MARKET VALUE POTENTIAL
PERFORMANCE INCENTIVE PLAN
PLAN DESCRIPTION
1. PURPOSE OF PLAN
The purpose of this plan is to provide incentive to select key employees to
effectively utilize company capital thereby maximizing the value of
shareholder investment. This plan aligns participant compensation incentive
with the factors upon which the Company's market value is driven.
2. DEFINITIONS
2.1 "Pay Position Policy" is a statement of salary, bonus formula and expense
allowances prepared for each key employee each year as approved by the Board
of Directors of RLI Corp. at their annual meeting. This incentive plan
description is part of the pay position policy statement and is not to be
construed as an employment agreement.
2.2 "Company" means RLI Corp.
2.3 "Participant" is a key executive of the Company designated by the Board
of Directors of the Company to be eligible for the plan.
2.4 "Plan Administration Committee" consists of the RLI Insurance Company's
Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and
Administrative Vice President. The Committee is authorized to interpret the
plan and may, from time to time, adopt such rules and regulations necessary
for the administration of the plan as it shall determine. Decisions of the
Committee shall be final, subject at all times to review or change by members
of the Executive Resources Committee who are outside directors, within the
meaning of Section 162(m) of the Internal Revenue Code, of the Board of
Directors of the Company.
2.5 "Award Year" is the Company's current fiscal year.
2.6 "Invested Capital" is the historic common and preferred stock investment
including retained earnings plus outstanding debt instruments owned by outside
parties as indicated on the Company's year-end audited financial statements.
2.7 "Blended Cost of Capital" is defined for purpose of this plan as the
thirty-year U.S. Treasury Bill rate plus 6% modified by the Dow Jones Property
& Casualty Insurance group beta on a five-year rolling average basis at the
beginning of the year. This resulting rate is blended prorata (comparing
market capitalization of the Company's stock with outstanding Company debt at
cost or conversion price, whichever is higher) with the coupon or interest
rate actually incurred on the outstanding debt. Should preferred stock be
issued the historic investment after-tax will be blended with the historic
common stock investment plus retained earnings.
2.8 "Actual Return" is the Company's GAAP fiscal year adjusted increase in
shareholders' equity as calculated in Section 3.
2.9 "Required Return" is equal to the beginning of the year Invested Capital,
times the Blended Cost of Capital plus the after-tax cost of any ESOP and
excess ESOP contribution for the year in accordance with the plan provisions.
This return is required before executive bonuses are eligible for payment.
Amounts in excess of the Required Return equal Market Value Potential ("MVP")
for bonus purposes.
Required Return will be adjusted quarterly on a time-weighted basis as
follows:
2.91 Beginning Invested Capital:
2.911 At the end of each quarter the increase (or decrease) in Invested
Capital, net of retained earnings, is divided by four. The result is
multiplied by the number of quarters left in the fiscal year and added (or
subtracted) to beginning capital;
2.912 The result equals adjusted Invested Capital;
2.913 The increase (or decrease) in Invested Capital is multiplied by the
debt or equity component of the December 31 Blended Cost of Capital;
2.914 No adjustment will be made in the fourth quarter of the fiscal year.
2.10 "Cause" means failure to meet the Company's standards with respect to
performance of duties, excessive absenteeism, unethical behavior, or violation
of a material policy of the Company.
2.11 "Trade Secret" means information that: is used or intended for use in a
trade or business; is included or embodied in a formula, pattern, compilation,
computer software, drawing, device, method, technique or process; is not
publicly known and is not generally known in the trade or business of the
Company; cannot be readily ascertained or derived from publicly available
information; and has significant economic value.
3. BONUS CALCULATION
3.1 For bonus purposes, MVP is quantified as below:
3.11 Company ending GAAP book value:
3.111 Plus outstanding debt instruments at end of period;
3.112 Less additional investments in the Company in the form of stock issues
(including ESOP and Excess ESOP stock purchases from the Company) or outside
debt instruments issued during the year at issue price. This includes
acquisitions using the Company's stock or debt whether pooled or not;
3.113 Plus any Company stock repurchases;
3.114 Plus any payment of debt principal;
3.115 Plus after-tax accrued interest paid on all outside debt instruments;
3.116 Plus shareholder dividends paid during the year;
3.117 Plus current year after-tax accrued executive MVP bonuses;
3.118 Plus current year after-tax accrued ESOP contribution;
3.119 Plus current year after-tax payment of preferred dividends.
3.12 Less Company beginning GAAP book value:
3.121 Plus outstanding debt instruments at beginning of period.
3.13 The result is the Actual Return for the Award Year.
3.2 The Actual Return less the Required Return is MVP.
3.3 Each Participant will be assigned a percent of MVP as determined annually
by the Executive Resources Committee of the Company's Board of Directors. The
assigned percent times MVP will be credited without limit to a memo bank
account for each Participant. If the Required Return is not achieved, any
amount less than the Required Return will be charged to the Participant's bank
account at the same rate without limit.
3.4 The bonus for a Participant newly hired during the Award Year shall be
calculated prorata beginning the first day of the following month of
employment. The new Participant shall not be eligible to participate in the
plan if hired during the fourth quarter.
3.5 Bonus Bank
As MVP bonuses are calculated after-tax, the earned bonus will be grossed up
by the Company's marginal state and federal income tax rate and credited to
the Participant's bonus bank account established for that purpose. If the
Required Return is not earned, negative bonus will be grossed up by the same
tax rates and charged to the Participant's bonus bank account. The grossed up
debit or credit to the bank will be made without limit. These calculations
shall be done immediately after the annual audit.
3.6 Interest will be paid in arrears by the Company to each Participant's
bank account once a year on any unpaid positive balance before the current
year's contribution. The interest rate applied will be the three-year U.S.
Treasury Bill rate in effect at the end of the fiscal year.
3.7 After the Award Year bonus (or charge) and applicable interest are posted
to the Participant's bank account and upon completion of the annual outside
audit, 60% of any positive total bonus bank balance will be paid to the
Participant and the amount of such payment will reduce the bank balance.
3.8 Positive or negative balances will be carried forward to the next year as
long as the Participant is employed by the Company. The Participant will not
be required to reimburse the Company for a negative balance upon termination
of employment or otherwise.
3.9 Upon termination of employment (including retirement in accordance with
the Company's normal retirement policies) should the Participant's bank
account balance be positive, it will be payable to the terminated Participant
subject to the following limitations:
3.91 The bank account balance of the terminated Participant will be
calculated as of the end of the quarter in which the termination took place.
The Participant's bank account balance will be at risk from a negative MVP
charge only until that time. Twenty percent(20%) of the eligible positive
balance will then be paid. Twenty percent(20%) of the remaining balance will
then be paid twelve(12) months later. Thirty percent(30%) of the balance will
be paid at twenty-four(24) months and the balance will be paid thirty-six(36)
months after the date of termination. All payments are subject to the
following benefits and restrictions:
3.911 At the Company's fiscal year-end, if the Participant's bank balance is
positive, it will be credited in arrears with interest at the three-year U.S.
Treasury Bill rate on that date;
3.912 During the payment period, the Participant must cooperate with the
Company and must not divulge or use in any way, either directly or indirectly,
whether or not for personal gain, proprietary Company information such as, but
not limited to, customer lists, software, or Company procedures. The
Participant must never disclose any Company Trade Secret;
3.913 The Participant agrees to give depositions and testify in any court
matter effecting the Company without charging a fee. The Company will
reimburse out-of-pocket transportation, meal and lodging costs;
3.914 The Participant does not directly or indirectly solicit Company
employees to work for another company. In addition the Participant shall not
directly or indirectly solicit any person who was employed by the Company
within six months prior to the date the Participant's employment terminated;
3.915 The Participant shall not contact any producer of the Company for the
purpose of soliciting business away from the Company. This restriction shall
not apply to producers already licensed and/or producing with competitors.
4. AMENDMENT AND TERMINATION OF PLAN
The Board of Directors of the Company may at any time terminate, modify or
amend this plan. Any change shall not adversely affect the then existing
earned bonus bank of each Participant.
5. NONASSIGNABLE DEATH AND TOTAL DISABILITY
No right or interest of any Participant in the plan shall be assignable or
transferable or subject to any lien, directly, by operation of law or
otherwise, including execution, levy garnishment, attachment, pledge and
bankruptcy. In the event of a Participant's death or total disability, payment
of the then existing balance calculated to the end of the nearest quarter
shall be made to the Participant together with interest calculated to the date
of termination as described in Section 3.6. If deceased, payment will be made
to the Participant's designated beneficiary, or in the absence of such
designation, to the Participant's estate. If in the judgment of the Plan
Administration Committee the beneficiary designation is insufficient, or if
the designated beneficiary dies before all payments due have been made, any
unpaid earned bonus amount will be made in the order noted during the lifetime
of each individual beneficiary: the Participant's spouse if living, or if not,
the Participant's then living descendants per stirpes, or if there are none,
the Participant's estate.
6. TAX WITHHOLDING
The Company shall deduct from payments under this plan any applicable Federal,
state, local or other taxes including any interest, penalty or addition,
whether disputed or not.
7. HOLD HARMLESS
The Participant must hold the Company harmless from and pay any cost, expense
or fee incurred by the Company in respect to any claim, due or demand asserted
by any person, except the Company, against such Participant's MVP bonus amount
or bank account balance.
8. FUNDING
The MVP bank account balance is contingent upon future events, is unfunded, is
subject to the claims of the general creditors of the Company, may not be
assigned, sold, anticipated, pledged or otherwise transferred and shall not be
subject to the claims of the Participant, the Participant's spouse, or their
assigns. The foregoing sentence shall not relieve the Company of its
obligation to pay the bonus when due under the terms of the plan.
9. EMPLOYMENT OR RELATED AGREEMENTS
This plan shall not constitute an employment agreement between the Company and
any Participant, as consideration for or as an inducement to any Participant
to assume or remain employed by the Company. Nothing expressed in this plan
shall be deemed to grant to any Participant any right to be retained in the
service of the Company or to interfere with the right of the Company other
than as limited by any written employment agreement between the Company and
the Participant to the contrary. Notwithstanding any provision of the plan to
the contrary, no Participant shall earn any benefit under this plan unless
such Participant satisfies all conditions applicable to such Participant and
such Participant's benefit to the subjective satisfaction of the Company.
10. EFFECTIVE DATE
The effective date of the plan is January 1, 1996.
11. APPLICABLE LAW
The validity and interpretation of the plan and all matters relating to it
shall be determined under, and construed according to, the laws of the State
of Illinois.
12. INVALID PROVISION
If any term or provision of this plan or its application to any person or
circumstance will to any extent be held invalid or unenforceable, the
remainder of this plan, or the application of such term or provision to such
person or circumstance other than that as to which is invalid or
unenforceable, will not be effected. Each term or provision of this plan is
valid and will be enforced to the fullest extent permitted by law.
13. NOTICES
All notices, requests, communications and demands shall be in writing and
shall be deemed to have been duly given if delivered in person or sent by
registered or certified mail, postage prepaid, to the Company at its principal
place of business, or to such other address as the Company shall periodically
designate by written notice. In the case of the Participant, notice shall be
mailed to the Participant's last known principal place of residence or to such
other address as the Participant shall periodically designate by written
notice.
14. VENUE
As a substantial portion of the duties and obligations of the parties created
by the plan are performable in Peoria, Illinois, it shall be the sole and
exclusive venue for any arbitration, litigation, special proceedings, or
other proceedings between the parties in connection with the plan.
15. WAIVER
The waiver by the Company of any breach of this plan, whether in a single
instance or repeatedly, shall not be construed as a waiver of rights under the
plan. Such breach shall not be construed as a waiver by the Company to
strictly adhere to the terms and conditions of this plan, nor as a waiver of
any claim for damages or other remedy by reason of any such breach.