SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant / /
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Under Rule 14a-12
HARLEYSVILLE GROUP INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
1) Amount Previously Paid:
___________________________________________________________________________
2) Form, Schedule or Registration Statement No.:
___________________________________________________________________________
3) Filing Party:
___________________________________________________________________________
4) Date Filed:
___________________________________________________________________________
[GRAPHIC OMITTED] WILLIAM W. SCRANTON III 215.256.5000
Harleysville Chairman of the Board www.harleysvillegroup.com
Good people to know 355 Maple Avenue
Harleysville, PA 19438
March 28, 2006
Dear Harleysville Group Inc. Stockholder:
You are cordially invited to attend the Annual Meeting of the
Stockholders of Harleysville Group Inc. at the Company's headquarters, 355 Maple
Avenue, Harleysville, Pennsylvania, on Wednesday, April 26, 2006, at 10:30 a.m.
At the meeting, stockholders will vote on two scheduled items of
business. The items and the votes the Board of Directors recommends are:
Item Recommended Vote
---- ----------------
1. Election of three directors FOR
2. Approval of the Amended and Restated
Equity Incentive Plan FOR
We also will discuss Harleysville Group's 2005 operations and will be
pleased to answer your questions about the Company. Enclosed with this proxy
statement are your proxy card and the 2005 Annual Report.
We look forward to seeing you on April 26, 2006. Whether or not you
plan to attend the meeting in person, it is important that you complete and
return the enclosed proxy card in the envelope provided in order that your
shares can be voted at the meeting as you have instructed.
Sincerely,
/s/ William W. Scranton III
William W. Scranton III
[GRAPHIC OMITTED] ROBERT A. KAUFFMAN 215.256.5000
Harleysville Secretary www.harleysvillegroup.com
Good people to know 355 Maple Avenue
Harleysville, PA 19438
HARLEYSVILLE GROUP INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 26, 2006
To the Stockholders of
HARLEYSVILLE GROUP INC.
The Annual Meeting of Stockholders of HARLEYSVILLE GROUP INC. will be
held at 10:30 a.m., Wednesday, April 26, 2006, at its headquarters at 355 Maple
Avenue, Harleysville, Pennsylvania 19438, for the following purposes:
1. To elect three Class B directors;
2. To approve the Amended and Restated Equity Incentive Plan; and
3. To transact such other business as may properly be presented.
YOUR BOARD RECOMMENDS A VOTE TO ELECT THE NOMINATED DIRECTORS AND TO
APPROVE THE AMENDED AND RESTATED EQUITY INCENTIVE PLAN.
The Board of Directors has fixed the close of business on March 1,
2006, as the record date for determining the stockholders entitled to vote at
the Annual Meeting.
For further information on the individuals nominated as directors,
please read the proxy statement that follows.
This notice, the proxy statement, the proxy card and the 2005 Annual
Report to Stockholders are being distributed to stockholders on or about March
28, 2006.
By Order of the Board of Directors,
/s/ Robert A. Kauffman
Robert A. Kauffman
March 28, 2006
Table of Contents
ANNUAL MEETING OF STOCKHOLDERS 1
PURPOSE OF PROXY STATEMENT 1
MATTERS TO BE VOTED UPON 1
VOTING PROCEDURES 1
OTHER INFORMATION 3
BOARD OF DIRECTORS 3
CORPORATE GOVERNANCE PRACTICES 3
AUDIT COMMITTEE REPORT 6
AUDIT FEES 8
BOARD AND COMMITTEE MEETINGS 8
DIRECTOR NOMINATION PROCEDURES 12
SECURITY HOLDER COMMUNICATION PROCESS 12
COMPENSATION OF DIRECTORS 13
STOCKHOLDER ACTIONS 15
ITEM 1. ELECTION OF DIRECTORS 15
BIOGRAPHIES OF DIRECTOR NOMINEES AND DIRECTORS CONTINUING IN OFFICE 16
EXECUTIVE OFFICERS 18
ITEM 2. APPROVAL OF THE AMENDED AND RESTATED EQUITY INCENTIVE PLAN 20
KEY TERMS OF THE PLAN 21
FEDERAL INCOME TAX CONSEQUENCES 23
ESTIMATED PLAN BENEFITS 25
VOTE REQUIRED 25
SECURITIES AUTHORIZED UNDER EQUITY COMPENSATION PLANS AS OF DECEMBER 31, 2005 25
OWNERSHIP OF COMMON STOCK 26
TABLE I - FIVE PERCENT STOCKHOLDERS 26
TABLE II - BENEFICIAL OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS 27
REPORT OF COMPENSATION AND PERSONNEL DEVELOPMENT COMMITTEE 28
COMPENSATION PHILOSOPHY 28
COMPENSATION METHODOLOGY 28
CHIEF EXECUTIVE OFFICER COMPENSATION 31
INTERNAL REVENUE CODE IMPACT 32
COMPENSATION COMMITTEE INTERLOCKS 32
STOCK PERFORMANCE CHART 33
EXECUTIVE COMPENSATION 34
SUMMARY COMPENSATION TABLE
OPTION GRANTS IN 2005 37
OPTION EXERCISES AND YEAR-END VALUES 38
LONG TERM INCENTIVE PLAN PERFORMANCE OPPORTUNITY AWARDS IN 2005 38
PENSION PLANS 39
TRANSACTIONS WITH HARLEYSVILLE MUTUAL 40
SECTION 16 REPORTING COMPLIANCE 41
AMENDED AND RESTATED EQUITY INCENTIVE PLAN A-1
ANNUAL MEETING OF STOCKHOLDERS
PURPOSE OF PROXY STATEMENT
The Board of Directors of Harleysville Group is soliciting your proxy
for voting at the Annual Meeting of Stockholders to be held April 26, 2006, at
the headquarters of the Company. This proxy statement is being distributed to
stockholders on or about March 28, 2006.
MATTERS TO BE VOTED UPON
At the Annual Meeting, stockholders will vote on the election of three
Class B directors: Michael L. Browne, Frank E. Reed and Jerry S. Rosenbloom.
Please see pages 15-16 for information on the election of directors.
Stockholders will also vote to approve the Amended and Restated Equity Incentive
Plan. Please see pages 20-25 for information on the approval of the Amended and
Restated Equity Incentive Plan.
The Board of Directors knows of no other matters to be presented for
stockholder action at the meeting. If other matters are properly presented at
the meeting, your signed and dated proxy card authorizes any of Arthur E.
Chandler, Robert A. Kauffman or Catherine B. Strauss to vote your shares in
accordance with his or her best judgment.
VOTING PROCEDURES
Who May Vote
Stockholders as of the close of business on March 1, 2006 (the Record
Date) are entitled to vote at the Annual Meeting. Each share of common stock is
entitled to one vote.
How to Vote
Stockholders may vote:
o In person at the meeting, or
o By mail by completing and returning the proxy card.
Vote Needed for Election of Directors and Approval of Plan
The three nominees for directors receiving the highest number of votes
will be elected. The Amended and Restated Equity Incentive Plan will be approved
if it receives affirmative votes representing a simple majority of all shares
present and entitled to vote. As of the Record Date, Harleysville Mutual
Insurance Company owned 17,002,445 shares (or approximately 55 percent) of
Harleysville Group's outstanding common stock. The Company is thus a "controlled
company" under NASDAQ listing requirements. Harleysville Mutual has advised
Harleysville Group that it will vote in favor of the election of the nominated
directors and for approval of the Amended and Restated Equity Incentive Plan. As
a result, the nominated directors will be elected and the Amended and Restated
Equity Incentive Plan will be approved regardless of the votes of the other
stockholders.
1
Quorum to Transact Business
A quorum for the transaction of business at the Annual Meeting consists
of the holders of a majority of the issued and outstanding shares of the
Company's common stock, present in person or represented by proxy. As of the
Record Date, 30,709,049 shares of Harleysville Group's common stock were issued
and outstanding. If you attend in person and indicate your presence, or mail in
a properly signed and dated proxy card, you will be part of the quorum.
Voting of Shares via Proxy
If you have submitted a properly executed proxy by mail and are part of
the quorum, your shares will be voted as you indicate. If you sign, date and
mail in your proxy card without indicating how it should be voted on the
election of the directors or on the approval of the Amended and Restated Equity
Incentive Plan, your shares will be voted in favor of the election of the three
nominated directors and for approval of the plan. If you sign, date and mail
your proxy card and withhold voting for any or all of the nominated directors
(as explained on the proxy card), your vote will be recorded as being withheld,
but it will have no effect on the outcome of the election. A proxy card marked
"abstain" regarding approval of the Amended and Restated Equity Incentive Plan
will not be voted on that item, but will be included as present and entitled to
vote for determining whether the item has been approved. Broker non-votes are
not so included. A broker non-vote occurs when a broker votes on some matters on
the proxy card, but not on others because the broker does not have authority to
do so.
Revocation of Proxy
If you later decide to revoke or change your proxy, you may do so by:
(1) sending a written statement to that effect to the Secretary of the Company;
(2) submitting a properly signed proxy with a later date; or (3) voting in
person at the Annual Meeting.
Substantial Owners of Stock
In addition to Harleysville Mutual, Dimensional Fund Advisors Inc. owns
five percent or more of Harleysville Group common stock. Please see the chart on
page 26 for more details.
Duplicate Proxy Statements and Cards
You may receive more than one proxy statement, proxy card or annual
report. This duplication will occur if your shares are registered in different
names or your shares are in more than one type of account maintained by Mellon
Investor Services LLC, the Company's transfer agent. To have all your shares
voted, please sign and return all the proxy cards you have received. If you wish
to have your accounts registered in the same name(s) and address, please call
Mellon Investor Services LLC, at 1-888-525-8792, or contact Mellon through its
Web site: www.melloninvestor.com.
2
OTHER INFORMATION
Stockholder Proposals
An eligible stockholder who wants to have a qualified proposal
considered for inclusion in the proxy statement for the 2007 Annual Meeting of
Stockholders must notify the Secretary of the Company. The proposal must be
received at the Company's offices no later than November 17, 2006. A stockholder
must have been a registered or beneficial owner of at least one percent of the
Company's outstanding common stock or stock with a market value of $2,000 for at
least one year prior to submitting the proposal and the stockholder must
continue to own such stock through the date the Annual Meeting is held. A
stockholder who has not timely submitted a proposal for inclusion in the proxy
statement and who plans to present a proposal at the 2007 Annual Meeting of
Stockholders must provide notice of the matter to the Secretary of the Company
by February 10, 2007, or else the persons authorized under management proxies
will have discretionary authority to vote and act according to their best
judgment on the matter raised by the stockholder.
Expenses of Solicitation
Harleysville Group pays the cost of the preparation and mailing of this
proxy-soliciting material. In addition to the use of the mail, proxies may be
solicited personally, by telephone or by other electronic means by Harleysville
Group officers and employees, without their receiving additional compensation.
Harleysville Group pays all costs of solicitation, including certain expenses of
brokers and nominees who mail proxy material to their customers or principals.
Independent Registered Public Accounting Firm
Representatives of KPMG LLP ("KPMG"), an independent registered public
accounting firm that audited Harleysville Group's 2005 financial statements,
will attend the Annual Meeting. They will have the opportunity to make a
statement, if they desire to do so, and will respond to any appropriate
questions presented by stockholders. In the spring of each year, the Audit
Committee normally selects the independent registered public accounting firm to
perform the audit and thus has not selected the independent registered public
accounting firm for the fiscal 2006 financial statements.
BOARD OF DIRECTORS
CORPORATE GOVERNANCE PRACTICES
In order to promote the highest standards of management for the benefit
of stockholders, the Board of Directors of Harleysville Group follows certain
governance practices regarding how the Board conducts its business and fulfills
its duties. The Company's Board of Directors' Governance Principles may be
accessed through the Governance section of the Company's Web site
(www.harleysvillegroup.com). Among these practices are:
3
Board Size, Composition and Independence
The Board presently consists of eight directors comprised of seven
independent non-employee directors and one employee director, Michael L. Browne,
who is the President and Chief Executive Officer ("CEO"). The Board believes
that the Board should consist of at least seven directors and that, because some
members of the Board are also members of the Board of Harleysville Mutual, the
total number of individuals comprising the boards of Harleysville Mutual and
Harleysville Group should be no more than 12. The Board has determined that no
independent, non-employee director has a relationship with the Company that
impairs his or her independence. The Board further believes that of the maximum
total board membership of 12, no more than three should be employee directors,
with the remainder being independent directors as defined by the NASDAQ National
Market System corporate governance rules. The Company's Board of Directors'
Governance Principles provide that no member of the Board may serve as an
independent director on more than three other boards of for-profit companies.
Qualifications of Directors
The Nominating and Corporate Governance Committee, with input from the
Chairman of the Board and the CEO, screens director candidates. In overseeing
the nomination of candidates for election, the Committee and subsequently the
Board, seeks qualified individuals with outstanding records of success in their
chosen careers, the skills to perform the role of director, and the time and
motivation to perform as directors. Directors are expected to bring specialized
talents to the Board that add value to the Board's deliberative process and
advance the business goals and social consciousness of the Company. Directors
are expected to be knowledgeable about profit-making enterprises and the
elements necessary for such enterprises to be successful. The director
nomination process is more fully described on page 12.
Attendance at Directors' and Stockholders' Meetings
Directors are expected to attend all meetings of the Stockholders, the
Board and the Committees on which they serve. Members of management regularly
attend portions of Board and Committee meetings.
Director Retirement
It is Board policy that a director resigns as a director upon
resignation or retirement from his or her primary employment, unless the
Nominating and Corporate Governance Committee and the Chairman of the Board
request the individual to remain as a director. Pursuant to the Company's
by-laws, each director must retire from the Board at the first annual meeting
following his or her 72nd birthday.
Stock Ownership
By 2007 (or five years after election for a newly elected non-employee
director), each non-employee director is expected to beneficially own an amount
of the Company's common stock having a value equal to at least five times the
then current annual retainer. To assist the non-employee directors in attaining
this goal, the Company grants deferred stock units to non-employee directors.
Leadership
The Board retains the right to exercise its judgment to combine or
separate the offices of Chairman of the Board and Chief Executive Officer.
Currently, the Chairman of the Board is not the Chief Executive Officer.
4
CEO Performance Evaluation
The independent directors of the Company annually review the Chief
Executive Officer's performance. Each such director prepares a written
evaluation of the Chief Executive Officer's performance, which is submitted to
the chairman of the Compensation and Personnel Development Committee, who
compiles a report of the reviews of the independent directors. The independent
directors then meet in an executive session to discuss the Chief Executive
Officer's performance and to agree on the content of the appraisal, which the
members of the Compensation and Personnel Development Committee later review
with the Chief Executive Officer.
Code of Conduct
The Board of Directors through the Nominating and Corporate Governance
Committee has established and oversees compliance with a Code of Conduct for
Directors, Officers and Employees and a Code of Ethics for Senior Financial
Officers meeting the requirements of the Securities and Exchange Commission
("SEC") and the NASDAQ National Market System corporate governance rules. These
are posted in the Governance section of the Company's Web site
(www.harleysvillegroup.com). The Company will provide a copy of either code to
any person upon request and without charge. Requests should be addressed to the
Nominating and Corporate Governance Committee, Harleysville Group, 355 Maple
Avenue, Harleysville, PA 19438-2297, with the words "Request for Codes" placed
on the lower left-hand corner of the envelope. The Company intends to disclose
waivers from, and amendments to, the Code of Conduct and the Code of Ethics on
its Web site. In addition, in accordance with NASDAQ listing requirements, the
Company also intends to disclose on a Form 8-K any waivers from the Code of
Conduct that are granted to directors and executive officers.
Board Effectiveness Assessment
Annually the Nominating and Corporate Governance Committee conducts an
assessment of the Board's effectiveness and makes a report on that subject to
the Board. That Committee also reviews and makes recommendations to modify the
Company's Corporate Governance Practices. All standing committees also conduct
annual self-assessments.
Director Compensation
In order to attract and retain qualified board members, director
compensation should be competitive with the compensation of directors at peer
companies. Directors' fees are determined by the Nominating and Corporate
Governance Committee after consultation with independent compensation
consultants.
Board Agendas and Meetings
A board calendar for each year is prepared in advance that lists items
to be addressed by the Board. Additional items are added by the Chairman or CEO.
Each director is free to suggest items for an agenda, and each director is free
to raise subjects at any Board meeting that are not on the agenda for that
meeting. The Board reviews and approves Harleysville Group's yearly operating
plan and specific financial goals for each year, and the Board monitors
performance throughout the year. The Board also reviews long-range strategic
issues at regular Board meetings, as well as at periodic meetings devoted solely
to strategic issues.
5
Executive Sessions of Independent Directors
The independent directors meet in executive session without the CEO or
other employee-directors in attendance, to review the performance of the CEO and
to review recommendations of the Compensation and Personnel Development
Committee concerning compensation for the employee directors. Executive sessions
of the independent directors are always scheduled at each regular Board meeting
and at most committee meetings. The current practice is to have the non-employee
chairman of the board preside.
Access to Management and Independent Advisers
The independent directors have access to management and, as necessary
and appropriate, independent advisers.
Audit Committee
The Audit Committee, which adopted a formal written charter in 1999 and
revised it in 2000, 2003 and 2004, consists of at least three members, all of
whom satisfy the definition of independent director established by both NASDAQ
and state insurance regulatory requirements. Each member is financially
knowledgeable as required by NASDAQ and also satisfies the Securities and
Exchange Commission's ("SEC") additional independence requirements for members
of audit committees. The Audit Committee currently is comprised of three
individuals, G. Lawrence Buhl, W. Thacher Brown and Frank E. Reed, each of whom
has been determined by the Board of Directors to be an "audit committee
financial expert" as defined by NASDAQ and in Section 407 of the Sarbanes-Oxley
Act and implementing regulations. The Audit Committee reviews and assesses the
adequacy of the formal written charter on an annual basis. The Audit Committee
annually pre-approves the annual audit engagement and pre-approves any non-audit
services as necessary. The delegation by the Audit Committee of pre-approval of
additional audit services is as follows: The chair of the Audit Committee or, if
she or he is unavailable, any member of the Audit Committee may pre-approve any
additional audit services. In the event of such approval, the full Audit
Committee shall be so informed at its next meeting. With regard to non-audit
services, the pre-approval requirement does not apply if: 1) the aggregate
amount of all such services provided constitutes no more than five percent of
the total amount of revenues paid by the Company to its independent auditor
during the fiscal year in which the services are provided; 2) such services were
not recognized by the Company at the time of the engagement to be non-audit
services; and 3) such services are promptly brought to the attention of the
Audit Committee and approved by the Audit Committee or by its chair prior to the
completion of the audit. The Audit Committee has established procedures for the
reporting of accounting and auditing matters pursuant to Section 301 of the
Sarbanes-Oxley Act.
AUDIT COMMITTEE REPORT
Prior to release of the Company's consolidated financial statements for
2005, which are contained in the Company's Annual Report, the Audit Committee
met and held discussions with management and KPMG, the independent registered
public accounting firm, regarding the fair and complete presentation of the
Company's results. Management represented to the Committee that the Company's
consolidated financial statements were prepared in accordance with U.S.
generally accepted accounting principles, and the Committee reviewed and
discussed the consolidated financial statements with management and the
independent registered public accounting firm. The Committee discussed with KPMG
matters required to be discussed by Statement on Auditing Standards No. 61
(Communication with Audit Committees).
6
In addition, the Audit Committee has discussed with KPMG the firm's
independence from the Company and its management, including the matters in the
written disclosures required by the Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees). The Audit Committee also
considered whether KPMG's provision of other non-audit services to the Company
is compatible with the firm's independence. The Audit Committee has concluded
that the KPMG is independent from the Company and its management.
The Audit Committee discussed with the Company's internal auditor and
the independent registered public accounting firm the overall scope and plans
for their respective audits. The Audit Committee met with the internal auditors
and the independent registered public accounting firm, with and without
management present, to discuss the results of their examinations, the
evaluations of the Company's internal controls and procedures, and the overall
quality of the Company's financial reporting.
In reliance on the reviews and discussions referred to above, the Audit
Committee has recommended to the Board of Directors that the audited
consolidated financial statements be included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2005, for filing with the SEC.
Management is responsible for the Company's financial reporting process
and for the preparation of its consolidated financial statements in accordance
with U.S. generally accepted accounting principles. KPMG is responsible for
auditing those consolidated financial statements. The Audit Committee's
responsibility is to monitor and review these processes. It is not the Audit
Committee's responsibility to conduct auditing or accounting reviews or
procedures. Therefore, in approving the inclusion of the audited consolidated
financial statements in the Annual Report on Form 10-K, the Audit Committee has
relied on management's representation that the consolidated financial statements
have been prepared in conformity with U.S. generally accepted accounting
principles and on the reports of KPMG included in the Company's Annual Report on
Form 10-K.
SUBMITTED BY THE AUDIT COMMITTEE:
G. Lawrence Buhl, Chairman
W. Thacher Brown
Frank E. Reed
7
AUDIT FEES
KPMG, the Company's independent registered public accounting firm for
2004 and 2005, rendered the following services and billed, or expects to bill,
the following fees for fiscal 2004 and 2005.
-------------------------------------------- ----------------------------- -----------------------------
SERVICES 2004 FEES 2005 FEES
-------------------------------------------- ----------------------------- -----------------------------
Audit $1,135,000 $835,000
-------------------------------------------- ----------------------------- -----------------------------
Audit-Related $ 15,000 $ 15,000
-------------------------------------------- ----------------------------- -----------------------------
Tax $ 0 $ 0
-------------------------------------------- ----------------------------- -----------------------------
All Other $ 0 $ 0
-------------------------------------------- ----------------------------- -----------------------------
"Audit" services include audits of insurance operations in accordance
with statutory accounting principles required by insurance regulatory
authorities and review of documents filed with the SEC.
"Audit-Related" services include audits of employee benefit plans.
The Audit Committee has determined that the rendering of
"audit-related" services is compatible with KPMG maintaining its independence.
All (100 percent) of the above fees for 2005 were approved by the Audit
Committee. Less than 50 percent of the total hours expended on the independent
registered public accounting firm's audit of the Company was attributable to
persons other than the full-time permanent employees of the independent
registered public accounting firm.
BOARD AND COMMITTEE MEETINGS
The Board met seven times in 2005. A description of each standing Board
Committee follows the table of members and meetings. In 2005, each director
attended at least 75 percent of all Board meetings and meetings of committees on
which he or she served. In 2005, all Board members attended the annual meeting
of stockholders.
8
BOARD COMMITTEE MEMBERS & MEETINGS AS OF DECEMBER 31, 2005
- --------------------------- -------- ----------------- --------------- ------------- -------------- -------------- --------------
NAME AUDIT COMPENSATION COORDINATING CORPORATE EXECUTIVE FINANCE NOMINATING &
& STRATEGY & CORPORATE
PERSONNEL INVESTMENT GOVERNANCE
DEVELOPMENT
- --------------------------- -------- ----------------- --------------- ------------- -------------- -------------- --------------
Lowell R. Beck X X X*
- --------------------------- -------- ----------------- --------------- ------------- -------------- -------------- --------------
Michael L. Browne X X X
- --------------------------- -------- ----------------- --------------- ------------- -------------- -------------- --------------
W. Thacher Brown X X X* X
- --------------------------- -------- ----------------- --------------- ------------- -------------- -------------- --------------
G. Lawrence Buhl X*
- --------------------------- -------- ----------------- --------------- ------------- -------------- -------------- --------------
Mirian M. Graddick X X X
- --------------------------- -------- ----------------- --------------- ------------- -------------- -------------- --------------
Frank E. Reed X X X*
- --------------------------- -------- ----------------- --------------- ------------- -------------- -------------- --------------
Jerry S. Rosenbloom X* X X
- --------------------------- -------- ----------------- --------------- ------------- -------------- -------------- --------------
William W. Scranton III X X* X* X X
- --------------------------- -------- ----------------- --------------- ------------- -------------- -------------- --------------
Number of Meetings in 2005 5 6 1 3 1 4 4
- --------------------------- -------- ----------------- --------------- ------------- -------------- -------------- --------------
* Denotes Chairperson of the Committee.
Each standing committee has a charter that is posted in the Governance
section of the Company's Web site (www.harleysvillegroup.com).
The Audit Committee:
o is comprised exclusively of independent directors as
defined in the NASDAQ listing standards and the
requirements of the Securities and Exchange Commission;
o has a charter that satisfies the NASDAQ listing
requirements;
o appoints the independent auditor and pre-approves its audit
plan and services;
o oversees corporate accounting policies, reporting
practices, and the audits and quality and integrity of the
financial reports;
o reviews the internal audit function;
o facilitates free and open communication among the
directors, independent auditor, internal auditors and the
Company's financial management;
o establishes procedures for the receipt and investigation of
complaints regarding accounting and auditing matters; and
o performs other specific duties to accomplish the above as
set forth in its charter.
9
The Compensation and Personnel Development Committee:
o is comprised exclusively of independent directors as
defined in the NASDAQ listing requirements;
o approves compensation for the executive officers, other
than the CEO, and makes recommendations to the Board on
compensation for the CEO;
o determines participants in, establishes awards under and
approves payouts for the Senior Management Incentive
Compensation Plan and the Long Term Incentive Plan;
o grants awards of stock options, restricted stock and stock
appreciation rights under the Equity Incentive Plan;
o monitors compliance with the officers' stock ownership
guidelines;
o conducts the annual review of the CEO's performance;
o oversees Harleysville Group's management development and
succession program;
o reviews and determines compensation policies; and
o has the authority to retain and dismiss compensation
consultants.
The Coordinating Committee:
o is currently composed of the individuals who are solely
Harleysville Group directors and the individuals who are
solely Harleysville Mutual directors plus a non-voting
chairperson who is on the board of both companies; and
o reviews material transactions between Harleysville Group
and Harleysville Mutual. No material inter-company
transaction can occur until at least two of the
Harleysville Group directors and at least two of the
Harleysville Mutual directors on the Committee approve a
transaction. The decisions of the Coordinating Committee
are binding on Harleysville Group and Harleysville Mutual.
The Corporate Strategy Committee:
o participates with management in development of the
Company's strategy;
o monitors implementation of the Company's strategy; and
o provides advice and counsel to management on mergers and
acquisitions, capital management and financial risk
tolerance.
10
The Executive Committee:
o meets during the intervals between meetings of the Board of
Directors and has the right and authority to exercise the
full powers of the Board of Directors, except where limited
by law; and
o may not exercise powers given to other Committees unless
time is of the essence.
The Finance and Investment Committee:
o establishes overall investment policies and guidelines;
o reviews and ratifies investments made by the Company; and
o serves as the ex officio trustee of the Company's Pension
Plans.
The Nominating and Corporate Governance Committee:
o is comprised exclusively of independent directors as
defined in the NASDAQ listing requirements;
o recommends director fees for approval by the Board;
o has formal written procedures addressing the director
nomination process;
o considers and recommends nominees for election as a
director to the Board;
o considers recommendations for nominees for election as a
director from stockholders who submit such recommendations
in writing as described below;
o considers and recommends members for appointment to the
committees except the Nominating & Corporate Governance
Committee;
o assesses the effectiveness of the Board and corporate
governance practices;
o recommends new corporate governance practices to the Board;
and
o oversees establishment and compliance with the Code of
Conduct for Directors, Officers and Employees and the Code
of Ethics for Senior Financial Officers.
DIRECTOR NOMINATION PROCEDURES
The specific process for evaluating new directors, including
stockholder recommended nominees, will vary based on an assessment of the then
current needs of the Board and the Company. The Nominating and Corporate
Governance Committee will determine the desired profile of a new director, the
competencies of whom will likely include experience in one or more of the
following: property/casualty insurance operations, information technology, human
resources, investments, law, finance, actuarial science or accounting,
governmental affairs and public policy, and strategic planning and merger and
acquisitions. Candidates will be evaluated in light of the target criteria
chosen. If a name is submitted by a stockholder, the submission should include
the name, address and phone number of the person with proof that the sender is a
stockholder, if not a record holder, along with: 1) a description of the skills,
expertise, and experience of such individual; and 2) a discussion why such
11
individual would be a good board member for the Company. The submission should
also contain an affirmation that such person, to the submitting stockholder's
knowledge, is willing to serve and capable of serving, and that such individual
would qualify as an independent director under NASDAQ listing requirements. Any
communication to this end should be addressed to: Chairman of the Nominating and
Corporate Governance Committee, Harleysville Group Inc., 355 Maple Avenue,
Harleysville, PA 19438-2297. The words "Director Nomination" should be placed on
the lower left-hand corner of the envelope.
The Committee may, at its discretion, retain a search firm to assist in
locating and/or evaluating candidates.
Upon receipt of names and information on or from proposed candidates,
the Committee generally reviews the proposed candidates and chooses for further
review the candidate(s) who best meet the target profile. Such further review
may consist of requests for additional information, including references,
telephone contact, in-person interviews, etc. Interviews may be conducted by any
member of the Committee, the Chairman of the Board, the CEO and any other person
or persons requested and authorized by the Committee. Reports on the interviews
shall be made to all members of the Committee.
Once the Committee members are in agreement on a candidate to
recommend, the Committee will notify the remainder of the directors. If
requested by the other directors, the directors will be given the opportunity to
meet and conduct discussions with the candidate prior to the Board voting on the
nomination.
SECURITY HOLDER COMMUNICATION PROCESS
Stockholders can communicate with Board members by sending letters to
them, either via regular U.S. Mail or express delivery service. Letters may be
addressed to the individual members or to a specific committee chair at 355
Maple Avenue, Harleysville, PA 19438-2297. The actual letter should be enclosed
in an inner envelope. Attached to that envelope should be a cover page setting
forth the amount of stock owned by the sender and whether the sender owns the
shares directly or in a nominee (or street) name. If the latter, a recent
statement from the broker or custodian setting forth the amount of securities
owned should accompany the letter. The envelope containing the letter and the
cover page on stock ownership should be placed in an outer envelope which should
be mailed to the Company with the legend "Security Holder Communication" in the
lower left-hand corner. Company personnel will open the outer envelope and
determine if the sender is a security holder. If so, the inner envelope will be
forwarded to the Director so designated. If a letter is addressed to the "Audit
Committee Chair c/o Chief Complaint Officer," it is presumed to be a complaint
to the Audit Committee and will be handled as set forth in the Company's "Audit
Committee Complaints Procedures and Whistleblower Protection Policy."
12
COMPENSATION OF DIRECTORS
Cash Compensation
Employee directors receive no additional compensation for serving on
the Board or a Committee.
Non-employee directors receive the following fees:
- ----------------------------------------------------------------- ------------------------- ------------------------
TYPE OF COMPENSATION AS OF APRIL 2005 AS OF APRIL 2006
- ----------------------------------------------------------------- ------------------------- ------------------------
Annual Retainer $25,000 $25,000
- ----------------------------------------------------------------- ------------------------- ------------------------
Additional Monthly Retainer for Non-employee Chairman $ 8,333 $ 8,333
- ----------------------------------------------------------------- ------------------------- ------------------------
Board Attendance Fee per Meeting $ 1,500 $ 1,500
- ----------------------------------------------------------------- ------------------------- ------------------------
Committee Attendance Fee per Meeting $ 1,000 $ 1,000
- ----------------------------------------------------------------- ------------------------- ------------------------
Annual Retainer for Committee Chair $ 6,000/9,000 $ 6,000/9,000
- ----------------------------------------------------------------- ------------------------- ------------------------
The chair of the Audit Committee and the chair of the Compensation and Personnel
Development Committee receive an annual retainer of $9,000; the chairs of the
other committees receive an annual retainer of $6,000. Directors are reimbursed
for out-of-pocket expenses. A non-employee director who serves on both the
Harleysville Group and Harleysville Mutual boards receives only one retainer
and, if the boards or the same committees of Harleysville Group and Harleysville
Mutual meet on the same day, the non-employee director receives only one
attendance fee. In either situation, the retainer or attendance fee is allocated
equally to Harleysville Group and Harleysville Mutual.
Stock Acquisition Programs
o Directors' Deferred Stock Unit Program
In 2005, Harleysville Group adopted the Directors' Deferred Stock Unit
Plan (the "DSU Plan"), which provides for issuance of deferred stock units for
an aggregate of 110,000 shares of Common Stock subject to adjustment for stock
splits or other changes. The DSU Plan was approved by stockholders at the Annual
Meeting of Stockholders held on April 27, 2005. Under the DSU Plan, on the day
of the April Board meeting each year, each non-employee director of Harleysville
Group and Harleysville Mutual will receive a grant of deferred stock units
valued at $30,000, based on the fair market value of the stock on the day of the
April Board meeting. A deferred stock unit is a right to receive, without
payment to the Company, one share of common stock of the Company. Upon
termination of service, a non-employee director shall receive shares of common
stock equal to the number of deferred stock units in his or her account. To
date, 13,500 deferred stock units have been issued. Cash dividends paid on
shares of the Company's common stock are deemed to be paid on deferred stock
units and are paid to non-employee directors. A non-employee director has no
voting rights with respect to any deferred stock units until shares are issued.
The DSU Plan, which is administered by the Nominating and Corporate Governance
Committee of the Board of Directors of Harleysville Group, expires on December
31, 2009. The Committee has no discretion with regard to the eligibility or
selection of directors to receive deferred stock units, the number of deferred
stock units granted, the value of such units or the timing of the issuance of
shares under the DSU Plan.
13
o Directors' Stock Option Programs
In 1994, Harleysville Group adopted the 1995 Directors' Stock Option
Program (the "1995 Program"), which provided for the issuance of options on an
aggregate of 130,000 shares of common stock, subject to adjustment for stock
splits or other changes. The 1995 Program was approved by the stockholders at
the Annual Meeting of Stockholders held on April 27, 1994. Under the 1995
Program, on May 24, 1995, each non-employee director of Harleysville Group and
Harleysville Mutual received a one-time grant of 10,000 non-qualified stock
options, less the amount of unvested options, if any, under the prior
director's' stock option program at the then current fair market value and an
exercise price of $12.50. During the term of the 1995 Program, each newly
elected non-employee director and each employee director who became a
non-employee director of Harleysville Group or Harleysville Mutual received a
one-time grant of 10,000 non-qualified stock options at the first May Board
meeting following his or her election or becoming a non-employee director.
Twenty percent of the options granted vested on the day of grant with the
balance vesting at the rate of twenty percent per year of active Board service.
No options were exercisable until six months after the date of grant. The term
of each option is ten years. Options on 122,440 shares have been granted under
the 1995 Program, of which 20,000 remain unexercised. No additional options will
be granted under the 1995 Program. The 1995 Program is administered by the
Compensation and Personnel Development Committee of the Board of Directors of
Harleysville Group. The Committee has no discretion with regard to the
eligibility or selection of directors to receive options under the 1995 Program,
the number of shares of stock subject to such options under the 1995 Program, or
the purchase price thereunder. The 1995 Program did not provide for stock
appreciation rights.
In 1999, Harleysville Group adopted the Year 2000 Directors' Stock
Option Program (the "2000 Program"), which provides for the issuance of options
for an aggregate of 123,500 shares of common stock, subject to adjustment for
stock splits or other changes. The 2000 Program was approved by the stockholders
at the Annual Meeting of Stockholders held on April 28, 1999. Except for options
already granted under the 1995 Program, the 2000 Program superseded the 1995
Program. Under the 2000 Program, each year from 2000 through 2004, each
non-employee director of Harleysville Group and Harleysville Mutual received a
grant of 2,500 non-qualified stock options, less the amount of options each may
have, if any, under the 1995 Program that vested in that year, at the then
current fair market value. Options on 108,500 shares have been granted under the
2000 Program, of which 101,000 remain unexercised. The 2000 Program expired in
2004 and no additional options will be granted under this program. The options
vest immediately, although no option is exercisable until six months after the
date of grant. The term of each option is ten years. The 2000 Program is
administered by the Compensation and Personnel Development Committee of the
Board of Directors of Harleysville Group. The Committee has no discretion with
regard to the eligibility or selection of directors subject to such options
under the 2000 Program, the option price thereunder or the number of shares
granted to a director each year. The 2000 Program did not provide for stock
appreciation rights.
o Directors' Equity Award Program
Each Harleysville Group Board member who was a Board member on April
25, 1996, and remained an active Board member on August 28, 1996, received a
grant of 5,646 shares of Harleysville Group common stock restricted against
transfer and subject to forfeiture until the first to occur of his or her
retirement from the Board after attaining age 72, death or disability. A total
of 45,168 shares were awarded to eight directors. Each director-holder possesses
the right to vote the shares and receive dividends thereon. Directors' current
holdings of restricted stock are set forth on the chart on page 27.
14
o Directors' Stock Purchase Plan
In 1996, Harleysville Group adopted the Directors' Stock Purchase Plan.
This plan was approved by the stockholders at the Annual Meeting of Stockholders
held on April 24, 1996. This plan permitted non-employee directors of
Harleysville Group and Harleysville Mutual to purchase Company common stock at
the lower of 85 percent of the fair market value of the shares at the start or
end of a six-month subscription period, which runs from July 15 to January 14,
and January 15 to July 14. The Plan provided for up to 20 subscription periods.
Directors were permitted to contribute, through withholding from fees or a lump
sum payment, up to $20,000 per subscription period with the number of shares,
including fractional shares, purchased being equal to the dollar amount
contributed, divided by the purchase price. Two hundred thousand (200,000)
shares of Harleysville Group common stock were reserved for this program. During
the 17 subscription periods since its inception, a total of 97,369 shares have
been purchased by directors. The Plan has been discontinued with the last
subscription period ending on January 14, 2005.
STOCKHOLDER ACTIONS
ITEM 1. ELECTION OF DIRECTORS
Harleysville Group's Board of Directors currently consists of eight
directors. Each director is elected for a three-year term, except that if a
nominee will attain the age of 72 within the next two years following such
nominee's election, such nominee will be nominated for a term of one or two
years, as the case may be, to expire on the first Annual Meeting date following
the nominee's reaching age 72. The Board of Directors is divided into three
classes. The current three-year terms of Class A, B and C directors expire in
the years 2007, 2006 and 2008, respectively.
Three Class B directors are to be elected at the 2006 Annual Meeting.
Mr. Reed, who will attain the age of 72 after the 2006 but prior to the 2007
Annual Meeting, is nominated for a one year term. Messrs. Browne and Rosenbloom
are each nominated for a three year term. The nominees are:
- -------------------------------- --------------- ----------------------- ---------------------- ----------------------
NAME CLASS AGE DIRECTOR SINCE YEAR TERM WILL
EXPIRE IF ELECTED
- -------------------------------- --------------- ----------------------- ---------------------- ----------------------
Michael L. Browne B 59 1986 2009
- -------------------------------- --------------- ----------------------- ---------------------- ----------------------
Frank E. Reed B 71 1986 2007
- -------------------------------- --------------- ----------------------- ---------------------- ----------------------
Jerry S. Rosenbloom B 66 1999 2009
- -------------------------------- --------------- ----------------------- ---------------------- ----------------------
15
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINATED DIRECTORS.
If a nominee is unavailable for election, stockholders will vote for
another nominee proposed by the Board or the Board may reduce the number of
directors to be elected at the meeting.
Directors continuing in office are:
- -------------------------------- --------------- ----------------------- ---------------------- ----------------------
NAME CLASS AGE DIRECTOR SINCE YEAR TERM
WILL EXPIRE
- -------------------------------- --------------- ----------------------- ---------------------- ----------------------
Lowell R. Beck A 71 1996 2007
- -------------------------------- --------------- ----------------------- ---------------------- ----------------------
G. Lawrence Buhl A 59 2004 2007
- -------------------------------- --------------- ----------------------- ---------------------- ----------------------
W. Thacher Brown C 58 2002 2008
- -------------------------------- --------------- ----------------------- ---------------------- ----------------------
Mirian M. Graddick C 51 2000 2008
- -------------------------------- --------------- ----------------------- ---------------------- ----------------------
William W. Scranton III C 58 2004 2008
- -------------------------------- --------------- ----------------------- ---------------------- ----------------------
BIOGRAPHIES OF DIRECTOR NOMINEES AND DIRECTORS CONTINUING IN OFFICE
Nominees for Reelection at this Annual Meeting (Class B)
Mr. Browne was elected a director of Harleysville Group in 1986 and
non-executive Chairman of the Board in 2003. In 2003, he was also elected a
director and non-executive Chairman of the Board of Harleysville Mutual. He was
appointed CEO of Harleysville Group and President and CEO of Harleysville Mutual
on February 5, 2004, at which time he ceased being the chairman of the boards of
both Companies. On January 26, 2005, Mr. Browne was appointed President of
Harleysville Group. From 1980 to 1983, Mr. Browne was the Insurance Commissioner
of the Commonwealth of Pennsylvania. In 1983, Mr. Browne joined the law firm of
Reed Smith LLP, in Philadelphia, Pennsylvania, as a partner. He was the managing
partner of its Delaware Valley regional office from January 1993 until January
2001, when he became head of Reed Smith's international insurance practice, a
position he held until February 2004.
Mr. Reed was elected a director of Harleysville Group in 1986 and has
been a director of Harleysville Mutual since 1985. From 1984 to March 1990, Mr.
Reed served as President and Chief Operating Officer of First Pennsylvania
Corporation and First Pennsylvania Bank, Philadelphia, Pennsylvania. Beginning
in March 1990, as a result of a merger between First Pennsylvania Corporation
and CoreStates Financial Corp., Mr. Reed became President and Chief Executive
Officer of CoreStates Philadelphia National Bank. Mr. Reed retired from that
position in March 1995. Mr. Reed was Chairman of the Board and a director of
360(degree) Communications Company until its merger in July 1998 with Alltel
Corporation, of which he was a director until his retirement in April 2005.
Dr. Rosenbloom, who was elected a director of Harleysville Mutual in
1995, became a director of Harleysville Group in 1999. Dr. Rosenbloom is the
Frederick H. Ecker Emeritus Professor of Insurance and Risk Management and
Academic Director of the Certified Employee Benefit Specialist Program at the
Wharton School of the University of Pennsylvania, a position he has held since
1978. He also served as Chairman of the Department of Insurance and Risk
Management at Wharton from 1989 until 1994. Dr. Rosenbloom is a trustee of MBIA
Claymore Closed End Municipal Bond Fund (a mutual fund) and a trustee of Century
Shares Trust (a mutual fund).
16
Directors with Terms Expiring in 2007 (Class A)
Mr. Beck was elected a director of Harleysville Group in 1996. From
1982 until his retirement in 1996, Mr. Beck was President and Chief Executive
Officer of the National Association of Independent Insurers, an insurance
industry trade group headquartered in Des Plaines, Illinois. Prior to 1982, he
served in various executive capacities with the American Bar Association in
Chicago, Illinois. He has served as of counsel to the law firm of Stone and
Moore, Chicago, Illinois; and as adjunct professor of political science at the
University of Tennessee at Chattanooga.
Mr. Buhl was elected a director of Harleysville Group in August 2004
and became a director of Harleysville Mutual in April 2005. In 2003, Mr. Buhl
retired from Ernst & Young after serving 35 years with the firm. Most recently
he served as Regional Director of Insurance Services in Ernst & Young's
Philadelphia Office and had served in the same capacity for both the Baltimore
and New York Offices. For 24 of his years with Ernst & Young, he was an audit
partner performing extensive work for the Pennsylvania Insurance Department and
many insurance companies. He is also a director of Assured Guaranty, Ltd., for
which he serves as chairman of its audit committee and a member of its finance
committee.
Directors with Terms Expiring in 2008 (Class C)
Mr. Brown was elected a director of Harleysville Group in December 2002
and was elected a director of Harleysville Mutual in 1994. Mr. Brown had been
President of 1838 Investment Advisers, LLC in King of Prussia, Pennsylvania from
1988 until his retirement in May 2004. He also had been President of MBIA Asset
Management LLC and a director of MBIA Insurance Company Inc. from 1998 until his
retirement in September 2004. He is a director of 1838 Bond Debenture Fund, 1838
Funds and Airgas, Inc.
Ms. Graddick was elected a director of Harleysville Group in February
2000, and at the request of the Chairman of the Board and the Nominating and
Corporate Governance Committee, she has agreed to continue as a director after
retiring from her primary employment in 2006. She had been executive vice
president for human resources of AT&T Corp., Bedminster, New Jersey from March
1999 until February 2006. Previously, she had been vice president at AT&T with
various human resource responsibilities since 1994. Prior to that, she held
various executive positions with AT&T, where she commenced working in 1981.
Mr. Scranton was elected a director and non-executive Chairman of the
Board of Harleysville Group on February 5, 2004. He was elected a director of
Harleysville Mutual in May 1999 and was named non-executive Chairman of the
Board of Harleysville Mutual on February 5, 2004. Mr. Scranton was lieutenant
governor of Pennsylvania from 1980 to 1988 and is currently manager of the
Scranton Family Office in Scranton, Pennsylvania.
17
EXECUTIVE OFFICERS
The executive officers of the Company as of December 31, 2005 were:
- ------------------------------------------- ------------------------ -----------------------------------------------
NAME AGE TITLE
- ------------------------------------------- ------------------------ -----------------------------------------------
Michael L. Browne 59 President & Chief Executive Officer
- ------------------------------------------- ------------------------ -----------------------------------------------
Mark R. Cummins 49 Executive Vice President, Chief Investment
Officer & Treasurer
- ------------------------------------------- ------------------------ -----------------------------------------------
Catherine B. Strauss 58 Executive Vice President, Human Resources &
Public Affairs
- ------------------------------------------- ------------------------ -----------------------------------------------
Allan R. Becker 47 Senior Vice President & Chief Actuary
- ------------------------------------------- ------------------------ -----------------------------------------------
Arthur E. Chandler 49 Senior Vice President & Chief Financial
Officer
- ------------------------------------------- ------------------------ -----------------------------------------------
Thomas E. Clark 45 Senior Vice President, Field Operations
- ------------------------------------------- ------------------------ -----------------------------------------------
Robert A. Kauffman 42 Senior Vice President, Secretary, General
Counsel & Chief Governance Officer
- ------------------------------------------- ------------------------ -----------------------------------------------
Deborah A. Neuscheler 52 Senior Vice President, Performance Excellence
- ------------------------------------------- ------------------------ -----------------------------------------------
Kevin M. Toth 32 Senior Vice President, Claims
- ------------------------------------------- ------------------------ -----------------------------------------------
Akhil Tripathi 55 Senior Vice President & Chief Information
Officer
- ------------------------------------------- ------------------------ -----------------------------------------------
Robert G. Whitlock Jr. 49 Senior Vice President & Chief Underwriting
Officer
- ------------------------------------------- ------------------------ -----------------------------------------------
Mark R. Cummins is Executive Vice President, Chief Investment Officer
and Treasurer of Harleysville Group and Harleysville Mutual and has been in
charge of the investment and treasury function since 1992.
Catherine B. Strauss has been Executive Vice President for Human
Resources and Public Affairs for Harleysville Group and Harleysville Mutual
since August 2002. Before that, commencing in 1998, she was senior vice
president and had been a vice president in charge of human resources since 1996.
Allan R. Becker became Senior Vice President and Chief Actuary of
Harleysville Group and Harleysville Mutual in October 2005. Before joining
Harleysville, he was vice president and senior actuary for ACE USA. During his
18 years with ACE USA and its predecessor CIGNA Property and Casualty, he held a
variety of actuarial management roles. He holds the FCAS and MAAA designations.
Arthur E. Chandler was named Senior Vice President and Chief Financial
Officer in April 2005. Prior to that, he was senior vice president of financial
controls for XL America, and he had been chief financial officer for Kemper
Insurance's casualty division. He also spent nearly 20 years with CIGNA in
various financial positions.
18
Thomas E. Clark was named Senior Vice President for Harleysville Group
and Harleysville Mutual in charge of branch and subsidiary operations in March
2004. Before that, commencing in January 2001, he was in charge of branch
operations and had been Resident Vice President for the New Jersey operations of
Harleysville Group and Harleysville Mutual since July 2000. From 1995 through
2000, he worked for Fireman's Fund Insurance Company as a business segment
leader.
Robert A. Kauffman has been Senior Vice President, Secretary, General
Counsel and Chief Governance Officer of Harleysville Group and Harleysville
Mutual since November 2004. Before joining Harleysville he had been a
shareholder in the securities litigation department of the law firm, Berger &
Montague. Prior to that he was an equity partner in the law firm of Reed Smith
LLP in Philadelphia. He also served as an Assistant United States Attorney in
the criminal and asset forfeiture divisions of the United States Attorney's
Philadelphia office.
Deborah A. Neuscheler became Senior Vice President, Performance
Excellence for Harleysville Group and Harleysville Mutual in February 2005.
Before joining Harleysville she had been a consultant for QPM Solutions and
prior to that senior vice president of business transformation for Chase
Regional Banking in New York. She also served as principal consultant in the Six
Sigma practice for PricewaterhouseCoopers Management Consulting in Washington,
DC and had been senior vice president of GE Financial Assurance in Philadelphia.
Kevin M. Toth was appointed Senior Vice President, Claims for
Harleysville Group and Harleysville Mutual in July 2005. He joined Harleysville
in January 2005 as Vice President, Associate General Counsel and Chief
Litigation Counsel. Before that he was an attorney in the litigation department
of the law firm of Reed Smith LLP.
Akhil Tripathi became Senior Vice President and Chief Information
Officer for Harleysville Group and Harleysville Mutual in January 2005. He came
to Harleysville from Marsh Affinity and Private Client Services where he was
managing director and chief information officer. Prior to that he was executive
vice president and IT executive for e-Fusura Agency, a major Internet insurance
exchange he started for American International Group. He also served as vice
president and chief information officer for AIG Life and the former Providian
Direct Insurance.
Robert G. Whitlock Jr. was named Senior Vice President and Chief
Underwriting Officer of Harleysville Group and Harleysville Mutual in October
2005. He was Senior Vice President and Chief Actuary since February 1995, and
had been in charge of various actuarial functions from 1991 to 1995.
19
ITEM 2. APPROVAL OF THE AMENDED AND RESTATED EQUITY INCENTIVE PLAN
On February 22, 2006, the Board of Directors adopted, subject to
stockholder approval at the 2006 Annual Meeting, the Amended and Restated Equity
Incentive Plan for officers and key employees of the Company. The Harleysville
Group Inc. Amended and Restated Equity Incentive Plan (the "Plan") enables
Harleysville Group (the "Company") to grant stock options, stock appreciation
rights, and restricted stock awards to officers and key employees of the
Company, Harleysville Mutual and subsidiaries (the "Participants"). The
stockholders of the Company initially approved the Plan in 1986, and in 1990 and
1997 approved an additional number of shares to be authorized under the Plan.
Non-employee directors of the Company are not eligible to participate in the
Plan.
The Board believes that the Plan has proved to be of substantial value
to the Company over the years because it enables the Company to offer officers
and key employees long-term performance-based compensation that creates a
proprietary interest in the Company and motivates officers and key employees to
contribute to the continuing financial success of the Company. The Board
anticipates that awards will be made to approximately 150 officers and key
employees annually, although additional awards may be made if the circumstances
warrant.
From the Plan's inception in 1986 through December 31, 2005, options
covering 6,465,172 shares of Common Stock (including options that subsequently
reverted or expired and were re-granted under the terms of the Plan) and 114,294
shares of restricted stock (including shares that were forfeited) have been
granted to officers and key employees. From 1986 through December 31, 2005,
options for 3,070,178 shares have been exercised. The shares which have been
subject to grants as of December 31, 2005, plus reverted or expired options and
forfeited restricted shares, leaves 1,228,353 shares available for future
options or other awards.
The number of shares of Common Stock remaining available for grants
under the Plan is insufficient to adequately provide for participation of the
officers and key employees who are eligible to receive such grants over the next
three to four years because the Company intends to discontinue the Long Term
Incentive Plan (described on page 30) and provide all long-term incentive
compensation through this Plan. Based on this change to long-term incentive
compensation and the recommendations of an independent compensation consultant,
the Board, subject to stockholder approval, has amended and restated the Plan
to:
o increase the aggregate number of shares of Common Stock available
for issuance under the Plan by an additional 1,000,000 shares;
o change prospectively the vesting period for stock option grants;
o change prospectively the provisions regarding expiration of
options upon termination of employment;
o provide for the lapse of restrictions on restricted stock based on
the attainment of objective performance goals in accordance with
Section 162(m) of the Internal Revenue Code;
o specifically provide for the payment of withholding tax owed upon
the lapse of restrictions on restricted stock by foregoing
delivery of shares due as a result of the lapsed restrictions;
20
o provide for lapse of restrictions on restricted stock awards under
certain circumstances upon retirement; and
o revise the change in control language to reflect changes in the
definition of change in control in employment agreements.
In the event the stockholders approve the current proposal to adopt the
Plan, a total of approximately 2,228,353 shares will be available for future
options or awards under the Plan. The market value, as of March 1, 2006, of a
share of the Common Stock is $26.11. In the event the stockholders do not
approve the proposal to adopt the Amended and Restated Equity Incentive Plan,
the Board may reconsider its intent to discontinue the Long Term Incentive Plan.
The proposed Plan is described below.
KEY TERMS OF THE PLAN
Stock Options
Under the Plan, the Company may grant stock options designed to qualify
for special tax treatment under Section 422 of the Code ("Incentive Stock
Options") or stock options that are not intended to so qualify for special tax
treatment under Section 422 of the Code ("Non-Qualified Stock Options"). The
exercise price of a stock option may not be less than the fair market value of
the stock on the date the option is granted. Pursuant to the Plan, the exercise
price may be payable in cash or in Common Stock of the Company or a combination
of cash and stock. The Compensation and Personnel Development Committee
("Committee") may specify at the time of any option grant that any withholding
taxes required to be paid by the officer or key employee at the time of exercise
may be paid though delivery of or forbearance to receive Common Stock of the
Company. Under the Plan, generally no option may be exercised during the first
year of its term, 33 1/3 percent of the option award vests and becomes
exercisable during its second year, another 33 1/3 percent of the option award
vests and becomes exercisable during its third year and the remaining 33 1/3
percent of the option award vests and becomes exercisable during its fourth
year. The Plan provides that stock options are immediately exercisable upon a
change in control of the Company (except for Incentive Stock Options within six
months of grant). A change in control would include a consolidation or merger of
the Company into another company, a sale of all the assets of the Company,
liquidation or dissolution, one entity acquiring 20 percent of the voting
securities of the Company, or a majority of Board members of Harleysville Mutual
or the Company changing within two years (without the approval of the
then-existing directors).
All unexercised options will terminate unless the Committee otherwise
provides, after ten years or earlier upon the Participant's cessation of
employment, except that no Incentive Stock Option is exercisable after ten years
from the date of grant. Unless the Committee otherwise provides, all unexercised
options will terminate 30 days after the date of cessation of employment except
in the case of retirement, death or disability. In the case of retirement, death
or disability, all options that have been held for at least six months become
immediately exercisable and, unless the Committee otherwise provides, if the
options do not otherwise expire, Participants who die or become disabled have
one year after cessation of employment to exercise their options; Participants
who retire after attaining age 55, and prior to attaining age 62, with five
years of service have two years after retirement to exercise their options; and
Participants who retire after attaining age 62 with five years of service have
five years after retirement to exercise their options. The Plan permits the
Committee to allow Non-Qualified Stock Options to be transferred to immediate
family members. No officer or key employee may receive more than 200,000 options
in any calendar year.
21
Incentive Stock Options will be subject to the requirements of Code
Section 422 requiring that the aggregate fair market value of stock subject to
an Incentive Stock Option exercisable for the first time by a Participant during
a calendar year shall not exceed $100,000 and no Incentive Stock Option shall be
granted to any employee if such employee at the time the option is granted
possesses more than 10 percent of the total combined voting power of all classes
of stock of the Company unless the option price at date of grant is at least 110
percent of the fair market value of the stock subject to the option and is not
exercisable after the expiration of five years from date of grant.
Stock Appreciation Rights
The Plan also permits the Committee to grant Stock Appreciation Rights
in conjunction with the granting of stock options under the Plan. These rights
entitle the recipient to receive at the time of the exercise of the related
stock option, cash equal to the difference between the fair market value of the
share of stock at the time of the grant of Stock Appreciation Rights and the
fair market value of a share of stock at the time of the exercise, which cash
may be applied to the purchase price of the related stock option.
Restricted Stock Awards
The Plan further authorizes the Committee to grant restricted stock
upon such terms and conditions as the Committee finds appropriate. Restriction
periods will generally be for three to five years although the Committee may
establish other time periods. The lapse of restrictions may be based upon the
attainment of performance goals established by the Committee in accordance with
Section 162(m) of the Internal Revenue Code. Such performance goals may include
specific amounts of, or changes in, financial or operating goals including:
revenues; expenses; net income; operating income; equity; return on equity,
assets or capital employed; shareholder return; premium volume; or other
financial or operating goals determined by the Committee. Upon the lapse of
restrictions, shares of common stock free of restrictions shall be issued to the
Participant. The Committee has the power to permit, in its discretion,
acceleration of the applicable restriction period with respect to any part or
all of an award. Unless the Committee provides otherwise, all restrictions upon
shares awarded under the Plan shall lapse: 1) upon the retirement of a
Participant, after attaining age 65 with five years of service; or 2) on a
pro-rata basis, upon the retirement of a Participant after attaining age 55 with
ten years of service or attaining age 62 with five years of service. Otherwise,
upon cessation of employment, all shares as to which there still remains
unlapsed restrictions are forfeited without payment of any consideration by the
Company, unless the Committee provides otherwise.
A Participant may forego delivery of an applicable number of shares due
to such Participant as a result of lapse of restrictions on such restricted
stock award to pay any withholding tax due upon such lapse of restrictions.
22
Administration
The Plan will be administered by the Committee, which will have general
authority to interpret provisions of the Plan and enact such rules and
regulations, which it shall deem appropriate for the administration of the Plan;
provided however, that the Committee shall have no discretion regarding the
number of shares made available to cover awards made under the Plan.
Amendments
The Board may amend the Plan for any reason, except that if stockholder
approval is required by federal or state laws or regulations or by the rules and
regulations of a national securities exchange or NASDAQ Stock Market, the
amendment will not be effective until such approval.
Change in Control
In the event of a change in control of the Company, all previously
granted stock options (except for incentive stock options within six months of
grant) and Stock Appreciation Rights shall become exercisable immediately and
all previously issued shares of restricted stock shall be issued free of any
restrictions or forfeiture obligations.
Adjustments
In the event of certain changes in the number or kind of outstanding
shares of Common Stock, an appropriate adjustment may be made with respect to
the existing and future awards under the Plan. The proceeds received by the
Company from the exercise of stock options under the Plan are added to the
general funds of the Company.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion addresses certain federal tax consequences in
connection with awards under the Plan. State and local tax treatment is subject
to individual state and local laws and is not reviewed in this discussion.
Incentive Stock Options
An Incentive Stock Option results in no taxable income to the
Participant or a deduction to the Company at the time it is granted or
exercised. If the Participant retains the stock received as a result of an
exercise of an Incentive Stock Option for at least two years from the date of
grant and one year from the date of exercise, then the gain is treated as a long
term capital gain. If the shares are disposed of during this period, the option
will be treated similar to a Non-Qualified Stock Option. The Company receives a
tax deduction only if the shares are disposed of during such period. The
deduction is equal to the amount of taxable income to the Participant.
Non-Qualified Stock Options
A Non-Qualified Stock Option results in no taxable income to the
Participant or deduction to the Company at the time it is granted. A Participant
exercising such an option will, at that time, realize taxable compensation in
the amount of the difference between the option price and the then fair market
value of the shares. Subject to the applicable provisions of the Code, the
23
deduction for federal income tax purposes will be allowed for the Company in the
year of the exercise in an amount equal to the taxable compensation realized by
the Participant. Under Section 162(m) of the Code, the Company may be precluded
from claiming a federal income tax deduction for total remuneration in excess of
$1,000,000 paid to a Named Executive Officer in any one year. Total remuneration
would include amounts received upon the exercise of Non-Qualified Stock Options.
An exception does exist, however, for "performance-based compensation,"
including amounts received upon the exercise of stock options (the exercise
price for which is at or above the fair market value of the underlying shares at
the date of grant), if such options are granted pursuant to a plan approved by
stockholders that meets certain requirements. The Plan is intended to make
grants of Non-Qualified Stock Options thereunder meet the requirements of
"performance-based compensation."
Stock Appreciation Rights
No income will be recognized by the recipient of a Stock Appreciation
Right until the underlying stock option is exercised and cash is either paid or
credited to the purchase price of the underlying stock option. The amount of
such income will be equal to the cash awarded and the fair market value of such
shares on the exercise date less the fair market value on the date of the grant,
and will be ordinary income. The Company will be entitled to a deduction under
the same rules described in connection with Non-Qualified Stock Options.
A Participant who receives a payout under this Plan will immediately
realize ordinary income and Harleysville Group will be entitled to a deduction
for federal income tax purposes at the time of receipt in the same amount. The
amount of income realized and the amount of the deduction will be the sum of the
cash component and the total fair market value of the stock awarded.
If a Participant disposes of shares of Company Common Stock acquired
under this Plan, any amount received in excess of the value of the shares of
Common Stock on which the Participant has been previously taxed will be treated
as a long-term or short-term capital gain depending upon the holding period of
the shares. If the amount received is less than that value, the loss will be
treated as a long-term or short-term capital loss, depending upon the holding
period of the shares.
To the extent that any receipt of cash or shares of stock is deferred,
then there will be no income tax consequences to the Participant or the Company
until the cash or the shares are paid.
Restricted Stock Awards
No income will be recognized by the recipient of a Restricted Stock
Award if such award is subject to a substantial risk of forfeiture. Generally
when the substantial risk of forfeiture terminates with respect to a Restricted
Stock Award, then the fair market value of the stock will constitute ordinary
income to the employee. Concurrently, generally for federal income tax purposes
a deduction will be allowed to the Company in an amount equal to the
compensation realized by the employee. Under Section 162(m) of the Code, the
Company may be precluded from claiming a federal income tax deduction for a
total remuneration in excess of $1,000,000 paid to a Named Executive Officer in
any one year. Total remuneration would include amounts received as restricted
stock awards, unless the grants are made subject to performance goals as
described above.
24
ESTIMATED PLAN BENEFITS
The awards that may be granted in future periods under the Amended and
Restated Equity Incentive Plan to the Named Executive Officers and non-executive
officers are not determinable at this time. There will be no awards under this
Plan to employee directors.
VOTE REQUIRED
The affirmative vote of a majority of the shares of Common Stock
present and entitled to vote at the Annual Meeting is required for the adoption
of the Amended and Restated Equity Incentive Plan.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AMENDED AND RESTATED EQUITY
INCENTIVE PLAN.
SECURITIES AUTHORIZED UNDER EQUITY COMPENSATION PLANS AS OF DECEMBER 31, 2005
- ---------------------------------------------------------------------------------------------------------------------------
PLAN CATEGORY NUMBER OF SECURITIES WEIGHTED-AVERAGE NUMBER OF SECURITIES
TO BE ISSUED UPON EXERCISE PRICE OF REMAINING AVAILABLE
EXERCISE OF OUTSTANDING OUTSTANDING OPTIONS, FOR FUTURE ISSUANCE
OPTIONS, WARRANTS WARRANTS AND UNDER EQUITY
AND RIGHTS RIGHTS COMPENSATION PLANS
(EXCLUDING SECURITIES
REFLECTED IN COLUMN (A))
- ---------------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
Equity compensation --------------------------------------------------------------------------------------------
plans approved by
security holders 2,468,497 22.30 2,287,657
- ---------------------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by 0 0 0
security holders
- ---------------------------------------------------------------------------------------------------------------------------
The equity compensation plans approved by stockholders, are described
on pages 13-15, 20-25 and 30-31, except for the Amended and Restated Agency
Stock Purchase Plan. In 2005, the Company adopted the Amended and Restated
Agency Stock Purchase Plan, which was approved by written consent of the holders
of a majority of the Company's voting stock. Under the Plan, the top-tier
independent insurance agencies that sell insurance products for the Company's
parent, subsidiaries and affiliates may purchase twice a year, on January 15 and
July 15, Company stock at a discount of 10 percent off the closing price on the
previous trading day. The amount that can be purchased by any one agency is
limited to no more than $12,500 in value every six months. A total of 1,000,000
shares were reserved for issuance under this program at the time of its initial
adoption in February 1995. As of March 1, 2006, 517,220 shares have been issued
under this program.
25
OWNERSHIP OF COMMON STOCK
TABLE I - FIVE PERCENT STOCKHOLDERS
Those persons owning five percent or more of Harleysville Group stock
as of December 31, 2005, are set forth below. On that date, there were
30,610,233 shares of Harleysville Group stock held by stockholders.
- ------------------------------ ---------------------------- -------------------------- ------------------ -----------
NAME AND ADDRESS VOTING AUTHORITY DISPOSITIVE TOTAL AMOUNT OF PERCENT
AUTHORITY BENEFICIAL OF CLASS
OWNERSHIP
- ------------------------------ --------------- ------------ --------------- ---------- ------------------ -----------
SOLE SHARED SOLE SHARED
- ------------------------------ --------------- ------------ --------------- ---------- ------------------ -----------
HARLEYSVILLE MUTUAL
INSURANCE COMPANY 17,002,445 0 17,002,445 0 17,002,445 55.54%
355 MAPLE AVENUE
HARLEYSVILLE, PA 19438
- ------------------------------ --------------- ------------ --------------- ---------- ------------------ -----------
DIMENSIONAL FUND
ADVISORS INC. 2,525,375 0 2,525,375 0 2,525,375 8.28%
1299 OCEAN AVENUE
SANTA MONICA, CA 90401
- ------------------------------ --------------- ------------ --------------- ---------- ------------------ -----------
26
TABLE II - BENEFICIAL OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
This table shows Harleysville Group stock holdings of the Directors,
including the Director Nominees, and Named Executive Officers (who are the CEO
and the next four most highly compensated executive officers employed as of
December 31, 2005, and those otherwise required to be included pursuant to SEC
rules), based on salary and bonus attributable to 2005 and all directors and
executive officers as a group as of March 1, 2006. Please see the table on page
18 for titles of the Named Executive Officers. The "Aggregate Number of Shares
Beneficially Owned" listed in the second column includes the numbers listed in
the third, fourth and fifth columns. For a description of the restricted shares
owned by Directors, please see the Directors' Equity Award Program description
on pages 14-15 and for a description of the deferred stock units held by
non-employee Directors, please see the Directors' Deferred Stock Unit Plan on
pages 13-14. For a description of the restricted shares owned by Named Executive
Officers, see page 35. On March 1, 2006, there were 30,709,049 shares of
Harleysville Group stock outstanding.
- ----------------------------- ----------------- -------------- ------------------- ----------------- -------------------
NAME AGGREGATE RIGHT TO NUMBER OF NUMBER OF PERCENT OF
NUMBER ACQUIRE SHARES OF DEFERRED STOCK SHARES (LESS THAN
OF SHARES (NUMBER OF RESTRICTED STOCK UNITS 1% UNLESS
BENEFICIALLY SHARES)(2) OWNED INDICATED)
OWNED
- ----------------------------- ----------------- -------------- ------------------- ----------------- -------------------
Lowell R. Beck 25,137 18,500 0 1,500
- ----------------------------- ----------------- -------------- ------------------- ----------------- -------------------
W. Thacher Brown 54,535 12,500 5,646 1,500
- ----------------------------- ----------------- -------------- ------------------- ----------------- -------------------
G. Lawrence Buhl 2,793 0 0 1,500
- ----------------------------- ----------------- -------------- ------------------- ----------------- -------------------
Mirian M. Graddick 22,994 12,500 0 1,500
- ----------------------------- ----------------- -------------- ------------------- ----------------- -------------------
Frank E. Reed 44,084 12,500 5,646 1,500
- ----------------------------- ----------------- -------------- ------------------- ----------------- -------------------
Jerry S. Rosenbloom 42,252 10,500 5,646 1,500
- ----------------------------- ----------------- -------------- ------------------- ----------------- -------------------
William W. Scranton III 15,975 12,500 0 1,500
- ----------------------------- ----------------- -------------- ------------------- ----------------- -------------------
Michael L. Browne 84,365 70,148 5,646 0
- ----------------------------- ----------------- -------------- ------------------- ----------------- -------------------
Mark R. Cummins 151,782 131,770 0 0
- ----------------------------- ----------------- -------------- ------------------- ----------------- -------------------
Catherine B. Strauss 93,269 76,898 0 0
- ----------------------------- ----------------- -------------- ------------------- ----------------- -------------------
Akhil Tripathi 11,455 6,103 4,275 0
- ----------------------------- ----------------- -------------- ------------------- ----------------- -------------------
Robert G. Whitlock Jr. 106,946 90,249 0 0
- ----------------------------- ----------------- -------------- ------------------- ----------------- -------------------
M. Lee Patkus(1) 0 0 0 0
- ----------------------------- ----------------- -------------- ------------------- ----------------- -------------------
All Directors & Executive
Officers as a Group (19) 733,431 510,666 43,042 10,500 2%
- ----------------------------- ----------------- -------------- ------------------- ----------------- -------------------
(1) Mr. Patkus ceased employment with the Company in January 2005.
(2) Includes shares of common stock subject to vested, unexercised stock options
and shares of common stock subject to stock options, which will vest within
60 days after March 1, 2006.
27
REPORT OF COMPENSATION AND PERSONNEL DEVELOPMENT COMMITTEE
COMPENSATION PHILOSOPHY
The Compensation and Personnel Development Committee of the Board of
Directors (the "Compensation Committee"), which consists entirely of independent
directors as defined in Section 162(m) of the Internal Revenue Code and as
defined by NASDAQ, oversees a management compensation program designed to
further the attainment of the Company's strategic goals of growth and
profitability and thus enhance stockholder value. In order to achieve these
strategic goals, the Company has identified four principles to guide its
compensation program. The program is designed to:
o attract, retain and motivate talented executives;
o reward competencies and behaviors critical to the Company's success;
o offer total compensation levels that are consistent with the performance of
the executive measured against other executives both within the Company and
within the industry; and
o focus executives on performance goals and measures that are the key to the
Company's success by providing variable compensation programs linked to
creation of stockholder value.
COMPENSATION METHODOLOGY
The Harleysville Group compensation program is designed to enable the
Company to fairly compete for talented and experienced staff with companies of
similar size whether publicly or privately held. Data from many different
insurance and other companies are employed to determine proper competitive
compensation levels for an organization the size of Harleysville. As a result,
the group from which data are gathered and used is not the same as the peer
group represented on the Stock Performance Charts, which includes all NASDAQ
Stock Market traded property/casualty companies regardless of size or other
characteristics, although data from many of the same companies may be employed.
Total compensation is comprised of fixed compensation (annual base
salary), variable compensation (annual and long-term incentive plans) and stock
incentive awards. The total compensation target is the 50th percentile of the
market for comparable executive positions and is designed to enable the
organization to attract and retain high-performing executives and to reward
above average performance, while a flexible mix between base salary and variable
compensation permits higher potential of pay for those positions where
performance results are highly measurable and where the value of those results
to the Company is clear and significant. In some cases, for the purpose of
attraction, retention or incenting of specific employees, stock appreciation
rights or restricted stock are awarded as well. An independent compensation
consultant provides data to the Compensation Committee regarding market rates
for compensation and compensation plan structures. The data is derived from
analysis of publicly available information and proprietary survey sources.
The specific components of the compensation program and how they
function are described below.
28
Base Salary
Consistent with the compensation philosophy, annual base
salary is designed to be competitive within the industry. Each position
in the Company is placed in an appropriate paygrade, the midpoint of
which is set at the median pay for that position when compared to
comparable positions in the property/casualty insurance industry and,
if appropriate, other industries, on a size-adjusted basis. The Company
also considers the paygrades assigned to comparable positions within
the Company and individual circumstances when determining paygrade
assignments for a particular position. A salary range based on the
midpoint is developed for that paygrade. Salaries for the Named
Executive Officers and all officers are determined after the close of
the year for the 12 month period commencing April 1 and are based on a
combination of individual performance and Company performance, the
weightings of which may change from year to year. Information regarding
base salary for fiscal years 2003, 2004 and 2005 for the Named
Executive Officers is found in the table on page 34. To evaluate
Company performance, the Compensation Committee compares the Company's
overall corporate performance against the insurance industry with
respect to a number of factors including return on equity and combined
ratio. The term "combined ratio" is a standard term of measurement in
the property/casualty insurance industry that is the ratio produced by
adding: 1) the ratio of losses, loss adjustment expenses, and
policy-holder dividends to net earned premiums; and 2) the ratio of
underwriting expenses to net written premium. The resulting fraction
then is expressed as a percentage.
Annual Incentive Compensation
The Company each year adopts targets under its Senior
Management Incentive Compensation Plan in order to direct executive
officer attention to the attainment of significant annual corporate
goals. The 2005 Plan contained the same goals for all executive
officers, other than the Chief Investment Officer: a combined ratio
goal for Harleysville Group's property/casualty operations; an
operating return on equity ("ROE") goal; and an individual objectives
goal. The weightings for each factor were: combined ratio, 40 percent;
operating ROE, 30 percent; and individual objectives, 30 percent. For
the Chief Investment Officer, goals and their relative weightings were:
combined ratio, 25 percent; operating ROE, 20 percent; performance of
Company's equity portfolio, 10 percent; performance of Company's fixed
income portfolio, 15 percent; and individual objectives, 30 percent.
The Plan is designed to pay a target award at a level of 20 percent to
40 percent of annual base salary depending on officer position and
title when the target goals are achieved. Payouts may be up to 200
percent of the target award if actual performance exceeds the target.
Conversely, payouts may be less than 100 percent, and as low as zero,
if actual performance does not attain the target.
Consistent with the Compensation Committee's philosophy, the
size of the award range is determined for the Chief Executive Officer
specifically and executive officers generally based on an analysis of
the appropriate competitive total compensation package that is
typically available for executive officers of a property/casualty
insurance company of similar size. For 2005, the threshold for a payout
under the Plan was a ROE equal to or exceeding eight percent and the
Company exceeded its target goals. For the Named Executive Officers,
payments earned under the Senior Management Incentive Compensation Plan
for fiscal years 2003, 2004 and 2005 are listed in the table on page
34.
29
Long Term Incentive Compensation
Since 1988, the Company has maintained a Long Term Incentive
Plan designed to reward those senior executive officers of Harleysville
Group involved in establishing the Company's strategy. From the Plan's
inception and up to and including the Plan period beginning in 1999,
the Plan rewarded the attainment of long-term ROE goals. Commencing in
2000, the Plan was changed, with stockholder approval, in order to help
achieve the desired total compensation target. The Plan became a
three-year plan and the award, which has both a cash and stock
component that can vary by participant, is based on relative Total
Shareholder Return ("TSR"), the components of which include both change
in stock price and imputed dividend reinvestment, compared to a
universe of at least 20 property/casualty stocks. The target award,
which ranges from 30 percent to 200 percent of annual base salary at
the beginning of the period, is payable if the TSR is at the 50th
percentile at the end of such period. Target cash and target share
awards are established as of January 1 of the first year of each
three-year period based on a participant's annual base salary and the
value of a share of stock. A maximum award of 150 percent of target is
paid if the TSR is at the 80th percentile or higher while a minimum
award of 50 percent of target is paid if the TSR is at the 35th
percentile. No award is paid if the TSR is below the 35th percentile.
TSR falling between the 35th and 50th percentiles and between the 50th
and 80th percentiles will be interpolated to determine the size of the
award. There was no payout for the 2001-2003, the 2002-2004 or the
2003-2005 plan periods as the TSR was less than the 35th percentile for
those periods. See the chart on page 38 for further information on
awards under this Plan for 2005-2007.
After discussion with and analysis by its independent
compensation consultant, the Compensation Committee has decided to
discontinue this Plan and intends that the last performance period will
be the one which commenced in 2005. Starting in 2006, the Company
intends to provide all long-term incentive compensation through grants
of stock options and restricted stock under the Amended and Restated
Equity Incentive Plan described on pages 20-25, subject to stockholder
approval of the Plan. The Compensation Committee believes that this
change will continue to align executive rewards with the creation of
value for the stockholders, while being easier for participants and
stockholders to understand. Furthermore, the Compensation Committee
believes that the new structure will more closely align the long-term
incentive compensation program with the Company's current business
strategy and the long-term compensation programs of its competitors.
Stock Options
Pursuant to the terms of the Equity Incentive Plan, each year
the Compensation Committee grants stock options to officers and key
employees of Harleysville Group. Because stock option grants are a
component of a compensation target, these awards do not take into
account options already held by the officer. A target award of stock
options for each paygrade is established after taking into account the
other components of compensation to achieve the total compensation
target established by the Compensation Committee for the paygrade level
of the executive position. The Compensation Committee generally uses
the Black-Scholes option value method to determine the value of the
stock option grant component of compensation and awards the number of
stock options whose total value equals the target amount. Based upon
the recommendation of the CEO, in light of the officer's performance,
an officer may receive an award greater or lesser than target,
30
including none at all. For 2005, executive officers who are eligible
for participation in the Long Term Incentive Plan, including the
President and CEO and other Named Executive Officers, must, by January
1, 2008, or within six years of becoming eligible for participation in
the Long Term Incentive Plan, beneficially own Harleysville Group stock
equal to a specific multiple of base salary in order to receive stock
options at a level necessary to keep total compensation at the target
level. For the President and CEO, the multiple is three, for the
executive vice presidents the multiple is two, and for senior vice
presidents the multiple is one times base salary.
The stock option grants to the Named Executive Officers in 2005
are set out on the Summary Compensation Table on page 34 and the Option
Grant Table on page 37. All stock options granted under the Equity
Incentive Plan in 2005, as well as in 2004 and 2003, have been
non-qualified options receiving no special tax benefit, have an
exercise price equal to the fair market value of a share of common
stock on the date of grant, have a term of ten years and vest at the
rate of 50 percent each on the first and second anniversary dates of
award, except that options held for at least six months become
immediately exercisable upon an optionee's retirement, death or
disability. Retired optionees, age 61 and younger, may exercise the
options within one year of retirement, and retired optionees, age 62
and older, may exercise the options granted prior to May 1997 within
two years after retirement and may exercise the options granted May
1997 and after within five years after retirement, if the options do
not otherwise expire. However, if a retiree over 55 has a combination
of age and service at retirement that equals or exceeds the number 72,
then that retiree has five years in which to exercise the options after
retirement if the options do not otherwise expire. The exercise price
may be paid by delivery of already owned shares, cash or a combination
of cash and shares. In the event of a merger, consolidation or other
change in control of Harleysville Group, options are exercisable
immediately. The Company has never re-priced stock options and has no
current intention to do so.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Browne's compensation for 2005, as set forth in the Summary
Compensation Table on page 34, was based on the factors set forth above. His
total compensation, composed of base salary, a contribution to a non-qualified
deferral plan for directors for which he had enrolled prior to being appointed
CEO, annual incentive compensation, long term incentive compensation and stock
option grants, reflects both a target compensation package commensurate with
similar officers within the insurance industry peer group as well as an
evaluation of his personal and Company performance on both a qualitative and
quantitative basis. Mr. Browne's base salary was adjusted in February 2005 based
upon review of Mr. Browne's performance and the Company results for the
preceding calendar year. In 2004, the Company's fundamental key performance
measures had greatly improved and stabilized. Net income per share had increased
to $1.55 from a net loss per share of $1.59 in 2003. The combined ratio improved
to 105.9 percent from 123.2 percent in 2003. ROE was nine percent. In light of
these greatly improved results, the Committee awarded Mr. Browne a 4.2 percent
increase for 2005.
31
Mr. Browne's annual incentive compensation plan payout of $310,000 for
2005 was based on the formula described above and reflects that the Company
exceeded its combined ratio and ROE goals for 2005 and the Board's evaluation of
Mr. Browne's stellar performance on his individual objectives. In 2005, the
Company achieved a combined ratio of 102.2 percent, an ROE of 11 percent and
posted record earnings per share of $2.01. Under Mr. Browne's direction, the
Company also made significant progress in its technology initiatives,
consolidated operations and introduced a new field structure.
The long term incentive payout of $0 reflects that there was no payout
for the 2003-2005 period as the TSR was less than the 35th percentile for the
period. Finally, the award of stock options in February 2005 was based on the
appropriate formula described above.
INTERNAL REVENUE CODE IMPACT
Internal Revenue Code Section 162(m) imposes conditions on the full
deductibility of compensation in excess of $1 million. The Compensation
Committee has reviewed, and continues to review, the potential consequences to
the Company of this section. This section had no impact on the Company in 2005
and it is not expected to have any significant impact on the Company in 2006,
inasmuch as the compensation levels other than from stock option exercises or
the Long Term Incentive Plan are likely to be below the $1 million figure, and
any income from stock option exercises and the Long Term Incentive Plan is fully
deductible under the current requirements of Section 162(m).
COMPENSATION COMMITTEE INTERLOCKS
No member of the Compensation Committee is an employee of an entity on
whose board an executive officer of the Company sits.
SUBMITTED BY THE COMPENSATION AND PERSONNEL DEVELOPMENT COMMITTEE
Jerry S. Rosenbloom, Chairman
W. Thacher Brown
Mirian M. Graddick
William W. Scranton III
32
STOCK PERFORMANCE CHART
The following graph shows changes over the past five-year period (all
full calendar-year periods) in the value of $100 invested in: 1) Harleysville
Group common stock; 2) the NASDAQ Stock Market index; and 3) the Peer Group
index. All values are as of the last trading day of each year.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL STOCKHOLDER RETURN
[GRAPHIC OMITTED]
-------------------------------------------------------
2000 2001 2002 2003 2004 2005
- --------------------------------------------------------------------------------
Harleysville Group 100 83.6 94.8 73.4 91.2 104.3
- --------------------------------------------------------------------------------
Nasdaq 100 79.3 54.8 82.0 89.2 91.1
- --------------------------------------------------------------------------------
Peer Group 100 102.5 105.4 130.3 157.9 177.2
- --------------------------------------------------------------------------------
YEARS
The year-end values of each investment shown in the preceding graph are
based on share price appreciation plus dividends, with the dividends reinvested
as of the day such dividends were ex-dividend. The calculations exclude trading
commissions and taxes. Total stockholder returns from each investment, whether
measured in dollars or percentages, can be calculated from the year-end
investment values shown beneath each graph.
The graph was prepared by the Center for Research in Security Prices
("CRSP"). The NASDAQ National Market System index includes all U.S. Companies in
the NASDAQ National Market System and the Peer Group index includes 54 NASDAQ
Company stocks in SIC Major Group 633 (SIC 6330-6339: U.S. and foreign, fire,
marine and casualty insurance). A complete list of these companies may be
obtained from CRSP at the University of Chicago Graduate School of Business,
1101 East 58th Street, Chicago, Illinois 60637; (773) 702-7467. CRSP reweights
the indices daily, using the market capitalization on the previous trading day.
33
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
This table indicates, for the last three fiscal years, cash and other
compensation earned by the Named Executive Officers, including Mr. Patkus, who
ceased employment in January 2005 but is required to be included under
applicable SEC rules. Mr. Browne was not an executive officer or otherwise
employed by the Company in 2003; Mr. Tripathi was not an executive officer or
otherwise employed by the Company in 2003 or 2004.
- ------------------------------------------------------------------------------------------------------------------------------------
NAME AND PRINCIPAL YEAR ANNUAL LONG-TERM ALL OTHER
POSITION COMPENSATION COMPENSATION COMPENSATION
AWARDS PAYOUTS
- ------------------------------------------------------------------------------------------------------------------------------------
SALARY BONUS OTHER RESTRICTED SECURITIES LONG-TERM
STOCK UNDERLYING INCENTIVE
AWARDS STOCK OPTIONS PLAN
(# OF SHARES) (# OF SHARES) PAYOUTS
- ------------------------------------------------------------------------------------------------------------------------------------
Michael L. Browne 2005 $593,538 $310,000 0 0 45,000 0 $65,659
President & Chief 2004 $525,046 $105,000 $106,579 0 37,648 0 $36,901
Executive Officer
- ------------------------------------------------------------------------------------------------------------------------------------
M. Lee Patkus 2005 $ 34,461 $336,000 $ 40,000 0 0 0 0
Former President & 2004 $348,923 0 0 0 25,903 0 $12,300
Chief Operating Officer 2003 $336,000 0 0 0 12,952 0 $ 5,040
- ------------------------------------------------------------------------------------------------------------------------------------
Mark R. Cummins 2005 $326,233 $ 62,474 0 0 16,200 0 $17,492
Executive Vice President, 2004 $330,335 $ 41,292 0 0 16,148 0 $11,149
Chief Investment 2003 $318,100 0 0 0 8,074 0 $ 4,772
Officer & Treasurer
- ------------------------------------------------------------------------------------------------------------------------------------
Catherine B. Strauss 2005 $243,680 $ 65,828 0 0 14,200 0 $13,928
Executive Vice President, 2004 $246,738 $ 30,842 0 0 14,176 0 $ 8,327
Human Resources & Public 2003 $237,600 0 0 0 7,088 0 $ 3,564
Affairs
- ------------------------------------------------------------------------------------------------------------------------------------
Akhil Tripathi 2005 $269,711 $ 70,425 0 4,275 12,250 0 $15,306
Senior Vice President &
Chief Information Officer
- ------------------------------------------------------------------------------------------------------------------------------------
Robert G. Whitlock Jr. 2005 $242,787 $ 67,976 0 0 12,700 0 $13,984
Senior Vice President & 2004 $214,650 $ 21,465 0 0 10,614 0 $ 7,083
Chief Underwriting 2003 $206,700 0 0 0 5,307 0 $ 3,100
Officer
- ------------------------------------------------------------------------------------------------------------------------------------
34
Salary paid in 2004 reflects the 27 pay periods in 2004, compared to
the usual 26 pay periods in 2003 and 2005.
Cash bonuses earned under the Senior Management Incentive Compensation
Plan for services rendered in fiscal years 2003, 2004 and 2005 have been listed
as a bonus in the year earned, although actually paid in the following year.
Bonuses earned under the Long Term Incentive Plan for targets achieved
in the fiscal year 2001-2003, 2002-2004 and 2003-2005 periods would have been
listed in 2003, 2004 and 2005, respectively, although, again, any payouts would
have been made in the subsequent year. No bonus was paid under the Long Term
Incentive Plan for these performance periods.
The amount shown as "Salary" under Annual Compensation for 2005 for
Mr. Patkus includes salary paid while he was an employee plus payments received
for accrued vacation after his employment terminated. The amount shown as
"Bonus" and "Other" under Annual Compensation for 2005 for Mr. Patkus reflects
amounts paid in 2005 in connection with a Settlement, Non-Solicitation and
Release Agreement. Under the terms of the agreement, Mr. Patkus agreed that for
a period of one year from the date of the agreement, he would not directly or
indirectly solicit or try to hire, refer for hire or assist in hiring any
employees of the Company. Additionally, the Company and Mr. Patkus released any
and all claims against each other arising out of Mr. Patkus' employment or
cessation of employment by the Company.
The terms of stock options awarded in fiscal years 2003, 2004 and 2005
are described in the Report of the Compensation and Personnel Development
Committee on pages 30-31. Mr. Browne and Mr. Tripathi are the only Named
Executive Officers who held restricted stock of the Company as of December 31,
2005. Mr. Browne was awarded restricted stock when he was a non-employee
director pursuant to the Directors' Equity Award Program, which is described on
pages 14-15. As of December 31, 2005, he held 5,646 restricted shares with a
value of $149,619. Mr. Browne possesses both the right to vote and receive
dividends on those shares. Mr. Tripathi held 4,275 restricted shares with a
value of $113,287 as of December 31, 2005. The restricted shares were originally
awarded to Mr. Tripathi on January 11, 2005, upon his commencement of employment
and are scheduled to vest in three years from the date of grant subject to
acceptable performance ratings during the three year period. Mr. Tripathi
possesses both the right to vote and receive dividends on these shares.
Named Executive Officers as of December 31, 2005, are eligible to
participate in the tax-qualified Extra Compensation Plan (a 401(k) plan) and a
Nonqualified Excess Match Program. This Nonqualified Excess Match Program pays a
match at the same rate as paid under the Extra Compensation Plan on the amount
of base salary in excess of the annual limitation on compensation imposed by the
Internal Revenue Code and on annual incentive plan payments. The Plan match can
be 25, 50, 75, 100 or 125 percent of base salary dependent upon the ROE of the
Company for the year.
The amount shown under "All Other Compensation" in the Summary
Compensation Table reflects contributions to the Extra Compensation Plan: a) for
2005 of $9,450 on behalf of Messrs. Browne, Cummins, Tripathi and Whitlock and
Ms. Strauss, to match the 2005 pre-tax elective deferred contributions made by
each to the Extra Compensation Plan; b) for 2004 of $6,150 on behalf of each of
the Named Executive Officers, except Mr. Browne and Mr. Tripathi, to match 2004
pre-tax elective deferred contributions made by each to the Extra Compensation
Plan; and c) for 2003 of $3,000 on behalf of each of the Named Executive
Officers, except Messrs. Browne and Tripathi, to match the 2003 pre-tax elective
deferred contributions made by each to the Extra Compensation Plan. The
remainder of each amount shown under "All Other Compensation" is the allocation
35
for each Named Executive Officer under the Nonqualified Excess Match Program
except for Mr. Browne whose total for 2005 also reflects $31,209 for the
Nonqualified Excess Match Program, and a $25,000 contribution to a non-qualified
deferral plan for directors for which he had enrolled prior to being appointed
CEO and whose total for 2004 reflects $15,651 for the Nonqualified Excess Match
Program, $3,250 for the qualified match and an $18,000 contribution to a
non-qualified deferral plan for directors for which he had enrolled prior to
being appointed CEO.
Change-in-Control Arrangements
The Company has entered into agreements with Messrs. Browne,
Cummins, Tripathi and Whitlock and Ms. Strauss that provide for compensation to
be paid to the Named Executive Officers in the event of both a change in control
of Harleysville Group or its parent Harleysville Mutual and a subsequent
substantial change in status of such Named Executive Officer's role with
Harleysville Group. Changes in status include diminution of responsibilities,
reduction in pay, failure to continue comparable incentive plans, change of
place of employment or termination of employment, if they occur within three
years of a change in control for Mr. Browne or within two years of the change in
control for the other Named Executive Officers and are not for cause, e.g., the
Named Executive Officer's failure to perform his or her duties or willful
conduct that injures the Company. The compensation to be paid to the CEO is 2.99
times, and the compensation to be paid to the other Named Executive Officers is
two times, the sum of annual base salary and the average annual incentive target
awards over the past three years, plus the prorated long term incentive plan
target awards for all plans in which the Named Executive Officer participates
and the value of any stock options which may not legally be exercised at the
time of change in control. A Named Executive Officer may also receive funds to
pay any resulting excise tax payable and will continue, for three years for the
CEO and for two years for the other Named Executive Officers, to participate in
welfare benefit plans comparable to those received prior to the change in
control and change in status. The initial term of the agreements expires on
December 31, 2007, except for Mr. Browne's, which initially expires on December
31, 2009. The agreements renew after expiration of the initial term unless, not
later than 12 months prior to the initial expiration date or any scheduled
renewal, the Company gives notice of non-renewal. The agreements described
supersede prior change in control agreements between the Company and the Named
Executive Officers. Mr. Patkus was party to a change in control agreement that
terminated effective January 1, 2005.
36
OPTION GRANTS IN 2005
This table shows the number and value of stock options granted to the
Named Executive Officers in 2005.
- -------------------------------- --------------- ---------------- ------------------- ------------------ -----------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION GRANT DATE
NAME GRANTED FISCAL YEAR PER SHARE DATE PRESENT VALUE
- -------------------------------- --------------- ---------------- ------------------- ------------------ -----------------------
Michael L. Browne 45,000 8% $21.25 2/23/15 $282,600
- -------------------------------- --------------- ---------------- ------------------- ------------------ -----------------------
Mark R. Cummins 16,200 3% $21.25 2/23/15 $101,736
- -------------------------------- --------------- ---------------- ------------------- ------------------ -----------------------
Catherine B. Strauss 14,200 3% $21.25 2/23/15 $ 89,176
- -------------------------------- --------------- ---------------- ------------------- ------------------ -----------------------
Akhil Tripathi 12,205 2% $23.39 1/10/15 $ 87,022
- -------------------------------- --------------- ---------------- ------------------- ------------------ -----------------------
Robert G. Whitlock Jr. 12,700 2% $21.25 2/23/15 $ 79,756
- -------------------------------- --------------- ---------------- ------------------- ------------------ -----------------------
In calendar year 2005, Harleysville Group granted a total of 545,638
options representing the right to purchase 545,638 shares of common stock to 131
officers and key employees under the Equity Incentive Plan.
The Grant Date Present Value was determined using the Black-Scholes
option pricing model. The dividend yield assumption was 3.18 percent; the
expected volatility assumption was 36.13 percent; the risk-free interest rate
assumption was 4.05 percent; and the expected life assumption was six years.
These numbers are calculated based on the requirements promulgated by the SEC
and do not reflect Harleysville Group's estimate of future stock price growth.
Use of this model should not be viewed in any way as a forecast of the future
performance of Harleysville Group's common stock, which will be determined by
future events and unknown factors.
For a description of the stock option program, please see page 30-31.
37
OPTION EXERCISES AND YEAR-END VALUES
This table shows the number and value of stock options exercised in 2005
and the value of unexercised options as of the end of 2005 for the Named
Executive Officers. Year-end value is calculated using the difference between
the option exercise price and $26.50 (the closing price of the Company's common
stock on December 31, 2005) multiplied by the number of shares underlying the
option.
- ----------------------------- ------------- --------------- ------------------------------------ -----------------------------------
NAME NO. OF VALUE REALIZED NO. OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING IN-THE-MONEY
ACQUIRED ON UNEXERCISED OPTIONS AT FISCAL OPTIONS AT YEAR-END
EXERCISE YEAR-END
- ----------------------------- ------------- --------------- ---------------- ------------------- --------------- -------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- ------------- --------------- ---------------- ------------------- --------------- -------------------
Michael L. Browne 0 $ 0 28,824 63,824 $171,461 $373,665
- ----------------------------- ------------- --------------- ---------------- ------------------- --------------- -------------------
Mark R. Cummins 0 $ 0 115,596 24,274 $608,072 $143,990
- ----------------------------- ------------- --------------- ---------------- ------------------- --------------- -------------------
Catherine B. Strauss 0 $ 0 62,710 21,288 $252,308 $126,292
- ----------------------------- ------------- --------------- ---------------- ------------------- --------------- -------------------
Akhil Tripathi 0 $ 0 0 12,205 $ 0 $ 37,958
- ----------------------------- ------------- --------------- ---------------- ------------------- --------------- -------------------
Robert G. Whitlock Jr. 8,844 $ 71,106 78,592 18,007 $434,563 $105,416
- ----------------------------- ------------- --------------- ---------------- ------------------- --------------- -------------------
M. Lee Patkus 20,038 $120,335 0 0 $ 0 $ 0
- ----------------------------- ------------- --------------- ---------------- ------------------- --------------- -------------------
LONG TERM INCENTIVE PLAN PERFORMANCE OPPORTUNITY AWARDS IN 2005
This table shows the potential target payouts for the Named Executive
Officers under the Long Term Incentive Plan for a three-year performance period
commencing in 2005. Three-year performance periods were completed in 2003, 2004
and 2005. Actual payments for those performance periods are shown in the Summary
Compensation Table on page 34 for those years.
- ------------------------------- ---------------------- -------------------------- ------------------
NAME TARGET CASH AS A TARGET PERFORMANCE
PERCENT OF SALARY IN NUMBER OF SHARES PERIOD
2005
- ------------------------------- ---------------------- --------------------------- ------------------
Michael L. Browne 45% 38,961 3 years
- ------------------------------- ---------------------- --------------------------- ------------------
Mark R. Cummins 35% 4,138 3 years
- ------------------------------- ---------------------- --------------------------- ------------------
Catherine B. Strauss 35% 3,091 3 years
- ------------------------------- ---------------------- --------------------------- ------------------
Akhil Tripathi 15% 4,032 3 years
- ------------------------------- ---------------------- --------------------------- ------------------
Robert G. Whitlock Jr. 32% 3,224 3 years
- ------------------------------- ---------------------- --------------------------- ------------------
For a description of the current Long Term Incentive Plan, please see page 30.
38
PENSION PLANS
The Company currently has a qualified Pension Plan and related
Supplemental Retirement Plan ("SERP") in place for its executives, including the
Named Executive Officers. Prior to March 31, 2006, a pension awarded under such
pension plans was based on the highest five-year average of credited salary plus
average annual incentive compensation. As of March 31, 2006, no further benefits
will accrue under the pension plans, although participants will continue to earn
vesting credit. The following table shows the final benefit that will be accrued
as of March 31, 2006 for the Named Executive Officers, which is payable at age
65 in the form of a single life annuity. For participants who are married at
retirement, the normal form of payment would be an actuarially reduced joint and
50 percent survivor annuity.
--------------------------------- ------------------ ----------- --------------------------------------
NAME FIVE YEAR YEARS OF ANNUAL ACCRUED RETIREMENT
AVERAGE SERVICE BENEFIT AS OF MARCH 31, 2006
COMPENSATION
WITH BONUS
--------------------------------- ------------------ ----------- ------------ ---------- --------------
QUALIFIED SERP
PLAN BENEFIT TOTAL
--------------------------------- ------------------ ----------- ------------ ---------- --------------
Michael L. Browne $782,698 2.0 $ 8,375 $16,795 $25,170
--------------------------------- ------------------ ----------- ------------ ---------- --------------
Mark R. Cummins $364,688 14.0 $ 50,590 $31,298 $81,888
--------------------------------- ------------------ ----------- ------------ ---------- --------------
Catherine B. Strauss $259,905 9.5 $ 35,071 $ 4,785 $39,856
--------------------------------- ------------------ ----------- ------------ ---------- --------------
Akhil Tripathi $332,636 1.0 $ 4,655 $ 1,607 $ 6,261
--------------------------------- ------------------ ----------- ------------ ---------- --------------
Robert G. Whitlock, Jr. $242,077 15.0 $ 53,000 $ 3,281 $56,280
--------------------------------- ------------------ ----------- ------------ ---------- --------------
M. Lee Patkus $331,570 5.25 $ 19,603 $ 0 $19,603
--------------------------------- ------------------ ----------- ------------ ---------- --------------
Mr. Tripathi will become a participant in the pension plans if he
remains employed as of March 31, 2006. Neither Mr. Tripathi nor Mr. Browne is
vested in his benefit under the qualified Pension Plan; each of them will vest
in such benefit upon attaining five years of credited service. The other Named
Executive Officers are fully vested participants in the qualified Pension Plan.
Currently, the only Named Executive Officer entitled to a benefit under the SERP
is Ms. Strauss. The other Named Executive Officers will be entitled to the SERP
benefit if they continue to be employed until attaining age 55 and five years of
service.
39
TRANSACTIONS WITH HARLEYSVILLE MUTUAL
Harleysville Group was formed by Harleysville Mutual in 1979. It was a
wholly owned subsidiary of Harleysville Mutual until June 1986, when
Harleysville Mutual sold shares of Harleysville Group's common stock in a public
offering. Harleysville Mutual's ownership of Harleysville Group's outstanding
common stock was reduced from 100 percent to approximately 70 percent at that
time. In April 1992, Harleysville Mutual sold additional shares of its
Harleysville Group common stock holdings, further reducing Harleysville Mutual's
ownership to approximately 55 percent. In 2000, Harleysville Mutual completed a
purchase of 1,000,000 shares of Harleysville Group stock, thereby increasing its
stock ownership at that time to approximately 57 percent. Harleysville Mutual
has engaged in additional stock purchases to a lesser degree since then,
although its ownership remained at approximately 56 percent as of December 31,
2005. Harleysville Group's operations are interrelated with the operations of
Harleysville Mutual. Harleysville Group believes that its various transactions
with Harleysville Mutual, of which the material ones are summarized below, have
been fair to Harleysville Group (as well as Harleysville Mutual) and at least as
favorable to Harleysville Group as those terms that could have been negotiated
with an independent third party.
Under a second amendment to a lease, effective January 1, 2005,
Harleysville Mutual rents the home office property from a partnership owned by
Harleysville Group for a five-year term at a base rent of $3,959,789 per year.
Harleysville Mutual may also pay additional rent, based on a formula, for any
additions, improvements or renovations. There was no additional rental payment
made in 2005. Harleysville Mutual is also responsible for all operating expenses
including maintenance and repairs. The base rent and formula for additional
charges are based upon an appraisal obtained from an independent real estate
appraiser. Harleysville Mutual and Harleysville Group and their respective
affiliates share these facilities, and the expenses of the facilities are
allocated according to an intercompany allocation agreement.
Harleysville Group provides certain management services to Harleysville
Mutual and its insurance subsidiaries. Under related agreements, Harleysville
Group serves as the paymaster for the Harleysville companies, with each company
being charged for its proportionate share of salary and employee benefits
expense based upon time allocation. Harleysville Group received a fee of
$6,696,749 in 2005 for its services under these management agreements.
Harleysville Group borrowed approximately $18.5 million from
Harleysville Mutual in connection with the acquisition of Mid-America Insurance
Company and Harleysville Insurance Company of New York in 1991. It was a demand
loan with a stated maturity in March 1998. In February 1998, the maturity was
extended to March 2005 and the interest rate became LIBOR plus .65 percent,
which was a commercially reasonable market rate in 1998. In February 2005, the
maturity was extended to March 2012 and the interest rate was decreased to LIBOR
plus .45 percent, which is a commercially reasonable rate in 2005.
Harleysville Group's property/casualty insurance subsidiaries
participate in an underwriting pool with Harleysville Mutual whereby such
subsidiaries cede to Harleysville Mutual all of their insurance business and
assume from Harleysville Mutual an amount equal to their participation in the
pooling agreement. All losses and loss settlement and other underwriting
expenses are prorated among the parties on the basis of participation in the
pooling agreement. The agreement pertains to all insurance business written or
earned on or after January 1, 1986, and Harleysville Group's pool participants
are not liable for losses occurring prior to January 1, 1986. Harleysville
Group's participation in 2005 was 72 percent. The pooling agreement may be
amended or terminated by agreement of the parties. Further information
describing the pool arrangement is contained in Harleysville Group's 2005 Annual
Report to Stockholders.
40
The property/casualty insurance subsidiaries of Harleysville Group
entered into a reinsurance agreement with Harleysville Mutual, effective January
1, 1997, whereby Harleysville Mutual reinsures the property/casualty insurance
company subsidiaries of Harleysville Group on a post-pooled basis for property
losses as a result of catastrophes, excluding earthquakes and hurricanes and,
effective July 1, 2002, excluding losses from terrorism, incurred in a quarter.
Harleysville Mutual in turn pays to the subsidiaries in the event of covered
catastrophes 100 percent of the subsidiaries' accumulated net loss in a quarter
in excess of their retention (or deductible), which for 2005 was their pooling
percentage times $5 million, up to a maximum net loss equaling $20 million times
the subsidiaries' total pooling percentages. The reinsurance agreement was
terminated effective December 31, 2005. The premium paid by the subsidiaries of
Harleysville Group to Harleysville Mutual in 2005 was $8,812,337. Further
information about the reinsurance agreement is contained in Harleysville Group's
2005 Annual Report to Stockholders.
SECTION 16 REPORTING COMPLIANCE
Harleysville Group believes that for 2005, its officers, directors and
10 percent stockholders complied with the requirements of Section 16 of the
Securities Exchange Act of 1934 based on a review of forms filed, or written
notice that no annual forms were required.
41
Appendix "A"
HARLEYSVILLE GROUP INC.
AMENDED AND RESTATED
EQUITY INCENTIVE PLAN
APPROVED BY THE BOARD OF DIRECTORS
FEBRUARY 22, 2006
I. INTRODUCTION
A. PURPOSE OF THE PLAN: Harleysville Group Inc. (the "Company") has
established the Plan to further the growth, development and success of
the Company by providing additional incentives to those officers and
key employees who are responsible for the management of the Company's
business affairs which enable them to participate directly in the
growth of the capital stock of the Company. The Company intends that
the Plan will facilitate securing, retaining, and motivating management
employees of high caliber and potential. It is intended that the
amended and restated Plan shall satisfy the requirements for
transactions pursuant hereto to be exempt from Section 16(b) of the
Securities Exchange Act of 1934 ("Exchange Act") and for compensation
paid hereunder to be fully deductible to the Company to the extent
permitted under Section 162(m) of the Internal Revenue Code of 1986.
B. DEFINITIONS: When used in the Plan, the following terms shall have the
meanings set forth below:
1. "Award(s)" shall mean Incentive Stock Options, Non-Qualified Stock
Options, stock appreciation rights and restricted stock made under
the Plan.
2. "Change in Control" shall be deemed to have occurred:
(a) if the "beneficial ownership" (as defined in Rule 13d-3
under the Securities Exchange Act of 1934) of securities
representing more than twenty percent (20 percent) of the combined
voting power of the Employer Voting Securities (as herein defined)
is acquired by any individual, entity or group (a "Person"), other
than the Parent, the Company, any trustee or other fiduciary
holding securities under any employee benefit plan of the Company
or an affiliate thereof, or any corporation owned, directly or
indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company (for
purposes of this Plan, "Company Voting Securities" shall mean the
then outstanding voting securities of the Company entitled to vote
generally in the election of directors); provided, however, that
the following shall not constitute a Change in Control under this
paragraph (a): (i) any acquisition pursuant to a transaction which
complies with clauses (i), (ii) and (iii) of paragraph (c) of this
Section B2; (ii) any acquisition of the Company Voting Securities
A-1
from the Parent pursuant to a Business Combination (as herein
defined) or otherwise, if (x) the acquiring or resulting entity is
organized in the mutual form, and (y) persons who were members of
the Incumbent Board (as herein defined) of the Parent immediately
prior to such acquisition constitute at least two-thirds of the
members of the Board of Directors of the acquiring entity
immediately following such acquisition and (iii) any acquisition of
voting securities from the Company or the Parent by a person
engaged in business as an underwriter of securities who acquires
the shares through his participation in good faith in a firm
commitment underwriting registered under the Securities Act of
1933; and (iv) any acquisition otherwise within the terms of this
paragraph (a) during any period in which Parent owns at least a
majority of the combined voting power of Company Voting Securities
(the "Parent Control Period"), but if such an acquisition is made
during a Parent Control Period by any Person and such Person
continues to hold more than 20 percent of the combined voting power
of all Company Voting Securities on the first day following the
termination of a Parent Control Period, such acquisition will be
deemed to have been first made on such date; or
(b) if, during any period of twenty-four (24) consecutive
months, individuals who, as of the beginning of such period,
constitute the Board of Directors of the Company or the Parent, as
the case may be (the "Applicable Incumbent Board"), cease for any
reason to constitute at least a majority of the Board of Directors
of the Company or the Parent, as the case may be; provided,
however, that (x) any individual becoming a director of the Company
or the Parent, as the case may be, during such period whose
election, or nomination for election, was approved by a vote of at
least a two-thirds of the directors then comprising the Applicable
Incumbent Board (other than in connection with the settlement of a
threatened proxy contest) shall be considered as though such
individual were a member of the Incumbent Board of Directors of the
Company or the Parent, as the case may be, and (y) the provisions
of this paragraph (b) shall not be applicable to the composition of
the Board of Directors of Parent if Parent shall cease to own at
least 20 percent of the combined voting power of all Company Voting
Securities; or
(c) upon consummation by the Company of a reorganization,
merger or consolidation or sale or other disposition of all or
substantially all of the assets of the Company or the acquisition
of assets or stock of another entity (a "Business Combination"),
unless, in any such case, immediately following such Business
Combination the following three conditions are met: (i) more than
50 percent of the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of
directors of (x) the corporation resulting from such Business
Combination (the "Surviving Corporation"), or (y) if applicable, a
corporation which as a result of such transaction owns the Company
or all or substantially all of the Company's assets either directly
or through one or more subsidiaries (the "New Parent Corporation"),
is represented, in either such case, directly or indirectly, by
Company Voting Securities outstanding immediately prior to such
Business Combination (or, if applicable, is represented by shares
into which such Company Voting Securities were converted pursuant
to such Business Combination), and such voting power is distributed
among the holders thereof, in substantially the same proportions as
their ownership, immediately prior to such Business Combination, of
the Company Voting Securities; and (ii) no Person (excluding any
A-2
employee benefit plan (or related trust) of the Company or such
corporation resulting from such Business Combination) beneficially
owns, directly or indirectly, 50 percent or more of the combined
voting power of the then outstanding voting securities eligible to
elect directors of the New Parent Corporation (or, if there is no
New Parent Corporation, the Surviving Corporation) except to the
extent that such ownership of the Company existed prior to the
Business Combination, and (iii) at least a majority of the members
of the board of directors of the New Parent Corporation (or, if
there is no New Parent Corporation, the Surviving Corporation) were
members of the Board of Directors of the Company at the time of the
execution of the initial agreement, or the action of the Board,
providing for such Business Combination; or
(d) Parent affiliates with, or acquires by merger, a third
party and, as a consequence thereof, persons who were members of
the Incumbent Board of Parent immediately prior to such transaction
cease to constitute at least two-thirds of the directors of Parent
following such transaction provided, however, that this paragraph
(d) shall not apply if immediately prior to such affiliation or
merger, Parent does not own more than 20 percent of the combined
voting power of Company Voting Securities; or
(e) upon approval by the stockholders of the Company and all
necessary regulatory authorities of a complete liquidation or
dissolution of the Company; or
(f) any other event shall occur that would be required to be
reported by the Company in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Exchange Act (or any provision
successor thereto); or
(g) the Company or Parent has entered into a management
agreement or similar arrangement pursuant to which an entity other
than the Company or the Parent or the Boards of Directors or the
executive officers and management of the Company or the Parent has
the power to direct or cause the direction of the management and
policies of the Company or the Parent; provided, however, that this
paragraph (g) shall not apply to Parent if, immediately prior to
entering into any such management agreement or similar arrangement,
Parent does not own more than 20 percent of Company Voting
Securities.
3. "Company" shall mean Harleysville Group Inc., a Delaware
corporation, and any successor in a reorganization or similar
transaction.
4. "Board" or "Board of Directors" shall mean the Board of Directors
of the Company.
5. "Code" shall mean the Internal Revenue Code of 1986, as amended.
6. "Committee" shall mean the Compensation & Personnel Development
Committee of the Board of Directors of Harleysville Group Inc. The
Committee shall consist of three or more directors selected by the
Board of Directors each of whom:
A-3
(i) is not a current employee of the Company, the Parent or a
subsidiary of the Company;
(ii) is not a former employee of the Company who receives
compensation for prior services (other than benefits under a
tax-qualified retirement plan) during the taxable year;
(iii) has not been an officer of the Company and is not currently
an officer of the Company, the Parent or subsidiary of the
Company;
(iv) does not receive remuneration from the Company, the Parent or
a subsidiary of the Company either directly or indirectly for
services rendered in any capacity other than as a director,
except for an amount that is de minimis remuneration within
the meaning of Treasury Regulation ss.1.162.27(e)(iii) and
does not exceed the dollar amount for which disclosure would
be required pursuant to Item 404 (a) of Regulation S-K;
(v) does not possess an interest in any other transaction for
which disclosure would be required pursuant to Item 404(a) of
Regulation S-K; and
(vi) is not engaged in a business relationship for which
disclosure would be required pursuant to Item 404(b) of
Regulation S-K.
7. "Common Stock" shall mean the common stock of the Company, par
value of $1.00 per share, and may be either stock previously
authorized but unissued, or stock reacquired by the Company.
8. "Director" shall mean a member of the Board of Directors of the
Company.
9. "Disability" shall mean the inability of a Participant to perform
the services normally rendered due to any physical or mental
impairment that can be expected to be of either permanent or
indefinite duration, as determined by the Committee on the basis of
appropriate medical evidence, and that results in the Participant's
cessation of active employment with the Company.
10. "Early Retirement" shall mean cessation of employment with the
Company after attaining the age of 55 and completing at least ten
years of continuous service with the Company or attaining the age
of 62 and completing at least five years of continuous service with
the Company.
11. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
12. "Fair Market Value" shall mean the closing price of Common Stock,
as reported by such responsible reporting service as the Committee
may select, or if there were no transactions in the Common Stock on
such day, then on the last preceding day on which a transaction in
the Common Stock took place. The foregoing notwithstanding, the
Committee may determine the Fair Market Value in such other manner
as it may deem more appropriate for Plan purposes or as is required
by applicable laws or regulations.
A-4
13. "Incentive Stock Option" or "ISO" shall mean a right to purchase
the Company's Common Stock, which is intended to comply with the
terms and conditions for an incentive stock option, set forth in
Section 422 of the Code, or such other sections of the Code as may
be in effect from time to time.
14. "Non-Qualified Stock Option" or "NQSO" shall mean a right to
purchase the Company's Common Stock, which is not intended to
comply with the terms and conditions for an incentive stock option,
as set forth in Section 422 of the Code, or such other sections of
the Code as may be in effect from time to time.
15. "Normal Retirement" shall mean cessation of employment with the
Company after attaining the age of 65 and completing at least five
years of continuous service with the Company.
16. "Parent" shall mean Harleysville Mutual Insurance Company.
17. "Participant" shall mean those eligible officers and other key
employees of the Company who receive Awards under the Plan.
18. "Performance Goals" shall mean specific targeted amounts of, or
changes in, financial or operating goals including: revenues;
expenses; net income; operating income; equity; return on equity,
assets or capital employed; shareholder return; or premium volume.
Other financial or operating goals may also be used as determined
by the Committee. Such goals may be applicable to the Company as a
whole or one or more of its business units and may be applied in
total or on a per share or percentage basis and on an absolute
basis or relative to other companies, including industries or
indices or any combination thereof, as determined by the Committee.
19. "Performance Period" shall mean the period of time designated by
the Committee, for which Performance Goals are measured for
Restricted Stock Awards.
20. "Plan" shall mean the Company's Equity Incentive Plan amended and
restated on February 22, 2006.
21. "1997 Plan" shall mean the Equity Incentive Plan as amended and
restated in 1997.
22. "Retirement" shall mean Normal Retirement or Early Retirement.
23. "Stock Option" shall mean a Non-Qualified Stock Option and an
Incentive Stock Option.
24. "Termination of Employment" shall mean a cessation of the
Participant's employment with the Company for any reason other than
Retirement, death or Disability.
A-5
II. PLAN ADMINISTRATION
A. ADMINISTRATION: The Plan shall be administered by the Committee.
Subject to the express provisions of the Plan, the Committee shall have
full and exclusive authority:
(i) to interpret the Plan;
(ii) to determine the employees to whom awards should be made under
the Plan;
(iii) to determine the type of awards to be made and the amount, size
and terms of each such award;
(iv) to determine the time when the awards are granted and the
duration of any applicable exercise or restriction period,
including the criteria for exercisability and the acceleration
thereof;
(v) to prescribe, amend and rescind rules and regulations relating to
the Plan; and
(vi) to make all other determinations deemed necessary or advisable in
the implementation and administration of the Plan as permitted by
federal and state laws and regulations, including those laws and
regulations regarding deductibility from income under the Code
and exemption from ss.16 of the Exchange Act, or by rules and
regulations of a national securities exchange or the NASDAQ NMS.
The determination of the Committee in the administration of the Plan,
as described herein, shall be final and conclusive and binding upon all
persons including, without limitation, the Company, its stockholders,
Participants, and any persons having any interest under the Plan. The
Secretary of the Company shall be authorized to implement the Plan in
accordance with its terms and to take such action of a ministerial
nature, including the preparation of award documents provided to
participants, as shall be necessary to effectuate the intent and
purposes hereof.
Notwithstanding the foregoing, no Incentive Stock Options may be
granted after the expiration of ten years from the Plan's adoption by
the Board of Directors.
B. ELIGIBILITY: Persons eligible to receive Awards under the Plan shall be
those officers and other key employees of the Company, its Parent and
its subsidiaries (as defined in Section 424 of the Code, or any
amendment or substitute thereto) who are in positions in which their
decisions, actions and counsel significantly impact upon the
profitability and success of the Company. Directors of the Company who
are not otherwise officers or employees of the Company, its Parent or
its subsidiaries shall not be eligible to participate in the Plan.
C. MAXIMUM NUMBER OF SHARES AVAILABLE: Subject to adjustment as specified
in Section II.E. below, the aggregate number of shares of common stock
that may be issued or transferred under the Plan is 1,000,000 shares,
which shall be newly registered subsequent to the adoption and approval
of this Plan, plus such previously registered shares under the 1997
Plan that have not previously been granted or, if granted, have again
become available for reissuance. If any previously registered shares
A-6
again become available for issuance and are reissued, they shall be
fully subject to the terms and conditions of this Plan. Such shares may
be authorized and unissued shares or treasury shares. Except as
provided herein, any shares subject to an option or right, which for
any reason expires or is forfeited or terminated in accordance with the
Plan, shall again be available under the Plan.
D. MAXIMUM SHARES AWARDED: No one Participant shall receive stock options,
restricted stock or stock appreciation rights for more than 200,000
shares of Common Stock during any one calendar year under the Plan.
E. ADJUSTMENTS: In the event of stock dividends, stock splits,
re-capitalizations, mergers, consolidations, combinations, exchanges of
shares, spin-offs, liquidations, reclassifications or other similar
changes in the capitalization of the Company, the number of shares of
Common Stock available for grant under this Plan, in the aggregate or
to any one individual, shall be adjusted proportionately or otherwise
by the Board, and where deemed appropriate, the number of shares, and
the option price of outstanding Stock Options shall be similarly
adjusted. Also, in instances where another business entity is acquired
by the Company or its Parent, and the Company or its Parent has assumed
outstanding employee option grants under a prior existing plan of the
acquired entity, similar adjustments are permitted at the discretion of
the Board of the Company. In the event of any other change affecting
the Common Stock reserved under the Plan, such adjustment, if any, as
may be deemed equitable by the Committee, shall be made to give proper
effect to such event.
F. REGISTRATION CONDITIONS:
1. Unless issued pursuant to a registration statement under the
Securities Act of 1933, as amended, no shares shall be issued to a
Participant under the Plan unless the Participant represents and
agrees with the Company that such shares are being acquired for
investment and not with a view to the resale or distribution
thereof, or agrees to such other documentation as may be required
by the Company, unless in the opinion of counsel to the Company
such representation, agreement or documentation is not necessary to
comply with such Act.
2. Any restriction on the resale of shares shall be evidenced by an
appropriate legend on the stock certificate.
3. The Company shall not be obligated to deliver any Common Stock
until it has been listed on each securities exchange on which the
Common Stock may then be listed and until there has been
qualification under or compliance with such federal or state laws,
rules or regulations as the Company may deem applicable. The
Company shall use reasonable efforts to obtain such listing,
qualification and compliance.
G. RIGHTS UPON A CHANGE IN CONTROL: In the event of a Change in Control,
notwithstanding any other restrictive provisions herein, all previously
granted Stock Options and stock appreciation rights shall become
exercisable immediately, except that no Incentive Stock Option may be
exercised prior to six months following the date of grant thereof, and
all previously issued shares of restricted stock shall be issued free
of restrictive legend, within 90 days following the date of occurrence
of such Change in Control regardless of whether the applicable
Restriction Period has expired or whether Performance Goals have been
met.
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III. STOCK OPTIONS
All Stock Options granted to Participants under the Plan shall be subject
to the following terms and conditions, which shall be set forth in an
appropriate written document ("Option Document") and which may provide such
other terms, conditions and provisions, not inconsistent with this Plan, as
the Committee may direct:
A. TYPE OF OPTION: Each Option Document shall identify the option
presented thereby as Incentive Stock Options or Non-Qualified Stock
Options, as the case may be.
B. PRICE: The option price per share shall not be less than one hundred
percent (100 percent) of the Fair Market Value of a share of Common
Stock on the date of grant and, in no event, less than the par value of
the stock.
C. EXERCISE TERM AND VESTING: Except as provided in Paragraph F below,
33 1/3 percent of a Stock Option Award shall be exercisable after the
first anniversary of the award, 33 1/3 percent of a Stock Option Award
shall be exercisable after the second anniversary, and the remaining
33 1/3 percent of the Award shall be exercisable after the third
anniversary of the Award. Each Stock Option document shall state the
period or periods of time within which the Stock Option may be
exercised, in whole or in part. The Committee shall have the power to
permit an acceleration of previously established exercise terms,
subject to the requirements set forth herein, upon such circumstances
and subject to such terms and conditions as the Committee deems
appropriate. All options shall expire as of 5:00 p.m. on the tenth
anniversary of the grant unless the Committee provides otherwise.
D. EXERCISE PROCEDURES: A Stock Option, or portion thereof, shall be
exercised by delivery of a written notice of exercise to the Secretary
of the Company, and payment of the full price of the shares being
purchased, as well as payment of all withholding taxes due thereon, if
any.
E. PAYMENT: The price of an exercised Stock Option, or portion thereof,
may be paid:
1. by check, bank draft, money order, or electronic funds transfer
payable to the order of the Company; or
2. through the delivery of shares of the Company's Common Stock owned
by the Participant, having an aggregate Fair Market Value as
determined as of the date prior to exercise equal to the option
price; or
3. by such other method as the Committee may approve, including
payment through a broker in accordance with procedures permitted by
Regulation T of the Federal Reserve Board; or
4. by a combination of 1, 2 and 3 above.
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In the event a Participant delivers already-owned shares of the
Company's Common Stock, at the Participant's option, the Participant
may provide an executed attestation of ownership in lieu of actual
delivery of shares.
Subject to the approval of the Committee, as set forth in the Option
Document or otherwise in accordance with Rule 16b-3 of the Exchange
Act, a Participant may surrender already-owned shares of the Company's
Common Stock or forego delivery of shares due as a result of the
exercise, in order to pay any withholding tax required to be collected
upon exercise of a Non-Qualified Stock Option. Such shares shall be
valued at their Fair Market Value pursuant to subparagraph 2 above.
If payment is made under Section III.E.3. of the Plan, the written
exercise notice may instruct the Company to deliver shares due upon the
exercise of the Stock Option to a registered broker or dealer
designated by the Company, if any, ("Designated Broker") in lieu of
delivery to the optionee. Such instructions must designate the account
into which the shares are to be deposited.
F. RIGHTS UPON TERMINATION OF EMPLOYMENT: In the event of an optionee's
Termination of Employment, all Stock Options awarded to such optionee
shall expire, on the thirtieth day following the effective date of the
Termination of Employment unless the Committee in the Option Document
or otherwise grants an additional period in which to exercise the Stock
Options. In the event that an optionee ceases employment due to
Retirement, death or Disability, prior to the expiration of his or her
Stock Options and without having fully exercised his or her Stock
Options, all Non-Qualified Stock Options and Incentive Stock Options
that have been held for at least six months shall immediately become
exercisable and the optionee or his successor shall have the right to
exercise the Stock Option during its term within a period of one year
after cessation of employment due to death or Disability and within a
period of two years after cessation of employment due to Retirement, or
one year from Optionee's date of death, whichever occurs first, or
within such other period, and subject to such terms and conditions, as
may be specified by the Committee; provided, however, an Optionee who
ceases employment due to Retirement after attaining age 62 with at
least five years of continuous service may exercise Non-Qualified Stock
Options, if otherwise exercisable, during their term within five years
after Retirement, and provided further that ISO tax treatment shall be
available only as permitted under the Internal Revenue Code.
G. RESTRICTIONS UPON TRANSFER: Unless otherwise directed by the Committee,
each Option Document for Non-Qualified Stock Options shall further
provide that no option nor any interest or right therein or part
thereof shall be liable for the debts, contracts or engagements of the
optionee or his successors in interest or shall be subject to
disposition by transfer, alienation, anticipation, pledge, encumbrance,
assignment or any other means whether such disposition be 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; provided, however, that this Paragraph III.G.
shall not prevent (with Committee approval) transfers to the
Participant's spouse, children, grandchildren, parents or a trust
established for any of them or the Participant, or by will or the laws
of descent and distribution. If such a transfer is made, the employee
may not receive any consideration therefore, and the Option will
continue to be subject to the same terms and conditions as were
applicable to the Option immediately before transfer.
A-9
H. INCENTIVE STOCK OPTIONS: An Incentive Stock Option shall be subject to
the following terms and conditions, which shall be set forth in the
Option Document and which may provide such other terms, conditions and
provisions as the Committee determines necessary or desirable in order
to qualify such option as an incentive stock option (within the meaning
of Section 422 of the Code, or any amendment or substitute thereto or
regulation thereunder):
(1) The period or periods of time within which the option may be
exercised, in whole or in part, which shall be such period or
periods of time as may be determined by the Committee, provided
that no option shall be exercisable prior to six months nor after
ten years from the date of grant thereof. The Committee shall have
the power to permit an acceleration of previously established
exercise terms, subject to the requirements set forth herein, upon
such circumstances and subject to such terms and conditions as the
Committee deems appropriate;
(2) The aggregate Fair Market Value (determined as of the date the
option is granted) of the stock with respect to which Incentive
Stock Options are exercisable for the first time by such
individual during a calendar year (under all plans of the Company)
shall not exceed $100,000;
(3) No Incentive Stock Option shall be granted to any employee if at
the time the option is granted the individual owns stock
possessing more than ten percent (10 percent) of the total
combined voting power of all classes of stock of the Company or
its Parent or its subsidiaries unless at the time such option is
granted the option price is at least 110 percent (110 percent) of
the fair market value of the stock subject to the option and such
option by its terms is not exercisable after the expiration of
five years from the date of grant; and
(4) No Incentive Stock Option nor any interest or right therein or
part thereof shall be liable for the debts, contracts or
engagements of the optionee or his successors in interest or shall
be subject to disposition by transfer, alienation, anticipation,
pledge, encumbrance, assignment or any other means whether such
disposition be 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;
provided, however, that this Subparagraph III.H(4) shall not
prevent transfers by will or by the laws of descent and
distribution. During the lifetime of the optionee, the option is
exercisable only by the optionee.
IV. STOCK APPRECIATION RIGHTS
Stock appreciation rights may be granted in connection with a contemporaneously
granted stock option and shall be subject to the following terms and conditions
that shall be set forth in the Option Document which may provide such other
terms, conditions and provisions not inconsistent with this Plan as the
Committee may direct.
A. GRANT OF RIGHTS: Stock appreciation rights shall entitle the grantee,
subject to such terms and conditions determined by the Committee, to
receive upon exercise thereof all or a portion of the excess of (i) the
Fair Market Value of a specified number of shares of the Common Stock
A-10
at the time of exercise, as determined by the Committee, over (ii) a
specified price, which shall not be less than 100 percent (100 percent)
of the Fair Market Value of the stock on the day the right is granted.
B. TERM: The period or periods of time within which the stock appreciation
rights may be exercised, in whole or in part, is co-extensive with the
contemporaneously granted Stock Option. 33 1/3 percent of an Award of
stock appreciation rights shall be exercisable after the first
anniversary of the Award, 33 1/3 percent of an Award of stock
appreciation rights shall be exercisable after the second anniversary
of the Award, and the remaining 33 1/3 percent of the award shall be
exercisable after the third anniversary of the Award. The Committee
shall have the power to permit an acceleration of previously
established exercise terms, subject to the requirements set forth
herein, upon such circumstances and subject to such terms and
conditions as the Committee deems appropriate.
C. LIMITS ON STOCK APPRECIATION RIGHTS:
(1) Stock appreciation rights shall be paid only upon exercise of the
Stock Option and then only in respect to the number of shares then
being purchased.
(2) Stock appreciation rights shall be payable only to the extent the
Stock Option may become exercisable and shall expire or terminate
with the Stock Option.
(3) No stock appreciation rights nor any interest or right therein or
part thereof shall be liable for the debts, contracts or
engagements of the Participant or his successors in interest or
shall be subject to disposition by transfer, alienation,
anticipation, pledge, encumbrance, assignment or any other means
whether such disposition be 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; provided, however, that this Subparagraph IV.C.(3) shall
not prevent transfers to the Participant's spouse, children,
grandchildren, parents or trust established for any of them or the
Participant, or by will or the laws of descent and distribution;
provided, however, that stock appreciation rights granted in
connection with an Incentive Stock Option shall be subject to the
same transferability restrictions as Incentive Stock Options as
provided in Subparagraph III.H(4).
D. PAYMENT: Payments upon exercise of stock appreciation rights shall be
paid in cash, less any withholding tax required to be withheld, and may
be applied to the contemporaneous Stock Option exercise.
E. OTHER TERMS: Stock appreciation rights shall be granted in such manner
and such form, and subject to such additional terms and conditions as
the Committee in its sole discretion deems necessary or desirable,
including without limitation: (i) if in connection with an Incentive
Stock Option, in order to satisfy any requirements set forth under
Section 422 of the Code, or any amendment or substitute thereto, or
regulation thereunder; or, (ii) in order to avoid any insider trading
liability in connection with stock appreciation rights under Section
16(b) of the Exchange Act.
A-11
V. RESTRICTED STOCK AWARDS
Restricted Stock Awards shall be subject to the following terms and conditions,
which shall be set forth in an appropriate written agreement between the Company
and the Participant ("Award Document") and which may provide such other terms,
conditions and provisions not inconsistent with this Plan, as the Committee may
direct.
A. PRICE: Restricted stock may be made available to a Participant free of
any purchase price or for such purchase price as established by the
Committee.
B. RESTRICTION PERIOD: Shares awarded pursuant to this Plan shall be
subject to such terms, conditions and restrictions, including without
limitation, prohibitions against transfer, substantial risks of
forfeiture and attainment of performance objectives for such period or
periods as shall be determined by the Committee and set forth in the
Award Document ("Restriction Period"). Restriction Periods will
normally be from three to five years; provided, however, that the
Committee in its sole discretion may establish other time periods; and
further provided, that the Restrictions Period for an award conditioned
upon a Participant's continued employment with the Company shall not be
less than three years. The Committee shall have the power to permit, in
its discretion, an acceleration of the expiration of the applicable
restriction period with respect to any part or all of the shares
awarded to a Participant.
C. RESTRICTION UPON TRANSFER: During the Restriction Period determined by
the Committee that is applicable to any shares of restricted stock
under the Plan, no right or interest of any Participant in such
restricted stock nor any interest or right therein (including the right
to vote such shares and receive dividends thereon) or part thereof
shall be liable for the debts, contracts or engagements of the
Participant or his successors in interest or shall be subject to
disposition by transfer, alienation, anticipation, pledge, encumbrance,
assignment or any other means whether such disposition be 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. Notwithstanding the foregoing and except as
otherwise provided in the Plan, the Participant shall have all the
other rights of a stockholder including, but not limited to, the right
to receive dividends and the right to vote such shares.
D. PERFORMANCE GOALS: The lapse of restrictions on restricted stock may be
based upon the attainment of Performance Goals established by the
Committee in accordance with Section 162(m) of the Code. Within the
period of time which is the first 25 percent of the Performance Period,
the Committee shall establish, in writing, the Performance Goals. In
establishing the Performance Goals, the Committee shall take the
necessary steps to insure that the Company's ability to achieve the
pre-established goals is uncertain at the time the goals are set. The
established written Performance Goals shall be written in terms of an
objective formula, whereby any third party having knowledge of the
relevant Company performance results could calculate the amount to be
paid. Such Performance Goals may vary by Participant and by grant.
The Committee shall have the discretion, by Participant and by grant,
to reduce (but not to increase) some or all of the number of shares on
which restrictions lapse that would otherwise be payable by reason of
the satisfaction of the Performance Goals. In making any such
A-12
determination, the Committee is authorized to take into account any
such factors it determines are appropriate, including but not limited
to Company, business unit and individual performance.
E. CERTIFICATES: Each certificate issued in respect of shares awarded to a
Participant shall be deposited with the Company or its designee and
shall bear the following legend:
This certificate and the shares of stock represented hereby are
subject to the terms and conditions (including forfeiture provisions
and restrictions against transfer) contained in the Harleysville
Group Inc. Amended and Restated Equity Incentive Plan and an
agreement entered into between the Participant and the Company.
Release from such terms and conditions shall be obtained only in
accordance with the provisions of the Plan and agreement, a copy of
each of which is on file in the office of the Secretary of
Harleysville Group Inc.
F. LAPSE OF RESTRICTIONS: The Award Document shall specify the terms and
conditions upon which any restrictions upon shares awarded under the
Plan shall lapse, as determined by the Committee. Upon the lapse of
such restrictions, shares of Common Stock free of the restrictive
legend shall be issued to the Participant or his or her other legal
representative.
In accordance with Rule 16b-3 of the Exchange Act, a Participant may
surrender already owned shares of the Company's Common Stock or forego
delivery of shares due as a result of the lapse of restrictions in
order to pay any withholding tax required to be collected upon lapse of
restrictions. Such shares shall be valued at their Fair Market Value as
of the day prior to the lapse of restrictions.
In the event of a Participant's cessation of employment due to death or
Disability, all restrictions upon shares awarded under the Plan shall
lapse and shares of Common Stock free of the restrictive legend shall
be issued to the Participant or his or her legal representative.
In the event of a Participant's cessation of employment due to Normal
Retirement, all restrictions upon shares awarded under the Plan shall
lapse and shares of Common Stock free of the restrictive legend shall
be issued to the Participant or his or her legal representative, unless
the Committee provides otherwise.
In the event of a Participant's cessation of employment due to Early
Retirement, restrictions upon shares awarded under the Plan shall lapse
for that proportion of shares that represents the number of days from
the Date of Grant until the date of retirement divided by the number of
days in the restriction period and that number of shares of Common
Stock free of the restrictive legend shall be issued to the Participant
or his or her legal representative, unless the Committee provides
otherwise
The Committee shall have the power to permit an acceleration of
previously established lapse of restriction terms, upon such
circumstances and subject to such terms and conditions as the Committee
deems appropriate.
G. TERMINATION PRIOR TO LAPSE OF RESTRICTIONS: In the event of a
Participant's Termination of Employment prior to the lapse of
restrictions as determined pursuant to the provisions of preceding
A-13
subparagraph V.E, all shares as to which there still remains unlapsed
restrictions shall be forfeited by such Participant to the Company
without payment of any consideration by the Company, and neither the
Participant nor any successors, heirs, assigns, or personal
representatives of such Participant shall thereafter have any further
rights or interest in such shares or certificates.
VI. MISCELLANEOUS PROVISIONS
A. AMENDMENT, SUSPENSION AND TERMINATION OF PLAN: The Board of Directors
may suspend or terminate the Plan or revise or amend it in any respect
whatsoever except where stockholder approval is required by federal or
state laws or regulations or by rules and regulations of a national
securities exchange or NASDAQ.
B. GOVERNMENT AND OTHER REGULATIONS: The obligation of the Company to
issue Awards under the Plan shall be subject to all applicable laws,
rules and regulations, and to such approvals by any government agencies
as may be required.
C. OTHER COMPENSATION PLANS AND PROGRAMS: The Plan shall not be deemed to
preclude the implementation by the Company, Parent or its subsidiaries
of other compensation plans or programs which may be in effect from
time to time. Participation in this Plan shall not affect an employee's
eligibility to participate in any other benefit or incentive plan of
the Company, its Parent or its subsidiaries. Any Awards made pursuant
to this Plan shall not be used in determining the benefits provided
under any other plan of the Company, Parent or its subsidiaries unless
specifically provided.
D. WITHHOLDING TAXES: The Company shall have the right to require a
payment from a Participant to cover applicable withholding for any
federal, state or local taxes. The Company reserves the right to offset
such tax payment from any other funds which may be due the Participant
by the Company.
E. SINGLE OR MULTIPLE DOCUMENTS: Multiple forms of Awards or combinations
thereof may be evidenced by a single document or multiple documents, as
determined by the Committee.
F. NON-UNIFORM DETERMINATIONS: The Committee's determinations under the
Plan (including without limitation determinations of the persons to
receive Awards, the form, amount and timing of such Awards, the terms
and provisions of such Awards, and the documents evidencing same) need
not be uniform and may be made selectively among persons who receive,
or are eligible to receive, Awards under the Plan whether or not such
persons are similarly situated.
G. ISSUANCE OF SHARES: Whenever the Plan provides for issuance of stock
certificates to reflect the issuance of shares, the issuance may be
affected on a non-certificate basis, to the extent not prohibited by
applicable law or the applicable rules of any stock exchange.
H. CONSTRUCTION OF PLAN: The interpretation of the Plan and the
application of any rules implemented hereunder shall be determined in
accordance with the laws of the Commonwealth of Pennsylvania.
A-14
I. PRONOUNS, SINGULAR AND PLURAL: The masculine may be read as feminine,
the singular as plural, and the plural as singular as necessary to give
effect to the Plan.
J. LIMITATION OF RIGHTS:
1. No Right to Continue as an Employee: Neither the Plan, nor the
granting of an Award nor any other action taken pursuant to the
Plan, shall constitute or be evidence of any agreement or
understanding, express or implied, that the Participant has a right
to continue as an employee of the Company for any period of time,
or at any particular rate of compensation.
2. No Stockholder's Rights for Options: An optionee shall have no
rights as a stockholder with respect to the shares covered by
options granted hereunder until the date of the issuance of stock
in book entry or certificate form and no adjustment will be made
for dividends or other rights for which the record date is prior to
the date such shares are issued.
K. DURATION OF THE PLAN: The Plan shall remain in effect until all Awards
under the Plan have been satisfied by the issuance of shares or the
payment of cash, expire by their terms, or are otherwise forfeited,
provided, however, that no Incentive Stock Option Award shall be
granted more than ten years after the Plan is adopted by the Company's
Board of Directors.
L. STOCKHOLDER APPROVAL: The Plan shall be subject to stockholder
approval.
A-15
THIS PROXY WHEN PROPERLY SIGNED WILL BE VOTED AS SPECIFIED. IF A CHOICE IS
NOT SPECIFIED, THE PROXY WILL BE VOTED FOR THE ELECTION OF DIRECTORS AND FOR
THE APPROVAL OF THE AMENDED AND RESTATED EQUITY INCENTIVE PLAN.
Please Mark Here for
Address Change or Comments |_|
SEE REVERSE SIDE
1. ELECTION OF CLASS B DIRECTORS
FOR WITHHOLD
all the AUTHORITY
nominees to vote for the
listed. nominees listed.
|_| |_|
A VOTE FOR IS RECOMMENDED BY THE BOARD OF DIRECTORS.
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL
NOMINEE, STRIKE A LINE THROUGH THE NOMINEE'S NAME BELOW.)
01 Michael L. Browne
02 Frank E. Reed
03 Jerry S. Rosenbloom
FOR AGAINST ABSTAIN
2. APPROVAL OF AMENDED AND RESTATED |_| |_| |_|
EQUITY INCENTIVE PLAN
A VOTE FOR IS RECOMMENDED BY THE BOARD OF DIRECTORS.
3. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING AND ANY ADJOURNMENT THEREOF.
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|
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SIGNATURE__________________ SIGNATURE_____________________ DATE________________
This proxy should be dated, signed by the stockholder exactly as his or her name
appears herein and returned promptly in the enclosed envelope. Persons signing
in a fiduciary capacity should so indicate.
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^ FOLD AND DETACH HERE ^
[Graphic Appears Here]
HARLEYSVILLE(R)
ANNUAL MEETING
OF
HARLEYSVILLE GROUP INC. STOCKHOLDERS
Wednesday, April 26, 2006
10:30 A.M.
355 Maple Ave.
Harleysville, PA 19438
YOUR VOTE IS IMPORTANT!
Mark, sign and date your proxy card and return it promptly in the enclosed
envelope.
PLEASE VOTE
You can now access your account online via Investor ServiceDirect(R) at
http://www.melloninvestor.com
[Graphic Appears Here]
HARLEYSVILLE(R)
PROXY
HARLEYSVILLE GROUP INC.
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 26, 2006
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Arthur E. Chandler, Robert
A. Kauffman and Catherine B. Strauss, and each or any of them, proxies of the
undersigned, with full power of substitution, to vote all the shares of
Harleysville Group Inc. (the "Company") which the undersigned may be entitled to
vote at the Annual Meeting of Stockholders of the Company, to be held at 355
Maple Avenue, Harleysville, Pennsylvania, on April 26, 2006, at 10:30 A.M.,
local time, and at any adjournment thereof, as follows:
(CONTINUED, AND TO BE MARKED, DATED AND SIGNED ON REVERSE SIDE)
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ADDRESS CHANGE/COMMENTS (Mark the corresponding box on the reverse side)
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^ FOLD AND DETACH HERE ^
MAP TO HARLEYSVILLE GROUP INC.
HARLEYSVILLE
GROUP INC.
355 Maple Ave.
Harleysville, PA 19438
(800) 523-6344
(215) 256-5000
[Graphic of Map Appears Here]