def14a
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by
the Registrant þ
Filed by a Party other than the Registrant o
Check the appropriate box:
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Preliminary Proxy Statement |
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
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Definitive Proxy Statement |
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Definitive Additional Materials |
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Soliciting Material Pursuant to §240.14a-12 |
Donegal Group Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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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
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NOTICE OF ANNUAL MEETING OF
STOCKHOLDERS
To Be Held April 16, 2009
To the Stockholders of
DONEGAL GROUP INC.:
We will hold our annual meeting of stockholders at
10:00 a.m., local time, on Thursday, April 16, 2009,
at our offices, 1195 River Road, Marietta, Pennsylvania 17547.
At our annual meeting, our stockholders will act on the
following matters:
1. Election of the three nominees for Class B
directors named in the accompanying proxy statement, each for a
term of three years and until the election of his or her
respective successor;
2. Ratification of our audit committees selection of
KPMG LLP as our independent registered public accounting firm
for 2009; and
3. Any other matter that properly comes before our annual
meeting.
We have fixed the close of business on February 27, 2009 as
the record date for the determination of our stockholders who
are entitled to notice of, and to vote at, our annual meeting
and any adjournment or postponement of our annual meeting.
We are mailing our 2008 annual report, which is not part of our
proxy soliciting material, to stockholders of record together
with this notice.
It is important that you vote your shares at our annual meeting.
Please submit your proxy, whether or not you expect to attend
our annual meeting in person. If you attend our annual meeting
and wish to vote in person, you may withdraw your proxy and vote
in person.
By order of our board of directors,
Donald H. Nikolaus,
President and Chief Executive Officer
March 16, 2009
Marietta, Pennsylvania
Important
Notice Regarding the Availability of Proxy Materials for Our
Stockholders Meeting to Be Held on April 16, 2009
The accompanying proxy statement and our 2008 annual report to
stockholders are available at www.donegalgroup.com.
DONEGAL
GROUP INC.
PROXY
STATEMENT
This proxy statement contains information relating to the annual
meeting of stockholders of Donegal Group Inc. to be held on
Thursday, April 16, 2009, beginning at 10:00 a.m., at
our offices, 1195 River Road, Marietta, Pennsylvania 17547, and
at any adjournment or postponement of our annual meeting. We are
first mailing this proxy statement and the accompanying proxy
card to stockholders on or about March 16, 2009. Unless the
context indicates otherwise, all references in this proxy
statement to we, us, our or
the Company refer to Donegal Group Inc. individually
or collectively with its insurance subsidiaries; all references
to Donegal Mutual refer to Donegal Mutual Insurance
Company; all references to Atlantic States refer to
Atlantic States Insurance Company; all references to
Southern refer to Southern Insurance Company of
Virginia; all references to Le Mars refer to Le Mars
Insurance Company; all references to Peninsula refer
to the Peninsula Insurance Group, and all references to
Sheboygan refer to Sheboygan Falls Insurance Company.
CONTENTS
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ii
OUR
ANNUAL MEETING
What
are the purposes of our annual meeting?
At our annual meeting, our stockholders will act upon the
election of the three nominees for Class B directors named
in this proxy statement, the ratification of our audit
committees selection of KPMG LLP as our independent
registered public accounting firm for 2009 and any other
business that properly comes before our annual meeting or any
adjournment or postponement of our annual meeting. In addition,
our management will report on our performance during 2008 and
respond to appropriate questions from stockholders.
What
should I do now?
You should first carefully read this proxy statement. After you
have decided how you wish to vote your shares, please vote by
submitting your proxy using one of the methods described below.
The proxies will vote your shares as you direct. If you are a
registered stockholder and attend our annual meeting, you may
deliver your completed proxy card in person. Street
name stockholders who wish to vote at our annual meeting
will need to obtain a signed proxy from the nominee in whose
name their shares are registered.
VOTING
How do
I vote my shares?
If you are a registered stockholder, that is, if your stock is
registered in your name, you may attend our annual meeting and
vote in person or vote by proxy. You may vote by proxy by
telephone, electronically through the internet or by mail by
following the instructions included with your proxy card. The
deadline for registered stockholders to vote telephonically or
electronically through the internet is 3:00 a.m., eastern
daylight time, on April 15, 2009.
We encourage you to take advantage of these ways to vote your
shares on the matters to be considered at our annual meeting.
The following summary describes the three voting methods
registered stockholders may use to vote by proxy.
Vote by telephone use any touch-tone telephone to
vote your proxy 24 hours a day, 7 days a week. Have
your proxy card in hand when you call. You will be prompted to
enter your control numbers, which are located on your proxy
card, and then follow the directions given.
Vote electronically through the internet use the
internet to vote your proxy 24 hours a day, 7 days a
week. Have your proxy card in hand when you access the web site.
You will be prompted to enter your control numbers, which are
located on your proxy card, and to create and submit an
electronic ballot.
Vote by mail mark, sign and date your proxy card and
return such card in the postage-paid envelope we have provided
you.
If you vote by telephone or electronically through the internet,
you do not need to return your proxy card.
Although there is no charge to you for voting by telephone or
electronically through the internet, there may be costs
associated with electronic access, such as usage charges from
internet service providers and telephone companies. We will not
cover these costs; they are solely your responsibility. The
telephone and internet voting procedures available to you are
valid forms of granting proxies under the Delaware General
Corporation Law, or the DGCL.
If you hold your shares through a broker, bank, nominee or other
holder of record, please check your proxy card or contact your
broker, bank, nominee or other holder of record to determine
whether you will be able to vote by telephone or electronically
through the internet.
1
Who is
entitled to vote at our annual meeting?
Holders of Class A common stock and Class B common
stock of record as of the close of business on the record date,
February 27, 2009, are entitled to receive notice of and to
vote at our annual meeting and any adjournment or postponement
of our annual meeting. A complete alphabetical list of the
record holders of our Class A common stock and Class B
common stock entitled to vote at our annual meeting will be
available for inspection at our principal executive offices
during normal business hours for any purpose germane to our
annual meeting for a period of ten days prior to the date of our
annual meeting.
What
are the voting rights of our stockholders?
We have two outstanding classes of stock: Class A common
stock and Class B common stock. As of the record date,
February 27, 2009, we had outstanding
19,884,500 shares of Class A common stock, each of
which may cast one-tenth of a vote with respect to each matter
to be voted on at our annual meeting, and 5,576,775 shares
of Class B common stock, each of which may cast one vote
with respect to each matter to be voted on at our annual
meeting. Therefore, the holders of our Class A common stock
may cast a total of 1,988,450 votes at our annual meeting and
the holders of our Class B common stock may cast a total of
5,576,775 votes at our annual meeting, resulting in a total of
7,565,225 votes that may be cast at our annual meeting.
As of the record date, Donegal Mutual owned
8,355,184 shares, or 42.0%, of our outstanding Class A
common stock and 4,153,666 shares, or 74.5%, of our
outstanding Class B common stock, and, therefore, will have
the right to cast 65.9% of the votes entitled to be cast at our
annual meeting. Donegal Mutual has advised us that it will vote
its shares for the election of Jon M. Mahan, Donald H. Nikolaus
and Richard D. Wampler, II as Class B directors and
for the ratification of our audit committees selection of
KPMG LLP as our independent registered public accounting firm
for 2009. Therefore, Jon M. Mahan, Donald H. Nikolaus and
Richard D. Wampler, II will be elected as Class B
directors and our audit committees selection of KPMG LLP
as our independent registered public accounting firm for 2009
will be ratified, irrespective of the votes cast by our
stockholders other than Donegal Mutual.
Who
can attend our annual meeting?
All stockholders as of the record date, or their duly appointed
proxies, may attend our annual meeting. Even if you currently
plan to attend our annual meeting, we recommend that you also
submit your proxy as described above so that your vote will be
counted if you later decide not to attend, or are unable to
attend, our annual meeting.
If you hold your shares in street name, that is,
through a broker or other nominee, you will need to bring a copy
of a brokerage statement reflecting your stock ownership as of
the record date and check in at the registration desk at our
annual meeting.
If you wish to obtain directions to be able to attend our annual
meeting and vote in person, please contact us at
(800) 877-0600,
attention Jeffrey D. Miller.
What
constitutes a quorum?
The presence at our annual meeting, in person or by proxy, of
the holders of a majority of the total votes entitled to be cast
by the holders of our Class A common stock and our
Class B common stock outstanding on the record date will
constitute a quorum, permitting the conduct of business at our
annual meeting. Proxies received but marked as abstentions and
broker non-votes will be included in the calculation of the
number of shares present at our annual meeting.
How do
I vote in person?
If your stock is registered in your name and you attend our
annual meeting and wish to vote in person, we will provide you
with a ballot before voting commences at our annual meeting.
2
How do
I vote if my shares are held in street name?
If you are not a stockholder of record, but you are a
beneficial owner, meaning that your shares are
registered in a name other than your own, such as a
brokers name, you must either direct the holder of record
of your shares as to how you want to vote your shares or obtain
a form of proxy from the holder of record that you may then vote.
How do
I vote my 401(k) plan shares?
If you participate in Donegal Mutuals 401(k) plan, you may
vote your shares of Class A common stock and Class B
common stock credited to your 401(k) plan account as of the
record date. You may vote by instructing Putnam Fiduciary
Trust Company, or Putnam, the trustee of our 401(k) plan,
pursuant to the instruction card included with this proxy
statement. As long as Putnam receives your duly executed
instruction card by April 9, 2009, Putnam will vote your
shares in accordance with your instructions.
If you do not return your instruction card, Putnam will vote
your shares in the same proportion that Putnam votes the shares
for which it did receive timely instruction cards.
You may also revoke previously given voting instructions by
filing either a written notice of revocation or a duly executed
instruction card bearing a later date with Putnam.
May I
change my vote after I have voted?
Yes. You may revoke your proxy at any time before the vote is
taken at our annual meeting. If you are a stockholder of record,
you may revoke your proxy by:
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submitting written notice of revocation to our corporate
secretary prior to the voting of that proxy at our annual
meeting;
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submitting a later dated proxy by telephone, internet or
mail; or
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voting in person at our annual meeting.
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However, simply attending our annual meeting without voting will
not revoke an earlier proxy.
If your shares are held in street name, that is, in
the name of a bank, broker, nominee or other holder of record,
you should follow the instructions of the bank, broker, nominee
or other holder of record regarding the revocation of proxies.
What
are the recommendations of our board of directors?
Unless you provide contrary instructions on your proxy card, the
persons named as proxy holders will vote in accordance with the
recommendations of our board of directors. Our board of
directors unanimously recommends that you vote:
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FOR the election of the three nominees for Class B
directors named in this proxy statement; and
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FOR the ratification of our audit committees selection of
KPMG LLP as our independent registered public accounting firm
for 2009.
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What
vote is required?
Election of Class B Directors. The three
persons nominated in accordance with our by-laws who receive the
highest number of FOR votes cast by the holders of
our Class A common stock and Class B common stock,
voting together as a single class, will be elected as
Class B directors. A properly executed proxy card marked
Withhold Authority will not be voted with respect
to the nominee or nominees so indicated, although the votes
represented by the proxy will be counted for the purposes of
determining whether a quorum is present. Our certificate of
incorporation and by-laws do not authorize cumulative voting in
the election of our directors.
3
Ratification of the Selection of KPMG
LLP. Ratification of our audit committees
selection of KPMG LLP as our independent registered public
accounting firm for 2009 will require the affirmative vote of a
majority of the votes entitled to be cast by the holders of our
Class A common stock and Class B common stock whose
shares are represented at our annual meeting in person or by
proxy, voting together as a single class. Abstentions and shares
held by brokers or nominees as to which voting instructions have
not been received from the beneficial owner of, or person
otherwise entitled to vote the shares, and as to which the
broker or nominee does not have discretionary voting power,
i.e., broker non-votes, are considered shares of stock
outstanding and entitled to vote and are counted in determining
the number of votes necessary for a majority. An abstention or
broker non-vote will, therefore, have the practical effect of
voting against approval of the ratification of the selection of
KPMG LLP as our independent registered public accounting firm
for 2009 because each abstention and broker non-vote will
represent one fewer vote for approval of the ratification.
Based on the advance notice provisions of our by-laws and
applicable provisions of Delaware law, no matter other than the
election of three Class B directors and the ratification of
our audit committees selection of KPMG LLP as our
independent registered public accounting firm for 2009 can be
properly brought before our annual meeting.
Who
will pay the costs of soliciting proxies on behalf of our board
of directors?
We will pay the costs of preparing and mailing this proxy
statement on behalf of our board of directors. In addition to
mailing this proxy statement and related materials, our regular
officers and employees, who will not receive any special
compensation for doing so, may solicit proxies in person, by
telephone or over the internet. Upon request, we will reimburse
brokers, nominees, fiduciaries, custodians and other persons
holding shares in their names or in the names of nominees for
their reasonable expenses in sending our proxy materials to
beneficial owners of our stock.
STOCK
OWNERSHIP
Our
Principal Stockholders
The following table identifies each person whom we know owns
beneficially more than 5% of our Class A common stock or
Class B common stock and states the percentage of total
votes entitled to be cast by each. All information is as of
February 27, 2009.
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Class A
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Percent of
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Class B
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Percent of
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Shares
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Class A
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Shares
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Class B
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Name of Individual or
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Beneficially
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Common
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Beneficially
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Common
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Percent of
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Identity of Group
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Owned
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Stock
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Owned
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Stock
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Total Votes
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Donegal Mutual Insurance Company
1195 River Road
Marietta, PA 17547
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8,355,184
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42.0
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%
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4,153,666
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74.5
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%
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65.9
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%
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Dimensional Fund Advisors LP(1)
1299 Ocean Avenue
Santa Monica, CA 90401
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1,601,941
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8.1
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237,391
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4.3
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5.3
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(1) |
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As reported in a Schedule 13G filed with the Securities and
Exchange Commission, or the SEC, by Dimensional
Fund Advisors LP, which serves as an investment advisor to
four investment companies and as investment manager to certain
other commingled group trusts and separate accounts. Dimensional
Fund Advisors LP disclaims beneficial ownership of these
securities. |
The
Stock Ownership of Our Directors and Executive
Officers
The following table shows the amount and percentage of our
outstanding Class A common stock and Class B common
stock beneficially owned by each director, each nominee for
director, each executive officer named in the Summary
Compensation Table and all of our executive officers and
directors as a group as of
4
December 31, 2008, as well as the percentage of total votes
entitled to be cast by them by reason of that beneficial
ownership.
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Percent of
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Class B
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Percent of
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Class A Shares
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Class A
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Shares
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Class B
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Beneficially
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Common
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Beneficially
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Common
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Percent of
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Name of Individual or Identity of Group
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Owned(1)(2)
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Stock(3)
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Owned(1)
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Stock(3)
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Total Votes
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Directors:
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Donald H. Nikolaus(4)
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756,412
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3.8
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%
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186,375
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3.3
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%
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3.5
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%
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Robert S. Bolinger
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20,077
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1,450
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Patricia A. Gilmartin
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9,696
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Philip H. Glatfelter, II
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24,189
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3,276
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John J. Lyons
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57,473
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1,776
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Jon M. Mahan
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6,955
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S. Trezevant Moore, Jr.
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622
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1,000
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R. Richard Sherbahn
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18,922
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677
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Richard D. Wampler, II
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17,632
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Executive Officers:
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Cyril J. Greenya
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56,119
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820
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|
|
|
|
Jeffrey D. Miller
|
|
|
60,868
|
|
|
|
|
|
|
|
582
|
|
|
|
|
|
|
|
|
|
Robert G. Shenk
|
|
|
75,660
|
|
|
|
|
|
|
|
5,450
|
|
|
|
|
|
|
|
|
|
Daniel J. Wagner
|
|
|
53,960
|
|
|
|
|
|
|
|
166
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (13 persons)
|
|
|
1,158,585
|
|
|
|
5.8
|
%
|
|
|
201,572
|
|
|
|
3.6
|
%
|
|
|
4.2
|
%
|
|
|
|
(1) |
|
Information furnished by each individual named. This table
includes shares that are owned jointly, in whole or in part,
with the persons spouse, or individually by his or her
spouse. |
|
(2) |
|
See Executive Compensation Outstanding Equity
Awards at Fiscal Year End for additional information as to
the stock options held at December 31, 2008 by the persons
named above. The totals above include stock options that are
currently exercisable and exclude stock options not currently
exercisable within 60 days of December 31, 2008. |
|
(3) |
|
Less than 1% unless otherwise indicated. |
|
(4) |
|
Includes 150,154 shares of Class A common stock and
3,938 shares of Class B common stock owned by a family
foundation of which Mr. Nikolaus is trustee. |
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, or
the Exchange Act, requires that our officers and directors, as
well as persons who own 10% or more of a class of our equity
securities, file reports of their ownership of our securities,
as well as statements of changes in such ownership, with us and
the SEC. Based upon written representations we received from our
officers, directors and 10% or greater stockholders and our
review of the statements of beneficial ownership changes our
officers, directors and 10% or greater stockholders filed with
us during 2008, we believe that all such filings required during
2008 were made on a timely basis.
5
OUR
RELATIONSHIP WITH DONEGAL MUTUAL
Background
Donegal Mutual was organized in 1889. In the mid-1980s, Donegal
Mutual, like a number of other mutual property and casualty
insurance companies, recognized the need to develop additional
sources of capital and surplus to remain competitive, have the
capacity to expand its business and assure its long-term
viability. Donegal Mutual, again like a number of other mutual
property and casualty insurance companies, determined to
implement a downstream holding company structure as a strategic
response. Thus, in 1986, Donegal Mutual formed us as a
downstream holding company, initially wholly owned by Donegal
Mutual, and caused us to form an insurance company subsidiary
known as Atlantic States.
As part of the implementation of the downstream holding company
strategy, Donegal Mutual and Atlantic States entered into a
pooling agreement in 1986. Under this pooling agreement, Donegal
Mutual and Atlantic States pool substantially all of their
respective premiums, losses and expenses. Each company then
receives an allocation of the pooled business. The consideration
to Donegal Mutual for entering into the pooling agreement was
Donegal Mutuals ownership of majority control of our
Class A common stock and Class B common stock and the
expectation that Donegal Mutuals surplus would increase
over time as the value of its ownership interest in us increased.
Since 1986, we have completed three public offerings. A major
purpose of these offerings was to provide additional capital for
Atlantic States and our other insurance subsidiaries and to fund
acquisitions. As the capital of Atlantic States has increased,
its underwriting capacity has increased proportionately. Thus,
as originally planned in the mid-1980s, Atlantic States has had
access to the capital necessary to support the growth of its
direct business and increases in the amount and percentage of
business it assumes from the underwriting pool with Donegal
Mutual. As a result, the participation of Atlantic States in the
underwriting pool has increased over the years from its initial
participation of 35% in 1986 to its current participation of
80%, and the size of the underwriting pool has increased
substantially.
Our insurance subsidiaries and Donegal Mutual have interrelated
operations. While each company maintains its separate corporate
existence, Donegal Mutual and our insurance subsidiaries conduct
business together as the Donegal Insurance Group. As such,
Donegal Mutual and our insurance subsidiaries have the same
business philosophy, the same management, the same employees and
the same facilities and offer the same types of insurance
products.
The risk profiles of the business our insurance subsidiaries and
Donegal Mutual write have historically been, and are expected to
continue to be, substantially similar. The same executive
management and underwriting personnel administers products,
classes of business underwritten, pricing practices and
underwriting standards of Donegal Mutual and our insurance
subsidiaries.
In addition, as the Donegal Insurance Group, Donegal Mutual and
our insurance subsidiaries have a combined business plan to
achieve market penetration and underwriting profitability
objectives. The products offered by Donegal Mutual and our
insurance subsidiaries are generally complementary, thereby
allowing the Donegal Insurance Group to offer a broader range of
products to a given market and to expand the Donegal Insurance
Groups ability to service an entire personal lines or
commercial lines account. Distinctions within the products of
Donegal Mutual and our insurance subsidiaries generally relate
to the specific risk profiles targeted within similar classes of
business, such as preferred tier products compared to standard
tier products, but not all of the standard risk gradients are
allocated to one of the companies. Therefore, the underwriting
profitability of the business directly written by each of
Donegal Mutual and Atlantic States will vary. However, the risk
characteristics of all business written directly by Donegal
Mutual and Atlantic States are homogenized within the
underwriting pool and each of Donegal Mutual and Atlantic States
shares the underwriting results in proportion to its
participation in the underwriting pool. We realize 80% of the
underwriting results of the underwriting pool because of the 80%
participation of Atlantic States in the underwriting pool. The
business Atlantic States derives from the underwriting pool
represents the predominant percentage of our total revenues.
6
In April 2001, we completed a recapitalization under which we
effected a one-for-three reverse split of our Class B
common stock, which has one vote per share, and issued two
shares of our Class A common stock, which has one-tenth of
a vote per share, as a stock dividend for each post-reverse
split share of our Class B common stock. As a result of the
reverse split and the stock dividend, each of our stockholders
as of April 19, 2001 continued to own the same number of
shares of our common stock, with one-third of the shares being
shares of our Class B common stock and two-thirds of the
shares being shares of our Class A common stock. As a
result, the relative voting power or equity of our then
stockholders did not change.
We completed this recapitalization because we believed a capital
structure that has more than one class of publicly traded
securities offered us a number of benefits. The principal
benefit was our ability after the recapitalization to issue our
Class A common stock or securities convertible into our
Class A common stock for financing, acquisition and
compensation purposes without materially adversely affecting the
percentage voting power of any stockholder, including Donegal
Mutual. At the time of the recapitalization, our board of
directors recognized that the recapitalization tended to favor
longer-term investors, including Donegal Mutual, and would
discourage attempts to take us over, which our board of
directors believed to be remote because Donegal Mutual has
voting control of us.
We believe our relationship with Donegal Mutual provides us and
our insurance subsidiaries with a number of competitive
advantages, including the following:
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facilitating our stable management, the consistent underwriting
discipline of our insurance subsidiaries, external growth and
long-term profitability;
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|
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|
creating operational and expense synergies from the combination
of resources and integrated operations of Donegal Mutual and our
insurance subsidiaries;
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|
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|
enhancing our opportunities to expand by acquisition because of
the ability of Donegal Mutual to affiliate with and, over time,
acquire control of other mutual insurance companies and,
thereafter, demutualize them and sell them to us;
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|
|
|
producing more stable and uniform underwriting results for our
insurance subsidiaries over extended periods of time than we
could achieve without our relationship with Donegal
Mutual; and
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|
|
providing Atlantic States with a significantly larger
underwriting capacity because of the underwriting pool Donegal
Mutual and Atlantic States have maintained since 1986.
|
The
Coordinating Committee
We and Donegal Mutual have maintained a coordinating committee
since our formation in 1986. The coordinating committee consists
of two members of our board of directors who are not also
members of Donegal Mutuals board of directors and two
members of Donegal Mutuals board of directors who are not
also members of our board of directors.
Under our by-laws and the by-laws of Donegal Mutual, any new
agreement between Donegal Mutual and us and any proposed change
to an existing agreement between Donegal Mutual and us must
first be submitted to the coordinating committee for approval.
In determining whether to approve a new agreement or a change to
an existing agreement between Donegal Mutual and us, our members
of the coordinating committee will not approve the new agreement
or the change in an existing agreement between Donegal Mutual
and us unless both of our members believe the new agreement or
the change in an existing agreement between Donegal Mutual and
us is fair and equitable to us and in the best interests of our
stockholders. Donegal Mutuals members of the coordinating
committee will not approve the new agreement or a change in an
existing agreement between Donegal Mutual and us unless both
Donegal Mutual members believe the new agreement or the change
in an existing agreement between Donegal Mutual and us is fair
and equitable to Donegal Mutual and is in the best interests of
its policyholders. If the coordinating committee unanimously
approves the new agreement or the change in an existing
agreement between Donegal Mutual and us, the new agreement or
the change in an existing agreement is then submitted to our
board of directors and to the board of directors of Donegal
Mutual for their separate consideration. The new agreement or
the change in an
7
existing agreement between Donegal Mutual and us will become
effective only if the coordinating committee, our board of
directors and the Donegal Mutual board of directors all approve
the new agreement or the change in an existing agreement between
Donegal Mutual and us.
The coordinating committee also meets annually to review each
existing agreement between Donegal Mutual and us or our
insurance subsidiaries to determine if the terms of the existing
agreements remain fair and equitable to us and our stockholders
and fair and equitable to Donegal Mutual and its policyholders
or if adjustments should be made. These agreements are ongoing
in nature and will continue in effect throughout 2009 in the
ordinary course of business.
Our members of the coordinating committee are Robert S. Bolinger
and John J. Lyons. See Item 1 Election of
Directors for information about Messrs. Bolinger and
Lyons. Donegal Mutuals members of the coordinating
committee are John E. Hiestand and Frederick W. Dreher.
Mr. Hiestand, age 70, has been a director of Donegal
Mutual since 1983 and has been a self-employed provider of
insurance administrative services for more than the past five
years. Mr. Hiestand beneficially owns 5,239 shares of
our Class A common stock and 157 shares of our
Class B common stock. In 2008, Donegal Mutual paid
directors fees of $34,500 in cash to Mr. Hiestand and
granted him a restricted stock award of 311 shares as
director compensation.
Mr. Dreher, age 68, has been a director of Donegal
Mutual since 1996 and has been a partner in the law firm of
Duane Morris LLP since 1971. Mr. Dreher beneficially owns
70,901 shares of our Class A common stock and
33,022 shares of our Class B common stock. In 2008,
Donegal Mutual paid director fees of $32,250 in cash to
Mr. Dreher and granted him a restricted stock award of
311 shares as director compensation.
Agreements
Between Donegal Mutual and Us
Donegal Mutual provides the personnel for five of our six
insurance subsidiaries, Atlantic States, Southern, Le Mars and
the two Peninsula companies. Under the terms of an inter-company
services agreement, we allocate expenses to Southern, Le Mars
and Peninsula according to a time allocation and estimated usage
agreement and to Atlantic States in relation to the relative
participation of Donegal Mutual and Atlantic States in the
underwriting pool described below. Charges for these services
totalled $58,564,903 in 2008.
We lease office equipment and automobiles to Donegal Mutual.
Donegal Mutual made lease payments to us of $926,690 in 2008.
Donegal Mutual and Atlantic States participate in an
underwriting pool, whereby both companies cede substantially all
of their business to the underwriting pool and then receive an
allocation of a given percentage of the combined underwriting
results of the underwriting pool. The underwriting pool excludes
certain intercompany reinsurance assumed by Donegal Mutual from
our insurance subsidiaries. Since March 1, 2008, Atlantic
States has had an 80% participation in the results of the
underwriting pool and Donegal Mutual has had a 20% participation
in the results of the underwriting pool. Donegal Mutual and
Atlantic States pro rate all premiums, losses, loss adjustment
expenses and other underwriting expenses between themselves on
the basis of their respective participation in the underwriting
pool.
Donegal Mutual and Atlantic States may amend or terminate the
pooling agreement at the end of any calendar year by agreement
of the parties, subject to approval by the boards of directors
of Donegal Mutual and Atlantic States and by the coordinating
committee. Donegal Mutual and Atlantic States base the pool
participation percentages on their respective relative amounts
of capital and surplus, expectations of future relative amounts
of capital and surplus and our ability to provide capital to
Atlantic States. Our 2008 annual report to stockholders contains
additional information describing the underwriting pool.
In addition to the underwriting pool and third-party
reinsurance, our insurance subsidiaries have various on-going
reinsurance agreements with Donegal Mutual. These agreements
include:
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|
|
|
|
catastrophe reinsurance agreements with Atlantic States, Le Mars
and Southern;
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|
|
|
an excess of loss reinsurance agreement with Southern;
|
8
|
|
|
|
|
a quota-share reinsurance agreement with Peninsula; and
|
|
|
|
a quota-share reinsurance agreement with Southern.
|
The intent of the catastrophe and excess of loss reinsurance
agreements is to lessen the effects of a single large loss, or
an accumulation of smaller losses arising from one event, to
levels that are appropriate given each insurance
subsidiarys size, underwriting profile and surplus
position.
Donegal Mutual and Peninsula have a quota-share reinsurance
agreement that transfers to Donegal Mutual 100% of the premiums
and losses related to the workers compensation product
line of Peninsula, which provides the availability of an
additional workers compensation tier to Donegal
Mutuals commercial accounts.
Donegal Mutual and Southern maintain a quota-share reinsurance
agreement that transfers to Southern 100% of the premiums and
losses related to certain personal lines products offered in
Virginia by Donegal Mutual through the use of its automated
policy quoting and issuance system.
Southern and Le Mars also have 100% retrocessional agreements
with Donegal Mutual that provide Southern and Le Mars with the
same A.M. Best rating, currently A (Excellent), as Donegal
Mutual, a rating that Southern and Le Mars might not be able to
achieve if these agreements were not in effect. The
retrocessional agreements do not otherwise provide for pooling
or reinsurance with or by Donegal Mutual and do not transfer
insurance risk for accounting purposes. In addition, Donegal
Mutual and we entered into a capital support agreement with
Sheboygan for the purpose of maintaining its A.M. Best
rating of A (Excellent).
We own 48.2% and Donegal Mutual owns 51.8% of Donegal Financial
Services Corporation, or DFSC, the holding company for Province
Bank FSB, or Province Bank, a federal savings bank with offices
in Marietta, Columbia and Lancaster, Pennsylvania. We and
Donegal Mutual conduct banking operations in the ordinary course
of business with Province Bank.
Donegal Mutual and Province Bank are parties to a lease whereby
Province Bank leases 3,600 square feet in one of Donegal
Mutuals buildings located in Marietta, Pennsylvania. In
addition, Province Bank leases 3,000 square feet of space
in a building in Lancaster, Pennsylvania from DFSC. Both leases
provide for an annual rent based on an independent appraisal.
Donegal Mutual and Province Bank are also parties to an
administrative services agreement whereby Donegal Mutual
provides various human resources services, principally payroll
and employee benefits administration, administrative support,
facility and equipment maintenance services and purchasing, to
Province Bank, subject to the overall limitation that the costs
Donegal Mutual charges may not exceed the costs of independent
vendors for similar services and further subject to annual
maximum cost limitations specified in the administrative
services agreement.
The coordinating committee annually reviews each of the
agreements and transactions described above and in January 2009
approved the terms of such agreements and transactions for 2009.
HOUSEHOLDING
We may, unless we receive contrary instructions from you, send a
single copy of our annual report, proxy statement and notice of
annual or special meeting to any household at which two or more
stockholders reside if we believe the stockholders are members
of the same family.
If you would like to receive your own copies of our annual
disclosure documents in future years or if you share an address
with another stockholder and together both of you would like to
receive only a single set of our annual disclosure documents,
follow these instructions:
If your shares are registered in your own name, please contact
our transfer agent and inform it of your request to revoke or
institute householding by calling Computershare
Trust Company at
(800) 317-4445
or writing to Computershare Trust Company, N.A., at
P.O. Box 43069, Providence, Rhode Island
02940-3078.
Within 30 days of a request, we will comply with your
request.
If a bank, broker, nominee or other holder of record holds your
shares, please contact your bank, broker, nominee or other
holder of record directly.
9
ITEM 1
ELECTION OF DIRECTORS
Introduction
The DGCL, the Pennsylvania Insurance Holding Companies Act, or
the Holding Companies Act, and our by-laws govern the election
of our directors by our stockholders. The following discussion
summarizes these provisions and describes the process our
nominating committee follows in connection with the nomination
of candidates for election as directors by the holders of our
Class A common stock and our Class B common stock.
Background
of Our Nominating Committee
The Holding Companies Act provides that the board of directors
of a Pennsylvania insurer or a company controlling a
Pennsylvania insurer, which we are, shall establish one or more
committees comprised solely of directors who are not officers or
employees of the insurer or of any entity controlling,
controlled by or under common control with the insurer and who
are not beneficial owners of a controlling interest in the
voting stock of the insurer or any such entity, and that such
committee or committees shall have responsibility for
recommending the selection of the insurers independent
registered public accounting firm, reviewing the insurers
financial condition, reviewing the scope and results of the
insurers independent audit and any internal audit,
nominating candidates for election as directors by stockholders,
evaluating the performance of officers deemed to be principal
officers of the insurer and recommending to the insurers
board of directors the selection and compensation of the
insurers principal officers.
Our by-laws are consistent with the Holding Companies Act and
provide that:
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our board of directors shall annually appoint a nominating
committee that shall consist of not less than two directors who
are not officers or employees of us or any entity controlling,
controlled by or under common control with us and who are not
beneficial owners of a controlling interest in us; and
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the nominating committee shall, prior to each annual meeting of
stockholders, determine and nominate candidates for election as
directors by our stockholders.
|
In accordance with these by-law provisions, on April 17,
2008, our board of directors appointed a nominating committee.
The members are R. Richard Sherbahn and Philip H.
Glatfelter, II. Neither Mr. Sherbahn nor
Mr. Glatfelter is one of our executive officers named in
the Summary Compensation Table or a beneficial owner of a
controlling interest in us.
Nominating
Procedures
Our stockholders may nominate candidates for election as
directors at any annual meeting of our stockholders if the
stockholder gives timely notice in writing of any such
nomination in accordance with the advance notice procedures set
forth in our by-laws. We describe those procedures under
Stockholder Proposals in this proxy statement. Our
nominating committee may also consider candidates for election
as directors proposed by our management. We have not utilized
third-party executive search firms to identify candidates for
election as directors.
With the exception of applicable regulations of the SEC, the
listing application standards of the NASDAQ Global Select
Market, or NASDAQ, and the Holding Companies Act, our nominating
committee does not have any specific, minimum qualifications for
the nomination of candidates for election to our board of
directors, and our nominating committee may take into account
such factors as it deems appropriate. Our nominating committee
reviews the specific attributes of candidates for election to
our board of directors and also considers the judgment, skill,
diversity, business experience, the interplay of the
candidates experience with the experience of the other
members of our board of directors and the extent to which the
candidate would contribute to the overall effectiveness of our
board of directors.
10
Our nominating committee utilizes the following processes in
identifying and evaluating the nomination of candidates for
election as members of our board of directors:
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Evaluation of the performance and qualifications of the members
of our board of directors whose term of office expires at the
forthcoming annual meeting of stockholders and a determination
of whether the committee should nominate such current members
for re-election.
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Consideration of the suitability of the candidates for election,
including incumbent directors.
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|
Review of the qualifications of any candidates proposed by our
stockholders, our management and individual members of our board
of directors.
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|
After such review and consideration, our nominating committee
meets and proposes candidates for election at our forthcoming
annual meeting of stockholders.
|
Actions
Taken by Our Nominating Committee
Our nominating committee met on February 10, 2009 to
evaluate the performance and qualifications of the members of
our board of directors whose terms are expiring and to nominate
candidates for election as Class B directors by our
stockholders at our annual meeting. After considering the
performance and qualifications of the members of our board of
directors during 2008, our nominating committee nominated the
persons named below. On March 11, 2009, our board of
directors accepted the report of our nominating committee and
approved the nomination by our nominating committee of the three
persons named below as candidates for election as Class B
directors.
Candidates
for Election
Our board of directors currently consists of nine members. We
elect each director for a three-year term and until the election
of the directors successor. The current three-year terms
of our directors expire in 2009, 2010 and 2011, respectively.
We will elect three Class B directors at our annual
meeting. Unless otherwise instructed, the proxies solicited by
our board of directors will vote for the election of the three
nominees named below. Each Class B director nominee is
currently a Class B director.
If any of the nominees becomes unavailable for any reason, our
board of directors will designate a substitute nominee. Our
board of directors believes each nominee will be able to serve
if elected. A majority of our board of directors may fill any
vacancy that arises in our board of directors until the
expiration of the term of the class of directors in which the
vacancy occurs.
Our
board of directors recommends a vote FOR the election of the
three nominees for Class B directors named
below.
The names of our three nominees for election as Class B
directors, and our Class C directors and Class A
directors who will continue in office after our annual meeting
until the expiration of their respective terms and the election
of their respective successors, together with certain
information regarding them, are as follows:
Nominees
for Election as Class B Directors
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Director
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Year Term
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Name
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Age
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Since
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Will Expire*
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Jon M. Mahan
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39
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2006
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2012
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Donald H. Nikolaus
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66
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1986
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2012
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|
Richard D. Wampler, II
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67
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2004
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2012
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* |
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If elected at our annual meeting. |
11
Directors
Continuing in Office
Class C
Directors
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Director
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Year Term
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Name
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Age
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Since
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Will Expire
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S. Trezevant Moore, Jr.
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55
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2006
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2010
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R. Richard Sherbahn
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79
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1986
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2010
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John J. Lyons
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69
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2001
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2010
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Class A
Directors
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Director
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Year Term
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Name
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Age
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Since
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Will Expire
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|
Robert S. Bolinger
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72
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1986
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2011
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|
Patricia A. Gilmartin
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69
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1986
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2011
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|
Philip H. Glatfelter, II
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79
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1986
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2011
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|
Mr. Bolinger retired in 2001 as Chairman and Chief
Executive Officer of Susquehanna Bancshares, Inc., a position he
held since 1982.
Mrs. Gilmartin has been an employee since 1969 of
Associated Donegal Insurance Brokers, which has no affiliation
with us, except that Associated Donegal Insurance Brokers
receives insurance commissions in the ordinary course of
business from our insurance subsidiaries and Donegal Mutual in
accordance with their standard commission schedules and agency
contracts. Mrs. Gilmartin has been a director of Donegal
Mutual since 1979.
Mr. Glatfelter retired in 1989 as a Vice President of
Meridian Bank, a position he held for more than five years prior
to his retirement. Mr. Glatfelter has been a director of
Donegal Mutual since 1981, was Vice Chairman of Donegal Mutual
from 1991 to 2001 and has been our Chairman of the Board and
Chairman of the Board of Donegal Mutual since 2001.
Mr. Lyons was President and Chief Operating Officer of
Keefe Managers, LLC, a manager of private investment funds from
February 1999 to June 2007 when Mr. Lyons retired.
Mr. Lyons currently manages a private investment fund under
the name of Keefe Ventures, LLC.
Mr. Mahan has been a Managing Director in the Investment
Banking Division of Stifel Nicolaus & Company,
Incorporated, or Stifel Nicolaus, and, previously, Legg Mason
Wood Walker, Incorporated, prior to the acquisition of the Legg
Mason Capital Markets Division by Stifel Nicolaus on
December 1, 2005. Mr. Mahan joined Legg Mason in 1996
and served as a principal from 2001 to 2004.
Mr. Moore served as a consultant from May 2008 to November
2008 to a medical malpractice insurance company. Mr. Moore
is currently self-employed. Mr. Moore was President and
Chief Executive Officer of Luminent Mortgage Capital, Inc., or
Luminent, from May 2007 to May 2008 and was President and Chief
Operating Officer of Luminent from March 2005 to May 2007. From
2000 to 2005, Mr. Moore was Executive Vice President,
Capital Markets, of Radian Guaranty, Inc.
Mr. Nikolaus has been President and Chief Executive Officer
of Donegal Mutual since 1981 and a director of Donegal Mutual
since 1972. He has been our President and Chief Executive
Officer since 1986. Mr. Nikolaus also serves as the
Chairman and Chief Executive Officer of Province Bank and as
Chairman or President of each of our insurance subsidiaries.
Mr. Nikolaus has been a partner in the law firm of
Nikolaus & Hohenadel since 1972.
Mr. Sherbahn has owned and operated Sherbahn Associates,
Inc., a life insurance and financial planning firm, since 1974.
Mr. Sherbahn has been a director of Donegal Mutual since
1967.
12
Mr. Wampler is a certified public accountant and is a
retired principal of the accounting firm of Brown Schultz
Sheridan & Fritz, a position held from October 1,
1998 to June 30, 2005. For 28 years prior thereto, he
was a partner in the accounting firm of KPMG LLP.
Of our nine directors, five (Messrs. Bolinger, Lyons,
Mahan, Moore and Wampler) are independent.
Corporate
Governance
Because Donegal Mutual owns more than 50% of our voting power,
NASDAQ regulations treat us as a controlled company.
Therefore, we are not required to comply with the following
NASDAQ requirements:
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a majority of the members of our board of directors must consist
of persons who are independent;
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our compensation and nominating committees must consist solely
of independent directors;
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the compensation of our executive officers must be determined by
a majority of our independent directors or a compensation
committee comprised solely of independent directors; and
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director nominees that are selected or recommended for selection
by our board of directors, must be recommended by either a
majority of our independent directors or a nominating committee
comprised solely of independent directors.
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However, as a voluntary commitment to sound corporate governance
principles, our board of directors and the committees of our
board of directors satisfy all of the above NASDAQ criteria.
Our Board
of Directors and Its Committees
Our board of directors met nine times in 2008. Our board of
directors has an executive committee, an audit committee, a
nominating committee, a compensation committee and, together
with Donegal Mutual, a coordinating committee.
Executive
Committee
Our executive committee met 12 times in
2008. Messrs. Nikolaus, Sherbahn and
Glatfelter are the members of our executive committee. Our
executive committee has the authority to take all action that
can be taken by our full board of directors, consistent with
Delaware law, between meetings of our board of directors.
Audit
Committee
Our audit committee, which consists of Messrs. Bolinger,
Lyons and Wampler, met 10 times in 2008. Each member of our
audit committee satisfies the independence requirements of the
SEC. Consistent with applicable provisions of the Holding
Companies Act and the Sarbanes-Oxley Act of 2002, our audit
committee has responsibility for:
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selecting our independent registered public accounting firm;
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reviewing the scope and results of our audit by our independent
registered public accounting firm;
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reviewing related party transactions; and
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reviewing the adequacy of our accounting, financial, internal
and operating controls.
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Our audit committee operates pursuant to a written charter, the
full text of which may be viewed on our website at
http://www.donegalgroup.com.
Our audit committee reviews its charter annually.
Nominating
Committee
Our nominating committee, the members of which are
Messrs. Sherbahn and Glatfelter, met once in 2008.
13
Our by-laws are consistent with the Holding Companies Act and
provide that our nominating committee has responsibility for:
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identifying individuals believed to be qualified to become
members of our board of directors and recommending to our board
of directors nominees to stand for election as directors;
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identifying members of our board of directors qualified to serve
on the various committees of our board of directors;
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evaluating the procedures and processes by which the committees
of our board of directors conduct a self-evaluation of their
performance; and
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providing our board of directors of an annual performance
evaluation of our nominating committee.
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Our nominating committee operates pursuant to a written charter,
the full text of which may be viewed on our website at
http://www.donegalgroup.com.
Our nominating committee reviews its charter annually.
Compensation
Committee
Our compensation committee consists of Messrs. Sherbahn and
Glatfelter and met four times in 2008. The compensation
committee of Donegal Mutual consists of Messrs. Sherbahn,
Glatfelter and Dreher. Because our employees are employees of
Donegal Mutual for reasons of efficiency and cost savings and
because our insurance subsidiaries are members of the Donegal
Insurance Group, our compensation committee and the compensation
committee of Donegal Mutual conduct joint meetings followed by a
meeting which only the members of our compensation committee
attend and make compensation determinations with respect to our
executive officers and other employees.
Our by-laws are consistent with the Holding Companies Act and
provide that our compensation committee has responsibility for:
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reviewing annually the compensation of our executive officers;
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making annual compensation recommendations to our board of
directors for all of our officers;
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determining the employees who participate in our employee stock
option plans and providing recommendations to our board of
directors as to individual stock option grants; and
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generally overseeing our employee benefit plans.
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Our compensation committee operates pursuant to a written
charter, the full text of which may be viewed on our website at
http://www.donegalgroup.com.
Our compensation committee reviews its charter annually.
See Executive Compensation Compensation
Discussion and Analysis for further information.
Compensation
Committee Interlocks and Insider Participation
No members of our compensation committee are former or current
officers of us, or have other interlocking relationships, as
defined by the SEC.
DIRECTOR
STOCKHOLDER COMMUNICATIONS
Our stockholders may communicate with our board of directors
through our corporate secretary. Stockholders who wish to
communicate with any of our directors may do so by sending their
communication in writing addressed to a particular director, or
in the alternative, to Non-Management Directors as a
group, to the attention of our corporate secretary, Sheri O.
Smith, at our principal executive offices at 1195 River Road,
Marietta, Pennsylvania 17547. We will promptly forward all such
communications that our corporate secretary receives to the
addressee or addressees set forth in the communication.
14
We encourage our directors to attend our annual meetings of
stockholders because we believe director attendance at our
annual meetings provides our stockholders with an opportunity to
communicate with the members of our board of directors. All of
our directors attended our annual meeting of stockholders in
2008.
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Introduction
Our compensation committee oversees our compensation and benefit
plans and policies and our compensation levels, including
reviewing and approving equity awards to our executive officers,
and reviews and recommends annually for approval by our board of
directors all compensation decisions relating to our executive
officers.
Our compensation committee determined that the primary
objectives of our compensation programs for our executive
officers are to:
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attract and retain talented and dedicated executive officers who
contribute to our growth, development and profitability and to
encourage their retention;
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motivate our executive officers to achieve our strategic
business objectives and to reward them when they achieve those
objectives; and
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provide long-term compensation to our executive officers that
rewards them for sustained financial and operating performance
and leadership excellence.
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To achieve these objectives, we compensate our executive
officers through a combination of base salary, annual cash
bonuses and long-term equity compensation.
Our compensation committees charter reflects these
responsibilities, and our compensation committee reviews its
charter annually.
Our
Compensation Philosophy and Objectives
The most significant component of the compensation policy our
compensation committee administers is that a substantial portion
of the aggregate annual compensation of our named executive
officers should be based on the annual underwriting results and
premium growth of our insurance subsidiaries and our return on
equity. Our compensation committee also evaluates the
achievement of our other corporate objectives and the
contribution of each named executive officer to those
achievements.
We rely on our discretionary judgment in making compensation
decisions after reviewing our performance and the performance of
our executives based on financial and operational objectives. We
do not retain the services of a compensation consultant. None of
our named executive officers has an employment, severance or
change-of-control agreement.
For a number of years, we have maintained a cash incentive
compensation program for our officers, including our named
executive officers. Under this program, a formula-based
percentage of the underwriting profit of our insurance
subsidiaries is available for allocation for bonuses for our
officers, including our named executive officers. The factors
affecting the allocation include the underwriting profit and
premium growth of our insurance subsidiaries and our return on
equity. Our compensation committee does not assign specific
weights to these factors. For the five years ended
December 31, 2008, the incentive bonus pool we have paid to
our officers, including our named executive officers, has
averaged 64% of the maximum amount that the plan permits us to
allocate.
15
The
Compensation of Our Officers
Our officers, all of whom are also officers of Donegal Mutual,
receive the following compensation:
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Base Salary. We establish the base salaries of
our officers, including our named executive officers, based on
the scope of their responsibilities and the recommendation of
our chief executive officer to our compensation committee for
other than his own compensation. Our compensation committee
reviews the base salaries of our named executive officers
annually, including our chief executive officer, and recommends
adjustments to base salaries annually after taking into account
individual responsibilities, performance, length of service,
current salary, experience and compensation history as well as
our results of operations.
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Annual Cash Bonus. Our officers, including our
named executive officers, receive annual cash bonuses based
primarily on underwriting results with the allocations of these
results determined by various factors, including premium growth,
underwriting profitability and return on equity among other
factors. We determine the maximum aggregate amount available
annually for our officers by formula. Our compensation committee
then recommends to our board of directors the percentage of the
maximum amount we should allocate among our officers, including
our named executive officers, on a discretionary basis. Our
chief executive officer submits recommended bonuses for our
officers, including our named executive officers other than
himself, to our compensation committee. Our compensation
committee reviews our chief executive officers
compensation recommendations and then recommends the annual
bonuses for all of our executive officers to our board of
directors. We pay the cash bonuses recommended by our
compensation committee and approved by our board of directors in
a single payment.
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Long-Term Equity Incentives. We believe that
we can maximize our long-term performance best if the
compensation of our officers is significantly tied to our
long-term performance. We design our long-term equity
compensation plans to provide all members of our management,
including our named executive officers, with equity incentives
to foster the alignment their interests with the interests of
our stockholders.
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The primary form of equity compensation that we have
historically awarded to our officers, including our named
executive officers, is stock options. Our compensation committee
receives preliminary recommendations for periodic stock option
grants from our chief executive officer for our officers other
than himself. Our compensation committee then reviews his
recommendations and recommends stock option grants for all of
our officers, including our chief executive officer, to our
board of directors for approval.
Our stock option plans authorize us to grant options to purchase
shares of our Class A common stock to our employees,
officers and directors. We have consistently followed the
practice of granting stock options to purchase our Class A
common stock at an exercise price that is in excess of the
closing price of our Class A common stock on NASDAQ on the
date we grant the stock options.
The
Operation of Our Compensation Process
Our compensation committee recommends all compensation and
equity awards to our executive officers for final discretionary
action by our board of directors. Our compensation committee, in
recommending the annual compensation of our officers, including
our named executive officers, subject to the ultimate approval
of our board of directors, reviews the performance and
compensation of our officers. In assessing the performance of
our named executive officers in light of the objectives our
board of directors establishes, our compensation committee
reviews specific achievements associated with attainment of the
objectives, the degree of difficulty of the objectives and the
extent to which significant unforeseen obstacles or favorable
circumstances affected their performance.
Our compensation committee recommends to our board of directors
the base salaries, annual aggregate bonus pool amount and
individual allocations and stock option grants to the members of
our management. As
16
part of its oversight of the compensation of our named executive
officers, our compensation committee recommended the following
compensation adjustments for 2008 for our named executive
officers:
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increases in base salaries of our named executive officers in
2008 that averaged 2.0% which our compensation committee
considered an adjustment consistent with published information
about annual base salary increases in the property and casualty
insurance industry in the United States in 2008 and prevailing
adverse economic conditions; and
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due to the decrease in underwriting profitability in 2008, the
individual allocations to our named executives decreased. The
decreases were based on factors including premium growth,
underwriting profitability and return on equity. Our
compensation committee regarded the individual allocations to
our executive officers as appropriate recognition of the
underwriting profitability, our return on equity and our growth
of our insurance subsidiaries in 2008.
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Tax
Matters
Section 162(m) of the Internal Revenue Code of 1986, as
amended, generally does not allow us a deduction for federal
income tax purposes to the extent that we pay annual
compensation to any of our executive officers named in the
Summary Compensation Table in this proxy statement that is in
excess of $1 million. However, compensation paid to such an
executive officer that is paid pursuant to a performance-based
plan is generally not subject to the Section 162(m)
limitation. Although our compensation committee is aware of the
Section 162(m) limitation, our compensation committee
believes that it is equally important to maintain flexibility
and the competitive effectiveness of the compensation of our
named executive officers. Our compensation committee may,
therefore, from time to time, authorize compensation that is not
deductible for federal income tax purposes if our compensation
committee believes it is in our best interests and the best
interests of our stockholders to do so.
17
Summary
Compensation Table
The following table shows the compensation we paid during 2006,
2007 and 2008 for services rendered in all capacities to our
chief executive officer, our chief financial officer and our
three other most highly compensated executive officers. We refer
to these persons, who are named in the table below, as our named
executive officers. We do not have employment agreements with
any of our named executive officers, nor do we provide any of
them with restricted stock awards, non-equity incentive plan
compensation, deferred compensation or pension benefits.
Based on the compensation paid to our named executive officers
in 2008, their salaries accounted for 48% of their total
compensation in 2008 and their performance-based bonuses
accounted for 22% of their total compensation in 2008.
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All
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Other
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Stock
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Option
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Compen-
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Awards
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Awards
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sation
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Total
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Name and Principal Position
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Year
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Salary($)
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Bonus($)
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($)
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($)(1)
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($)(2)
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($)
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Donald H. Nikolaus,
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2008
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555,000
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360,000
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5,340
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360,500
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49,139
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1,329,979
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President and Chief
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2007
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555,000
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840,000
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6,092
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52,038
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1,453,130
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Executive Officer
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2006
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535,000
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970,000
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5,415
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293,155
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46,668
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1,850,238
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Cyril J. Greenya,
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2008
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180,000
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58,000
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5,340
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82,400
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42,538
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368,278
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Senior Vice President and
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2007
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174,000
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125,000
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6,092
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42,603
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347,695
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Chief Underwriting Officer
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2006
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162,000
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138,000
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43,007
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16,860
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359,867
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Jeffrey D. Miller,
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2008
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187,000
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62,000
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92,700
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10,932
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352,632
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Senior Vice President and
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2007
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177,000
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132,000
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10,098
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319,098
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Chief Financial Officer
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2006
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162,000
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145,000
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43,007
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9,244
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359,251
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Robert G. Shenk,
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2008
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229,000
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58,000
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82,400
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12,887
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382,287
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Senior Vice President,
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2007
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223,000
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125,000
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11,866
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359,866
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Claims
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2006
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214,000
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138,000
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50,255
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11,427
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413,682
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Daniel J. Wagner,
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2008
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180,000
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58,000
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82,400
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11,147
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331,547
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Senior Vice President
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2007
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174,000
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125,000
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10,126
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309,126
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and Treasurer
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2006
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162,000
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138,000
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43,007
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9,244
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352,251
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(1) |
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Option awards are shown at an estimated grant date fair value,
which we obtained by using an option pricing model. Further, the
options are subject to a vesting schedule, and the estimated
value obtained from the option pricing model does not represent
actual value based upon trading prices of our Class A
common stock at the grant date. See Note 14 to our
consolidated financial statements included in our 2008 annual
report to stockholders for information on the accounting
treatment and calculation of the grant date fair value of these
stock options. |
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(2) |
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In the case of Mr. Nikolaus, the total shown includes
directors and committee meeting fees of $32,750 and a matching
401(k) plan contribution of $11,207 paid during 2008. In the
case of Messrs. Shenk, Miller and Wagner, the total shown
includes a matching 401(k) plan contribution of $10,653, $10,513
and $10,544, respectively, paid during 2008. In the case of
Mr. Greenya, the total shown includes directors fees of
$30,500 and a matching 401(k) plan contribution of $9,885 paid
during 2008. |
18
Grants
of Plan-Based Awards
Our compensation committee recommended to our board of
directors, and our board of directors approved, the following
stock option grants to our named executive officers during 2008:
2008
Grants of Plan-Based Awards
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All Other
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Stock Option
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Awards:
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Exercise
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Grant Date
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Number of
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or Base
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Closing
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Fair Value
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Securities
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Price of
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Price on
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of Stock
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Underlying
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Option
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Grant
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and Option
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Grant
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Approval
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Options
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Awards
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Date
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Awards
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Name
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Date
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Date
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(#)
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($/Sh)
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($/Sh)
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($)(1)
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Donald H. Nikolaus(2)
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7/17/2008
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7/17/2008
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175,000
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17.50
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17.10
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360,500
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Cyril J. Greenya(3)
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7/17/2008
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7/17/2008
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40,000
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17.50
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17.10
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82,400
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Jeffrey D. Miller(4)
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7/17/2008
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7/17/2008
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45,000
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17.50
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17.10
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92,700
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Robert G. Shenk(5)
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7/17/2008
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7/17/2008
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40,000
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17.50
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17.10
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82,400
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Daniel J. Wagner(6)
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7/17/2008
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7/17/2008
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40,000
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17.50
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17.10
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82,400
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(1) |
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Based on the Black-Scholes options pricing model, we used the
following assumptions in calculating the grant date present
value: |
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Stock volatility 20.6%.
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Stock dividend yield 2.46%.
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Length of option term 3 years.
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Annualized risk-free interest rate 2.3%.
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(2) |
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During 2008, we granted Mr. Nikolaus a non-qualified option
to purchase 175,000 shares of our Class A common stock
at an exercise price of $17.50 per share. These options vest in
three equal installments on March 1, 2009, March 1,
2010 and March 1, 2011, respectively. |
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(3) |
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During 2008, we granted Mr. Greenya a non-qualified option
to purchase 40,000 shares of our Class A common stock
at an exercise price of $17.50 per share. These options vest in
three equal installments on March 1, 2009, March 1,
2010 and March 1, 2011, respectively. |
|
(4) |
|
During 2008, we granted Mr. Miller a non-qualified option
to purchase 45,000 shares of our Class A common stock
at an exercise price of $17.50 per share. These options vest in
three equal installments on March 1, 2009, March 1,
2010 and March 1, 2011, respectively. |
|
(5) |
|
During 2008, we granted Mr. Shenk a non-qualified option to
purchase 40,000 shares of our Class A common stock at
an exercise price of $17.50 per share. These options vest in
three equal installments on March 1, 2009, March 1,
2010 and March 1, 2011, respectively. |
|
(6) |
|
During 2008, we granted Mr. Wagner a non-qualified option
to purchase 40,000 shares of our Class A common stock
at an exercise price of $17.50 per share. These options vest in
three equal installments on March 1, 2009, March 1,
2010 and March 1, 2011, respectively. |
Stock
Incentive Plans
We have an equity incentive plan for employees and an equity
incentive plan for our directors. Under these plans, our board
of directors, upon the recommendation of our compensation
committee, may grant options to purchase our Class A common
stock and, in the case of our directors, restricted stock awards
as well as stock options. Grants under the plans can take the
form of incentive stock options, non-qualified stock options,
stock appreciation rights, stock units and other stock-based
awards. With the exception of an annual fixed restricted stock
award to our directors, all of our incentive compensation grants
have been stock options.
19
The purpose of the plans is to provide long-term incentive
awards to our employees and directors as a means to attract,
motivate, retain and reward talented persons.
As of December 31, 2008, we had reserved
2,275,000 shares of our Class A common stock for
grants under our equity incentive plan for employees and
288,835 shares of our Class A common stock for grants
under our equity incentive plan for directors. If shares covered
by an option cease to be issuable for any reason, we may again
grant options to purchase those shares.
Our board of directors may adjust the number and kind of shares
available for grants and options under our plans and the
exercise price of outstanding options in the event of a merger,
consolidation, reorganization, stock split, stock dividend or
other event affecting the number of outstanding shares of our
common stock. Unless otherwise provided in individual option
agreements, unvested options do not automatically accelerate in
the event of a business combination or in the event of the sale
of all or substantially all of our assets.
Our board of directors, upon the recommendation of our
compensation committee, has:
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the authority to determine the persons eligible to be granted
options, the number of shares subject to each option, the
exercise price of each option, the vesting schedule, the
circumstances in which the vesting of options is accelerated and
any extension of the period for exercise; and
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full discretionary authority to determine any matter relating to
options granted under our plans.
|
Our board of directors has the authority to suspend, amend or
terminate our plans, except as would adversely affect the rights
of persons holding outstanding awards without the consent of
such persons.
Outstanding
Equity Awards at Fiscal Year End
The following table summarizes the outstanding equity awards
held by our named executive officers at December 31, 2008:
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|
|
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|
|
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Option Awards
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Stock Awards
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Number of Securities
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Number of
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Market Value
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Underlying
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Shares or
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of Shares or
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Unexercised Options
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Option
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Units of Stock
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Units of Stock
|
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(#)
|
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(#)
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Exercise
|
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Option
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That Have Not
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That Have Not
|
Name
|
|
Exercisable
|
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Unexercisable
|
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Price ($)
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Expiration Date
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Vested (#)
|
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Vested ($)
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Donald H. Nikolaus
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233,333
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15.75
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7/21/2010
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311
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5,215
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116,667
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58,333
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21.00
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10/19/2011
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175,000
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17.50
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7/17/2013
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Cyril J. Greenya
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33,333
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15.75
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7/21/2010
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311
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5,215
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|
20,000
|
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|
|
10,000
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|
|
21.00
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|
10/19/2011
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|
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|
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40,000
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17.50
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7/17/2013
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Jeffrey D. Miller
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33,333
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|
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15.75
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7/21/2010
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|
|
|
|
|
|
|
|
|
|
|
20,000
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|
|
|
10,000
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|
|
|
21.00
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|
10/19/2011
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|
|
|
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45,000
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17.50
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7/17/2013
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Robert G. Shenk
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33,333
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15.75
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|
7/21/2010
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|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
10,000
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|
|
|
21.00
|
|
|
|
10/19/2011
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
40,000
|
|
|
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17.50
|
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|
|
7/17/2013
|
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|
|
|
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Daniel J. Wagner
|
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33,333
|
|
|
|
|
|
|
|
15.75
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|
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|
7/21/2010
|
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|
|
|
|
|
|
|
|
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|
20,000
|
|
|
|
10,000
|
|
|
|
21.00
|
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|
|
10/19/2011
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|
|
|
|
|
|
|
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40,000
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|
17.50
|
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7/17/2013
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20
Option
Exercises and Stock Vested
The following table summarizes stock options exercised by our
named executive officers and, in the case of our named executive
officers who are also directors, restricted stock awards vested,
during 2008:
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Option Exercises and Stock Vested
|
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|
|
Option Awards
|
|
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Stock Awards
|
|
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Number of Shares
|
|
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Value Realized
|
|
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Number of Shares
|
|
|
Value Realized
|
|
Name
|
|
Acquired on Exercise (#)
|
|
|
on Exercise ($)(1)
|
|
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Acquired on Vesting (#)
|
|
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on Vesting ($)(1)
|
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Donald H. Nikolaus
|
|
|
116,667
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|
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1,220,504
|
|
|
|
311
|
|
|
|
5,215
|
|
Cyril J. Greenya
|
|
|
|
|
|
|
|
|
|
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311
|
|
|
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5,215
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Jeffrey D. Miller
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|
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Robert G. Shenk
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Daniel J. Wagner
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(1) |
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Value realized is based upon the closing price of our common
stock on NASDAQ on the date of exercise or vesting minus the
exercise price of the option awards. |
Pension
Benefits
None of our named executive officers participated in or had an
account balance in qualified or non-qualified defined benefit
plans that we sponsored in 2006, 2007 or 2008, and none is
contemplated for 2009.
Non-Qualified
Deferred Compensation
None of our named executive officers participated in or had
account balances in non-qualified deferred compensation plans or
other deferred compensation plans that we maintained in 2006,
2007 or 2008, and none is contemplated for 2009.
Director
Compensation
Our directors and the directors of Donegal Mutual received an
annual retainer of $30,000 in 2008. Members of the committees of
our board of directors and of the board of directors of Donegal
Mutual received a fee of $250 for each committee meeting
attended in 2008, with the exception of meetings of the audit
committees. Members of the audit committees received a fee of
$500 for each meeting attended in 2008. A person who serves on
our board of directors as well as the board of directors of
Donegal Mutual receives only one annual retainer. Since
March 1, 2008, we have allocated 20% of that retainer to
Donegal Mutual and 80% to us.
Under our equity incentive plan for directors, each of our
directors and each director of Donegal Mutual who is not also
one of our directors receives an annual restricted stock award
of 311 shares of our Class A common stock as of the
first business day of each year, provided the director served as
a member of our board of directors or the board of directors of
Donegal Mutual during any portion of the preceding calendar
year. Each of our directors and each of the directors of Donegal
Mutual is also eligible to receive non-qualified options to
purchase shares of our Class A common stock in an amount
determined by our board of directors from time to time. Donegal
Mutual reimburses us for the options and restricted stock awards
granted to those directors of Donegal Mutual who are not also
members of our board of directors.
21
The following table sets forth a summary of the compensation we
paid to our non-officer directors during 2008.
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Fees Earned
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Stock
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|
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Option
|
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|
|
Name
|
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or Paid in Cash ($)
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Awards ($)
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Awards ($)
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Total ($)
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Robert S. Bolinger
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38,250
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|
|
|
5,215
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|
|
15,450
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|
|
58,915
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Patricia A. Gilmartin
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|
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31,000
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|
|
5,215
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|
|
|
15,450
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51,665
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Philip H. Glatfelter, II
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|
|
78,708
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5,215
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|
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15,450
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99,373
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John J. Lyons
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37,750
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5,215
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|
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15,450
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58,415
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John M. Mahan
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32,000
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|
|
5,215
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|
|
15,450
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52,665
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S. Trezevant Moore, Jr.
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31,000
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|
|
5,215
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|
|
15,450
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51,665
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R. Richard Sherbahn
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|
|
34,000
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|
|
5,215
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|
|
|
15,450
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|
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|
54,665
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Richard D. Wampler, II
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|
|
37,500
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5,215
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15,450
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|
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58,165
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Related
Person Transactions
We have adopted a policy formalizing the manner in which we deal
with a proposed transaction between us and a related person
other than Donegal Mutual because we recognize that related
person transactions present a heightened risk of a conflict of
interest and can create the appearance of a conflict of
interest. Under our policy, all proposed related person
transactions must receive the prior approval of our audit
committee before we can enter into the transaction, and, if the
transaction continues for more than one year, the continuation
must be approved annually by our audit committee. Our
transactions with Donegal Mutual require the prior approval of
the coordinating committee. See Our Relationship with
Donegal Mutual The Coordinating Committee.
Donald H. Nikolaus, our President and a director of us and the
President and a director of Donegal Mutual, is also a partner in
the law firm of Nikolaus & Hohenadel. Such firm has
served as general counsel to Donegal Mutual since 1970 and to us
since 1986, principally in connection with the defense of claims
litigation arising in Lancaster, Dauphin and York counties of
Pennsylvania. We pay such firm its customary fees for such
services. Those fees were $372,926 in 2007 and $369,372 in 2008.
Patricia A. Gilmartin, a director of us and a director of
Donegal Mutual, is an employee of Associated Donegal Insurance
Brokers, which has no affiliation with us except that Associated
Donegal Insurance Brokers receives insurance commissions in the
ordinary course of business from our insurance subsidiaries and
Donegal Mutual in accordance with their standard commission
schedules and agency contracts.
Frederick W. Dreher, a director of Donegal Mutual, is a partner
in the law firm of Duane Morris LLP, which represents us and
Donegal Mutual in certain legal matters. We pay such firm its
customary fees for such services. Those fees were $1,013,913 in
2007 and $1,226,249 in 2008.
Four of our nine directors are affiliated with Donegal Mutual,
our majority stockholder, with whom we have a variety of
inter-company agreements providing for, among other things, the
pooling of underwriting results, reinsurance and expense
sharing. See Stock Ownership Our Relationship
with Donegal Mutual.
Limitation
of Liability and Indemnification
Our certificate of incorporation includes a provision that
limits, to the maximum extent permitted by Delaware law, the
liability of our directors and officers to us and to our
stockholders for money damages except for liability resulting
from:
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actual receipt of an improper benefit or profit in money,
property or services; or
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active and deliberate dishonesty established by a final judgment
as being material to the cause of action.
|
This limitation does not, however, apply to violations of the
federal securities laws, nor does it limit the availability of
non-monetary relief in any action or proceeding.
22
Our certificate of incorporation and by-laws obligate us, to the
maximum extent permitted by Delaware law, to indemnify any
person who is or was a party to, or is threatened to be made a
party to, any threatened or pending action, suit or proceeding
by reason of the fact that such person is or was one of our
directors or officers, or, while one of our directors or
officers, is or was serving, at our request, as a director or
officer of another entity. Insofar as indemnification for
liabilities arising under the federal securities laws may be
permitted to our officers and directors pursuant to the
foregoing provisions, we have been informed that, in the opinion
of the SEC, such indemnification is against public policy as
expressed in such laws and is unenforceable.
In addition, our certificate of incorporation and by-laws permit
us, at our expense, to purchase and maintain insurance to
protect us and any director, officer or employee against any
liability of any character asserted against or incurred by us or
any such director, officer or employee, or arising out of any
such persons corporate status, whether or not we would
have the power to indemnify such person against such liability
under Delaware law. We also have and intend to maintain
directors and officers liability insurance.
Evaluation
of Executive Performance in 2008 and Executive
Compensation
Our compensation committee does not restrict its evaluation of
the performance of our named executive officers to predetermined
formulas or a limited set of criteria. Our compensation
committee considered our progress during 2008 in achieving the
short-term and long-term objectives described below:
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our continued achievement of underwriting results superior to
the underwriting results of other property and casualty
insurance companies on a long-term basis;
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our achievement of a compound rate of revenue growth in excess
of 6.5% over a five-year period;
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our status in being named as one of Wards top 50
performing insurance companies over a five-year period for the
fourth straight year;
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our continued geographic expansion;
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our development of automated underwriting and policy issuance
software that enables us to compete with the national carriers;
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Donegal Mutuals completion of the conversion of Sheboygan
Mutual Insurance Company into a stock insurance company and our
acquisition of that stock insurance company on December 1,
2008;
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enhancing our personnel and their skills; and
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our realization of operational and expense synergies on a
continuing basis.
|
On an overall basis, our compensation committee believes that
our progress in the achievement of these objectives met or
exceeded the targets established for these objectives at the
start of 2008 with emphasis given to our underwriting profit of
$9.7 million in 2008. This underwriting profit was the
basis of the decisions made by our compensation committee at its
meetings in December 2008 and February 2009 with respect to
adjustments to base salary and the allocation of our annual cash
bonuses for our named executive officers.
Our philosophy and that of our compensation committee is founded
on performance and profitability, so that the major portion of
the compensation of our named executive officers arises from
annual bonuses and stock options that will have their greatest
value only when our performance and profitability is at a high
level. The compensation recommendations of our compensation
committee to our board of directors and the compensation
determinations of our board of directors as to each of our named
executive officers is discussed below and were based on the
policies and procedures described earlier in this proxy
statement and the factors and criteria described below. The
specific compensation decisions made for each of our named
executive officers in 2008 reflect our strong financial and
operational performance in 2008.
23
Our
President and Chief Executive Officer
Base Salary. Mr. Nikolaus received a base
salary of $555,000 in 2008 and 2007. We did not increase the
base salary of Mr. Nikolaus at his request and also because
Mr. Nikolaus prefers that a substantial portion of his
compensation be performance-based.
Annual Cash Bonus. Mr. Nikolaus received
a bonus of $360,000 in respect of 2008 and a bonus of $840,000
in respect of 2007, which represent allocations from our
formula-based bonus plan tied to our underwriting profitability
and a subjective analysis of the performance of
Mr. Nikolaus in 2007 and 2008. The principal subjective
factors in determining the allocations to Mr. Nikolaus were
the leadership he provides us, his achievement of our objectives
in 2007 and 2008 and our overall financial, strategic and
operational performance in 2007 and 2008. Mr. Nikolaus
received a 39% and 40% allocation from the bonus pool in 2008
and 2007, respectively.
Our
Senior Vice President and Chief Financial Officer
Base Salary. Mr. Miller received a base
salary of $187,000 in 2008 compared to a base salary of $177,000
in 2007. The 5.6% increase reflected Mr. Millers
successful performance of his responsibilities as our chief
financial offer and a cost-of-living adjustment. The principal
reason for the increase was Mr. Millers meeting of
objective and subjective performance criteria we established
plus our continuing record of strong financial performance.
Annual Cash Bonus. Mr. Miller received a
bonus of $62,000 in respect of 2008 and a bonus of $132,000 in
respect of 2007. This 53% decrease in his 2008 bonus was
principally the result of our reduced underwriting
profitability. The bonus reflected Mr. Millers
effective oversight of our financial reporting and our systems
of internal control.
Our
Senior Vice President of Claims
Base Salary. Mr. Shenk received a base
salary of $229,000 in 2008 compared to $223,000 in 2007. The
2.7% increase represented a cost-of-living adjustment.
Annual Cash Bonus. Mr. Shenk received a
bonus of $58,000 in respect of 2008 and a bonus of $125,000 in
respect of 2007. This 54% decrease in his 2008 bonus was
principally the result of our reduced underwriting
profitability. The bonus reflected our substantially lower than
industry average combined ratio and Mr. Shenks
leadership in maintaining the quality and promptness of our
claims service.
Our
Senior Vice President and Chief Underwriting
Officer
Base Salary. Mr. Greenya received a base
salary of $180,000 in 2008 compared to a base salary of $174,000
in 2007. This 3.4% increase reflected a cost-of-living
adjustment.
Annual Cash Bonus. Mr. Greenya received a
bonus of $58,000 in respect of 2008 and a bonus of $125,000 in
respect of 2007. This 54% decrease in his 2008 bonus was
principally the result of our reduced underwriting
profitability. The bonus reflected Mr. Greenyas
effective oversight of our underwriting operations and his
participation in negotiating cost-effective renewals of our
reinsurance.
Our
Senior Vice President and Treasurer
Base Salary. Mr. Wagner received a base
salary of $180,000 in 2008 compared to a base salary of $174,000
in 2007. This 3.4% increase reflected a cost-of-living
adjustment.
Annual Cash Bonus. Mr. Wagner received a
bonus of $58,000 in respect of 2008 and a bonus of $125,000 in
respect of 2007. This 54% decrease in his 2008 bonus was
principally the result of our reduced underwriting
profitability. The bonus reflected Mr. Wagners
effective supervision of our billing, cash management and
treasury functions.
24
Report of
Our Compensation Committee
The following report of our compensation committee does not
constitute proxy solicitation material and shall not be deemed
filed or incorporated by reference into any of our filings under
the Securities Act or the Exchange Act, except to the extent
that we specifically incorporate this compensation committee
report by reference therein.
Our compensation committee held a joint meeting with the
compensation committee of the board of directors of Donegal
Mutual. The compensation committees reviewed and discussed the
compensation discussion and analysis that appears under the
caption Executive Compensation with management.
Based on the review and discussion by our compensation committee
with management and the joint meeting with the members of the
compensation committee of Donegal Mutual, the members of our
compensation committee then held a meeting at which they
recommended to our board of directors that our board of
directors approve the inclusion of the compensation discussion
and analysis set forth in this proxy statement under the
caption Executive Compensation for filing with the
SEC and the incorporation by reference of such compensation
discussion and analysis in our annual report on
Form 10-K
for the year ended December 31, 2008 for filing with the
SEC.
MEMBERS OF THE COMPENSATION COMMITTEES
OF DONEGAL GROUP INC. AND DONEGAL
MUTUAL INSURANCE COMPANY
Philip H. Glatfelter, II
R. Richard Sherbahn
Frederick W. Dreher
March 11, 2009
Equity
Compensation Plan Information
The following table sets forth information regarding our equity
compensation plans:
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Number of Securities
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(by Class) Remaining
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Number of Securities
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Available for Future
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(by Class) to be Issued
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Weighted-Average
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Issuance Under Equity
|
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Upon Exercise of
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Exercise Price of
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Compensation Plans
|
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|
|
Outstanding Options,
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Outstanding Options,
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|
(Excluding Securities
|
|
Plan category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans
approved by
|
|
|
3,422,432
|
(Class A)
|
|
$
|
17.98
|
(ClassA)
|
|
|
2,563,835
|
(Class A)
|
securityholders
|
|
|
|
(Class B)
|
|
|
|
(Class B)
|
|
|
|
(Class B)
|
Equity compensation plans not approved by securityholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,422,432
|
|
|
$
|
17.98
|
|
|
|
2,563,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
AUDIT AND
NON-AUDIT FEES
Our audit committee approves the fees and other significant
compensation to be paid to our independent registered public
accounting firm for the purpose of preparing and issuing an
audit report or related work. Our audit committee also
pre-approves all auditing services and permitted non-audit
services, including the fees and terms thereof, to be performed
for us by our independent registered public accounting firm,
subject to the de minimis exceptions for non-audit services
described in the Exchange Act. Our audit committee delegates to
our audit committee chairman pre-approval authority for
non-audit services up to $25,000 subject to subsequent approval
by the full audit committee at its next scheduled meeting.
Our audit committee reviewed and discussed with KPMG LLP the
following fees for services rendered for our 2008 fiscal year
and considered the compatibility of non-audit services with KPMG
LLPs independence.
Audit Fees. The fees of KPMG LLP, our
independent registered public accounting firm, in the aggregate
for the fiscal years ended December 31, 2007 and 2008 were
$680,000 and $715,000, respectively, in connection with
(i) the audit of our annual consolidated and statutory
financial statements for those fiscal years, (ii) the
reviews of our consolidated financial statements included in our
Form 10-Q
quarterly reports and (iii) services performed in
connection with filings of registration statements and offerings.
Audit-Related Fees. We paid audit-related fees
of $10,000 and $-0-, respectively, to KPMG LLP during 2007 and
2008 for SEC and general accounting matters.
Tax Fees. We did not pay any tax fees to KPMG
LLP during 2007 or 2008.
All Other Fees. KPMG LLPs aggregate fees
for other services during our fiscal years ended
December 31, 2007 and 2008 were $61,000 and $63,500,
respectively.
Report of
Our Audit Committee
The following report of our audit committee does not
constitute soliciting material and shall not be deemed filed or
incorporated by reference into any other filing by us under the
Securities Act or the Exchange Act, except to the extent we
specifically incorporate this report by reference therein.
Our audit committee performs its responsibilities in accordance
with Section 3(a)(58)(A) of the Exchange Act. Each of our
audit committee members satisfies the independence requirements
of Exchange Act
Rule 10A-3
and complies with the financial literacy requirements thereof.
Our board of directors has determined that all three members of
our audit committee, Messrs. Bolinger, Lyons and Wampler,
satisfy the financial expertise requirements and have the
requisite experience as defined by the SECs rules. Our
audit committee operates pursuant to a written charter, the full
text of which may be viewed on our website at
http://www.donegalgroup.com.
Our audit committee reviews and reassesses the adequacy of its
charter on an annual basis.
The charter of our audit committee specifies that the purpose of
our audit committee is to assist our board of directors in:
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the oversight of our accounting and financial reporting
processes and the audits of our financial statements;
|
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the preparation of the annual report of our audit committee
required by the disclosure rules of the SEC;
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the oversight of the integrity of our financial statements;
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our compliance with legal and regulatory requirements;
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the qualifications and independence of our independent
registered public accounting firm;
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the retention of our independent registered public accounting
firm;
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the adequacy of our systems of internal controls; and
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26
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the performance of our independent registered public accounting
firm and of our internal audit function.
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In carrying out these responsibilities, our audit committee,
among other things:
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monitors preparation of quarterly and annual financial reports
by our management;
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supervises the relationship between us and our independent
registered public accounting firm, including having direct
responsibility for its appointment, compensation and retention,
reviewing the scope of its audit services, approving audit and
non-audit services and confirming the independence of our
independent registered public accounting firm; and
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oversees managements implementation and maintenance of
effective systems of internal and disclosure controls, including
review of our policies relating to legal and regulatory
compliance, ethics and conflicts of interest and review of our
internal audit program.
|
Our audit committee met 10 times during 2008. Our audit
committee schedules its meetings in order to have sufficient
time to devote appropriate attention to all of its
responsibilities. When it deems it appropriate, our audit
committee holds meetings with our independent registered public
accounting firm and with our internal auditors in executive
sessions at which our management is not present.
As part of its oversight of our financial reporting process, our
audit committee reviews all annual and quarterly financial
statements and discusses them with our independent registered
public accounting firm and with management prior to the issuance
of the statements. During 2008, management and our independent
registered public accounting firm advised our audit committee
that each of these financial statements had been prepared in
accordance with generally accepted accounting principles, and
they reviewed significant accounting and disclosure issues with
our audit committee. These reviews included discussion with our
independent registered public accounting firm as to the matters
required to be discussed pursuant to Statement of Auditing
Standards No. 61 (The Auditors Communication With
Those Charged With Governance), including the accounting
principles we employ, the reasonableness of significant
judgments made by management and the adequacy of the disclosures
in our financial statements. Our audit committee has received
the written disclosures and the letter from the independent
registered public accounting firm required by applicable
requirements of the Public Company Accounting Oversight Board
regarding the independent registered public accounting
firms communications with our audit committee concerning
independence and has discussed with the independent registered
public accounting firm its independence.
Our audit committee also reviewed methods of enhancing the
effectiveness of our internal and disclosure control systems.
Our audit committee, as part of this process, analyzed steps
taken to implement recommended improvements in our internal
control procedures.
Based on our audit committees reviews and discussions as
described above, the members of our audit committee recommended
to our board of directors that our board of directors approve
the inclusion of our audited financial statements in our Annual
Report on
Form 10-K
for the year ended December 31, 2008 for filing with the
SEC.
Submitted by:
Audit Committee
Robert S. Bolinger
John J. Lyons
Richard D. Wampler, II
March 11, 2009
27
ITEM 2
RATIFICATION OF OUR AUDIT COMMITTEES SELECTION OF KPMG
LLP
AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR
2009
Our audit committee has appointed KPMG LLP as our independent
registered public accounting firm for the year ending
December 31, 2009. We are asking our stockholders to ratify
our audit committees selection of KPMG LLP as our
independent registered public accounting firm for 2009. Although
ratification is not required by our by-laws or otherwise, we are
submitting the selection of KPMG LLP to our stockholders for
ratification as a matter of good corporate practice.
Representatives of KPMG LLP will be present at our annual
meeting to respond to appropriate questions and to make such
statements as they may desire.
Our
board of directors recommends that our stockholders vote
FOR the ratification of the appointment of KPMG LLP
as our independent registered public accounting firm for
2009.
In the event our stockholders do not ratify the appointment, our
audit committee and our board of directors will reconsider the
appointment. Even if our stockholders ratify the appointment,
the audit committee in its discretion may select a different
independent registered public accounting firm at any time during
the year if it determines that such a change would be in our
best interests and in the best interests of our stockholders.
28
STOCKHOLDER
PROPOSALS
Any stockholder who, in accordance with and subject to the
provisions of
Rule 14a-8
of the proxy rules of the SEC, wishes to submit a proposal for
inclusion in our proxy statement for our 2010 annual meeting of
stockholders must deliver such proposal in writing to our
corporate secretary at our principal executive offices at 1195
River Road, Marietta, Pennsylvania 17547, not later than
November 16, 2009.
Pursuant to Section 2.3 of our by-laws, if a stockholder
wishes to present at our 2010 annual meeting of stockholders
(i) nominations of persons for election to our board of
directors or (ii) an item of business to be transacted by
our stockholders otherwise than pursuant to
Rule 14a-8
of the proxy rules of the SEC, the stockholder must comply with
the provisions relating to stockholder proposals set forth in
our by-laws, which are summarized below. Written notice of any
such proposal containing the information required under our
by-laws, as described herein, must be received by our corporate
secretary, at our principal executive offices at 1195 River
Road, Marietta, Pennsylvania 17547, during the period commencing
on November 16, 2009 and ending on December 16, 2009.
A written proposal of nomination for a director must set forth:
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the name and address of the stockholder, as the same appears on
our books, who intends to make the nomination (the
Proposing Stockholder);
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as to each person whom the Proposing Stockholder nominates for
election or reelection as a director, all information relating
to such person as would be required to be disclosed in a
solicitation of proxies for election of such nominees as
directors pursuant to the proxy rules under the Exchange Act;
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the principal occupation or employment for the past five years
of each person whose nomination the Proposing Stockholder
intends to make;
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a description of any arrangement or understanding between each
person whose nomination is proposed and the Proposing
Stockholder with respect to such persons nomination for
election as a director and actions to be proposed or taken by
such person if elected as a director;
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the written consent of each person so nominated to serve as a
director if elected as a director; and
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the number of shares of our Class A common stock and
Class B common stock beneficially owned within the meaning
of SEC
Rule 13d-3
and of record by the Proposing Stockholder.
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As to any other business that the Proposing Stockholder intends
to bring before our 2010 annual meeting of stockholders, the
written proposal must set forth:
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a brief description of such business;
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the Proposing Stockholders reasons for presenting such
business at our 2010 annual meeting of stockholders;
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any material interest of the Proposing Stockholder in such
business;
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the name and address of the Proposing Stockholder; and
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the number of shares of our Class A common stock and our
Class B common stock beneficially owned within the meaning of
SEC Rule
13d-3 and of
record by the Proposing Stockholder.
|
Only candidates nominated by stockholders for election as a
member of our board of directors in accordance with our by-law
provisions as summarized herein will be eligible for election as
a member of our board of directors at our 2010 annual meeting of
stockholders. A written proposal relating to a matter other than
a nomination for election as a director must set forth
information regarding the matter equivalent to the information
that would be required under the proxy rules of the SEC if
proxies were solicited for stockholder consideration of the
matter at a meeting of stockholders.
Only such business may be conducted at our 2010 annual meeting
of stockholders as shall have been brought before our annual
meeting in accordance with the procedures set forth in our
by-law provisions as
29
summarized herein. The chairman of our 2010 annual meeting of
stockholders will have the discretion to determine if a
nomination or an item of business has been proposed in
accordance with the procedures set forth in our by-laws as
summarized herein. Only stockholder proposals submitted in
accordance with the by-law provisions summarized above will be
eligible for presentation at our 2010 annual meeting of
stockholders, and any matter not submitted to our board of
directors in accordance with such provisions will not be
considered or acted upon at our 2010 annual meeting of
stockholders.
OTHER
MATTERS
Our board of directors does not know of any matters to be
presented for consideration at our annual meeting other than the
matters described in the notice of annual meeting, but if any
matters are properly presented, proxies in the enclosed form
returned to us will be voted in accordance with the
recommendation of our board of directors or, in the absence of
such a recommendation, in accordance with the judgment of the
proxy holder.
By order of our board of directors,
Donald H. Nikolaus,
President and Chief Executive Officer
March 16, 2009
30
. NNNNNNNNNNNN NNNNNNNNNNNNNNN C123456789 000004 000000000.000000 ext 000000000.000000 ext
000000000.000000 ext 000000000.000000 ext MR A SAMPLE DESIGNATION (IF ANY) 000000000.000000 ext
000000000.000000 ext ADD 1 Electronic Voting Instructions ADD 2 ADD 3 You can vote by Internet or
telephone! ADD 4 Available 24 hours a day, 7 days a week! ADD 5 Instead of mailing your proxy, you
may choose one of the two voting ADD 6 methods outlined below to vote your proxy. NNNNNNNNN
VALIDATION DETAILS ARE LOCATED BELOW IN THE TITLE BAR. Proxies submitted by the Internet or
telephone must be received by 1:00 a.m., Central Time, on April 16, 2009. Vote by Internet Log on
to the Internet and go to www.investorvote.com/DGIC Follow the steps outlined on the secured
website. Vote by telephone Call toll free 1-800-652-VOTE (8683) within the United States, Canada
& Puerto Rico any time on a touch tone telephone. There is NO CHARGE to you for the call. Using a
black ink pen, mark your votes with an X as shown in X Follow the instructions provided by the
recorded message. this example. Please do not write outside the designated areas. Annual Meeting
Proxy Card 123456 C0123456789 12345 3 IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD
ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. 3 A Proposals
The Board of Directors recommends a vote FOR each nominee listed in Proposal 1 and FOR Proposal
2. 1. Election of Class B Directors: For Withhold For Withhold For Withhold + 01 Jon M. Mahan 02
- Donald H. Nikolaus 03 Richard D. Wampler, II For Against Abstain 2. Ratification of KPMG LLP as
the Companys independent registered public accounting firm for 2009. 3. In their discretion, the
proxies are authorized to vote upon such other business as may properly come before the meeting and
any adjournment or postponement thereof. B Non-Voting Items Change of Address Please print new
address below. C Authorized Signatures This section must be completed for your vote to be
counted. Date and Sign Below Please sign exactly as name(s) appears hereon. Joint owners should
each sign. When signing as attorney, executor, administrator, corporate officer, trustee, guardian,
or custodian, please give full title. Date (mm/dd/yyyy) Please print date below. Signature 1
Please keep signature within the box. Signature 2 Please keep signature within the box. C
1234567890 J N T MR A SAMPLE (THIS AREA IS SET UP TO ACCOMMODATE 140 CHARACTERS) MR A SAMPLE AND MR
A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND NNNNNNN3 1 A V 0 2 0 8 6 7 1 MR A
SAMPLE AND MR A SAMPLE AND MR A SAMPLE AND + <STOCK#> 0106XD . |
3 IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND
RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. 3 Proxy DONEGAL GROUP INC. ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD APRIL 16, 2009 THIS PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The
undersigned hereby appoints Daniel J. Wagner and Jeffrey D. Miller, and each or either of them,
proxies of the undersigned, with full power of substitution, to vote all of the shares of Class A
common stock and Class B common stock of Donegal Group Inc. (the Company) that the undersigned
may be entitled to vote at the Annual Meeting of Stockholders of the Company to be held at the
Companys offices, 1195 River Road, Marietta, Pennsylvania 17547, on April 16, 2009 at 10:00 a.m.,
and at any adjournment or postponement thereof, as set forth on the reverse side of this proxy
card. You are encouraged to specify your choices by marking the appropriate boxes, SEE REVERSE
SIDE, but you need not mark any boxes if you wish to vote in accordance with our board of
directors recommendations. |