UNITED STATES
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 No. )
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WE WILL HOLD ON APRIL 21, 2011
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 21, 2011,19, 2012, at our principal executive 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 four nominees for Class AB directors we name in our 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 the selectionappointment of KPMG LLP as our independent registered public accounting firm for 2011;2012.
The advance notice by-laws we have had in effect for many years require our stockholders of the compensation of our named executive officers we describe in our accompanying proxy statement;
no stockholder may validly present any such actionnomination 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 20112012 annual meeting norof stockholders other than those we list in this notice of annual meeting; and
we will wenot conduct a vote of our stockholders on any such matter.item of stockholder business at our 2012 annual meeting of stockholders other than those items of stockholder business we list in this notice of annual meeting.
Our board of directors has fixedestablished the close of business on March 4, 20112, 2012 as the record date for the determination of the holders of our stockholdersClass A common stock and the holders of our Class B common stock entitled to notice of, and to vote at, our 2012 annual meeting.
We include our 20102011 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 and our proxy statement that accompanies this noticemeeting. You may also view each of annual meeting.
PROXY STATEMENT
This proxy statement contains information relating to our 2012 annual meeting of stockholders. We will hold our 2012 annual meeting of stockholders that we will hold on Thursday, April 21, 2011,19, 2012, at 10:00 a.m., local time, at our executive offices, 1195 Riverthe Heritage Hotel Lancaster, 500 Centerville Road, Marietta,Lancaster, Pennsylvania 17547. 17601.
On March 18, 2011,19, 2012, we mailed our proxy statement, the accompanying proxy card and our 2010 annual report to our stockholders of record as ofat the close of business on March 4, 2011. 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.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 theysuch 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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Our Compensation Philosophy and Risk Management Considerations | 24 | |||
The Recommendations of the Compensation Analysts We Retained | 25 | |||
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Unless we otherwise specify,expressly indicate, all of the information we include or incorporate by reference in ourthis proxy statement for our 2012 annual meeting of stockholders relates to our 20102011 fiscal year. Our 20102011 fiscal year began on January 1, 20102011 and ended on December 31, 2010.
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Our board of directors solicits proxies from our stockholders through this proxy statement from our stockholders for use in connection with our 20112012 annual meeting of stockholders.stockholders and any adjournment or postponement of that annual meeting. We will hold our 20112012 annual meeting of stockholders at our principal executive offices at 1195 Riverthe Heritage Hotel Lancaster, 500 Centerville Road, Marietta,Lancaster, Pennsylvania 1754717601 at 10:00 a.m., prevailinglocal time, on April 21, 2011.
At our 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. As is the case with many publicly-owned companies, we have had “advance No stockholder 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. Our by-laws What is the agenda for our 2012 annual meeting?meeting of stockholders?20112012 annual meeting of stockholders, our stockholders will act upon:• the election of the four nominees for Class A directors we name in this proxy statement;• the ratification of the selection of KPMG LLP as our independent registered public accounting firm for 2011;• the approval, by a non-binding vote of our stockholders, of the compensation of our named executive officers we describe in this proxy statement;• the determination, by a non-binding vote of our stockholders, of the frequency with which we submit to our stockholders for approval the compensation of our named executive officers;• the approval of our 2011 employee stock purchase plan;• the approval of our 2011 equity incentive plan for employees; and• the approval of our 2011 equity incentive plan for directors.What is the effect of our advance notice by-laws?Likenotice by-laws.” Advancenotice” 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 20112012 annual meeting of stockholders or to propose any other item of stockholder business for stockholder action at our 20112012 annual meeting.meeting of stockholders. The purpose of our advance notice by-laws is to assureensure that we can include in ourthis proxy statement, for the information of all of our stockholders, all of the actions we or others propose to submit to a vote of our stockholderspresent for stockholder consideration at our 2012 annual meeting or that any otherof stockholders. intends to propose.Because none of our stockholders 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 for transaction at our 20112012 annual meeting of stockholders within the time limits our advance notice by-laws specify,specify. Accordingly, no business other than the seven agendatwo items of stockholder business we list abovedescribe in our notice of our 2012 annual meeting of stockholders may properly come before our 20112012 annual meeting of stockholders or be submitted to a votestockholders. Further, we will not submit any other item of our stockholders at our 2011 annual meetingstockholder business, other than procedural matters related to the conduct of our 20112012 annual meeting. 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.Themeeting of stockholders, to a vote of our stockholders at our 2012 annual meeting of stockholders.What iswill constitute a quorum at our 2012 annual meeting?meeting of stockholders?stateprovide that the presence, in person or by proxy, of not less than a majority of the total number of votes the holders of allaggregate 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 may cast constituteswill constitute a quorum at our 2012 annual meeting.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 attendvote 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 assureensure the presence of a quorum at our 2012 annual meeting and thatof stockholders. As a result, our stockholders maywill 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.1meeting 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. At the direction of ourOur board of directors named Donald H. Nikolaus, our Presidentpresident and Chief Executive Officer,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 chairconduct the transaction of the items of stockholder business we list in our annual meeting. As chairnotice of our annual meeting at our 2012 annual meeting of stockholders. Mr. Nikolaus will determine, as chair of our 2012 annual meeting of stockholders, in his reasonablebroad 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. meeting of stockholders.
We have historically conducted the voting on the proposals we have submitted tosubmit for stockholder action at our annual meetings of stockholders as the first items of businessbusiness. We intend to follow the same procedure at our 2012 annual meeting.meeting of stockholders. Mr. Nikolaus, our president and chief executive officer, will then report ondiscuss our results of operations for 20102011 and our outlook for 2011.2012. After Mr. Nikolaus completes his remarks, he will respond to appropriateentertain questions and comments from our stockholders.
Our 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 for a stockholder of record, to attend our 2012 annual You are a stockholder of record if your name appears on the list of our stockholders as of the record date that our independent transfer agent prepares If a bank or broker holds your shares Who may attend and who may vote at and attend our 2012 annual meeting?meeting of stockholders?stockholdersboard of record as ofdirectors established the close of business on March 4, 2011,2, 2012 as the record date for the determination of the holders of our boardClass A common stock and the holders of directors designated for our 2011 annual meeting,Class B common stock who are our stockholders who mayentitled to notice of, and to vote at, our 2012 annual meeting.meeting of stockholders. We refer to those eligible stockholders as “stockholders of record” in this proxy statement. Stockholders of record, including persons whom a stockholder of record duly appointedand validly appoints as proxies, by stockholders of record, may attend and vote at our 2012 annual meeting. meeting of stockholders.meeting.meeting of stockholders. Even if you currently plan to attend our 2012 annual meeting of stockholders in person, we recommend that you returnsubmit your proxy using one of the methods we describe below under “How do Iyou vote my shares?the DGI shares registered in your name?” By doing so, we can then include your vote even if you later decide not to attend, orfind you are unable to attend, or you do not to attend for any reason, our 2012 annual meeting of stockholders.forin connection with our 2012 annual meeting.meeting of stockholders. For example, you are a stockholder of record if you receive dividend checks andreceived the proxy materials for our 2012 annual meeting of stockholders directly from us.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, upon written request to our chief financial officer that we determine, in our sole discretion, is proper request,and legally relevant to our 2012 annual meeting of stockholders, inspect during normal business hours at our principal executive offices in Marietta, Pennsylvania an alphabetical list of the holders of record of our Class A common stock and of our Class B common stock during normal business hours for any purpose germane to our annual meeting.stock.as your nominee,in “street name,” we consider you the beneficial owner of the shares held in “street name” by your bank or broker holds for you, and we consider your nominee asbank or broker the stockholder of record of your shares. Your bank or broker will send you separately, as the beneficial owner, a separate packageinformation describing the procedure for voting your shares. You should follow the instructions your bank or broker provides you on how to vote your shares.
Election of Class stockholders and any adjournment or postponement of our 2012 annual meeting of stockholders. Our certificate of incorporation provides that our shares of Class A common stock and our shares of Class B common stock vote together as a single class in the election of directors. At our 2012 annual meeting of stockholders, the four candidates for election as Class B directors who receive the highest number of If you properly submit your proxy and markWithhold Authority, the proxies will not vote your shares with respect to the nominee or nominees as to which you so indicate, but we will count your shares as present at our 2012 annual meeting of stockholders in determining whether a quorum exists. Our certificate of incorporation and by-laws do not authorize cumulative voting in the election of our directors. Ratification of the What percentage of the aggregate voting power of our outstanding voting power must we receiveClass A common stock and our outstanding Class B common stock is required to constitute approval by our stockholders ofapprove the items of business on which our stockholders will transactvote at our 2012 annual meeting?meeting of stockholders?AB Directors. The four nominees our board of directors nominated for election as Class AB directors in accordance with our by-laws, who are the only nominees eligible for election as Class AB directors at our 2012 annual meeting ofFOR stockholder votes cast by the holders of our Class A common stockwill be elected and our Class B common stock, voting together as a single class, will become Class AB directors for a term of three years and until our stockholders elect their successors. successors take office.SelectionAppointment of KPMG LLP.LLP. Ratification of the selectionappointment by the audit committee of our board of directors of KPMG LLP as our independent registered public accounting firm for 20112012 requires the affirmative vote of a majority of the voting power of our outstanding Class A common stock and our Class B common stock present in person or by proxy at our annual meeting.Approval of the compensation of our named executive officers we describe in this proxy statement. Approval, by a non-binding vote of our stockholders, of the compensation of our named executive officers we2
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 forto constitute a majority, itquorum at our 2012 annual meeting of stockholders, a quorum will not affectbe present at our 2012 annual meeting of stockholders, because the determinationpresence 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 Donegal Mutual owns will ensure the presence of a quorum, because the presence of Donegal Mutual at the annual meeting assures the presence of a quorum at our annual meeting.quorum. Broker non-votes are shares held by brokers or nominees hold in their name for which we have not 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.
At March 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 What are the voting rights of our stockholders?meeting of stockholders.As of4, 2011,2, 2012, we had outstanding:• 20,013,067 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 presented for a vote at our annual meeting; 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 presented for a vote at our annual meeting.in the aggregate cast a total of 2,001,3061,999,859 votes on each matter submittedwe submit to a vote of our stockholders at our 2012 annual meeting of stockholders, and the holders of all of our outstanding shares of Class B common stock may cast in the aggregate a total of 5,576,775 votes on each matter submitted towe submit for a vote of our stockholders at our 2012 annual meeting.3
Donegal Mutual has advised us that it will vote all of its shares of our Class A common stock and our Class B common stock as follows:
for the election of Kevin 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 our audit committee’s appointment of KPMG LLP as our independent registered public accounting firm for 2012.
Therefore, based on the votes Donegal Mutual will cast at our 20112012 annual meeting at our 2011 annual meetingof stockholders, our stockholders will:
elect Kevin 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
ratify our audit committee’s appointment of KPMG LLP as our independent registered public accounting firm for 2012.
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 of stockholders and vote in person orHow do Iyou vote my shares?the DGI shares registered in your name? vote by proxy. The proxies our board of directors has namedappointed will vote your shares as you direct.direct on any proxy card you return by mail. If you prefer, you may vote your proxy by telephone by usingor via the internet or by mail by following the instructions we have set forthinclude on yourthe proxy card.card we sent to you. The deadline for stockholders of record to vote telephonicallyby telephone or usingvia the internet is 3:0011:59 p.m., local time, on April 20, 2011.18, 2012. We must receive proxies submitted by mail or by express delivery services by 3:00 p.m., local time on April 20, 2011.4
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 yourthe control numbers listed on your proxy card and then follow the prompts. The telephone number is 1-800-690-6903.
1-800-652-VOTE (8683).
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 web site.website. When requested, enter yourthe 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.investorvote.com/DGICwww.proxyvote.com.
If a broker, bank nominee or other nominee is the holder of record holdsof your shares, see “How do Iyou vote the DGI shares Iyou hold in street name?” below.
If you are not a stockholder of record, but you are a “beneficial owner” How do Iyou vote the DGI shares Iyou hold in street name?directors.as ofat the close of business on March 4, 2011,2, 2012, which means that the list of our stockholders of record stockholders our independent transfer agent prepared as ofat the close of business on March 4, 20112, 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 how to vote your shares on the matters our stockholders will consider and vote upon at our 2012 annual meeting of stockholders or you must first 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 or nominee may vote your shares only on those proposals as to which your broker or nominee has the discretion to vote your shares. Under the NASDAQ Global Select Market, or NASDAQ, corporate governance rules, your broker or nominee does not have the discretion to vote your shares on non-routine matters, such asincluding the election of directors or proposals 3, 4, 5, 6 and 7.
If you participate in Donegal Mutual’s 401(k) plan, you may vote How do Iyou vote the DGI shares Iyou hold in myyour 401(k) plan?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.yourthe shares of Class A common stock and Class B common stock credited to your 401(k) plan account as ofat the close of business on March 4, 20112, 2012 by completing, signing and returningtelephone, by mail or via the proxy card that accompanies this proxy statement.
Our board of directors unanimously recommends that you How does our board of directors recommend thatstockholders vote at our stockholders vote?2012 annual meeting of stockholders?vote as follows:vote:
| • | FORthe election of the four nominees for Class | ||
| • | FORthe ratification of the | ||
Unless you mark your proxy card to the 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 for the ratification of the appointment of KPMG LLP as indicated above.
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You may revoke your proxy at any time prior to the closingtime during our 2012 annual meeting of voting at our annual meeting.stockholders when the proxies cast their votes. If you are a stockholder of record, you may revoke 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 at 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.
If a bank, broker, nominee or other person is the holder of record of the shares you own, you should follow the instructions of the bank, broker, nominee or other holder of record regarding the revocation ofas 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 Sheri O. Smith,Jeffrey D. Miller, our corporate secretarysenior vice president and chief financial officer, at(800) 877-0600 1-800-877-0600 ore-mail Ms. Smith Mr. Miller atsherismith@donegalgroup.comjeffmiller@donegalgroup.com.
The table below lists each person whom we believe Our Principal Stockholdersowns beneficially owned 5% or more of the outstanding shares of our Class A common stock andor 5% or more of the outstanding shares of our Class B common stock asat the close of business on March 4, 2011, except as otherwise noted. Class A Percent of Class B Percent of Shares Class A Shares Class B Name of Individual or Beneficially Common Beneficially Common Identity of Group Owned Stock Owned Stock Donegal Mutual Insurance Company 8,355,184 41.7 % 4,198,339 75.3 % 1195 River Road
Marietta, PA 17547 Dimensional Fund Advisors LP(1) 1,412,433 7.1 — — 1299 Ocean Avenue
Santa Monica, CA 90401 Gregory M. Shepard(2) 3,251,000 16.2 373,366 6.7 7028 Portmarnock Place
Bradenton, FL 34202
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 that each of our directors and nominees for director, each of our named executive officersOur Directors and Executive Officers named in the Summary Compensation Table and all of our executive officers, nominees for director and directors as a group owned beneficially as ofat the close of business on March 4, 2011.2, 2012. The total shown for each person includes shares that the person owned jointly, in whole or in part, with the person’s spouse, or individually by the person’s spouse and shares purchasable upon the exercise of stock options that are currently exercisable or are exercisable within 60 days of March 4, 2011.2, 2012. Ownership is less than 1% unless otherwise indicated. The6
| Percent of | Class B | Percent of | ||||||||||||||
| Class A Shares | Class A | Shares | Class B | |||||||||||||
| Beneficially | Common | Beneficially | Common | |||||||||||||
Name of Individual or Identity of Group | Owned | Stock | Owned | Stock | ||||||||||||
Directors and Nominees for Director: | ||||||||||||||||
| Donald H. Nikolaus(1) | 841,254 | 4.1 | % | 186,375 | 3.3 | % | ||||||||||
| Robert S. Bolinger | 24,343 | — | 1,450 | — | ||||||||||||
| Philip A. Garcia | 3,955 | — | — | — | ||||||||||||
| Patricia A. Gilmartin | 23,962 | — | — | — | ||||||||||||
| Philip H. Glatfelter, II | 28,660 | — | 3,276 | — | ||||||||||||
| Jack L. Hess(2) | 4,469 | — | — | — | ||||||||||||
| Kevin M. Kraft, Sr. | 21,069 | — | — | — | ||||||||||||
| John J. Lyons | 61,739 | — | 1,776 | — | ||||||||||||
| Jon M. Mahan | 21,221 | — | — | — | ||||||||||||
| S. Trezevant Moore, Jr. | 12,388 | — | 1,000 | — | ||||||||||||
| R. Richard Sherbahn | 23,786 | — | 677 | — | ||||||||||||
| Richard D. Wampler, II | 22,004 | — | — | — | ||||||||||||
Executive Officers: | ||||||||||||||||
| Cyril J. Greenya | 90,658 | — | 820 | — | ||||||||||||
| Jeffrey D. Miller | 101,702 | — | 582 | — | ||||||||||||
| Robert G. Shenk | 102,870 | — | — | — | ||||||||||||
| Daniel J. Wagner | 87,294 | — | 166 | — | ||||||||||||
| All directors and executive officers as a group (16 persons) | 1,471,374 | 7.0 | % | 196,122 | 3.5 | % | ||||||||||
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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Section 16(a) of We have reviewed, with the assistance of Duane Morris LLP, our outside counsel, Mr. Shepard’s Form 3 and Form 4 filings with the SEC during 2011. We believe, based upon the written advice of Duane Morris LLP, that Mr. Shepard filed his initial report Section 16(a) Beneficial Ownership Reporting Compliance of Our Officers and Directors the Securities Exchange Act of 1934, or the Exchange Act requires that each of our executive officers, each of our directors and each holder of 10% or more of our Class A common stock or 10% or more of our Class B common stock report his or hersuch person’s ownership of our Class 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.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 in writing that each of them made all of his or her required filings on a timely basis during 2010, although one director subsequently timely amended2011.to correct an error.Gregory M. Shepard reported on July 12, 2010 onForm 3 approximately 13 months after he became a Schedule 13D that he held beneficially more than 10% beneficial owner of our Class A common stock. However, we have no record that indicatesWe further believe, based upon the written advice of Duane Morris LLP, that Mr. Shepard madedid not report on a timely filing or any filing underbasis pursuant to Section 16(a) of the Exchange Act reporting his greater than 10% beneficial ownership146 separate transactions during 2010 and 2011 in which Mr. Shepard purchased shares of our Class A common stock or shares of any change inour Class B common stock. Finally, Mr. Shepard did not file a Form 5 with respect to his purchases of our shares of Class A common stock and Class B common stock by the requisite filing date of February 14, 2012. We note, for the record, that the files available for public inspection at the SEC indicate that Mr. Shepard has subsequently reported his ownership since July 12, 2010.7
A group of local residents and business owners in Lancaster County, Pennsylvania formed Donegal Mutual in 1889 to provide property and casualty insurance. Now, Since we established Atlantic States in 1986, Donegal Mutual and our insurance subsidiaries have conducted business together, while retaining their separate legal and corporate existences. As such, Donegal Mutual and our insurance subsidiaries share the same business philosophies, the same management, the same employees and the same facilities and In addition, as the Donegal Insurance Group, Donegal Mutual and our insurance subsidiaries share a combined business plan to achieve market penetration and underwriting profitability objectives. The productsIntroduction122123 years later, Donegal Mutual has succeeded and wegrown to have over $1.0 billionapproximately $334.0 million in total assets and over $500 millionsurplus of approximately $176.0 million. In addition, Donegal Mutual has a two-thirds ownership interest in surplus.DGI, which, at December 31, 2011, had total assets of approximately $1.3 billion and stockholders’ equity of approximately $383.0 million. Donegal Mutual and we now conduct business in 22 Mid-Atlantic, Midwestern, New England and Southern states. An important part of our business culture is to maintain and strengthen our founding principles and values.Since 1986, Donegal Mutual and the insurance companies subsidiaries of DGI have conducted business together as the Donegal Insurance Group. During 2010, A.M. Best Company reported that the Donegal Insurance Group ranked 116th among property and casualty insurance companies in the United States based on 2009 net premiums written and assigned the Donegal Insurance Group an A.M. Best rating of A (Excellent). The Donegal Insurance Group has also received the Ward’s Top 50 award for each of the last six years.The Formation of DGIIn 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 assure its long-term viability. Donegal Mutual determined to implement a downstream holding company structure as one of its strategic responses. 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 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. For the year ended December 31, 2010, our insurance subsidiaries paid a total of $12.0 million in dividends to us, which is a major source of the funds for the dividends we pay to our stockholders. Donegal Mutual received $5.5 million in dividends from us for the year ended December 31, 2010.As the capital of Atlantic States and our other insurance subsidiaries has increased, the underwriting capacity of our insurance subsidiaries, including Atlantic States, has increased proportionately. 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 changes 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. we offer the same types of insurance products. We believe Donegal Mutual’s majority voting interest in us fosters our ability to implement our business philosophies, enjoy management continuity, maintain superior employee relations and provide a stable environment within which we can grow our businesses.8
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.
We recapitalized in April 2001, we recapitalized.2001. We effected aone-for-three reverse stock split of our common stock and renamed it Class B common stock and issued two shares of our Class A common stock as a stock dividend for each post-reverse stock split share of our Class B common stock. Our Class A common stock has one-tenth of a vote per share and our Class B common stock has one vote per share. As a result of the reverse split and the stock dividend, each of our stockholders as ofat April 19, 2001 continued to own the same number of shares of our common stock, with one-third of the shares being shares of our Class B common stock and two-thirds of the shares being shares of our Class A common stock. As a result, the relative voting power and equity interest of our then stockholders remained constant, andconstant. Donegal Mutual’s continued ownership of more than a majority of the voting power of our outstanding common stock better enabledenables us to maintain our long-term relationship with Donegal Mutual, which our board of directors believes is a central part of our business strategy.
We effected 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 from our recapitalization is our ability 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 relative voting power of any of our stockholders, including Donegal Mutual. At the time of our recapitalization, our
board of directors recognized that our recapitalization was likely to favor longer-term investors, including Donegal Mutual, and could discourage attempts to acquire us, 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 DGI stockholderholder of our Class A common stock and our Class B common stock has invested in our Class A common stock orand our Class B common stock with the prior knowledge and consistent disclosure that Donegal Mutual has greater than majorityhad, since our formation, greater-than-majority voting control of us for the reasons previously discussed,we discuss in this proxy statement, and that Donegal Mutual intends to retain that greater than majoritygreater-than-majority voting control for the long-term future because it believes that greater than majoritygreater-than-majority voting control is in our long-term best interests and the long-term best interests of Donegal Mutual.
We believe our relationships with Donegal Mutual since 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 many advantages. We believe these advantages include the following:
enabling our stable management, the consistent underwriting discipline of our insurance subsidiaries, external growth, long-term profitability and financial strength; | ||
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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.
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, neither of whom is a member of Donegal Mutual’s board of directors, and two members of Donegal Mutual’s board of directors, neither of whom is a member of our board of directors. The purpose of the coordinating committee is to establish and maintain a process for an ongoing evaluation of the transactions between Donegal Mutual, our insurance subsidiaries and us. The coordinating committee considers the fairness of each intercompany transaction to Donegal Mutual and its policyholders and to us and our stockholders.
Any change to annew agreement between Donegal Mutual and us or one of our insurance subsidiaries, or any newchange to an existing agreement between Donegal Mutual and us or one of our insurance subsidiaries, is also subject to the applicable provisions of the Pennsylvania Insurance Company Law of 1921, as amended.
a new agreement or a change to an existing agreement must receive coordinating committee approval. The coordinating committee will only approve a new agreement or a change in an existing agreement if:
both of our members on the coordinating committee determine that the new agreement or the change in an existing agreement is as follows:fair and equitable to us and in the best interests of our stockholders; and
both of Donegal Mutual’s members on the coordinating committee determine that the new agreement or the change in an existing agreement is fair and equitable to Donegal Mutual and in the best interests of Donegal Mutual’s policyholders;
the new agreement or the change in an existing agreement is approved by our board of directors; and
the new agreement or the change in an existing agreement is approved by Donegal 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 results 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 typically relate to the reinsurance premiums, losses and reinstatement premiums. These agreements are ongoing in nature and will continue in effect throughout 20112012 in the ordinary course of business.
Robert S. Bolinger and John J. Lyons serve as our members of the coordinating committee. See “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. Certain information about Mr.Messrs. Bixenman and Mr. Hiestand is as follows:
Mr. Bixenman, age 64,65, has been a director of Donegal Mutual since 20062007 and is currently a Vice Presidentvice president and Senior Consultantsenior consultant at Williams & Co.Company Consulting, Inc., an environmental and business consulting
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Mr. Hiestand, age 72,73, 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 5,9016,326 shares of our Class A common stock and 157 shares of our Class B common stock. In 2010,As director compensation in 2011, Donegal Mutual paid directors and meetingMr. Hiestand cash fees of $32,250 in cash$38,250 and issued 311 shares of Class A common stock to Mr. Hiestand and granted him as a restricted stock awardaward.
Donegal Mutual provides facilities, personnel and other services to us and our insurance subsidiaries. Donegal Mutual allocates certain related expenses to Atlantic States in accordance with the relative participation of Donegal Mutual and Atlantic States in the 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 totaled $64.7 million in 2011, compared to $64.0 million in 2010.
We lease office equipment and automobiles to Donegal Mutual and Southern. Donegal Mutual and Southern made total lease payments to us of $957,353 in 2011, compared to $922,937 in 2010.
Donegal Mutual and Atlantic States participate in an underwriting pool. Both companies poolcede substantially all of their respective premiums, losses and loss expenses and receive an allocated percentage of their combined underwriting results. The underwriting pool excludes certain intercompany reinsurance Donegal Mutual assumes from our insurance subsidiaries. Since March 1, 2008, Atlantic States has had an 80% share of the results of the underwriting pool and Donegal Mutual has had a 20% share of the results of 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, subject to approval by the boards of directors of Donegal Mutual and Atlantic States and by the coordinating committee. Our 20102011 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 ongoing 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.
We refer you to footnotenote 3 of the notes to our consolidated financial statements includedwe include in our 2011 annual report to stockholders for further information about the reinsurance agreements between Donegal Mutual and our insurance subsidiaries. The intent of these catastrophe and excess of loss reinsurance agreements is to lessen the effects of a single large loss, or an accumulation of smaller losses arising from one event, to levels that are appropriate given each insurance subsidiary’s size, underwriting profile and surplus position.
We own 48.2% and Donegal Mutual owns 51.8% of Donegal Financial Services Corporation, or DFSC. Each of Donegal Mutual, DGI and DFSC has entered into an agreement to acquireconstitute grandfathered unitary savings and loan holding companies under the federal banking laws. On May 6, 2011, Union National Financial Corporation, or UNFC,UNNF, a bank holding company headquartered in Lancaster, Pennsylvania, merged with and its wholly-owned subsidiaryinto DFSC, with DFSC as the surviving corporation. On the same date, Union National Community Bank, or UNCB. The stockholdersa national banking association headquartered in Lancaster, Pennsylvania and a subsidiary of UNFC have approved the acquisition, subject to approval by the Office of Thrift Supervision, or OTS. At December 31, 2010, UNFC had consolidated assets of $448.0 million. DFSC owns 100% ofUNNF, 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 leases 3,600 square feet in a Donegal Mutual-owned building in Marietta, Pennsylvania to Province Bank.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 Province BankUCB 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.
Donegal Mutual and we maintain a risk management committee. The risk management committee consists of 14 officers of Donegal Mutual, seven of whom are also executive officers of DGI. The purpose of the 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 activities in identifying our risks; and reporting periodically to our respective boards of directors. Our Our board of directors has adopted corporate governance guidelines to assist the committees of our board CORPORATE GOVERNANCE MATTERSThe ChartersRisk Management CommitteeCommitteesrisk management committee is to assess and monitor the major strategic, operational, regulatory, informational and external risks that affect the business Donegal Mutual and we transact and Donegal Mutual’s and our internal and external resources for assessing and controlling such risk.Boardrisk management committee meets quarterly and annually evaluates its performance of Directorsits responsibilities.committeesof 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 responsibilities of the committee as well as the qualifications for committee membership, procedures for committee membership,the appointment and removal of committee members, committee structure and operations ofand committee reporting to our board of directors. You may view the charters of our executive committee, our audit committee, our nominating committee and our compensation committee on our website atwww.donegalgroup.com. The charters of the committees of our board of directors provide our stockholders with a description of the manner in which our board of directors and its committees functions. You may view these charters on our website athttp://www.donegalgroup.comfunction..12
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 by resolution.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 combined voting power of our outstanding shares of Class A common stock and our outstanding shares of Class B common stock, we constitute a “controlled company” under applicable NASDAQ regulations classify us as a “controlled company.”regulations. As we are a controlled company, we are exempt from a number of NASDAQ corporate governance requirements, including the requirement that a majority of the members of our board of directors be independent.
The composition of our board of directors is, however, subject to the corporate governance rules of the Pennsylvania Insurance Holding Companies Act, or the Holding Companies Act.PHCA. The Holding Companies ActPHCA requires that the board of directors of a Pennsylvania-domiciled insurance company or a company that controls a Pennsylvania-domiciled insurance company, such as we do, maintain a committee or committees that undertake certain corporate governance responsibilities. The Holding Companies ActPHCA further requires that the members of the committee orthese committees be solely directors who are not officers or employees of the Pennsylvania-domiciled insurance company or its holding company and who do not own beneficially a 10% 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 requirements of the Holding Companies Act.
Pursuant to the Holding Companies Act,PHCA, the committees of our committeesboard of directors annually performdischarge each of the following responsibilities:
recommend the appointment of an independent registered public accounting firm for our insurance company subsidiaries;
review the financial condition of our insurance company subsidiaries;
We expect our directors to attend meetings of our board of directors, meetings meetings of the committees of our board committeesof directors on which they serve and our meetings of our stockholders. We expect our directors to devote the time necessary to fulfill their responsibilities as directors. During 2010,2011, 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 20102011 annual meeting of stockholders.
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 “Our“The Relationship withof Donegal Mutual and DGI — The Coordinating Committee.”
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| Executive | Audit | Nominating | Compensation | |||||||||||||
| Number of Meetings | 10 | 10 | 3 | 5 | ||||||||||||
| Held in 2010 | ||||||||||||||||
| Robert S. Bolinger | — | 10 | — | — | ||||||||||||
| Philip A. Garcia* | — | 8 | — | — | ||||||||||||
| Philip H. Glatfelter, II | 10 | — | 3 | 5 | ||||||||||||
| John J. Lyons | — | 9 | — | — | ||||||||||||
| Jon M. Mahan | — | — | 3 | — | ||||||||||||
| Donald H. Nikolaus | 10 | — | — | — | ||||||||||||
| S. Richard Sherbahn | 10 | — | 3 | 5 | ||||||||||||
| Richard D. Wampler, II | — | 10 | — | — | ||||||||||||
| 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. |
| (2) | Mr. |
| (3) | Messrs. Lyons and Wampler have each attended all meetings since becoming members of the compensation committee during 2011. |
Members: Messrs. Glatfelter, Nikolaus (Chairperson) and Sherbahn. The responsibilities of exercising all powers and authority of our board of directors between meetings of our board of directors to the 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 performing such other functions as our board of Members: Messrs. Bolinger, The responsibilities of appointing our independent registered public accounting firm; reviewing the OurThe Executive Committee of Our Board of DirectorsOurThe 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.ourthe executive committee includeinclude:following matters:extent consistent with the DGCL and our governing documents;• exercising all powers and authority of our board of directors between meetings of our board of directors to the extent consistent with the DGCL;• 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;• 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.Our executive committee has a written charter. The full textfrom time to time; andourdirectors may specifically delegate to the executive committee charter may be reviewed on our website atfrom time to time.http://www.donegalgroup.com.The Audit Committee of Our executive committee reviews its charter annually.Our Audit CommitteeBoard of DirectorsGarcia,Hess, Lyons and Wampler (Chairperson). Each member of our audit committee satisfies the independence requirements of the SEC and NASDAQthe PHCA and is in compliance with applicable provisions of the Holding Companies ActPHCA 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.ourthe audit committee includeinclude:following matters:• selecting our independent registered public accounting firm;• reviewingscope and results of the scope and results of our independent registered public accounting firm’s audit of our financial statements and any internal audit;14
reviewing all of our periodic filings with the SEC and press releases;
reviewing related party transactions other than those transactions subject to review by our coordinating committee; and
reviewing the adequacy of our accounting, financial, internal and operating controls.
http://www.donegalgroup.com.The Nominating Committee of Our audit committee reviews its charter annually.
Members: Messrs. Glatfelter (Chairperson), Kraft, Mahan and Sherbahn
The responsibilities of the nominating committee include:
identifying individuals the nominating committee believes are qualified to serve as members of our board of directors;
recommending nominees to stand for election to our board of directors;
considering candidates nominated by other stockholders for election as members of our board of directors;
evaluating the self-evaluations each of the committees of our board of directors submit to us annually; and
providing our board of directors with an annual performance evaluation of our nominating committee include the following matters:committee.
http://www.donegalgroup.com. Our nominating committee reviews its charter annually.
Members: Messrs. Glatfelter, Lyons (Chairperson), Sherbahn and Sherbahn (Chairperson).Wampler. Because the employees who provide services to us are employees 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, and us, our compensation committee and the compensation committee of Donegal Mutual conduct joint meetings from time to time. The members of the Donegal Mutual compensation committee, as of the date of this proxy statement, are Frederick W. Dreher,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 ourthe compensation committee include the following matters:
the annual review of the guidelines for compensation increases for all | ||
the annual review of the compensation committee onof our website athttp://www.donegalgroup.com. Our compensation committee reviews its charter annually.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 — Compensation Discussion and Analysis” for further information.
15
No member of ourthe compensation committee is a former or current officer of Donegal Mutual or DGI,us, nor does any member of ourthe 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 Donald H. Nikolaus, our Patricia A. Gilmartin, one of our directors and a director of Donegal Mutual, is an employee of Associated Donegal Insurance Brokers. That firm has no affiliation with us except that it 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.Related Person Transactionsinvolving certain persons thatof 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 ourthis proxy statement and certain other filings we make withsubmit 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 because the parties to the transactions arecommittee. See “The Relationship of Donegal Mutual and us. See “Our Relationship with Donegal MutualDGI — The Coordinating Committee.” Our related person policy establishes procedures for theour approval of transactions between us and related persons because we recognize that related personsperson 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 any class of our Class A common stock or our Class B common stock and each of theirthe immediate family members.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.Presidentpresident and onea member of our board of directors and the Presidentpresident 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 general counsel 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. We paid Nikolaus & Hohenadel legal fees of $445,231 in 2009 and $420,760 in 2010.2010 and $418,818 in 2011.16
Our objectives for our director compensation program Compensation Type Form of Payment Annual Retainer Periodic Equity Grant 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 annual award Director Compensationisare to attract highly-qualified individuals to serve on our board of directors and to align the interests of our directors with the interests of our stockholders. OurThe compensation committee reviews our director compensation program at least annually to confirm that the compensation of the members of our board of directors remains competitive and appropriate and to recommend any changes it proposes to our board of directors. Compensation Type Amount Form of Payment Annual Retainer Base Retainer $ 35,000 $30,000 in cash and an annual grant of 311 restricted shares of Class A common stock (400 shares commencing in 2012) with an estimated value of $5,000 Additional retainer amount for each committee meeting attended $ 250 Cash Additional retainer amount for each audit committee meeting $ 500 Cash Periodic Equity Grant When we from time to time grant options to our executive personnel, we typically also grant options to purchase shares of Class A common stock to our directors exercisable for five years at the closing market price on the date of grant — Non-qualified stock options Amount 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 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 offrom 311 shares of our Class A common stock to 400 shares of our Class A common stock. We grant the award to each director as of the first business day of each year, provided the director served as a member of our board of directors or the board of directors of Donegal Mutual during any portion of the preceding year. Effective for 2012, we have increased the number of shares comprising the annual restricted stock award from 311 shares to 400 shares. Each of our directors and each of the directors of Donegal Mutual is also eligible to receive non-qualified options to purchase shares of our Class A common stock in an amount our board of directors determines from time to time. Donegal Mutual reimburses us for the restricted stock awards granted to those directors of Donegal Mutual who are not also members of our board of directors.17
| Fees Earned | Stock | Option | ||||||||||||||
Name | or Paid in Cash ($) | Awards ($) | Awards ($) | Total ($) | ||||||||||||
| Robert S. Bolinger | 36,750 | 4,503 | 12,600 | 53,853 | ||||||||||||
| Philip A. Garcia | 35,500 | 4,503 | 12,600 | 52,603 | ||||||||||||
| Patricia A. Gilmartin | 31,500 | 4,503 | 12,600 | 48,603 | ||||||||||||
| Philip H. Glatfelter, II | 85,750 | 4,503 | 12,600 | 102,853 | ||||||||||||
| Kevin M. Kraft, Sr. | 34,000 | 4,503 | 12,600 | 51,103 | ||||||||||||
| John J. Lyons | 36,250 | 4,503 | 12,600 | 53,353 | ||||||||||||
| John M. Mahan | 31,500 | 4,503 | 12,600 | 48,603 | ||||||||||||
| S. Trezevant Moore, Jr. | 31,500 | 4,503 | 12,600 | 48,603 | ||||||||||||
| R. Richard Sherbahn | 33,750 | 4,503 | 12,600 | 50,853 | ||||||||||||
| Richard D. Wampler, II | 36,500 | 4,503 | 12,600 | 53,603 | ||||||||||||
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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 | ||||||||||||
| Option Awards | Stock Awards | |||||||||||||||||||||||
| Number of Securities | Number of | Market Value | ||||||||||||||||||||||
| Underlying | Shares or | of Shares or | ||||||||||||||||||||||
| Unexercised Options | Option | Units of Stock | Units of Stock | |||||||||||||||||||||
| (#) | (#) | Exercise | Option | That Have Not | That Have Not | |||||||||||||||||||
Name | Exercisable | Unexercisable | Price ($) | Expiration Date | Vested (#) | Vested ($) | ||||||||||||||||||
| Robert S. Bolinger | 7,500 | — | 21.00 | 10/19/2011 | 311 | 4,503 | ||||||||||||||||||
| 5,000 | 2,500 | 17.50 | 7/17/2013 | |||||||||||||||||||||
| — | 10,000 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| Philip A. Garcia | — | 10,000 | 14.00 | 7/15/2015 | 311 | 4,503 | ||||||||||||||||||
| Patricia A. Gilmartin | 7,500 | — | 21.00 | 10/19/2011 | 311 | 4,503 | ||||||||||||||||||
| 5,000 | 2,500 | 17.50 | 7/17/2013 | |||||||||||||||||||||
| — | 10,000 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| Philip H. Glatfelter, II | 7,500 | — | 21.00 | 10/19/2011 | 311 | 4,503 | ||||||||||||||||||
| 5,000 | 2,500 | 17.50 | 7/17/2013 | |||||||||||||||||||||
| — | 10,000 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| Kevin M. Kraft, Sr. | 7,500 | — | 21.00 | 10/19/2011 | 311 | 4,503 | ||||||||||||||||||
| 5,000 | 2,500 | 17.50 | 7/17/2013 | |||||||||||||||||||||
| — | 10,000 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| John J. Lyons | 7,500 | — | 21.00 | 10/19/2011 | 311 | 4,503 | ||||||||||||||||||
| 5,000 | 2,500 | 17.50 | 7/17/2013 | |||||||||||||||||||||
| — | 10,000 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| Jon M. Mahan | 7,500 | — | 21.00 | 10/19/2011 | 311 | 4,503 | ||||||||||||||||||
| 5,000 | 2,500 | 17.50 | 7/17/2013 | |||||||||||||||||||||
| — | 10,000 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| S. Trezevant Moore, Jr. | 5,000 | 2,500 | 17.50 | 7/17/2013 | 311 | 4,503 | ||||||||||||||||||
| — | 10,000 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| R. Richard Sherbahn | 7,500 | — | 21.00 | 10/19/2011 | 311 | 4,503 | ||||||||||||||||||
| 5,000 | 2,500 | 17.50 | 7/17/2013 | |||||||||||||||||||||
| — | 10,000 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| Richard D. Wampler, II | 7,500 | — | 21.00 | 10/19/2011 | 311 | 4,503 | ||||||||||||||||||
| 5,000 | 2,500 | 17.50 | 7/17/2013 | |||||||||||||||||||||
| — | 10,000 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| 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 attendance at our boardmeetings of directors’ meetings, committee meetings and stockholders’ meetings. We also reimburse our directors for the reasonable expenses they incur associated with other business activities related to their service on our board of directors, such as participation in director education programs.
We operate pursuant to our code of business conduct and ethics because We also maintain an internal audit department that evaluates our business and financial processes and controls and reports regularly to Our Code of Business Conduct and Ethicsof the importanceit is important to us of conductingto conduct our business based onwith integrity and earningwith the trust of the people with whom we do business. Our code of business conduct and ethics seeks to provideprovides guidance to our employees and independent agents for dealingwho deal with the legal and ethical issues that can arise in our business dealings with others. You may view our code of business conduct and ethics on our website athttp://www.donegalgroup.com.ourthe audit committee.19
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| Director | Year Term | |||||||||||
Name | Age | Since | Will Expire* | |||||||||
| Robert S. Bolinger | 74 | 1986 | 2014 | |||||||||
| Patricia A. Gilmartin | 71 | 1986 | 2014 | |||||||||
| Philip H. Glatfelter, II | 81 | 1986 | 2014 | |||||||||
| Jack L. Hess | 63 | — | 2014 | |||||||||
| Director | Year Term | |||||||||||
Name | Age | Since | Will Expire | |||||||||
| Kevin M. Kraft, Sr. | 58 | 2009 | 2012 | |||||||||
| Jon M. Mahan | 41 | 2006 | 2012 | |||||||||
| Donald H. Nikolaus | 68 | 1986 | 2012 | |||||||||
| Richard D. Wampler, II | 69 | 2004 | 2012 | |||||||||
| Director | Year Term | |||||||||||
Name | Age | Since | Will Expire | |||||||||
| John J. Lyons | 71 | 2001 | 2013 | |||||||||
| S. Trezevant Moore, Jr. | 57 | 2006 | 2013 | |||||||||
| R. Richard Sherbahn | 81 | 1986 | 2013 | |||||||||
22
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In a year marked by an unusual frequency of severe storms, intense competition and a poor economic climate in the United States, our results of operations for Executive Summary20102011 Performance Review2010, although modestly better than 2009,2011 were below our historical expectations.expectations, as were our results of operations for 2010. We did, however, maintain our strong financial condition in 2010.2011. The24
| 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 with respect to 2009.
| 2010 | 2009 | % Change | ||||||||||
| Total revenues | $ | 408.8 million | $ | 386.7 million | 5.7 | % | ||||||
| Net income | 11.5 million | 18.8 million | −39.1 | % | ||||||||
| Stock price at year end | $ | 14.48 | $ | 15.54 | −6.8 | % | ||||||
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 | ||||||
The compensation of our named executive officers in a base salary; and long-term incentive compensation in the form of stock options. We paid no incentive bonuses in Annual Compensation Key Factors Purpose 2011 Actions Base Salary Annual Incentive Plan (Cash Incentive Compensation committee determines funding level Chief executive officer Motivates named executives to achieve individual Reinforces pay for performance Focuses entire organization on achieving key business objectives Long-Term Incentive Compensation Stock options support our growth, provide a link between the compensation of our named executive officers and our stock price and also Supports pay for performance because options Summary of the 20102011 Compensation of Our Named Executive Officers20102011 consisted of two principal elements:• a base salary; and• long-term incentive compensation in the form of stock options.20102011 to our named executive officers because theour formula we use to determine those annual bonuses resulted in no bonus pooldid not call for allocation to our officers, including oursuch payments. Our named executive officers for 2010. In addition, our named executive officers are eligible todid participate in our 401(k) plan to which we make contributions on a formula basis,basis. Our named executive officers also participate in our health and other insurance programs in whichavailable to all of our full-time employees may participate.employees.20102011 Total Direct Compensation of Our Named Executive Officers Annual CompensationKey FactorsPurpose2010 ActionsBase SalaryFixed committee reviews and recommends adjustments to base salary changes on an annual basis dependingannually 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 2010 limited to cost of living adjustments not exceeding2011 at an average of 2.5% to reflect salaries generally prevailing in the property and casualty industry (Cash
Award)
on a formula basisallocatesrecommends the allocation of the bonus pool among individual bonusesofficers based on performance against key business priorities and performance of their respective business units officersofficers’ performance goals NoWe did not pay any bonuses paid in 2010for 2011 because the formula we use to calculate these bonuses that areis based on our underwriting profitability resultedand we had an underwriting loss in no bonus pool for allocation2011 Stock options that vest in three equal annual installments servesserve as a retention devicegranted at not less than 100% of markethave substantial value only if stock price on date of grantincreases Stock options granted in 20102011 that are exercisable at $14.00$12.50 per share, vest in three equal annual installments and expire on 7/15/2015July 27, 202125
Our 20102011 compensation programs for our named executive officers reflect best practices, and we have designed themthose programs to balance risk and reward in our overall business strategy. The above description of compensation programs that apply to our named executive officers serves to emphasize that we tie a significant percentage of the total compensation of our named executive officers directly to our underwriting profitability.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 increaseda reduction in underwriting lossesprofitability 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. We therefore believeofficers as the compensation of our named executive officers in 2010 directly aligned2011 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.
Evaluation of our stockholders and support the creation of long-term value. Accordingly, our board of directors recommends that you voteFORthe approval of the compensation of our named executive officers we describe in this proxy statement.
The compensation committee does not restrict its evaluation of the performance of our named executive officers to predetermined formulas or a limited set of criteria. OurThe compensation committee considered our progressresults of operations during 20102011 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 20102011, notwithstanding increased severe weather events and prevailing economic conditions.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 20102011 was 102.9%107.9%, compared to the property and casualty industry combined ratio of 103.0%107.5% for 2011 projected by A.M. Best Company for 2010.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, 20102011 because our compound rate of revenue growth for that period was 5%7.6% despite a soft insurance market and intense competition.
We believe wealso achieved this goalrevenue growth in 2010 because we received this award for the sixth straight year.
Objective:
Develop automated underwriting and policy issuance software that enables us to commence business in Michigan.
26
Objective:
Achieve book value growth over a five-year period.
We believe we achieved this objective for the five years ended December 31, 20102011 because our compound rate of book value growth for that period was 6.5%3.6%.
The compensation committee believes that each component of our executive compensation is consistent with our overall compensation philosophy of pay for performance.“results-based pay.” We have designed the components of our executive compensation to complement each other and to reward the achievement of our short-term and long-term business objectives. OurThe compensation committee recognizes the individual fulfillment of our objectives through adjustments toadjusting base salary, and by awarding cash bonuses and by granting stock options.
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 entire 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. OurThe compensation committee also considers individual fulfillment of duties, teamwork, development, time in position, expenses and internal equity among our named executive officers and their ability to collaborate and communicate effectively with our other executive officers.
On an overall basis, our compensation committee believes that we made progress in achievingit achieved the targets our board of directors established for thesethe aforementioned objectives at the start of 2010.2011, notwithstanding abnormally adverse weather in the areas in which Donegal Mutual and our insurance subsidiaries market their products. Our performance and book value growthunderwriting loss in 20102011 were the basis offor the decisions our compensation committee made at its meetings in December 2010 and February 2011 with respect to adjustments to base salary and ourcommittee’s decision not to pay no annual cash bonuses to our named executive officers becauseofficers; however, with advice from our compensation analysts, Towers Watson, or Towers, we did adjust base salaries for certain of our underwriting results.
We believe the specific compensation decisions we made for each of our named executive officers in 20102011 appropriately reflectsreflect our financial and operational performance in 2010.2011. Our compensation committee also evaluates the achievement by our named executive officers of our other corporate objectives, and the contribution of each of our named executive officers to those achievements in each such officer’s primary area of responsibility. We use our discretion in making compensation decisions after reviewing our performance
Employment and the objective performanceChange of our named executives based on financialControl Agreements
On July 29, 2011, Donegal Mutual and operational objectives. We do not have any form ofwe entered into employment severance orchange-of-control agreements with anyour executive 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 many years, we decided to enter into employment agreements with all of our executive officers to provide employment security to these executive officers. Donegal Mutual and we 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 Change 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 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 jointly 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 all of our other 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 non-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 Mr. 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 named executive officers, contain provisions similar to those included in the employment agreement among Mr. Nikolaus, Donegal Mutual and us, except as follows:
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 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:
| (a) | the amount of: |
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 Donegal Mutual and us recommend and our board of directors and the board of directors of Donegal Mutual each respectively approve from time to time. |
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 committee, meeting separately and on occasion jointly with the compensation committee of Donegal Mutual, oversees our compensation and benefit plans and policies. Its oversight of our compensation process includes reviewing and recommending for approval by our board of directors 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 Our Compensation Philosophy and Risk Management Considerationsequityequity-based incentive awards to our executive officers and all compensation decisions relating to our executive officers.Our• Attract and retain talented and dedicated executive officers who contribute to our growth, development and profitability and to encourage their retention.our fivethe six executive officers namedwe name in our summary compensation table have worked continuously with us for all 25 years since our formation in 1986, and our other twothree named executive officers have worked for us for 2324, 18 and 1711 years, respectively.• Motivate our executive officers to achieve our strategic business objectives and to reward them when they achieve those objectives.27
Motivate our executive officers to achieve our strategic business objectives and reward them upon their achievement of those objectives.
Provide long-term compensation |
We believe, based upon the advice of our compensation analysts, Towers, that our compensation systems dohistorical stock option grants did not rewardprovide the undue takingbenefits we intended to provide, and in 2011, we modified the terms of risk.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 incomeresults, and long-term equity compensation.
The compensation committee believes that our underwriting profitability-basedresults-based bonus plan and our performance-based equity ownership programs create incentives, as revised during 2011, that are designed towill 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 and that we therefore believe discourages behaviorwithout creating conditions that could lead to the taking of excessive risk:
The financial measures we use to determine the bonuses | ||
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 December 2010,addition, the exercise price of the options we retained Towers Watson, a nationally-recognized compensation consulting firm,granted prior to assess2011 was generally higher than the competitivenessclosing price of our Class A common stock on the date we awarded the grant. Beginning in 2011, based on the advice of our compensation programanalysts, we are now granting stock options that are exercisable for approximately 20up to ten years at an exercise price that approximates the closing price of our key executive officers compared with a peer groupClass A common stock on the date of property and casualty insurance companies as well as advice with respect to the design of compensation programs in the future for our key executive officers. We have also retained Towers Watson to assist us in developing a leadership succession program. We do not expect the completed work product of Towers Watson until later this year at which time our compensation committee and our board of directors will consider the reports and recommendations of Towers Watson.
28
Our stock option plans authorize us to grant options to purchase shares of our Class A common stock to our employees, officers and directors.
We do not reduce the exercise price of stock options if the price of our Class A common stock subsequently declines below the exercise price unless we first obtain stockholder approval. However, we do adjust the exercise price of previously granted stock options to reflect recapitalizations, stock or extraordinary dividends, stock splits, mergers, spin-offs and similar events as permitted by the applicable stock option plan.plan permits.
At our 2011 annual meeting of stockholders, our stockholders voted to submit the compensation of our named executive officers to a non-binding vote of our stockholders once every three years. Our stockholders approved those compensation arrangements by a total of 6,048,225 votes FOR and 536,355 votes AGAINST at our annual meeting of stockholders. We will next submit the compensation of our named executive officers for stockholder approval at our 2014 annual meeting of stockholders.
The Recommendations of the Compensation Analysts We Retained
Towers presented its compensation program analysis to our board of directors at 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 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. As part of its oversight of the compensation of our named executive officers, ourthe compensation committee recommended the following compensation adjustments for 20102011 for our named executive officers:
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 to deduct annual compensation we pay to any of our named executive officers that is in excess of $1 million for federal income tax purposes. However, compensation paid pursuant to a performance-based plan is generally not subject to the Section 162(m) limitation.Limitations on the Deductibility of Compensation29
For a number of years, we have had a cash incentive 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 Our Cash Incentive Bonus Plancompensationbonus plan for our officers, including our named executive officers, that is tiedofficers. We determine the amount, if any, available for the award of these bonuses pursuant to a formula that is based on theour annual underwriting income and other financial metricsmeasurements of the Donegal Insurance Group.Mutual and us. The formula operates as follows:• We first determine the base underwriting income of the Donegal Insurance Group for the year;• We then adjust the base underwriting income by adding back our accrual for bonuses to our officers, and make a formula-based adjustment to limit the impact of any catastrophe losses and guaranty fund assessments on our base underwriting income;• We then adjust the amount so determined as the plan specifies based on variable percentages of the growth in net written premium of Donegal Insurance Group for the year;• We then multiply the amount so determined by a percentage that is based on our return on equity for the year; and• We then multiply the amount so determined by a predetermined factor, and the resulting amount constitutes the executive incentive compensation pool for the applicable year, which our compensation committee allocates among our officers, including our named executive officers.Insurance Group’s surplusMutual and our insurance subsidiaries for the year is below anthe amount the Planour cash incentive bonus plan specifies, we reduce the executive incentive compensation pool by 50%.
Other Benefits 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.Other Aspects of Our Compensation Philosophy
Recoupment PolicyIn order to align further management’s interests with the interests of our stockholders and to support good corporate governance practices, it is the intention of our board of directors to adopt a recoupment policy applicable to our annual bonus based on the underwriting results of our insurance subsidiaries and to stock options we have granted to our executive officers promptly following the definitive adoption of regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act.30
The following table shows the compensation we paid during 2008, 2009, 2010 and 20102011 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 officers, whowhom 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 with the exception of two of our executive officers who receive an annual restricted stock award of 311 shares (400 shares beginning in 2012) as part of their compensation as members of our board of directors and the Donegal Mutual board of directors.
Based on the compensation we paid to our named executive officers in 2010,2011, their salaries accounted for 69.1%56.2% of their total compensation in 20102011 and none of them received any performance-based bonus.
| Stock | Option | |||||||||||||||||||||||||||
| Awards | Awards | All | ||||||||||||||||||||||||||
| at | at | Other | ||||||||||||||||||||||||||
| Grant Date | Grant Date | Compen- | ||||||||||||||||||||||||||
| Fair Value | Fair Value | sation | Total | |||||||||||||||||||||||||
Name and Principal Position | Year | Salary($) | Bonus($)(1) | ($) | ($)(2) | ($)(3) | ($) | |||||||||||||||||||||
| Donald H. Nikolaus, | 2010 | 565,000 | — | 4,833 | 220,500 | 50,439 | 840,772 | |||||||||||||||||||||
| President and Chief | 2009 | 555,000 | 150,000 | 5,215 | — | 48,384 | 758,599 | |||||||||||||||||||||
| Executive Officer | 2008 | 555,000 | 360,000 | 5,340 | 360,500 | 49,139 | 1,329,979 | |||||||||||||||||||||
| Cyril J. Greenya, | 2010 | 190,000 | — | 4,833 | 63,000 | 45,772 | 303,605 | |||||||||||||||||||||
| Senior Vice President and | 2009 | 185,000 | 34,000 | 5,215 | — | 42,658 | 266,873 | |||||||||||||||||||||
| Chief Underwriting Officer | 2008 | 180,000 | 58,000 | 5,340 | 82,400 | 42,538 | 368,278 | |||||||||||||||||||||
| Jeffrey D. Miller, | 2010 | 207,000 | — | — | 69,300 | 11,711 | 288,011 | |||||||||||||||||||||
| Senior Vice President and | 2009 | 197,000 | 38,000 | — | — | 11,723 | 246,723 | |||||||||||||||||||||
| Chief Financial Officer | 2008 | 187,000 | 62,000 | — | 92,700 | 10,932 | 352,632 | |||||||||||||||||||||
| Robert G. Shenk, | 2010 | 236,000 | — | — | 63,000 | 13,362 | 312,362 | |||||||||||||||||||||
| Senior Vice President, | 2009 | 232,000 | 34,000 | — | — | 13,265 | 279,265 | |||||||||||||||||||||
| Claims | 2008 | 229,000 | 58,000 | — | 82,400 | 12,887 | 382,287 | |||||||||||||||||||||
| Daniel J. Wagner, | 2010 | 190,000 | — | — | 63,000 | 12,002 | 265,002 | |||||||||||||||||||||
| Senior Vice President | 2009 | 185,000 | 34,000 | — | — | 11,642 | 230,642 | |||||||||||||||||||||
| and Treasurer | 2008 | 180,000 | 58,000 | — | 82,400 | 11,147 | 331,547 | |||||||||||||||||||||
Name and Principal Position | Year | Salary($) | Bonus($)(1) | Stock Awards at Grant Date Fair Value ($) | Option Awards at Grant Date Fair Value ($)(2) | All Other Compen- sation ($)(3) | Total ($) | |||||||||||||||||||||
Donald H. Nikolaus, | 2011 2010 2009 | 575,000 565,000 555,000 | — — 150,000 | 4,404 4,833 5,215 | 380,000 220,500 — | 61,161 50,439 48,384 | 1,020,565 840,772 758,599 | |||||||||||||||||||||
Kevin G. Burke, | 2011 2010 2009 | 195,000 190,000 185,000 | — — 34,000 | — — — | 142,500 63,000 — | 11,718 11,661 11,435 | 349,218 264,661 230,435 | |||||||||||||||||||||
Cyril J. Greenya, | 2011 2010 2009 | 195,000 190,000 185,000 | — — 34,000 | 4,404 4,833 5,215 | 142,500 63,000 — | 51,910 45,772 42,658 | 393,814 303,605 266,873 | |||||||||||||||||||||
Jeffrey D. Miller, | 2011 2010 2009 | 217,000 207,000 197,000 | — — 38,000 | — — — | 142,500 69,300 — | 11,737 11,711 11,723 | 371,237 288,011 246,723 | |||||||||||||||||||||
Robert G. Shenk, | 2011 2010 2009 | 241,000 236,000 232,000 | — — 34,000 | — — — | 142,500 63,000 — | 13,387 13,362 13,265 | 396,887 312,362 279,265 | |||||||||||||||||||||
Daniel J. Wagner, | 2011 2010 2009 | 195,000 190,000 185,000 | — — 34,000 | — — — | 142,500 63,000 — | 12,068 12,002 11,642 | 349,568 265,002 230,642 | |||||||||||||||||||||
| (1) | Our executive officers are eligible to participate in a cash incentive bonus |
| (2) | We show the option awards at an estimated grant date fair value, which we | |
| (3) | In the case of Mr. Nikolaus, the total shown includes directors and committee meeting fees of |
31
During 2010,2011, we granted non-qualified options to purchase shares of our Class A common stock at an exercise price of $14.00$12.50 per share to our named executive officers one-third of which are currently vested.as set forth in the table below. On the date we granted the options, the closing market price of our Class A common stock was $12.06.
| Grant Date | ||||||||
| Number of Shares | Fair Value of | |||||||
Name | Subject to Option | Option Awards ($) | ||||||
| Donald H. Nikolaus | 175,000 | 220,500 | ||||||
| Cyril J. Greenya | 50,000 | 63,000 | ||||||
| Jeffrey D. Miller | 55,000 | 69,300 | ||||||
| Robert G. Shenk | 50,000 | 63,000 | ||||||
| Daniel J. Wagner | 50,000 | 63,000 | ||||||
Name | Grant Date | Number of Shares Subject to Option | Exercise or Base Price of Option Awards ($) | Grant Date Fair Value of Option Awards ($) | ||||||||||||
Donald H. Nikolaus | 7/27/11 | 200,000 | 12.50 | 380,000 | ||||||||||||
Kevin G. Burke | 7/27/11 | 75,000 | 12.50 | 142,500 | ||||||||||||
Cyril J. Greenya | 7/27/11 | 75,000 | 12.50 | 142,500 | ||||||||||||
Jeffrey D. Miller | 7/27/11 | 75,000 | 12.50 | 142,500 | ||||||||||||
Robert G. Shenk | 7/27/11 | 75,000 | 12.50 | 142,500 | ||||||||||||
Daniel J. Wagner | 7/27/11 | 75,000 | 12.50 | 142,500 | ||||||||||||
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.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 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. The purpose of the plans is to provide long-term incentive awards to our employees and directors as a means to attract, motivate, retain and reward talented persons.As of2010,2011, we had reserved 756,5001,410,000 shares of our Class A common stock for future grants under our 20072011 equity incentive plan for employees and 88,572175,000 shares of our Class A common stock for future grants under our 20072011 equity incentive plan for directors. If shares covered by an option are not issuable for any reason, we may again grant options to purchase those shares. The total number of reserved shares will increase to 3,900,000 shares if our stockholders approve our 2011 equity incentive plan for employees and our 2011 equity incentive plan for directors.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.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 may be accelerated 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.32
The following table summarizes the outstanding equity awards our named executive officers held at December 31, 2010:
| 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 | 175,000 | — | 21.00 | 10/19/2011 | 311 | 4,503 | ||||||||||||||||||
| 116,667 | 58,333 | 17.50 | 7/17/2013 | |||||||||||||||||||||
| — | 175,000 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| Cyril J. Greenya | 30,000 | — | 21.00 | 10/19/2011 | 311 | 4,503 | ||||||||||||||||||
| 26,667 | 13,333 | 17.50 | 7/17/2013 | |||||||||||||||||||||
| — | 50,000 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| Jeffrey D. Miller | 30,000 | — | 21.00 | 10/19/2011 | — | — | ||||||||||||||||||
| 30,000 | 15,000 | 17.50 | 7/17/2013 | |||||||||||||||||||||
| — | 55,000 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| Robert G. Shenk | 30,000 | — | 21.00 | 10/19/2011 | — | — | ||||||||||||||||||
| 26,667 | 13,333 | 17.50 | 7/17/2013 | |||||||||||||||||||||
| — | 50,000 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| Daniel J. Wagner | 30,000 | — | 21.00 | 10/19/2011 | — | — | ||||||||||||||||||
| 26,667 | 13,333 | 17.50 | 7/17/2013 | |||||||||||||||||||||
| — | 50,000 | 14.00 | 7/15/2015 | |||||||||||||||||||||
| 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 | ||||||||||||||||||||||
Donald H. Nikolaus |
| 175,000 58,333 — |
|
| — 116,667 200,000 |
|
| 17.50 14.00 12.50 |
|
| 7/17/2013 7/15/2015 7/27/2021 |
| 311 | 4,404 | ||||||||||
Kevin G. Burke |
| 40,000 16,666 — |
|
| — 33,334 75,000 |
|
| 17.50 14.00 12.50 |
|
| 7/17/2013 7/15/2015 7/27/2021 |
| ||||||||||||
Cyril J. Greenya |
| 40,000 16,666 — |
|
| — 33,334 75,000 |
|
| 17.50 14.00 12.50 |
|
| 7/17/2013 7/15/2015 7/27/2021 |
| 311 | 4,404 | ||||||||||
Jeffrey D. Miller |
| 45,000 18,333 — |
|
| — 36,667 75,000 |
|
| 17.50 14.00 12.50 |
|
| 7/17/2013 7/15/2015 7/27/2021 |
| ||||||||||||
Robert G. Shenk |
| 40,000 16,666 — |
|
| — 33,334 75,000 |
|
| 17.50 14.00 12.50 |
|
| 7/17/2013 7/15/2015 7/27/2021 |
| ||||||||||||
Daniel J. Wagner |
| 40,000 16,666 — |
|
| — 33,334 75,000 |
|
| 17.50 14.00 12.50 |
|
| 7/17/2013 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 Option Exercises and Stock Vested2010: Option Exercises and Stock Vested Option Awards Stock Awards Number of Shares Value Realized Number of Shares Value Realized Name Acquired on Exercise (#) on Exercise ($)(1) Acquired on Vesting (#) on Vesting ($)(1) Donald H. Nikolaus — — 311 4,503 Cyril J. Greenya — — 311 4,503 Jeffrey D. Miller — — — — Robert G. Shenk — — — — Daniel J. Wagner — — — —
| Option Exercises and Stock Vested | ||||||||||||||||
| Option Awards | Stock Awards | |||||||||||||||
Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($)(1) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($)(1) | ||||||||||||
Donald H. Nikolaus | — | — | 311 | 4,404 | ||||||||||||
Kevin G. Burke | — | — | — | — | ||||||||||||
Cyril J. Greenya | — | — | 311 | 4,404 | ||||||||||||
Jeffrey D. Miller | — | — | — | — | ||||||||||||
Robert G. Shenk | — | — | — | — | ||||||||||||
Daniel J. Wagner | — | — | — | — | ||||||||||||
| (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. |
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 20092010 or 2010,2011, and we contemplate none for 2011.2012. However, our compensation consultant,analysts, Towers, Watson, isare currently evaluating types of pension benefits as part of its review of our compensation structure.
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 Non-Qualified Deferred Compensation2008, 2009, 2010 or 2010,2011, and we contemplate none for 2011.2012. However, as noted above, we expect to receive advice from our compensation consultantanalysts and that advice may include some form of non-qualified deferred compensation plans in the future.33
Our certificate of incorporation includes a provision that limits, to the maximum extent permitted 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.
This limitation does not, however, apply to violations of the federal securities laws, nor does it limit the availability of non-monetary relief in any action or proceeding.
Our certificate of incorporation and by-laws obligate us, to the maximum extent permitted by Delaware law 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.
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 maintain and intend to continue to maintain directors’ and officers’ liability insurance.
The compensation committee of our board of directors 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 Discussion and Based on the review and discussion by Report of Ourthe Compensation CommitteeOurAnalysis” with management.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 ourthe compensation committee reviewed our success in meeting our corporate objectives for 2010 and2011. Our compensation committee then reviewed the individual performance of our named executive officers andofficers. 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 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, 20102011 for filing with the SEC.
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 | ||
34
The following table sets forth information regarding our equity compensation plans:
| 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 securityholders | 3,998,667 | (Class A) | $ | 16.80 | (Class A) | 839,474 | (Class A) | |||||
| Equity compensation plans not approved by securityholders | — | — | — | |||||||||
| Total | 3,998,667 | $ | 16.80 | 839,474 | ||||||||
Plan category | 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) | ||||||||||
Equity compensation plans approved by securityholders | 5,309,000 | (Class A) | $ | 14.18 | (Class A) | 1,582,000 | (Class A) | |||||
Equity compensation plans not approved by securityholders | — | — | — | |||||||||
Total | 5,309,000 | $ | 14.18 | 1,582,000 | ||||||||
PROPOSAL 3ADVISORY VOTE TO APPROVE THE COMPENSATION1
The provisionsDGCL, 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 Dodd-Frank Act requireaggregate 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 we submit to a non-binding advisory voteconsists of the holdersnot 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 andor 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 a proposal thator our Class B common stock.
Our stockholders may nominate candidates for election as director at any annual meeting of our stockholders approveprovided the compensationstockholders comply with the advance notice provisions of our named executive officers weby-laws. We describe those procedures under “Stockholder Proposals” in this proxy statement under “Executive Compensation”.statement. The nominating committee may also consider candidates our management proposes. We submitdo not use executive search firms to an advisory voteidentify 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 20112012 annual meeting of stockholders. It is our intent and the compensationintent 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 Role of the Nominating Committee
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 executive officersbelow for reelection to a new term as summarizedClass 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 section and more fully described in the “Executive Compensation” section of this proxy statement. AlthoughEach nominee for election as a Class B director is currently serving as a Class B director.
If any of the votenamed 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 | Age | Director Since | Year Term Will Expire* | |||||||||
Kevin M. Kraft, Sr. | 59 | 2009 | 2015 | |||||||||
Jon M. Mahan | 42 | 2006 | 2015 | |||||||||
Donald H. Nikolaus | 69 | 1986 | 2015 | |||||||||
Richard D. Wampler, II | 70 | 2004 | 2015 | |||||||||
| * | If elected at our 2012 annual meeting of stockholders. |
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 | Age | Director Since | Year Term Will Expire | |||||||||
Robert S. Bolinger | 75 | 1986 | 2014 | |||||||||
Patricia A. Gilmartin | 72 | 1986 | 2014 | |||||||||
Philip H. Glatfelter, II | 82 | 1986 | 2014 | |||||||||
Jack L. Hess | 64 | 2011 | 2014 | |||||||||
Class C Directors
Name | Age | Director Since | Year Term Will Expire | |||||||||
John J. Lyons | 72 | 2001 | 2013 | |||||||||
S. Trezevant Moore, Jr. | 58 | 2007 | 2013 | |||||||||
R. Richard Sherbahn | 82 | 1986 | 2013 | |||||||||
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 this proposalour 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 not bindingalso 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 us,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 outcomemanaging partner of this vote will provide important informationthat 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 its compensation committeeserve as they determine the compensationone of our nameddirectors.
Mr. Kraft has served as a director since December 2009. Mr. Kraft has been the chief executive officersofficer of Clyde W. Kraft Funeral Home, Columbia, Pennsylvania since 1995. Mr. Kraft served as a director of Central Savings and Loan Association in future years.
Mr. Lyons has advised usbeen 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 it will vote allfirm’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 sharespredecessor, 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 approvalcontinuation 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 compensationaccounting 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 named executive officers11 current directors also serve as we describe such compensation in this proxy statement. We refer you to the “Executive Compensation” sectiondirectors of this proxy statement. Therefore, our stockholders will approve the compensation of our named executive officers during 2010 we describe in the “Executive Compensation” section of this proxy statement even if all of our stockholders other than Donegal Mutual vote againstwith whom we have a variety of inter-company agreements providing for, among other things, the approvalpooling of such proposal.
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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 2011 Purchase Plan meets the requirements of Section 423 of the Code.
Representatives of KPMG LLP will attend our 2011 Purchase Plan, including mergers, consolidations, reorganizations and reclassifications. We will list on NASDAQ our shares of Class A common stock reserved for issuance under our 2011 Purchase Plan.
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Even if our stockholders ratify the Donegal Insurance Group by continuing to alignappointment 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 employees with the interests of our stockholders.
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Our audit committee approves the fees and other significant compensation we pay to our independent registered public accounting firm for the preparation and issuance of an audit report or related work incidental to the opinion. Our audit committee also approves all auditing services and permitted non-audit services, including the fees and terms 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.
Our audit committee reviewed and discussed with KPMG LLP the following fees for services KPMG LLP rendered to us during our 20102011 fiscal year and considered the compatibility of non-audit services with KPMG LLP’s independence.
| • | Audit Fees. The fees of KPMG LLP we incurred in connection with the audit of our annual consolidated and statutory financial statements for those fiscal years, the reviews of | ||
| • | Audit-Related Fees. We did not pay KPMG LLP any audit-related fees during | ||
| • | Tax Fees. We did not pay any tax fees to KPMG LLP during | ||
| • | All Other Fees. We did not pay KPMG LLP any fees for other services during our fiscal years ended December 31, |
The audit committee performs its responsibilities in accordance with the Exchange Act. Each of 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 and the process set forth in our by-laws relating to the coordinating committee. The audit committee of our board of directors, in 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 The audit committee met The members of committee provides as establishing an independent basis for a determination that our 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 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. 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 writing addressed to a particular director or directors, or in the alternative, to “Non-Management Directors” as a group. Please send your communication to our corporate secretary, Sheri O. Smith, at our principal executive offices at 1195 River Road, Marietta, Pennsylvania 17547 or bye-mail tosherismith@donegalgroup.com. Our corporate secretary will promptly forward all such communications to the addressee or addressees set forth in the communication. We encourage our directors to attend our annual meetings of stockholders. All of our directors attended our annual meeting of stockholders in 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 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 to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern Time April 18, 2012. Have your proxy card in hand when you access the website and follow the instructions to obtain your records and to create an electronic voting instruction form. VOTE BY PHONE - 1-800-690-6903 Use any touch-tone telephone to transmit your voting 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. 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 BLUE OR BLACK INK AS FOLLOWS: 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 write the number(s) of the nominee(s) on the line below. 1. Election of Directors Nominees 01 Kevin M. Kraft, Sr. 02 Jon M. Mahan 03 Donald H. Nikolaus 04 Richard D. Wampler, II 2. Ratification of the appointment of KPMG LLP as our independent registered public accounting firm for 2012 Please sign exactly as corporate or Signature [PLEASE SIGN WITHIN BOX] Signature (Joint Owners) Important Notice Regarding the April 19, 2012 10:00 AM This proxy is signed on reverse sideReport of Ourthe Audit CommitteeOurourthe audit committee members satisfies the independence and financial literacy requirements under applicable Exchange Act rules. Our board of directors believes that all four members of ourthe audit committee, Robert S. Bolinger, Philip A. Garcia,Jack L. Hess, John J. Lyons and Richard D. Wampler, II, satisfy the financial expertise requirements and have the requisite experience the SEC’s rules establish. OurThe audit committee operates pursuant to a written charter. You may view the full text of our audit committeecommittee’s charter on our website athttp://www.donegalgroup.com. OurThe audit committee reviews and reassesses the adequacy of its charter on an annual basis.Our• the selection, appointment, determination of funding for, compensation, retention and oversight of the work of our independent registered public accounting firm and the review of its qualifications and independence;• 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 and the process set forth in our by-laws relating to the coordinating committee.In carrying out these responsibilities, performs many functions, including the following:committee, among other things:• monitors preparation of quarterlyservices, approving audit and non-audit services and confirming the independence of our independent registered public accounting firm; 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 its45
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.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 management, which is responsiblesenior 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, hashave advised the members of ourthe audit committee that our financial statements were prepared in accordance with accounting principles generally accepted in the United States, or GAAP.Our1011 times during 2010. 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.ourthe audit committee rely, without independent verification, on the information and representations our management providessenior executive officers provide to them and on the representations our independent registered public accounting firm makes to them. Accordingly,As a result, you should not construe the oversight ourthe auditmanagement hassenior executive officers have established and maintainsmaintain appropriate internal controlcontrols 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 generally accepted in the United States.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 2010, management2011, our senior 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 managementfirm 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 on Auditing Standards, AU Section 380 (SAS No. 61) (Interim Financial Information and Rule 2.07 ofRegulation S-X, Communication with Audit Committees, as amended;amended); Statement on Auditing Standards, AU Section 772 (SAS No. 100). OurThe audit committee has received the written disclosures and the letter from the independent registered public accounting firm required bythe applicable requirementsprovisions of the PCAOBPublic 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 by the audit committee that we describe above, ourthe 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, 20102011 in our 2011 Annual Report on Form 10-K for filing with the SEC.Submitted by:Audit CommitteeRobert S. BolingerPhilip A. GarciaJohn J. LyonsRichard D. Wampler, II10, 2011461, 2012STOCKHOLDER PROPOSALS FOR OUR 20122013 ANNUAL MEETING OF STOCKHOLDERSourthe proxy statement for our 20122013 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 21, 2011.Pursuant to 19, 2012.20122013 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 weby-laws. We summarize these by-law provisions below. WrittenWe must receive written notice of any such proposal containingthat includes all of the information our by-laws require, as summarized herein, must be received byto the attention of our corporate secretary, Sheri O. Smith, at our principal executive offices at 1195 River Road, Marietta, Pennsylvania 17547, during the period that begins on November 21, 201119, 2012 and that ends on December 21, 2011.19, 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 in a solicitation of proxies for election of such nominees as directors pursuant to the proxy rules under the Exchange Act would require to be disclosed;• 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 the Proposing Stockholder proposes and the Proposing Stockholder 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 Class B common stock the Proposing Stockholder beneficially owns within the meaning of SECRule 13d-3 and of record.Proposing Stockholderproponent intends to bring before our 20122013 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 2012 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 the Proposing Stockholder beneficially owns within the meaning of SECRule 13d-3 and of record.summarized hereinwe summarize those provisions in this proxy statement will be eligible for election as a member of our board of directors at our 20122013 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 at20122013 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, as summarized herein.we summarize in this proxy statement. The chairman of our 20122013 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-47the procedures we describe in this proxy statement.lawby-law provisions summarized abovewe previously summarize in this proxy statement will be eligible for presentation at our 20122013 annual meeting of stockholders, and we will not consider any matter at our 2013 annual meeting of stockholders not submitted to our board of directors in accordance with such provisions will not be considered or acted upon at our 2012 annual meeting of stockholders.HOUSEHOLDINGonly one copyindividual 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 at(800) 317-4445 or writing to Computershare Trust Company, N.A., at P.O. Box 43069, Providence, Rhode Island02940-3078, who 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 COMMUNICATIONS2011.2010.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.card.By order of our board of directors, Donald H. Nikolaus, President and Chief Executive Officer By order of our board of directors,Donald H. Nikolaus,President and Chief Executive Officer18, 20114819, 2012KEEP THIS PORTION FOR YOUR RECORDS DETACH AND RETURN THIS PORTION ONLY APPENDIX ADONEGAL GROUP INC.2011 EMPLOYEE STOCK PURCHASE PLANSection 1.Purpose.Donegal Group Inc. (the “Company”) has established this 2011 Employee Stock Purchase Plan (this “Plan”) for the benefit of the eligible employees of the Company, its parent, Donegal Mutual Insurance Company (“Donegal Mutual”), participating subsidiaries of the Company and of Donegal Mutual and any company from which the Company or Donegal Mutual assumes 100% quota share reinsurance.The purpose of this Plan is to provide each eligible employee with an opportunity to acquire or increase his or her proprietary interest in the Company through the purchase of shares of the Company’s Class A common stock (the “Class A common stock”) at a discount from the market prices prevailing at the time of purchase. The Company intends that this Plan meet the requirements of Section 423 of the Internal Revenue Code of 1986,The board of directors recommends you vote
For the following:For All Withhold All For All Except ¨ ¨ ¨ The board of directors recommends you vote For the following proposal: For Against Abstain ¨ ¨ ¨ NOTE:In their discretion, our proxies are authorized to vote upon such other business as may properly come before our annual meeting and any adjournment or postponement thereof. amended (the “Code”).Section 2.Eligible Employees.(a) Employees eligible to participate in this Plan (“Eligible Employees”) will consist of all individuals: (i) who are full-time employees,your name(s) appear(s) hereon. When signing as defined in Section 2(b) of this Plan, of the Company, Donegal Mutual, any subsidiary, as defined in Section 424 of the Code, of the Company or Donegal Mutual or any company from which the Company or Donegal Mutual assumes 100% quota share reinsurance (a “Participating Company”), and (ii) who have completed one month of employment on or prior to the date on which an Enrollment Period, as defined in Section 4 of this Plan, begins.(b) A “full-time employee” is an employee of the Company, Donegal Mutual or any Participating Company who works or is scheduled to work at least 1,000 hours during any calendar year. The Company will consider an employee who is not scheduled to work at least 1,000 hours during a calendar year, but who in fact works at least 1,000 hours during a calendar year, a “full-time employee” once the employee is credited with at least 1,000 hours during such year.(c) A person who is otherwise an Eligible Employee may not purchase any shares of Class A common stock under this Plan to the extent that: (i) immediately after such person purchases Class A common stock, the person would own shares of Class A common stock, including shares that would be owned if all outstanding options to purchase Common Stock such person holds were exercised, that possess 5% or more of the total combined voting power or value of all classes of stock of the Company or any subsidiary of the Company or (ii) such right would cause such person to have purchase rights under this Plan and all other stock purchase plans of the Company or any subsidiary of the Company or Donegal Mutual that meet the requirements of Section 423 of the Code, that accrue at a rate that exceeds $25,000 of fair market value of the stock of the Company, or any subsidiary of the Company, determined at the time the right to purchase Class A common stock under this Plan is exercisable, for each calendar year in which a purchase right under this Plan is outstanding. For this purpose, a right to purchase Class A common stock accrues when such right first becomes exercisable during the calendar year, but the rate of accrual for any calendar year may in no event exceed $25,000 of the fair market value of Class A common stock subject to the right, and the number of shares of Class A common stock under one right may not be carried over to any other right.(d) Notwithstanding other provisions in this Plan to the contrary, any officer of the Company, Donegal Mutual or any Participating Company who is subject to Section 16 of the Securities Exchange Act of 1934 (the “Exchange Act”) with respect to his or her ownership of shares of Class A common stock (a “Section 16 officer”) will be subject to the restrictions and conditions set forth in Sections 7(b) and 9 of this Plan.Section 3.Duration of Plan and Subscription Periods.This Plan is effective as of July 1, 2011 through and including June 30, 2022. During the term of this Plan, this Plan will have 20 semi-annual “Subscription Periods.” Each Subscription Period will extend from July 1 through December 31 or from January 1 through June 30, respectively, with the first Subscription Period beginning on July 1, 2011 and the last Subscription Period ending on June 30, 2022.A-1Section 4.Enrollment and Enrollment Period.Enrollment for participation in this Plan will take place during the “Enrollment Period” that precedes each Subscription Period. Enrollment Periods are in effect from June 1 through June 30 and from December 1 through December 31 of each year. In addition, the Company will deem each individual who participates in the Company’s 2001 Employee Stock Purchase Plan and who is an Eligible Employee as of May 31, 2011 as automatically enrolled in this Plan effective as of the first Subscription Period. Except as provided regarding automatic enrollment in this Plan as of the first Subscription Period, any person who is an Eligible Employee and who would like to participate in this Plan should file a subscription agreement during an Enrollment Period, and that eligible employee’s participation in this Plan will then commence as of the commencement of the next Subscription Period. Once enrolled, an Eligible Employee will continue to participate in this Plan for each succeeding Subscription Period until such Eligible Employee terminates his or her participation, the Eligible Employee ceases to be an Eligible Employee or elects to withdraw from this Plan, this Plan expires or the Company terminates this Plan. An Eligible Employee who desires to change his or her rate of contribution may do so effective as of the beginning of the next Subscription Period by submitting a properly completed and executed enrollment form to the Company during the Enrollment Period for the next Subscription Period. An Eligible Employee who is not a Section 16 officer may also change his or her rate of contribution during a Subscription Period only pursuant to Section 7(b) of this Plan.Section 5.Total Number of Shares Available.The total number of shares available under this Plan is 300,000 shares of Class A common stock. Such Class A common stock may be authorized and unissued shares or previously issued shares that the Company reacquired. In the event the total number of shares available for purchase under this Plan have been purchased prior to the expiration of this Plan, the Company may terminate this Plan in accordance with Section 13 of this Plan.Section 6.Subscription Price.The “Subscription Price” for each share of Class A common stock subscribed for purchase under this Plan during each Subscription Period will be the lesser of (i) 85% of the fair market value of such share as determined as of the last trading day before the first day of the Enrollment Period with respect to such Subscription Period or (ii) 85% of the fair market value of such share as determined on the last trading day of such Subscription Period. The fair market value of a share will be the closing price the NASDAQ Stock Market reports for the applicable date.Section 7.Amount of Contribution and Method of Payment.(a) An Eligible Employee must pay the Subscription Price through a payroll deduction. The maximum payroll deduction may not be more than 10% of an Eligible Employee’s Base Pay, as defined in Section 7(c) of this Plan. An Eligible Employee must authorize a minimum payroll deduction, based on such employee’s Base Pay at the time of such authorization, that will enable such employee to accumulate by the end of the Subscription Period an amount sufficient to purchase at least ten shares of Class A common stock. An Eligible Employee may not make separate cash deposits toward the payment of the Subscription Price.(b) An Eligible Employee who is not a Section 16 officer may at any time during a Subscription Period reduce the amount the Eligible Employee previously authorized the Company to deduct from his or her Base Pay, provided the reduction conforms with the minimum payroll deduction set forth in Section 7(a) of this Plan. To do so, an Eligible Employee should forward to the Company a properly completed and executed written notice setting forth the requested reduction in his or her payroll deduction. The change in payroll deduction will become effective on a prospective basis as soon as practicable after the Company receives the change notice. An Eligible Employee may change his or her payroll deduction under this Section 7(b), by forwarding to the Company a properly completed and executed written notice setting forth such reduction in his or her payroll deduction only once during any Subscription Period. Any such reduction will remain in effect for subsequent Subscription Periods, subject to compliance with Section 7(a) of this Plan, until such Eligible Employee terminates his or her participation in this Plan, the Eligible Employee ceases to be an Eligible Employee, this Plan expires or the Company terminates this Plan. A Section 16 officer may not change his or her rate of contribution during a Subscription Period.A-2(c) “Base Pay” means the straight-time earnings or regular salary paid to an Eligible Employee. Base Pay will not include overtime, bonusesattorney, executor, administrator, or other items that the committee administering this Plan pursuant to Section 14 of this Plan does not consider to be regular compensation. Payroll deductions will commence with the first paycheck issued during the Subscription Period and, exceptfiduciary, please give full
title as set forth in Sections 9 and 10, will continue withsuch. Joint owners should each paycheck throughout the entire Subscription Period, except for pay periods for which the Eligible Employee receives no compensation (i.e., uncompensated personal leave, leave of absence, etc.).Section 8.Purchase of Shares.The Company will maintain a “Plan Account” on its books for recordkeeping purposes only in the name of each Eligible Employee who authorized a payroll deduction (a “participant”). At the close of each pay period, the Company will credit the amount deducted from the participant’s Base Pay to the participant’s Plan Account. The Company will pay no interest on any Plan Account balance in any circumstance. As of the last day of each Subscription Period, the Company will divide the amount then in the participant’s Plan Account by the Subscription Price for such Subscription Period as determined pursuant to Section 6 , and credit the participant’s Plan Account with the number of whole shares that results. The Company will not credit fractional shares under this Plan. The Company will issue and deliver share certificates to each participant within a reasonable time thereafter. The Company will carry forward any amount remaining in a participant’s Plan Account to the next Subscription Period. However, any amount the Company carries forward pursuant to this Section 8 will not reduce the amount a participant may contribute pursuant to Section 7 of this Plan during the next Subscription Period.sign personally. All holders must
sign. If a participant does not accumulate sufficient funds in hiscorporation or her Plan Account to purchase at least ten shares of Class A common stock during a Subscription Period, the Company will deem such participant to have withdrawn from this Plan pursuant to Section 9 of this Plan.If the number of shares subscribed for purchase during any Subscription Period exceeds the number of shares available for purchase under this Plan, the Company will allocate the remaining shares available for purchase among all participants in proportion to their Plan Account balances, exclusive of any amounts carried forward pursuant to the preceding paragraph. If the number of shares that would be credited to any participant’s Plan Account in either or both of the Subscription Periods occurring during any calendar year exceeds the limit specified in Section 2(c) of this Plan, the Company will credit the participant’s Plan Account with the maximum number of shares permissible, and refund the remaining amounts to the participant in cash without interest thereon.Section 9.Withdrawal from This Plan.A participant, other than a Section 16 officer, may withdraw from this Plan at any time by giving a properly completed and executed written notice of withdrawal to the Company. As soon as practicable following the Company’s receipt of a notice of withdrawal, the Company will refund the amount credited to the participant’s Plan Account in cash without interest thereon. The Company will make no further payroll deductions with respect to such participant except in accordance with an authorization for a new payroll deduction filed during a subsequent Enrollment Period in accordance with Section 4 of this Plan. A participant’s withdrawal will not affect the participant’s eligibility to participate during any succeeding Subscription Period. A withdrawal by a Section 16 officer, other than a withdrawal under Section 10 of this Plan, will not become effective until the Subscription Period that commences after the date the Company receives written notice of such withdrawal.Section 10.Separation from Employment.The Company will treat separation from employment for any reason, including death, disability or retirement, as defined in this Section 10, as an automatic withdrawal pursuant to Section 9 of this Plan. However, at the election of a participant who retires, or in the event of a participant’s death at the election of the participant’s beneficiary, any cash balance in such participant’s Plan Account may be used to purchase the appropriate number of whole shares of Class A common stock at a Subscription Price determined in accordance with Section 6 of this Plan using the date of the participant’s retirement or death as though it was the last day of the Subscription Period. The Company will refund in cash any cash balance in the Plan Account after such purchase to the participant, or in the event of the participant’s death to the participant’s beneficiary without interest thereon. As used in this Section 10, “retirement” means a termination ofA-3employment by reason of a participant’s retirement at or after the participant’s earliest permissible retirement date pursuant to and in accordance with his or her employer’s regular retirement plan or practice.Section 11.Assignment and Transfer Prohibited.No participant may assign, pledge, hypothecate or otherwise dispose of his or her subscription or rights to subscribe under this Plan to any other person, and any attempted assignment, pledge, hypothecation or disposition will be void. However, a participant may acquire shares of Class A common stock subscribed to under this Plan in the names of the participant and another person jointly with the right of survivorship upon appropriate written notice to the Company. No subscription or right to subscribe granted to a participant under this Plan will be transferable by the participant otherwise than by will or by the laws of descent and distribution, and such subscription rights will be exercisable only by the participant during the participant’s lifetime.Section 12.Adjustment of and Changes in Class A Common Stock.In the event that the outstanding shares of Class A common stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company, or of another corporation, by reason of reorganization, merger, consolidation, recapitalization, reclassification, stocksplit-up, stock dividend, either in shares of Class A common stock or of another class of the Company’s stock, spin-off or combination of shares, the committee appointed pursuant to Section 14 of this Plan will make appropriate adjustments in the aggregate number and kind of shares that are reserved for sale under this Plan.Section 13.Amendment or Termination of This Plan.The Board of Directors of the Company (the “Board”) will have the right to amend, modify or terminate this Plan at any time without notice, provided that the amendment, modification or termination of this Plan does not adversely affect any participant’s existing rights and provided further that, without the approval of the stockholders of the Company in accordance with applicable law and regulations, no such amendment will increase the benefits accruing to participants under this Plan, increase the total number of shares subject to this Plan, change the formula by which the price at which the shares will be sold is determined, or change the class of employees eligible to participate in this Plan.Section 14.Administration.A committee of three employees of the Company the Board appoints from time to time will administer this Plan. The committee may from time to time adopt rules and regulations for carrying out this Plan. Any interpretation or construction of any provision of this Plan by the committee will be final and conclusive on all persons absent contrary action by the Board. Any interpretation or construction of any provision of this Plan by the Board will be final and conclusive on all persons.Section 15.Designation of Beneficiary.A participant may file a written designation of a beneficiary who is to receive any cash credited to the participant under this Plan in the event of such participant’s death prior to the delivery to the participant of such cash. A participant may change such designation of a beneficiary at any time upon written notice to the Company. Upon the death of a participant and upon the committee’s receipt of proof of the participant’s death and of the identity and existence of a beneficiary validly designated by the participant under this Plan, the Company will deliver such cash to such beneficiary. In the event of the death of a participant and in the absence of a beneficiary validly designated under this Plan who is living at the time of such participant’s death, the Company will deliver such cash to the executor or administrator of the estate of the participant, or if, to the knowledge of the Company, the participant has not appointed such executor or administrator, the Company, in its sole discretion, may deliver such cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent, or relative is known to the Company, then to such other person as the Company may designate. No designated beneficiary will, prior to the death of the participant by whom the beneficiary has been designated, acquire any interest in the shares or cash credited to the participant under this Plan.A-4Section 16.Employees’ Rights.Nothing contained in this Plan will prevent the Company, Donegal Mutual or any Participating Company from terminating any employee’s employment. No employee will have any rights as a stockholder of the Company by reason of participation in this Plan unless and until the Company has issued and delivered certificates to the participant representing shares of Class A common stock for which the participant has subscribed.Section 17.Use of Funds.The Company may use all payroll deductions it receives or holds under this Plan for any corporate purpose, and the Company will not be obligated to segregate such payroll deductions. Any account established for a participant will be for recordkeeping purposes only.Section 18.Government Regulations.The Company’s obligation to sell and deliver Class A common stock under this Plan is subject to any prior approval or compliance that may be required to be obtained or made from or with any governmental or regulatory authority in connection with the authorization, issuance or sale of such Class A common stock.Section 19.Titles.Titles are provided in this Plan for convenience only and are not to serve as a basis for interpretation or construction of this Plan.Section 20.Applicable Law.This Plan will be construed, administered and governed in all respects under the laws of the Commonwealth of Pennsylvania and the United States of America.Section 21.Compliance withRule 16b-3.To the extent thatRule 16b-3 under the Exchange Act applies to purchases made under this Plan, it is the Company’s intent that this Plan comply in all respects with the requirements ofRule 16b-3, that the Company interpret any ambiguities or inconsistencies in the construction of this Plan to give effect to such intention and that if this Plan will not so comply, whether on the date of adoption or by reason of any later amendment to or interpretation ofRule 16b-3, the provisions of this Plan will be deemed to be automatically amended so as to bring them into full compliance with such rule.Section 22.Approval of Stockholders.Prior to June 30, 2011, the Company will submit this Plan to its stockholders for approval in accordance with applicable law and regulations. Subscriptions for the purchase of shares under this Plan will be subject to the condition that the stockholders of the Company approve this Plan prior to such date in the manner contemplated by Section 423(b)(2) of the Code. If the Company’s stockholders do not approve this Plan prior to such date, this Plan will terminate, all subscriptions under this Plan will be terminated and be of no further force or effect and the Company shall promptly refund in cash, without interest, of all sums previously deducted from their compensation pursuant to this Plan.A-5partnership name, by authorized officer.APPENDIX BDONEGAL GROUP INC.2011 EQUITY INCENTIVE PLAN FOR EMPLOYEES1. Purpose. The purpose of this 2011 equity incentive plan for employees (this “Plan”) is to encourage the employees of Donegal Group Inc. (the “Company”) and its subsidiaries to acquire a proprietary interest in the growth and performance of the Company, and to continue to align the interests of those employees with the interests of the Company’s stockholders to generate an increased incentive for such person to contribute to the growth, development and financial success of the Company and the member companies of the Donegal Insurance Group, including companies from which the Company or Donegal Mutual assumes 100% quota share reinsurance (the “Group”). To accomplish these purposes, this Plan provides a means whereby employees may receive stock options, stock awards and other stock-based awards that are based on, or measured by, or payable in shares of the Company’s Class A common stock.2. Administration.(a) Administrators. The Board of Directors of the Company (the “Board”) shall administer this Plan. The Board shall appoint a committee, which initially shall be the compensation committee to assist in the administration of this Plan. The committee, with the advice of the Company’s chief executive officer, shall recommend to the Board the employees to whom the Company should grant awards and the type, size and terms of each grant. The Board has the authority to make all other determinations necessary or advisable for the administration of this Plan. All decisions, determinations and interpretations of the Board shall be final and binding on all grantees and all other holders of awards granted under this Plan.(b) The Committee. The committee shall be comprised of two or more members of the Board, each of whom shall be a “non-employee director” within the meaning ofRule 16b-3 under the Securities Exchange Act of 1934 (the “Exchange Act”). In addition, each member of the committee shall be an “outside director” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). Subject to the foregoing, from time to time, the Board may increase or decrease the size of the committee, appoint additional members, remove members, with or without cause, appoint new members, fill vacancies or remove all members of the committee and thereafter directly administer this Plan. The committee shall have those duties and responsibilities assigned to it under this Plan, and the Board may assign to the committee the authority to make certain other determinations and interpretations under this Plan. All decisions, determinations and interpretations of the committee in such cases shall be final and binding on all grantees and all other holders of awards granted under this Plan.3. Shares Subject to this Plan.(a) Shares Authorized. The total aggregate number of shares of Class A common stock that the Company may issue under this Plan is 3,500,000 shares, subject to adjustment as described below. The Company may issue each of the shares authorized under this Plan pursuant to incentive stock options awards within the meaning of Section 422 of the Code. The shares may be authorized but unissued shares or reacquired shares for purposes of this Plan.(b) Share Counting. For administrative purposes, when the Board approves an award payable in shares of Class A common stock, the Board shall reserve, and count against the share limit, shares equal to the maximum number of shares that the Company may issue under the award. If and to the extent options granted under this Plan terminate, expire or are canceled, forfeited, exchanged or surrendered without having been exercised, and if and to the extent that any restricted stock awards are forfeited or terminated, or otherwise are not paidpartnership, please sign in full the Company shall make the shares reserved for such awards available again for purposes of this Plan.(c) Individual Limits. All awards under this Plan shall be expressed in shares of Class A common stock. The maximum number of shares of Class A common stock with respect to all awards that the Company may issue to any individual under this Plan during any calendar year shall be 250,000 shares, subject to adjustment as described below.B-1(d) Adjustments. If any change in the number or kind of shares of Class A common stock outstanding occurs by reason of: • a stock dividend, spinoff, recapitalization, stock split or combination or exchange of shares; • a merger, reorganization or consolidation; • a reclassification or change in par value; or • Dateany other extraordinary or unusual event affecting the outstanding Class A common stock as a class without the Company’s receipt of consideration, or if the value of outstanding shares of Class A common stock is substantially reduced as a result of a spinoff or the Company’s payment of any extraordinary dividend or distribution,Date the maximum number of shares of Class A common stock available for issuance under this Plan, the maximum number of shares of Class A common stock for which any individual may receive grants in any year, the kind and number of shares covered by outstanding awards, the kind and number of shares to be issued or issuable under this Plan and the price per share or applicable market value of such grants shall be automatically equitably adjusted to reflect any increase or decrease in the number of, or change in the kind or value of, issued shares of Class A common stock to preclude, to the extent practicable, the enlargement or dilution of rights and benefits under this Plan and such outstanding grants. The Company shall eliminate any fractional shares resulting from such adjustment. Any adjustments to outstanding awards shall be consistent with Section 409A of the Code, to the extent applicable.4. Eligibility for Participation. All employees of the Company and its subsidiaries and the member companies of the Group, including employees who are officers or members of the Board of any of the foregoing companies, shall be eligible to participate in this Plan. The committee shall recommend to the Board the employees to receive awards and the number of shares of Class A common stock subject to each award.5. Awards. Awards under this Plan may consist of stock options as described in Section 7, stock awards as described in Section 8 and other stock-based awards as described in Section 9. The committee shall specify the terms and conditions of the award granted to the grantee in an agreement. The award shall be conditioned upon the grantee’s signed agreement to accept the award and to acknowledge that all decisions and determinations of the committee and the Board shall be final and binding on the grantee, his or her beneficiaries and any other person having or claiming an interest under the award. Awards under this Plan need not be uniform as among the grantees. The Board may grant awards that are contingent on, and subject to, stockholder approval of this Plan or an amendment to this Plan.6. Definition of Fair Market Value. For purposes of this Plan, “fair market value” shall mean the last sales price of a share of Class A common stock on the NASDAQ Global Select Stock Market, or NASDAQ, on the day on which the Board is determining the fair market value, as reported by NASDAQ. In the event that there are no transactions in shares of Class A common stock on NASDAQ on such day, the Board will determine the fair market value as of the immediately preceding day on which there were transactions in shares of Class A common stock on that exchange. If shares of common stock are not listed by NASDAQ, the Board shall determine the fair market value pursuant to Section 422 of the Code.7. Stock Options. The committee may recommend to the Board the grant of stock options to an employee upon such terms and conditions as the committee deems appropriate under this Section 7.(a) Number of Shares. The committee shall recommend the number of shares of Class A common stock that will be subject to each grant of stock options.(b) Type of Stock Option, Price and Term. The committee may recommend to the Board the grant of stock options to purchase Class A common stock that the Company intends to qualify as incentive stock options within the meaning of Section 422 of the Code, or incentive stock options, or stock options that the Company does not intend to so qualify, or non-qualified stock options. The committee shall recommend the exercise price of shares of Class A common stock subject to a stock option, which shall be equal to or greater than the fair market value of a share of Class A common stock on the date of grant.(c) Exercisability of Stock Options. Each stock option agreement shall specify the period or periods of time within which a grantee may exercise a stock option, in whole or in part, as the Board determines. NoB-2grantee may exercise a stock option after ten years fromgrant dateAvailability of the stock option. The Board may accelerate the exercisability of any or all outstanding stock options at any time for any reason.(d) Termination of Employment. Except as provided in the stock option agreement, a grantee may exercise a stock option only while the Company, Donegal Mutual or any of their respective subsidiaries employs the grantee. The Board shall specify in the option agreement under what circumstances and during what time periods a grantee may exercise a stock option after employment terminates. If the term of an incentive stock option continues for more than three months after employment terminates due to retirement or more than one year after termination of employment due to death or disability, the stock option shall lose its status as an incentive stock option and the Company shall treat such stock option as a non-qualified stock option.(e) Exercise of Stock Options. A grantee may exercise a stock option that has become exercisable, in whole or in part, by delivering a notice of exercise to the Company. The grantee shall pay the exercise priceProxy Materials for the stock option:• in cash;• by delivery of shares of Class A common stock at fair market value, shares of Class B common stock at fair market value, or a combination of those shares, as the committee or the Board may determine from time to time and subject to the terms and conditions as the committee or the Board may prescribe;• by payment through a brokerage firm of national standing whereby the grantee will simultaneously exercise the stock option and sell the shares acquired upon exercise through the brokerage firm and the brokerage firm shall remit to the Company from the proceeds of the sale of the shares the exercise price as to which the option has been exercised in accordance with the procedures permitted by Regulation T of the Federal Reserve Board; or• by any other method the committee or the Board authorizes.Annual Meeting:The Company must receive payment for the shares acquired upon exercise of the stock option, and any required withholding taxes and related amounts, by the time the committee specifies depending on the type of payment being made, but in all cases prior to the issuance of the shares.(f) Notice & Proxy Statement, Annual Report is/ are available atIncentive Stock Optionswww.proxyvote.com. The committee shall recommend other terms and conditions of an incentive stock option as the committee deems necessary or desirable in order to qualify such stock option as an incentive stock option under Section 422 of the Code, including the following provisions, which the committee may omit or modify if no longer required under that section:• As determined as of the grant date, the aggregate fair market value of shares subject to incentive stock options that first become exercisable by a grantee during any calendar year, under all plans of the Company, shall not exceed $100,000;• The exercise price of any incentive stock option granted to an individual who owns stock having more than 10% of the total combined voting power of all classes of stock of the Company must be at least 110% of the fair market value of the shares subject to the incentive stock option on the grant date, and the individual may not exercise the incentive stock option after the expiration of five years from the date of grant; and• The grantee may not exercise the incentive stock option more than three months, or one year in the case of death or disability within the meaning of the applicable Code provisions, after termination of employment.8. Stock Awards. The committee may recommend to the Board the issuance of shares of Class A common stock to an employee upon such terms and conditions as the committee deems appropriate under this Section 8. The committee may recommend to the Board the issuance of shares of Class A common stock for cash consideration or for no cash consideration, and subject to restrictions or no restrictions. The committee may recommend conditions under which restrictions on stock awards shall lapse over a period of time orB-3according to other criteria as the committee deems appropriate, including restrictions based upon the achievement of specific performance goals.(a) Number of Shares. The committee shall recommend the number of shares of Class A common stock to be issued pursuant to a stock award and any restrictions applicable to the stock award.(b) Requirement of Employment. The Board shall specify in the stock award agreement under what circumstances a grantee may retain stock awards after termination of the grantee’s employment and under what circumstances the grantee may forfeit the stock awards.(c) Restrictions on Transfer. During the period that the stock award is subject to restrictions, a grantee may not sell, assign, transfer, pledge or otherwise dispose of the shares of the stock award except upon death as described in Section 13. Each certificate representing a share of Class A common stock issued under the stock award shall contain a legend giving appropriate notice of the restrictions on the stock award. The grantee shall be entitled to have the legend removed when all restrictions on the shares subject to the stock award have lapsed. The Company may maintain possession of any certificates representing shares subject to the stock award until all restrictions on the shares subject to the stock award have lapsed.(d) Right To Vote and To Receive Dividends. The committee shall recommend to what extent, and under what conditions, the grantee shall have the right to vote the shares subject to the stock award and to receive any dividends or other distributions paid on the shares during the restriction period.9. Other Stock-Based Awards. The committee may recommend to the Board the grant of other awards that are based on, measured by or payable in Class A common stock to an employee on such terms and conditions as the committee deems appropriate under this Section 9. The committee may recommend to the Board the grant of other stock-based awards subject to achievement of performance goals or other conditions and may be payable in shares of Class A common stock or cash, or a combination of cash and shares, as recommended by the committee in the stock-based award agreement.10. Grant Date. The grant date of an award under this Plan shall be the date of the Board of Director’s approval or such later date as may be determined by the Board at the time it authorizes the award. The Board may not make retroactive grants of awards under this Plan. The Company shall provide notice of the award to the grantee within a reasonable time after the grant date.11. Withholding. All grants under this Plan shall be subject to applicable federal, including FICA, state and local tax withholding requirements. The Company may require that the grantee or other person receiving or exercising a grant pay to the Company the amount of any federal, state or local taxes that the Company is required to withhold with respect to the grant, or the Company may deduct from other wages paid to the grantee the amount of any withholding taxes due with respect to the grants. The Board or the committee may permit a grantee to elect to satisfy the Company’s tax withholding obligations with respect to grants paid in shares of Class A common stock by having shares of Class A common stock withheld, at the time such grants become taxable, up to an amount that does not exceed the minimum applicable withholding tax rate for federal, including FICA, state and local tax liabilities. The Board or committee will value any shares so withheld as of the date the grants become taxable.12. Transferability of Grants. Only the grantee of an award may exercise rights under the award grant during the grantee’s lifetime, and a grantee may not transfer those rights except by will or by the laws of descent and distribution. When a grantee dies, the personal representative or other person entitled to succeed to the rights of the grantee may exercise those rights. Any successor to a grantee must furnish proof satisfactory to the Company of his or her right to receive the award under the grantee’s will or under the applicable laws of descent and distribution.13. Requirements for Issuance of Shares. The Company will not issue shares of Class A common stock in connection with any award under this Plan until the issuance of the shares complies with all applicable legal requirements to the satisfaction of the Board. The Board shall have the right to condition any award made to any employee under this Plan on the employee’s undertaking in writing to comply with the restrictions on his or her subsequent disposition of shares subject to the award as the Board shall deem necessary or advisable, and the Company may legend certificates representing those shares to reflect any such restrictions. Certificates representing shares of Class A common stock issued under this Plan will be subject toB-4such stop-transfer orders and other restrictions as applicable laws, regulations and interpretations may require, including any requirement that a legend be placed thereon. No grantee shall have any right as a stockholder with respect to shares of Class A common stock covered by an award until shares have been issued to the grantee.14. Amendment and Termination of this Plan.(a) Amendments. The Board may amend or terminate this Plan at any time, except that the Board shall not amend this Plan without approval of the stockholders of the Company if such approval is required in order to comply with the Code or applicable laws, or to comply with applicable stock exchange requirements. The Board may not, without the consent of the grantee, negatively affect the rights of a grantee under any award previously granted under this Plan.(b) No Repricing Without Stockholder Approval. The Board may not reprice stock options nor may the Board amend this Plan to permit repricing of options unless the stockholders of the Company provide prior approval for the repricing.(c) Termination. This Plan shall terminate on April 20, 2021, unless the Board terminates this Plan earlier or the term is extended with the approval of the stockholders of the Company. The termination of this Plan shall not impair the power and authority of the Board or the committee with respect to an outstanding award.15. Grants in Connection with Corporate Transactions and Otherwise. Nothing contained in this Plan shall be construed to:• limit the right of the Board to grant awards under this Plan in connection with the acquisition, by purchase, lease, merger, consolidation or otherwise, of the business or assets of any corporation, firm or association, including awards to employees of those entities who become employees, or for other proper corporate purposes; or• limit the right of the Company to grant stock options or make other stock-based awards outside of this Plan.Without limiting the foregoing, the Board may grant an award to an employee of another corporation or other entity who becomes an employee by reason of a corporate merger, consolidation, acquisition of stock or property, reorganization or liquidation involving the Company in substitution for a grant made by that corporation or other entity. The terms and conditions of the awards may vary from the terms and conditions this Plan requires and from those of the substituted stock awards, as the Board determines.16. Right to Terminate Employment. Nothing contained in this Plan or in any award agreement entered into pursuant to this Plan shall confer upon any grantee the right to continue in the employment of the Company or any of its subsidiaries or the Group or affect any right that the Company or any of its subsidiaries or the Group may have to terminate the employment of the grantee.17. Reservation of Shares. The Company, during the term of this Plan, shall at all times reserve and keep available the number of shares of Class A common stock needed to satisfy the requirements of this Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which the Company’s counsel has deemed such authority to be necessary to the lawful issuance and sale of any shares under this Plan, shall relieve the Company of any liability for the failure to issue or sell any shares as to which the Company has not obtained such requisite authority.18. Effect on Other Plans. Participation in this Plan shall not affect an employee’s eligibility to participate in any other benefit or incentive plan of the Company or any of its subsidiaries or the Group. The Company shall not use any awards granted pursuant to this Plan in determining the benefits provided under any other plan unless specifically provided.19. Forfeiture for Dishonesty. Notwithstanding anything to the contrary in this Plan, if the Board finds, by a majority vote, after full consideration of the facts presented on behalf of both the Company and any grantee, that the grantee has engaged in fraud, embezzlement, theft, commission of a felony or dishonest conduct in the course of his employment that damaged the Company or any of its subsidiaries or the Group or that the grantee has disclosed confidential information of the Company or any of its subsidiaries or the Group,B-5the grantee shall forfeit all unexercised or unvested awards and all exercised or vested awards under which the Company has not yet delivered the certificates or cash payments therefor. The decision of the Board in interpreting and applying the provisions of this Section 19 shall be final. No decision of the Board, however, shall affect the finality of the discharge or termination of the grantee.20. No Prohibition on Corporate Action. No provision of this Plan shall be construed to prevent the Company or any officer or director of the Company from taking any action the Company or such officer or director of the Company deems to be appropriate or in the Company’s best interest, whether or not such action could have an adverse effect on this Plan or any awards granted under this Plan, and no grantee or grantee’s estate, personal representative or beneficiary shall have any claim against the Company or any officer or director of the Company as a result of the taking of the action.21. Indemnification. With respect to the administration of this Plan, the Company shall indemnify each present and future member of the committee and the Board against, and each member of the committee and the Board shall be entitled without further action on such member’s part to indemnity from the Company for, all expenses, including the amount of judgments and the amount of approved settlements made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself, such member reasonably incurs in connection with or arising out of, any action, suit or proceeding in which he or she may be involved by reason of being or having been a member of the committee or the Board, whether or not he or she continues to be such member at the time of incurring such expenses; provided, however, that this indemnity shall not include any expenses such member incurs (i) in respect of matters as to which he or she shall be finally adjudged in any such action, suit or proceeding to have been guilty of gross negligence or willful misconduct in the performance of his or her duty as such member of the committee or the Board; or (ii) in respect of any matter in which any settlement is effected for an amount in excess of the amount approved by the Company on the advice of its legal counsel; and provided further that no right of indemnification under the provisions set forth in this Section 21 shall be available to or enforceable by any such member of the committee or the Board unless, within 60 days after institution of any such action, suit or proceeding, he or she shall have offered the Company in writing the opportunity to handle and defend the same at its own expense. The foregoing right of indemnification shall inure to the benefit of the heirs, executors or administrators of each such member of the committee or the Board and shall be in addition to all other rights to which such member may be entitled as a matter of law, contract or otherwise.22. Miscellaneous Provisions.(a) Compliance with Plan Provisions. No grantee or other person shall have any right with respect to this Plan, the Class A common stock reserved for issuance under this Plan or in any award until the Company and the grantee executed a written agreement and all the terms, conditions and provisions of this Plan and the award applicable to the grantee have been met.(b) Approval of Counsel. In the discretion of the Board, no shares of Class A common stock, other securities or property of the Company or other forms of payment shall be issued under this Plan with respect to any award unless counsel for the Company is satisfied that such issuance will be in compliance with applicable federal, state, local and foreign legal, securities exchange and other applicable requirements.(c) Compliance withRule 16b-3. To the extent thatRule 16b-3 under the Exchange Act applies to this Plan or to awards granted under this Plan, it is the intention of the Company that this Plan comply in all respects with the requirements ofRule 16b-3, that any ambiguities or inconsistencies in construction of this Plan be interpreted to give effect to such intention and that, if this Plan shall not so comply, whether on the date of adoption or by reason of any later amendment to or interpretation ofRule 16b-3, the provisions of this Plan shall be deemed to be automatically amended so as to bring them into full compliance with such rule.B-6(d) Section 409A Compliance. This Plan is intended to comply with the requirements of Section 409A of the Code and the regulations issued thereunder. To the extent of any inconsistencies with the requirements of Section 409A, this Plan shall be interpreted and amended in order to meet the requirements of Section 409A. Notwithstanding anything contained in this Plan to the contrary, it is the intent of the Company to have this Plan interpreted and construed to comply with any and all provisions Section 409A including any subsequent amendments, rulings or interpretations from appropriate governmental agencies.(e) Effects of Acceptance of the Award. By accepting any award or other benefit under this Plan, each grantee and each person claiming under or through the grantee shall be conclusively deemed to have indicated his acceptance and ratification of, and consent to, any action taken under this Plan by the Company, the Board or the committee or its delegates.Date of Adoption by Board: March 7, 2011.B-7APPENDIX CDONEGAL GROUP INC.2011 EQUITY INCENTIVE PLAN FOR DIRECTORS1. Purpose. The purposeAnnual Meeting of this 2011 equity incentive plan for directors (this “Plan”)Stockholdersto enhance the ability of Donegal Group Inc. (the “Company”) and its subsidiaries and the member companies of the Donegal Insurance Group, including companies from which the Company or Donegal Mutual assumes 100% quota share reinsurance (the “Group”), to attract and retain highly qualified directors, to establish a basis for providing a portion of director compensation in the form of equity and, in doing so, to strengthen the alignment of the interest of directors of the Company and the members of the Group with the interests of the Company’s stockholders.2. Administration.(a) Administrationsolicited by the Board. The Board of Directors of the Company (the “Board”) shall administer this Plan.(b) Duty and Powers of the Board. The Board shall have the power to interpret this Plan and the awards granted under this Plan and to adopt rules for the administration, interpretation and application of this Plan. The Board shall have the discretion to determine to whom the Company will grant stock options and to determine the number of stock options the Company will grant to any director, the timing of the grant and the terms of exercise. The Board shall not have any discretion to determine to whom the Company will grant restricted stock awards under this Plan.(c) Compensation; Professional Assistance; Good Faith Actions. Members of the Board shall not receive any compensation for their services in administering this Plan. The Company shall pay all expenses and liabilities incurred in connection with the administration of this Plan. The Company may employ attorneys, consultants, accountants or other experts. The Board, the Company and the officers and directors of the Company shall be entitled to rely upon the advice, opinions or valuations of any such experts. All actions taken and all interpretations and determinations the Board makes in good faith shall be final and binding upon all grantees, the Company and all other interested persons. No member of the Board shall be personally liable for any action, determination or interpretation the Board makes in good faith with respect to this Plan, and the Company shall fully protect and indemnify all members of the Board in respect to any such action, determination or interpretation.3. Shares Subject to this Plan.(a) Shares Authorized. The shares of stock issuable pursuant to awards shall be shares of Class A common stock. The total aggregate number of shares of Class A common stock that the Company may issue under this Plan is 400,000 shares, subject to adjustment as described below. The shares may be authorized but unissued shares or reacquired shares for purposes of this Plan.(b) Share Counting. For administrative purposes, when the Board approves an award payable in shares of Class A common stock, the Board shall reserve, and count against the share limit, shares equal to the maximum number of shares that the Company may issue under the award. If and to the extent options granted under this Plan terminate, expire or are canceled, forfeited, exchanged or surrendered without having been exercised, and if and to the extent that any restricted stock awards are forfeited or terminated, or otherwise are not paid in full, the Company shall make the shares reserved for such awards available again for purposes of this Plan.(c) Adjustments. If any change in the number or kind of shares of Class A common stock outstanding occurs by reason of:• a stock dividend, spinoff, recapitalization, stock split or combination or exchange of shares;• a merger, reorganization or consolidation;• a reclassification or change in par value; orC-1• any other extraordinary or unusual event affecting the outstanding Class A common stock as a class without the Company’s receipt of consideration, or if the value of outstanding shares of Class A common stock is substantially reduced as a result of a spinoff or the Company’s payment of any extraordinary dividend or distribution,the maximum number of shares of Class A common stock available for issuance under this Plan, the maximum number of shares of Class A common stock for which any individual may receive grants in any year, the kind and number of shares covered by outstanding awards, the kind and number of shares to be issued or issuable under this Plan and the price per share or applicable market value of such grants shall automatically be equitably adjusted to reflect any increase or decrease in the number of, or change in the kind or value of, issued shares of Class A common stock to preclude, to the extent practicable, the enlargement or dilution of rights and benefits under this Plan and such outstanding grants. Any fractional shares resulting from such adjustment shall be eliminated. Any adjustments to outstanding awards shall be consistent with Section 409A of the Internal Revenue Code of 1986, as amended, or the Code, to the extent applicable.4. Eligibility for Participation. Each director of the Company and its subsidiaries and each director of a member of the Group who is not eligible to receive stock options under the Company’s Equity Incentive Plan for Employees shall be eligible to receive stock options under this Plan. Each director of the Company and each director of the member companies of the Group shall be eligible to receive restricted stock awards under this Plan.5. Awards. Awards under this Plan may consist of stock options as described in Section 7 and restricted stock awards as described in Section 8. Each award shall be evidenced by a written agreement.6. Definition of Fair Market Value. For purposes of this Plan, “fair market value” shall mean the last sales price of a share of Class A common stock on the NASDAQ Stock Market, or NASDAQ, on the day on which the board is determining the fair market value, as reported by NASDAQ. In the event that there are no transactions in shares of Class A common stock on NASDAQ on such day, the Board will determine the fair market value as of the immediately preceding day on which there were transactions in shares of Class A common stock on that exchange. If shares of Class A common stock are not listed by NASDAQ, the Board shall determine the fair market value pursuant to Section 422 of the Code.7. Stock Options.(a) Granting of Stock Options. The Board may grant stock options to an outside director upon such terms as the Board deems appropriate under this Section 7.(b) Type of Stock Option and Price. The Board may grant stock options to purchase Class A common stock that the Board does not intend to qualify as incentive stock options within the meaning of Section 422 of the Code. The Board shall determine the exercise price of shares of Class A common stock subject to a stock option, which shall be equal to or greater than the fair market value of a share of Class A common stock on the date of grant.(c) Exercisability of Stock Options. Each stock option agreement shall specify the period or periods of time within which a grantee may exercise a stock option, in whole or in part, as the Board determines. No grantee may exercise a stock option after ten years from the grant date of the stock option. The Board may accelerate the exercisability of any or all outstanding stock options at any time for any reason.(d) Rights upon Termination of Service. Upon a grantee’s termination of service as an outside director, as a result of resignation, failure to be re-elected, removal for cause or any reason other than death, the grantee shall have the right to exercise the stock option during its term within a period of three years after such termination to the extent that the stock option was exercisable at the time of termination, or within such other period, and subject to such terms and conditions, as the Board may specify. In the event that a grantee dies prior to the expiration of his or her stock option and without having fully exercised his or her stock option, the grantee’s representative or successor shall have the right to exercise the stock option during its term within a period of one year after the grantee’s death to the extent that the stock option was exercisable at the time of death, or within such other period, and subject to such terms and conditions, as the Board may specify.C-2(e) Exercise of Stock Options. A grantee may exercise a stock option that has become exercisable, in whole or in part, by delivering a notice of exercise to the Company. The grantee shall pay the exercise price for the stock option:• in cash;• by delivery of shares of Class A common stock at fair market value, shares of Class B common stock at fair market value, or a combination of those shares, as the Board may determine from time to time and subject to the terms and conditions as the Board may prescribe;• by payment through a brokerage firm of national standing whereby the grantee will simultaneously exercise the stock option and sell the shares acquired upon exercise through the brokerage firm and the brokerage firm shall remit to the Company from the proceeds of the sale of the shares the exercise price as to which the option has been exercised in accordance with the procedures permitted by Regulation T of the Federal Reserve Board; or• by any other method the Board authorizes.The Company must receive payment for the shares acquired upon exercise of the stock option, and any required withholding taxes and related amounts, by the time the Board specifies depending on the type of payment being made, but in all cases prior to the issuance of the shares.8. Restricted Stock Awards.(a) Granting of Awards. The Company shall grant each director of the Company and each director of Donegal Mutual an annual restricted stock award consisting of 400 shares of Class A common stock, except that a person who serves as a director on both boards shall receive only one annual grant. The Company shall grant the restricted stock awards on the first business day of January in each year, commencing January 2, 2012, provided that the director served as a member of the Board or of the board of directors of a member of the Group during any portion of the preceding calendar year.(b) Terms of Restricted Stock Awards. Each restricted stock award agreement shall contain such restrictions, terms and conditions as this Plan requires:• The grantee may not sell or otherwise transfer the shares of Class A common stock comprising the restricted stock awards until one year after the date of grant. Although the Company shall register the shares of Class A common stock comprising each restricted stock award in the name of the grantee, the Company reserves the right to place a restrictive legend on the stock certificate. None of such shares of Class A common stock shall be subject to forfeiture.• Subject to the restrictions on transfer set forth in this Section 8(b), a grantee shall have all the rights of a stockholder with respect to the shares of Class A common stock the Company issues pursuant to restricted stock awards made under this Plan, including the right to vote the shares and receive all dividends and other distributions paid or made with respect to the shares.• In the event of changes in the capital stock of the Company by reason of stock dividends,split-ups or combinations of shares, reclassifications, mergers, consolidations, reorganizations or liquidations while the shares comprising a restricted stock award shall be subject to restrictions on transfer, any and all new, substituted or additional securities to which the grantee shall be entitled by reason of the ownership of a restricted stock award shall be subject immediately to the terms, conditions and restrictions of this Plan.• If a grantee receives rights or warrants with respect to any shares comprising a restricted stock award, the grantee may hold, exercise, sell or otherwise dispose of such rights or warrants or any shares or other securities acquired by the exercise of such rights or warrants free and clear of the restrictions and obligations set forth in this Plan.9. Date of Grant. The grant date of a stock option under this Plan shall be the date of the Board’s approval or such later date as the Board determines at the time it authorizes the grant. The Board may not make retroactive grants of stock options under this Plan. The Company shall provide notice of the grant to the grantee within a reasonable time after the grant date.C-310. Requirements for Issuance of Shares. The Company will not issue shares of Class A common stock in connection with any award under this Plan until the issuance of the shares complies with all of the applicable legal requirements to the satisfaction of the Board. The Board shall have the right to condition any award made to any director on the director’s undertaking in writing to comply with the restrictions on his or her subsequent disposition of shares subject to the award as the Board shall deem necessary or advisable, and certificates representing those shares may be legended to reflect any such restrictions. Certificates representing shares of Class A common stock issued under this Plan will be subject to such stop-transfer orders and other restrictions as applicable laws, regulations and interpretations may require, including any requirement that a legend be placed on the certificate.11. Withholding. The Company shall have the right to require the grantee to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to the delivery of any certificate for shares of Class A common stock. If and to the extent the Board authorizes, in its sole discretion, a grantee may make an election, by means of a form of election the Board prescribes, to have shares of Class A common stock that are acquired upon exercise of a stock option withheld by the Company or to tender other shares of Class A common stock or other securities of the Company owned by the grantee to the Company at the time of exercise of a stock option to pay the amount of tax that would otherwise be required by law to be withheld by the Company. Any such election shall be irrevocable and shall be subject to termination by the Board, in its sole discretion, at any time. Any securities so withheld or tendered will be valued by the Board as of the date of exercise.12. Transferability of Awards. Only the grantee of an award may exercise rights under the award grant during the grantee’s lifetime, and a grantee may not transfer those rights except by will or by the laws of descent and distribution. When a grantee dies, the personal representative or other person entitled to succeed to the rights of the grantee may exercise those rights. Any successor to a grantee must furnish proof satisfactory to the Company of his or her right to receive the award under the grantee’s will or under the applicable laws of descent and distribution. Except as stated in this Section 12, no stock option or interest therein and, for a period of one year after the date of grant, no restricted stock award or any interest therein, shall be subject to the debts, contracts or engagements of the grantee or his or her successors in interest, nor shall they be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means, whether such disposition is voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings, including bankruptcy, and any attempted disposition thereof shall be null and void and of no effect.13. Amendment and Termination of this Plan.(a) Amendments. The Board may amend or terminate this Plan at any time, except that the Board shall not amend this Plan without approval of the stockholders of the Company if such approval is required in order to comply with the Code or applicable laws, or to comply with applicable stock exchange requirements. The Board may not, without the consent of the grantee, negatively affect the rights of a grantee under any award previously granted under this Plan.(b) No Repricings Without Stockholder Approval. The Board may not reprice stock options, nor may the Board amend this Plan to permit repricing of stock options unless the stockholders of the Company provide prior approval for the repricing.(c) Termination. This Plan shall terminate on April 21, 2021, unless the Board earlier terminates this Plan or the term is extended with the approval of the stockholders of the Company. The termination of this Plan shall not impair the power and authority of the Board with respect to an outstanding award.C-414. Reservation of Shares. The Company, during the term of this Plan, shall at all times reserve and keep available the number of shares of Class A common stock needed to satisfy the requirements of this Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority the Company’s counsel deems necessary to the lawful issuance and sale of any shares under this Plan, shall relieve the Company of any liability for the failure to issue or sell any shares as to which the requisite authority the Company has not obtained.15. No Prohibition on Corporate Action. No provision of this Plan shall be construed to prevent the Company or any officer or director of the Company from taking any action the Company or such officer or director deems appropriate or in the Company’s best interest, whether or not such action could have an adverse effect on this Plan or any awards granted under this Plan, and no grantee or grantee’s estate, personal representative or beneficiary shall have any claim against the Company or any officer or director of the Company as a result of the taking of the action.16. Indemnification. With respect to the administration of this Plan, the Company shall indemnify each present and future member of the Board against, and each member of the Board shall be entitled without further action on such member’s part to indemnity from the Company for, all expenses, including the amount of judgments and the amount of approved settlements made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself, reasonably incurred by him or her in connection with or arising out of, any action, suit or proceeding in which he or she may be involved by reason of being or having been a member of the Board, whether or not he or she continues to be such member at the time of incurring such expenses; provided, however, that this indemnity shall not include any expenses incurred by any such member of the Board (i) in respect of matters as to which he or she shall be finally adjudged in any such action, suit or proceeding to have been guilty of gross negligence or willful misconduct in the performance of his or her duty as such member of the Board or (ii) in respect of any matter in which any settlement is effected for an amount in excess of the amount approved by the Company on the advice of its legal counsel; and provided further that no right of indemnification under the provisions set forth in this Section 16 shall be available to or enforceable by any such member of the Board unless, within 60 days after institution of any such action, suit or proceeding, he or she shall have offered the Company in writing the opportunity to handle and defend same at its own expense. The foregoing right of indemnification shall inure to the benefit of the heirs, executors or administrators of each such member of the Board and shall be in addition to all other rights to which such member may be entitled as a matter of law, contract or otherwise.17. Miscellaneous Plan Provisions.(a) Compliance with Plan Provisions. No grantee or other person shall have any right with respect to this Plan, the Class A common stock reserved for issuance under this Plan or in any award until the Company and the grantee execute a written agreement and the Company and grantee satisfy all the applicable terms, conditions and provisions of this Plan and award.(b) Approval of Counsel. In the discretion of the Board, no shares of Class A common stock, other securities or property of the Company or other forms of payment shall be issued hereunder with respect to any award unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable federal, state, local and foreign legal, securities exchange and other applicable requirements.(c) Compliance withRule 16b-3. To the extent thatRule 16b-3 under the Securities Exchange Act of 1934, as amended, applies to awards granted under this Plan, it is the intention of the Company that this Plan comply in all respects with the requirements ofRule 16b-3, that any ambiguities or inconsistencies in construction of this Plan be interpreted to give effect to such intention and that if this Plan shall not so comply, whether on the date of adoption or by reason of any later amendment to or interpretation ofRule 16b-3, the provisions of this Plan shall be deemed to be automatically amended so as to bring them into full compliance with that rule.C-5(d) Section 409A Compliance. This Plan is intended to comply with the requirements of Section 409A of the Code and the regulations issued thereunder. To the extent of any inconsistencies with the requirements of Section 409A, this Plan shall be interpreted and amended in order to meet the requirements of Section 409A. Notwithstanding anything contained in this Plan to the contrary, it is the intent of the Company to have this Plan interpreted and construed to comply with any and all provisions Section 409A including any subsequent amendments, rulings or interpretations from appropriate governmental agencies.(e) Effects of Acceptance of the Award. By accepting any award or other benefit under this Plan, the Company shall conclusively deem each grantee and each person claiming under or through the grantee to have indicated his acceptance and ratification of, and consent to, any action taken under this Plan by the Company, the Board or its delegates.Adopted by the Board on March 7, 2011.C-6002CS109686 IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE.6
+ Proxy — DONEGAL GROUP INC.ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 21, 2011This Proxy Solicited on behalf of the Board of DirectorsThe undersigned hereby appoints Daniel J. Wagner and Jeffrey D. Miler,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 RiverHeritage Hotel Lancaster, 500 Centerville Road, Marietta,Lancaster, Pennsylvania 17547,17601, on April 21, 201119, 2012 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. C Non-Voting ItemsChange of Address— Please print new address below.IF VOTING BY MAIL, YOU MUST COMPLETE SECTIONS A - C ON BOTH SIDES OF THIS CARD.+ 
Using ablack ink pen, mark your votes with anX as shown inthis example. Please do not write outside the designated areas.
Electronic Voting InstructionsYou can vote by Internet or telephone!Available 24 hours a day, 7 days a week!Instead of mailing your proxy, you may choose one of the two voting methods outlined below to vote your proxy.VALIDATION DETAILS ARE LOCATED BELOW IN THE TITLE BAR.Proxies submitted by the Internet or telephone must be received by 1:00 a.m., Central Time, on April 20, 2011.
Vote by Internet•Log on to the InternetContinued and go towww.investorvote.com/DGIC•Follow the steps outlined on the secured website.
Vote by telephone•Call toll free 1-800-652-VOTE (8683) within the USA, US territories & Canada any time on a touch tone telephone. There is NO CHARGE to you for the call.•Follow the instructions provided by the recorded message.
6 IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE.6AProposals — Our Board of Directors recommends a voteFOR each nominee listed in Proposal 1,FOR Proposal 2,FOR Proposal 3, forTHREE YEARS under Proposal 4,FOR Proposal 5,FOR Proposal 6 andFOR Proposal 7.+ 1. Election of Class A Directors:ForWithholdForWithhold 01 - Robert S. Bolingercc03 - Philip H. Glatfelter, IIcc 02 - Patricia A. Gilmartincc04 - Jack L. Hesscc For Against Abstain For Against Abstain 2. Ratification of KPMG LLP as our independent registered public accounting firm for 2011. c c c 5. Approval of our 2011 Employee Stock Purchase Plan. c c c 3. Approval, by a non-binding vote, of the executive compensation of our named executive officers during 2010. c c c 6. Approval of our 2011 Equity Incentive Plan for Employees. c c c 1 Yr 2 Yrs 3 Yrs Abstain 7. Approval of our 2011 Equity Incentive Plan for Directors. c c c 4. Determination, by a non-binding vote of our stockholders, of the frequency of our stockholder vote to approve the compensation of our named executive officers every one, two or three years. c c c c B 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.//
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