and we will not consider any matter at our 2013 annual meeting of stockholders not submitted in accordance with the procedures we describe in this proxy statement.accordance with such provisions will not be consideredwriting addressed to a particular director or acted upondirectors, or in the alternative, to “Non-Management Directors” as a group. Please send your communication to our corporate secretary, Sheri O. Smith, at our 2010principal executive offices at 1195 River Road, Marietta, Pennsylvania 17547 or by e-mail tosherismith@donegalgroup.com. Our corporate secretary will promptly forward all such communications to the addressee or addressees set forth in the communication.stockholders.OTHER MATTERSbutand in this proxy statement. However, if any matters arestockholder properly presented,presents such a matter, we will vote the proxies in the enclosed form returned to us will be votedwe receive from our stockholders, 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 persons named as proxies in our form of proxy holder.By order of our board of directors,Donald H. Nikolaus,President and Chief Executive OfficerMarch 16, 200930002CS18023
. NNNNNNNNNNNN NNNNNNNNNNNNNNN C123456789 000004 000000000.000000 ext 000000000.000000 ext 000000000.000000 ext 000000000.000000 ext MR A SAMPLE DESIGNATION (IF ANY) 000000000.000000 ext 000000000.000000 ext ADD 1 Electronic Voting Instructions ADD 2 ADD 3 You can vote byBy order of our board of directors, Donald H. Nikolaus, President and Chief Executive Officer or telephone! ADD 4 Available 24 hours a day, 7 days a week! ADD 5 Insteadto transmit your voting instructions and for electronic delivery of mailinginformation up until 11:59 P.M. Eastern Time April 18, 2012. Have your proxy card in hand when you may choose one ofaccess the twowebsite and follow the instructions to obtain your records and to create an electronic voting ADD 6 methods outlined belowinstruction form.votetransmit your proxy. NNNNNNNNN VALIDATION DETAILS ARE LOCATEDvoting instructions up until 11:59 P.M. Eastern Time April 18, 2012. Have your proxy card in hand when you call and then follow the instructions.THE TITLE BAR. Proxies submitted by the Internet or telephone must be received by 1:00 a.m., Central Time, on April 16, 2009. 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 United States, Canada & Puerto Rico any time on a touch tone telephone. There is NO CHARGE to you for the call. Using a black ink pen, mark your votes with an X as shown in X• Follow the instructions provided by the recorded message. this example. Please do not write outside the designated areas. Annual Meeting Proxy Card 123456 C0123456789 12345 3 IF YOU HAVE NOT VOTED VIA THE INTERNETBLUE OR TELEPHONE, FOLD ALONG THE PERFORATION, BLACK INK AS FOLLOWS:KEEP THIS PORTION FOR YOUR RECORDS DETACH AND RETURN THE BOTTOMTHIS PORTION IN THE ENCLOSED ENVELOPE. 3 A Proposals — ONLYThe Boardboard of Directorsdirectors recommends ayou vote FOR each nominee listed in Proposal 1
For the following:For All Withhold All For All Except FOR Proposal 2. write the number(s) of the nominee(s) on the line below.Class B Directors: For Withhold For Withhold For Withhold + Directors¨ ¨ ¨ —Kevin M. Kraft, Sr. 02 Jon M. Mahan 02 - -03 Donald H. Nikolaus 03 —04 Richard D. Wampler, IIThe board of directors recommends you vote For the following proposal: For Against Abstain the Company’sour independent registered public accounting firm for 2009. 3. 2012¨ ¨ ¨ NOTE:In their discretion, theour proxies are authorized to vote upon such other business as may properly come before theour annual meeting and any adjournment or postponement thereof. 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. Signature 2 — Please keep signature within the box. C 1234567890 J N T MR A SAMPLE (THIS AREA IS SET UP TO ACCOMMODATE 140 CHARACTERS) MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND NNNNNNN3 1 A V 0 2 0 8 6 7 1 MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND + <STOCK#> 0106XD .
attorney, executor, administrator, or other fiduciary, please give full
title as such. Joint owners should each sign personally. All holders must
sign. If a corporation or partnership, please sign in full corporate or
partnership name, by authorized officer.Date Date 
3 IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. 3 Proxy — DONEGAL GROUP INC. ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 16, 2009 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 16, 2009 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.