1
Exhibit (g)(4)
ELECTION OF DIRECTORS
Pursuant to the Company's By-Laws, the Board has fixed the number of
directors at eleven. The Directors are to be elected by the holders of the
Company's Common Stock, to serve until the 1998 Annual Meeting of Shareholders
and until their successors are elected and qualify. Unless instructions to the
contrary are received, proxies received in response to this solicitation will be
voted in favor of the nominees listed below. If any nominee should become
unavailable for election, the shares represented by the enclosed proxy will be
voted for such substitute nominee as may be proposed by the Board.
NAME, AGE AND POSITION DIRECTOR PRINCIPAL OCCUPATION, FIVE-YEAR BUSINESS
WITH THE COMPANY SINCE EXPERIENCE AND OTHER CORPORATE DIRECTORSHIPS
- - - ---------------------- -------- --------------------------------------------
Tucker Hart Adams, 59 1994 President, The Adams Group, Inc. (an economic
Director consulting firm), since 1989; Director of Tax
Free Fund of Colorado, Montana Power Company
and Rocky Mountain Equity Fund.
W. Marston Becker, 44 1996 Chairman and Chief Executive Officer since 1996
Director and Senior Vice President, 1994-1996, of Orion
Capital Corporation ("Orion"); President and
Chief Executive Officer of Design Professionals
Insurance Company, a subsidiary of Orion, 1994-
1996; President and Chief Executive Officer of
McDonough Caperton Insurance Group, 1987-1994.
Alan R. Gruber, 69 1984 Director and Chairman of the Executive and
Chairman of the Board Investment Committees of Orion since 1996;
Chairman of the Board and Chief Executive
Officer of Orion, 1976-1996; Trustee of six
trusts which manage the Neuberger & Berman
family of equity mutual funds; Director of
Trenwick Group, Inc.
Dennis J. Lacey, 43 1994 Director, President and Chief Executive Officer
2
Director of Capital Associates, Inc. (an equipment
leasing company) since 1991.
M. Ann Padilla, 54 1994 President, Sunny Side, Inc./Temp Side (a private
Director employment service), since 1975; Director of
Bank One Denver N.A.
Vincent T. Papa, 50 1996 Senior Vice President since 1996 and Vice
Director President and Treasurer, 1987-1996, of Orion;
Chairman and Chief Executive Officer of Wm. H.
McGee & Co., Inc., a subsidiary of Orion, since
1995.
James R. Pouliot, 43 1995 President and Chief Executive Officer of
Director; President and Guaranty since December 1996 and of Viking
Chief Executive Officer Insurance Holdings, Inc. ("Viking") since 1992;
Executive Vice President of Guaranty during
1996. Vice President, Marketing, Great American
Insurance Co., 1990-1992.
Robert B. Sanborn, 68 1988 Senior Executive Consultant of Orion since 1995;
Director Director since 1987, Vice Chairman 1994-1995,
and President and Chief Operating Officer,
1987-1994, of Orion; Director of HCG/Lloyd's
Investment Trust plc., Intercargo Corporation
and Nobel Insurance Limited.
William J. Shepherd, 70 1991 Private investor; Director of Orion, Chemical
Director Bank New Jersey and Princeton Bank and Trust
Company.
Richard R. Thomas, 51 1991 Chief Executive Officer and Chairman of the
Director Board of ADCO General Corporation (a property
and casualty general agency) since 1990.
Roger B. Ware, 62 1983 Senior Consultant of Guaranty since December
Director 1996 and President and Chief Executive Officer
of Guaranty, 1983-1996. Director of Orion.
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The Board of Directors met nine times during 1996. Each director attended
at least 75% of the meetings of the Board of Directors, as well as of the
meetings of the Committees on which he or she served.
Orion and Guaranty have entered into a Shareholder Agreement with respect
to the composition of the Board of Directors and committees thereof and the
future designation by Orion of four nominees (one of whom will be the Chairman
of the Board) to Guaranty's Board of Directors so long as Orion or its
subsidiaries beneficially own in the aggregate 30% or more of the voting
securities of Guaranty (or securities convertible or exchangeable therefor) and
of two nominees so long as Orion or its subsidiaries beneficially own 20% or
more of such securities. Messrs. Becker, Gruber, Papa and Shepherd have been
designated by Orion pursuant to this Agreement. In addition, Messrs. Sanborn (an
Orion designee prior to his retirement in 1994) and Ware are directors of Orion.
Messrs. Ware and Pouliot were nominated to the Board as officers of Guaranty.
The Company expects that Mr. Gruber will retire as Chairman of the Board after
the 1997 annual meeting and that Mr. Becker will be designated to succeed him.
The Shareholder Agreement also provides, among other matters, that the
members of the Board, other than the Orion designees and two officers of
Guaranty, be unaffiliated with but mutually agreeable to both Orion and Guaranty
and Orion may require that Guaranty's Compensation Committee include the Orion
designees to the Guaranty Board. On the record date for this meeting Orion or
its subsidiaries owned approximately 81% of the shares entitled to vote. They
intend to vote their shares in favor of all of the nominees, as well as the
proposals to approve the Equity Incentive Plan and ratify the selection of
Deloitte & Touche LLP.
COMMITTEES
The Board of Directors has Executive, Audit and Compensation Committees.
The Executive Committee, during intervals between meetings of the Board, may
exercise all of the powers of the Board in the management and control of the
business of Guaranty, except as limited by law and except with respect to
matters within the powers of the Audit or Compensation Committees. The
Executive Committee is composed of Mr. Gruber, as Chairman, and Mr. Pouliot. The
Committee did not meet during 1996.
The Compensation Committee consists of Mr. Shepherd as Chairman, Ms.
Padilla and Messrs. Gruber and Sanborn. The Compensation Committee recommends to
the Board of Directors the compensation to be paid to employees of the Company
and administers the Company's various employee benefit and key officer and
employee plans. The Committee met five times during 1996.
The Audit Committee confers periodically with management, the Company's
internal auditors and the Company's independent accountants in connection with
the preparation of financial statements and audits thereof and the maintenance
of proper financial records and
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controls. The Audit Committee also reviews the nature and extent of any non-
audit services provided by the Company's independent accountants. The Audit
Committee makes recommendations to the Board of Directors with respect to the
foregoing and brings to the attention of the Board any criticism and
recommendations that the independent accountants or the Audit Committee itself
may suggest. The Audit Committee consists of Mr. Lacey, as Chairman, Ms. Adams
and Mr. Thomas. The Committee met three times during 1996.
SECURITY OWNERSHIP OF DIRECTORS, OFFICERS,
AND PRINCIPAL BENEFICIAL OWNERS
The following table sets forth information concerning the shares of the
Company's Common Stock beneficially owned by each of the directors and nominees
for the Board, each of the named executive officers, all directors and executive
officers of the Company as a group, and each person or group who is known by the
Company to be the beneficial owner of more than five percent of the total number
of shares of the Company's Common Stock outstanding and entitled to vote. All
such information is given as of January 31, 1997, unless otherwise indicated.
Shares outstanding were deemed to be shares actually outstanding on January 31,
1997, and shares subject to options which were exercisable on or within 60 days
after that date.
AMOUNT AND
NATURE
OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OF
BENEFICIAL OWNER OWNERSHIP CLASS
------------------- ---------- -----
Orion Capital Corporation 600 Fifth Avenue New York, NY 10020.................... 12,129,942(a) 81.0%
Tucker Hart Adams................................................................ -0- -0-
W. Marston Becker................................................................ 2,450(b) * (b)
Alan R. Gruber................................................................... -0- (b) -0- (b)
Dennis J. Lacey.................................................................. 400 *
Arthur J. Mastera................................................................ 37,173(c) .2%
M. Ann Padilla................................................................... 506 *
Vincent T. Papa.................................................................. -0- (b) -0- (b)
Michael L. Pautler............................................................... 39,966(d) .3%
James R. Pouliot................................................................. 39,173(e) .3%
Fred T. Roberts.................................................................. 19,000(f) .1%
Robert B. Sanborn................................................................ 321(b) *
William J. Shepherd.............................................................. 1,605(b) * (b)
Richard R. Thomas................................................................ 1,500 * (b)
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Roger B. Ware.................................................... 92,071(b,g) .6% (b)
All Directors and Executive Officers as a Group.................. 12,384,092 82.7%
____________
* Less than .1%
(a) Represents beneficial ownership with sole voting and dispositive power of
Orion and certain of its subsidiaries as reported on an amendment to its
Schedule 13G filed with the Securities and Exchange Commission on March 19,
1997.
(b) Excludes the shares owned by Orion. Messrs. Becker and Papa are executive
officers of Orion and Messrs. Becker, Gruber, Sanborn, Shepherd and Ware
are directors of Orion. Each of such persons disclaims any beneficial
interest in Orion's shares.
(c) Includes 6,173 shares as to which Mr. Mastera has sole voting and
investment power, and vested options to acquire 31,000 shares granted
pursuant to the terms of the Company's 1991 Long-Term Performance Incentive
Plan (the "1991 Incentive Plan").
(d) Includes 5,966 shares as to which Mr. Pautler has sole voting and
investment power, and vested options to acquire 34,000 shares granted
pursuant to the terms of the Company's 1991 Incentive Plan.
(e) Includes 4,173 shares as to which Mr. Pouliot has sole voting and
investment power and vested options to acquire 35,000 shares granted
pursuant to the terms of the Company's 1991 Incentive Plan.
(f) Includes vested options to acquire 19,000 shares granted pursuant to the
terms of the Company's 1991 Incentive Plan.
(g) Includes 31,071 shares as to which Mr. Ware has sole voting and investment
power, and vested options to acquire 61,000 shares granted pursuant to the
terms of the Company's 1991 Incentive Plan.
EXECUTIVE COMPENSATION
CASH COMPENSATION
The following table sets forth the compensation of the Chief Executive
Officer and the four most highly compensated executive officers of the Company
during the three consecutive years ended December 31, 1996.
SUMMARY COMPENSATION TABLE
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LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------
OTHER RESTRICTED SHARES
ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARD(S) OPTIONS COMPENSATION
POSITION YEAR ($)(A) ($)(B) ($) ($)(C) (#) ($)(D)
- ------------------- ------------ ---------- ------------ ----------- ---------------------
James R. Pouliot........ 1996 273,065 140,000 -- -- 32,320 53,503
President of Viking; 1995 114,915(e) 50,000 -- $207,000 35,000 1,731
President and
Chief Executive Officer
of Guaranty
(eff. 12/17/97)
Roger B. Ware........... 1996 319,226 150,000 -- -0- -0- 72,473
Former President & 1995 291,917 50,000 -- -0- -0- 65,651
C.E.O. of
Guaranty (ret. eff. 1994 244,427 150,000 -- 87,500 16,000 58,483
12/17/96)
Fred T. Roberts......... 1996 189,423 48,500 -- 16,156 37,327
Senior Vice President-- 1995 162,384 25,000 -- -- -- 31,373
President
of Commercial Lines of 1994 148,115 75,000 -- 52,500 12,000 29,263
Guaranty
Michael L. Pautler...... 1996 177,115 62,000 -- -- 13,084 30,440
Senior Vice President-- 1995 152,558 35,000 -- -- -- 25,534
Finance &
Treasurer of Guaranty 1994 136,769 63,000 -- 52,500 12,000 20,924
Arthur J. Mastera....... 1996 175,192 51,000 -- -- 12,671 34,624
Senior Vice President-- 1995 158,538 10,000 -- -- -- 33,058
Chief
Administrative Officer 1994 147,038 60,000 -- 52,000 12,000 29,301
of Guaranty
____________
(a) Includes compensation deferred under Company's 401(k) Retirement Plan.
(b) Annual bonus amounts are earned and accrued during the year indicated.
(c) During 1995, 12,000 shares of restricted stock were granted to Mr.
Pouliot. Restricted stock was granted during 1994 as follows: Mr. Ware
5,000 shares, and Messrs, Roberts, Mastera and Pautler 3,000 shares each.
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Dividends are paid on non-vested shares of restricted stock.
(d) "All Other Compensation" represented (i) moving expenses of $12,664 paid
in connection with Mr. Pouliot's relocation to Colorado and (ii) Company
contributions to the 401(k) Retirement Plan ("401K"), Supplementary
Executive Retirement Plan ("SERP"), and split dollar insurance premiums
("LIFE"), as follows:
1996 1995 1994
---------------- ------------------ -------------------
401K SERP LIFE 401K SERP LIFE 401K SERP LIFE
($) ($) ($) ($) ($) ($) ($) ($) ($)
---- ---- ---- ----- ---- ---- ---- ---- -----
James R. Pouliot........ 9,500 31,339 -- 1,731 -- -- -- -- --
Roger B. Ware........... 9,500 42,153 20,820 9,240 37,224 19,187 9,000 28,201 21,282
Fred T. Roberts......... 9,500 17,490 10,337 9,240 12,613 9,520 8,887 10,015 10,361
Michael L. Pautler...... 9,500 15,152 5,788 9,240 10,746 4,548 8,206 8,540 4,178
Arthur J. Mastera....... 9,500 14,787 10,337 9,240 11,882 11,936 8,822 9,875 10,604
During 1995, Mr. Pouliot did not participate in the Company's 401K plan, as
Viking had a separate plan.
(e) Represents Mr. Pouliot's 1995 salary, including deferred amounts, after
the acquisition of Viking on July 18, 1995.
OPTIONS GRANTED AND EXERCISED
The following table sets forth the options granted (none were exercised) in
1996 under the Company's 1991 Incentive Plan to the Chief Executive Officer and
four most highly compensated executive officers of the Company, and certain
other information with respect to the options.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
---------------------------
% OF TOTAL EXERCISE
OPTIONS PRICE OR
OPTIONS GRANTED TO BASE GRANT
GRANTED EMPLOYEES PRICE EXPIRATION DATE
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NAME (#)(A) IN 1996 ($/SH) DATE VALUES(B)
- - - ---- --------- ---------- --------- -------- ---------
James R. Pouliot............... 32,320 10.5 16.875 12/17/06 $136,350
Roger B. Ware.................. -0- -0- -0- -0- -0-
Fred T. Roberts................ 16,156 5.2 16.875 12/17/06 68,158
Michael L. Pautler............. 13,084 4.2 16.875 12/17/06 55,198
Arthur J. Mastera.............. 12,671 4.1 16.875 12/17/06 53,456
____________
(a) Options may be either non-qualified options or qualified incentive stock
options. The options granted in 1996 become exercisable in installments at
the rate of 25% per year after the first, second, third and fourth
anniversaries of the date of grant. Vested options are exercisable for ten
years from the date of grant. For each named individual, a total of 5,925
option shares are qualified options and the remainder were issued as
nonqualified options.
(b) These values were determined utilizing a modified Black-Scholes option
pricing model with the following weighted average assumptions and
adjustments: For 1996 options, 3.0% dividend yield, expected volatility of
24%, risk free interest rate of 6.1% and expected term of 5.6 years.
The following table sets forth as of the year-end the number and values of
the shares of common stock underlying the outstanding "in-the-money" options
held by the named executive officers. The values represent the positive spread
between the exercise price of the options and the year-end price of the common
stock.
SHARES VALUE OF UNEXERCISED
ACQUIRED NUMBER OF UNEXERCISED IN-THE MONEY OPTIONS
ON VALUE OPTIONS AT YEAR-END AT YEAR-END
----------------- ------------------------- -----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - - ---- ----------------- -------------------------- -----------------------------
James R. Pouliot............ None N/A 35,000 32,320 -- --
Roger B. Ware............... None N/A 61,000 -- $67,500 --
Fred T. Roberts............. 14,000 $35,000 19,000 16,156 -- --
Michael L. Pautler.......... None N/A 34,000 13,084 $33,000 --
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Arthur J. Mastera....... None N/A 31,000 12,671 $ 9,000 --
PERFORMANCE UNIT PLAN VALUES
Guaranty's Performance Unit Plan, adopted in 1987 (the "1987 Plan"),
presently covers only three key officers. Beginning in 1996, performance units
may also be awarded under the 1991 Incentive Plan and the proposed Equity
Incentive Plan, on terms which are substantially different from those of the
1987 Plan, as described below. Awards under the Plan are payable in cash over a
period of five to eight years. Each vested unit is approximately equal in value
to the book value of one share of the Company's common stock. The purpose of the
awards is to motivate the participants to remain with the Company for an
extended period of time and to use their best efforts to maximize shareholder
value so long as the units are outstanding.
In order to encourage the recipients of 1987 awards to defer payment of
them until 1998, the Committee placed a floor on their value equal to their
value as of September 30, 1994. To receive the cash value of a unit, the
employee must remain an employee of the Company until the dates shown in the
following table, which also sets forth the value of the awards as of December
31, 1996:
NUMBER VALUE AT
YEAR OF DECEMBER 31,
NAME AWARDED UNITS 1996 DATE VESTED
---- ------- ------ ------------ -----------
James R. Pouliot.............. 1995 15,972 $234,866 Dec. 31, 1998
Roger B. Ware................. 1987 89,248 1,312,410 January 1, 1995
1993 26,774 393,717 Sept. 30, 1998
Fred T. Roberts............... 1987 41,650 612,472 January 1, 1995
1993 10,413 153,125 Sept. 30, 1998
1991 INCENTIVE PLAN
This Plan was amended in 1996 to add certain features contained in the
Equity Incentive Plan, described below, including the transferability of stock
options to immediate family members and the authorization of performance units
which provide for payments if the Company achieves Performance Targets (e.g.,
increases in book value, earnings per share, return on equity, etc.) which are
fixed at the time of granting the units. Payments may be made either in
cash or in stock. During 1996 grants of performance units were made providing
for payments over four years if certain targeted growth in book value occurs
over the same period of time. Maximum payments
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to the named executive officers will be: Mr. Pouliot, $68,400, Mr. Roberts,
$37,000, Mr. Mastera, $27,200, and Mr. Pautler, $31,050.
EMPLOYMENT AND SEVERANCE AGREEMENTS
On September 1, 1986, Guaranty entered into an employment agreement with
Mr. Ware. It provides for a base annual salary to be fixed by the Board of
Directors ($310,000 as of March 25, 1996), and for such bonus and other
incentive and deferred compensation as the Board determines to be appropriate.
On February 29, 1996, the agreement was amended to provide that Mr. Ware will
remain as President and Chief Executive Officer until December 17, 1996, and
thereafter will be employed until December 31, 1998 as a Senior Consultant to
the Company at the same base salary. Mr. Ware remains eligible for his normal
1996 performance bonus, but is not eligible for such bonuses for 1997 or 1998.
He has agreed that he will not compete with Guaranty for a one-year period after
the termination of the agreement. The agreement may be terminated by Guaranty
upon Mr. Ware's disability, in which event he would be paid 50% of his base
salary through 1998.
With the acquisition of Viking on July 18, 1995, an employment agreement
with Mr. Pouliot became effective for a term which is automatically extended so
that it will be in effect at all times for a period of two years. The agreement,
which also applies to his services as President and Chief Executive Officer of
Guaranty since December 17, 1996, provides for the grants of Restricted Stock,
Stock Options and Performance Units described above, an annual salary of at
least $250,000 ($300,000 as of December 16, 1996), and a guaranteed bonus with
respect to 1995 and 1996 of at least 40% of his earned salary for those years.
Mr. Pouliot has also agreed that he will not be employed by any business in the
non-standard private passenger automobile insurance industry for a period of one
year following termination of his employment agreement.
The Board of Directors has adopted a severance policy applicable to the
officers of the Company's insurance company subsidiaries. Pursuant to this
policy, officers are entitled to receive six months to one year's notice of
termination, depending on the position held, except in the event of termination
for cause. The policy currently applies to all of the senior officers other than
Messrs. Ware and Pouliot, including the other executive officers named in the
Compensation Table above, each of whom is entitled to one year's notice of
termination.
In September, 1991, the shareholders of Guaranty authorized the execution
by Guaranty of indemnification agreements with directors, officers and certain
employees of Guaranty and its subsidiaries, which, among other matters,
supplement the indemnity provided under Guaranty's articles of incorporation and
by-laws and the Colorado Corporation Code.
COMPENSATION OF DIRECTORS
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In 1996, Guaranty paid its six non-management directors a retainer fee at
the rate of $17,000 a year and an attendance fee of $800 for each Board of
Directors or committee meeting attended, except that $400 was paid for a
committee meeting held on the same date as a board meeting. The Committee
chairmen received an additional annual retainer of $5,000. Officers of Guaranty
and Orion who serve as directors of Guaranty do not receive either a retainer
fee or attendance fees for their service. All directors and officers are
reimbursed for expenses incurred in attending Board of Directors and committee
meetings.
COMPENSATION COMMITTEE REPORT
The Company's Compensation Committee consists of four members of the
Company's Board of Directors. Three members are nominated by Orion, pursuant to
the November 7, 1991, Shareholder Agreement, as amended, between Orion and the
Company and the fourth is an outside director of the Company. Roger B. Ware,
Guaranty's president during 1996, serves as a member of the board of directors
of Orion, and as such receives the regular fees paid to all non- employee
directors of Orion, but he is not a member of the Compensation Committee of
either corporation.
Objectives. Guaranty's Compensation Committee is responsible for
establishing and administering the Company's compensation policies for its chief
executive officer and its other senior officers, for determining annually the
base salary and bonus for each of the senior officers, and for awarding grants
under the Company's 1991 Incentive Plan, its Incentive Bonus Plan and the Equity
Incentive Plan, if it is approved by the shareholders. The Committee's goal is
to motivate management to enhance the profitability of the Company and thus its
value to shareholders. The Committee recognizes that to achieve this goal the
Company must attract and retain qualified executives who will contribute
significantly to the Company's progress. Therefore, the Committee has sought to
establish compensation policies which will balance corporate, business unit and
individual performance factors so as to effectively motivate management to lead
the Company toward long term growth in premium volume and profitability at a
pace consistent with maintaining conservative levels of capitalization and loss
reserves.
To this end, the Committee has determined that, in general, the base
salaries of management should be at or slightly above the median salary levels
of comparable companies recognizing, however, that limited information is
available concerning competitive specialty insurance companies of comparable
size. The Committee emphasizes variable compensation programs, based upon
achievement of individual and Company goals, which would make possible total
compensation levels which the Committee believes to be at the high end of the
range for such companies if the Company's or business unit's performance is
above average. The Committee believes that the Company's Bonus, Long-Term
Incentive Compensation and Equity Incentive Plans are key factors both for
achieving this objective and for attracting, retaining and motivating its
executives.
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General. The Committee considers a variety of factors in connection with
compensation decisions, although none of them is assigned a specific weight.
During the first quarter of each year, the Committee reviews material provided
by the chief executive officer in connection with his recommendations for
adjustments in the base salaries of each officer and the award of bonuses with
respect to services performed during the preceding year. This information
includes the annual performance goals established for the individual officers
and for the Company and its various business units, and the Company's operating
results for the preceding year, as compared to its business plan and the results
of other companies. Specially commissioned surveys of competitive companies are
also obtained at three to five year intervals. The individual experiences of its
members in connection with the operation of other businesses with which they are
or were associated are also taken into account by the Committee.
Chief Executive Officer. In determining the 1996 base salary for Mr. Ware,
the Committee considered, in addition to the foregoing, the Company's financial
performance as measured by its three key financial targets: a 15% increase in
gross written premiums, a GAAP operating ratio of not more than 98%; and a
return on equity of at least 15%. For 1995, against these key ratios, the
Company achieved a 5% return on equity, a 24% increase in gross written premium
volume and an operating ratio of 105%. In addition, the statutory combined loss
and expense ratio was over 100% in 1995 for the first time in nine years, at
106%. The property and casualty industry ratio during 1995 averaged 106% and has
not been under 100% since 1978. Based on the foregoing, the Committee awarded
Mr. Ware a nominal salary increase of approximately 3%, commencing in April,
1996.
Mr. Ware's 1996 bonus award of $150,000, granted in February, 1997,
represented an amount equal to 300% of his bonus for the preceding year and 60%
of the maximum 1996 bonus for which he was eligible. In determining the amount,
the Committee took into account the Company's overall financial performance as
measured by its three key financial targets for 1996. Gross written premiums
increased 19% compared to the target of 15%, the GAAP operating ratio decreased
from 106% to 100% compared to a target of 98%, and a return on equity of 12%,
compared to the target of at least 15%. The Committee also considered a number
of other positive achievements recorded during 1996, including a 10% increase in
the book value per share of the Company's common stock, primarily due to its
improved net earnings, the successful implementation of the transition process
resulting from Mr. Ware's retirement, and the development of a plan for the
integration of Viking's business with the Personal Lines Unit of the Company.
Other Executive Officers. A similar process was followed in determining the
level of salary increases and bonuses for the other officers of Guaranty.
Performance goals are established at the beginning of the year for each officer
and the Committee is able to consider the extent to which they have been met. In
addition, the Committee reviewed the earnings, the expense ratio, the operating
ratio, premium growth and operating cash flow of the individual business units
within the Company with which the officers were associated, and it met with the
chief executive
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officer to review management's compensation recommendations, based on the
individual performance of each officer and management's evaluation of the
factors considered by the Committee as they applied to each of the officers.
While individual compensation increases varied substantially, Guaranty limited
its annual executive compensation increases in 1996 to an aggregate of five
percent of the executive payroll.
Awards under Guaranty's Incentive Cash Bonus Plan are based in part on the
Company's performance for the year and in part on the achievement of the
individual goals and objectives which are set at the beginning of the year by
agreement between each officer and the senior executive to whom he or she
reports. Target awards for 1996, as a percentage of 1996 base salaries, ranged
from 20% for certain vice presidents to 40% for the chief executive officer.
Depending on performance, bonus payments may range between zero and two times
the target amount. In February, 1997, the Committee approved aggregate bonus
payments of $620,000 under the Plan for 1996 performance by all officers of the
Company's insurance subsidiaries, reflecting both the achievement by the
officers of their personal goals for the year and the Company's 1996 financial
performance. Amounts awarded to the Company's executive officers in 1997 with
respect to 1996 performance are reported in the Proxy Statement's Summary
Compensation Table.
Long-Term Incentives. Long-term incentives for the company's chief
executive officer and other officers are provided through the Company's 1991
Long-Term Performance Incentive Plan, as amended in 1996, and, subject to
shareholders approval, its Equity Incentive Plan, adopted by the Board in 1996.
The Committee grants awards under the Incentive Plan primarily on the basis of
the executive's ability to influence the Company's long term growth and
profitability. The awards can be in the form of stock options, restricted stock
or, since 1996, performance units. The Committee has the authority to determine
to whom awards will be made, in what amounts and on what conditions. It is
through awards under these Plans that the Committee attempts to align
management's long range interests with those of the shareholders and to provide
an opportunity for its officers to build a meaningful stake in the Company. The
amounts of the stock options and performance unit awards described in the
Executive Compensation Section of this Proxy Statement, were based on the
Committee's subjective determination as to an award which would motivate the
executive to remain with the Company until the award vested and to use his best
efforts to enhance the value of the Company during that period.
Other Benefits. The officers of the Company may also participate in the
Company's 401(k) Plan to which both the Company and employees may make
contributions, and in health and other benefit plans which are available to
employees generally. In addition, the Company adopted in 1987 a Performance Unit
Plan pursuant to which the pre-1996 awards described under "Performance Unit
Plan Values" in this Proxy Statement were made. The authority to make awards
under the Plan is reserved to the Committee, which determined that the 1987 and
1993 awards under the Plan had demonstrated their usefulness in retaining and
motivating the key executives who were responsible for the Company's operating
results during the ensuing years,
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and that the 1995 award to Mr. Pouliot would motivate him to remain as key
executive of the Company until 1998 and compensate him fairly for his
contribution to increases in shareholder values during that period. At the
present time, the Committee has no plans to make further awards under the
Performance Unit Plan, although it may, and in 1996 did, award performance units
under the Equity Incentive Plan and the amended 1991 Long-Term Performance
Incentive Plan.
Deductibility of Compensation. Section 162(m) of the Internal Revenue Code,
enacted in 1993, generally disallows a tax deduction to public companies for
compensation over $1 million paid to the Company's Chief Executive Officer or
any of the four other most highly compensated executive officers. Qualifying
performance-based compensation will not be subject to the deduction limit if
certain requirements are met. No executive officer would have been subject to
the limitations of Section 162(m) had it applied in 1996. The Committee intends
to structure any compensation for executive officers so that it qualifies for
deductibility under the new statute to the extent feasible. However, the
Committee reserves the authority to authorize payments, including salary and
bonuses, that may not be deductible if it determines that they are needed to
maintain the Company's competitive position.
COMPENSATION COMMITTEE
William J. Shepherd, Chairman
Alan R. Gruber
M. Ann Padilla
Robert B. Sanborn
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Guaranty and Orion have entered into a shareholder agreement pursuant to
which Orion has the right to require Guaranty to register any or all of Orion's
shares of Common Stock under the Securities Act of 1933, as amended (the
"Securities Act"), on up to three occasions through November 1997. In addition,
Guaranty has agreed to use its best efforts to include such shares in any
underwritten public offering of its Common Stock under the Securities Act and to
pay all expenses in connection with the first two registrations. See also the
description of certain other provisions of the Shareholder Agreement which are
set forth above under the caption "Election of Directors."
In the ordinary course of business, the Company's wholly-owned insurance
company subsidiaries reinsure certain risks with other companies. Such
arrangements serve to limit their maximum loss on large risks. To the extent
that any reinsuring company is unable to meet its obligations, the Company would
be liable for such amounts. For 1996, Guaranty National Insurance Company
("GNIC") and Landmark American Insurance Company entered into a 100% reinsurance
agreement with an Orion insurance subsidiary. Premiums written and ceded under
this
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agreement are included in premiums written as reported in Guaranty's
financial statements and were $49,000 for 1996. Also, for 1996 GNIC entered into
reinsurance agreements with other Orion insurance subsidiaries pursuant to which
GNIC assumed business written through affiliates totalling $15,673,000 in
premium. Guaranty paid to Orion $298,000 in fees and reimbursed $309,000 of
actual expenses incurred by Orion in conjunction with this reinsurance
agreement.
A subsidiary of Orion is an agent for the Company, pursuant to the
Company's standard agency contract. During 1996, this agency produced $436,000
in premiums and was paid $85,000 in commissions. The Company expects to pay it a
similar amount in 1997.
The Company and Orion have entered into an investment management agreement
pursuant to which the investment portfolio of the Company (other than short-
term investments and a portion of the equity securities) will continue to be
managed by investment managers of Orion, under the direction and supervision of
Guaranty and subject to Guaranty's Investment Policies. For its investment
management services, Orion was paid $650,000 in 1996. The contract will continue
in effect for one year unless terminated by either party upon 90 days prior
written notice.
Orion has committed to invest up to $5,000,000 in Insurance Partners L.P.,
a partnership formed to make equity investments of up to approximately $550
million in the insurance industry. Guaranty has committed to participate in
Orion's commitment in an aggregate amount not to exceed $1,500,000. Insurance
Partners L.P. is managed by Insurance Partners Advisors L.P., of which Steven B.
Gruber, the son of Alan Gruber, Chairman of Guaranty, is a managing director.
Mr. Richard R. Thomas, who is a director of Guaranty, is Chairman of the
Board and sole owner of ADCO General Corporation, a general agent of the
Company. ADCO has received from the Company gross commissions (including
contingency commissions), pursuant to a standard agency contract, of
approximately $731,000 in 1996 and is expected to receive gross commissions of
approximately the same amount during the current fiscal year.
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