Erie Endemnity Company PRE 14A
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY
STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities
Exchange Act of 1934 (Amendment
No. )
Filed by the Registrant x
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 Section
240.14a-11(c) or Section 240.14a-12
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ERIE INDEMNITY COMPANY
(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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No fee required. |
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Fee computed on table below per Exchange Act
Rules 14a-6(i)(1) and 0-11
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Title of each class of securities to which
transaction applies:
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(2) |
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Aggregate number of securities to which
transaction applies:
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(3) |
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Per unit price or other underlying value of
transaction computed pursuant to Exchange Act Rule 0-11 (Set forth
the amount on which the filing fee is calculated and state how it was
determined):
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(4) |
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Proposed maximum aggregate value of
transaction:
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(5) |
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Total fee paid:
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Fee paid previously by written preliminary
materials. |
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Check box if any part of the fee is offset as
provided by Exchange Act Rule 0-11(a)(2) and identify the filing for
which the offsetting fee was paid previously. Identify the previous filing
by registration statement number, or the Form or Schedule and the date of
its filing.
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(1) |
Amount Previously
Paid: |
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(2) |
Form Schedule or
Registration Statement No.: |
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(3) |
Filing Party: |
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(4) |
Date Filed: |
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 17, 2007
To the Holders of Class A Common Stock and
Class B Common Stock of ERIE INDEMNITY COMPANY:
We will hold our annual meeting of shareholders at 9:30 a.m., local time, on Tuesday, April
17, 2007, at the Auditorium of the F.W. Hirt-Perry Square Building, 100 Erie Insurance Place (Sixth
and French Streets), Erie, Pennsylvania 16530 for the following purposes:
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To elect 14 persons to serve as directors until our 2008 annual meeting of
shareholders and until their successors are elected; |
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To approve an amendment to our articles of incorporation to permit holders of
Class B common stock to act by majority written consent; |
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To approve an amendment to our bylaws to require the affirmative vote of the
holders of a majority of the outstanding shares of our Class B common stock to elect
directors; and |
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4. |
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To transact any other business that may properly come before our annual meeting
and any adjournment, postponement or continuation thereof. |
In the event that our annual meeting is adjourned:
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pursuant to Section 1756(b)(1) of the Pennsylvania Business Corporation Law of 1988,
or the BCL, those holders of Class B common stock entitled to vote who attend a
meeting of shareholders that was previously adjourned for lack of a quorum shall
constitute a quorum for the purpose of electing directors even though the number of
holders of Class B common stock present at such adjourned meeting constitutes less than
a quorum as fixed in our bylaws; and |
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pursuant to Section 1756(b)(2) of the BCL, those holders of Class B common stock
entitled to vote who attend a meeting of shareholders that was previously adjourned for
one or more periods aggregating at least 15 days because of an absence of a quorum
shall constitute a quorum for acting upon any matter set forth in this notice other
than the election of directors even though the number of holders of Class B common
stock present at such adjourned meeting constitutes less than a quorum as fixed in our
bylaws. |
This notice and proxy statement, together with a copy of our annual report to shareholders for
the year ended December 31, 2006, are being sent to all holders of Class A common stock and Class B
common stock as of the close of business on Friday, February 16, 2007, the record date established
by our board of directors. Holders of Class B common stock will also receive a form of proxy in
accordance with Securities and Exchange Commission rules. Holders of Class A common stock
will not receive proxies because they do not have the right to vote on any of the matters to be
acted upon at our annual meeting.
Holders of Class B common stock are requested to complete, sign and return the enclosed form
of proxy in the envelope provided, whether or not they expect to attend our annual meeting in
person.
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By order of our board of directors, |
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Jan R. Van Gorder, |
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Acting Secretary and General Counsel |
March 16, 2007
Erie, Pennsylvania
ERIE INDEMNITY COMPANY
PROXY STATEMENT
Unless the context indicates otherwise, all references in this proxy statement to we, us,
our or the Company mean Erie Indemnity Company and our three property and casualty insurance
subsidiaries. Our property and casualty insurance subsidiaries are Erie Insurance Company, or
Erie Insurance Co., Erie Insurance Company of New York, or Erie NY, and Erie Insurance Property
& Casualty Company or EI P&C. We sometimes refer to Erie Insurance Exchange as the Exchange
and to the Exchange, its subsidiary and our three property and casualty insurance subsidiaries as
the Property and Casualty Group. In addition, we hold investments in both affiliated and
unaffiliated entities, including a 21.63% interest in the common stock (EFL Common Stock) of Erie
Family Life Insurance Company or EFL, a life insurance company. The Exchange owns 78.37% of
EFLs Common Stock.
TABLE OF CONTENTS
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ERIE INDEMNITY COMPANY
100 Erie Insurance Place
Erie, Pennsylvania 16530
PROXY STATEMENT
INTRODUCTION
This proxy statement, which is first being mailed to the holders of our Class A common stock
and our Class B common stock on or about March 16, 2007, is furnished to such holders to provide
information regarding us and our 2007 annual meeting of shareholders. This proxy statement is also
being furnished in connection with the solicitation of proxies by our board of directors from
holders of Class B common stock to be voted at our 2007 annual meeting of shareholders and at any
adjournment, postponement or continuation thereof. Our annual meeting will be held at 9:30 a.m.,
local time, on Tuesday, April 17, 2007 at the Auditorium of the F.W. Hirt-Perry Square Building,
100 Erie Insurance Place (Sixth and French Streets), Erie, Pennsylvania 16530. Holders of Class B
common stock will also receive a form of proxy in accordance with Securities and Exchange
Commission, or SEC, rules.
Shares of Class B common stock represented by proxies in the accompanying form, if properly
signed and returned, will be voted in accordance with the specifications made thereon by the
holders of Class B common stock. Any proxy representing shares of Class B common stock not
specifying to the contrary will be voted:
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for the election of the candidates for director named below, who were nominated by
the nominating and governance committee of our board of directors, or our nominating
committee; |
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for the amendment to our articles of incorporation to permit holders of Class B
common stock to act by majority written consent; and |
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for the amendment to our bylaws to require a majority vote to elect directors. |
See Other Matters for a discussion of certain discretionary voting authority. A holder of Class
B common stock who signs and returns a proxy in the accompanying form may revoke it at any time
before it is voted by giving written notice of revocation to our Secretary, by furnishing a duly
executed proxy bearing a later date to our Secretary or by attending our annual meeting and
advising our Secretary that such holder intends to vote in person.
We will bear the cost of solicitation of proxies in the accompanying form, including expenses
in connection with preparing and mailing this proxy statement. Such solicitation will be made by
mail and may also be made on our behalf by our officers and regular employees in person, by e-mail
or by telephone. None of these persons will receive special compensation for such services. We,
upon request therefor, will also reimburse brokers, nominees, fiduciaries and custodians or persons
holding shares of Class A common stock and Class B common stock in their names or in the names of
nominees for their reasonable expenses in forwarding our proxy material to beneficial owners.
4
Only holders of Class B common stock of record at the close of business on February 16, 2007
are entitled to vote at our annual meeting. Each share of Class B common stock is entitled to one
vote on each matter to be considered at our annual meeting. Except as is otherwise provided in
Sections 1756(b)(1) and (2) of the Pennsylvania Business Corporation Law of 1988, or the BCL, in
the case of adjourned meetings, a majority of the outstanding shares of Class B common stock will
constitute a quorum at our annual meeting for the election of directors and the proposals to amend
our articles of incorporation and our bylaws. Cumulative voting rights do not exist with respect
to the election of directors. The 14 candidates for election as a director who receive the largest
number of votes cast by the holders of Class B common stock in person or by proxy at our annual
meeting will be elected as directors because our proposed bylaw amendment requiring a majority vote
will not yet have become effective. Abstentions and shares of Class B common stock held by brokers
and nominees as to which we have not received voting instructions from the beneficial owner of, or
other person entitled to vote, such shares and as to which the broker or nominee does not have
discretionary voting power, i.e., broker non-votes, are considered outstanding shares of Class B
common stock entitled to vote and such shares are counted in determining whether a quorum or a
majority is present. An abstention or a broker non-vote will therefore have the practical effect
of voting against approval of any matter that properly comes before our annual meeting other than
the election of directors because each abstention or broker non-vote will not represent a vote for
approval of the matter. Abstentions will be treated as the withholding of authority to vote for
nominees for election as directors.
As of the close of business on February 16, 2007, we had 57,705,993 shares of Class A common
stock outstanding, which are not entitled to vote on any matters to be acted upon at our 2007
annual meeting, and 2,573 shares of Class B common stock outstanding, which have the exclusive
right to vote on all matters to be acted upon at our 2007 annual meeting.
There are two H.O. Hirt Trusts, one for the benefit of F. William Hirt and one for the benefit
of Susan Hirt Hagen. The H.O. Hirt Trusts collectively own 2,340 shares of Class B common stock,
which, because such shares represent 90.94% of the outstanding shares of Class B common stock
entitled to vote at our 2007 annual meeting, is sufficient to determine the outcome of any matter
submitted to a vote of the holders of our Class B common stock, assuming all of the shares held by
the H.O. Hirt Trusts are voted in the same manner. As of the record date for our 2007 annual
meeting, the individual trustees of the H.O. Hirt Trusts are F. William Hirt, or Mr. Hirt, and
Susan Hirt Hagen, or Mrs. Hagen, and the corporate trustee is Sentinel Trust Company, L.B.A., or
Sentinel.
Under the provisions of the H.O. Hirt Trusts, the shares of Class B common stock held by the
H.O. Hirt Trusts are to be voted as directed by a majority of trustees then in office. If at least
a majority of the trustees then in office of both of the H.O. Hirt Trusts vote for the election of
the 14 candidates for director named below, such candidates will be elected as directors even if
all shares of Class B common stock other than those held by the H.O. Hirt Trusts do not vote for
such candidates. In addition, if at least a majority of the trustees then in office of both of the
H.O. Hirt Trusts vote for the proposals to amend our articles of incorporation and our bylaws, such
proposals will be approved even if all shares of Class B common stock other than those held by the
H.O. Hirt Trusts do not vote for such proposals. We have not been advised as of the date of this
proxy statement how the trustees of the H.O. Hirt Trusts intend to vote at our annual meeting.
5
We operate predominantly as a provider of management services to the Exchange. We also
operate as a property and casualty insurer through our subsidiaries. Since 1925, we have served as
the attorney-in-fact for the policyholders of the Exchange. The Exchange is a reciprocal insurance
exchange, which is an unincorporated association of individuals, partnerships and corporations that
agree to insure one another. Each applicant for insurance from the Exchange signs a subscribers
agreement, which appoints us as the attorney-in-fact for the subscriber. As attorney-in-fact, we
are required to perform certain services relating to the sales, underwriting and issuance of
policies on behalf of the Exchange.
The Property and Casualty Group writes personal and commercial lines of property and casualty
insurance coverages exclusively through approximately 1,800 independent agencies comprised of more
than 7,900 licensed representatives and pool their underwriting results. Our financial results are
not consolidated with those of the Exchange. As a result of the Exchanges 94.5% participation in
the underwriting results of the Property and Casualty Group, the underwriting risk of the Property
and Casualty Groups business is largely borne by the Exchange.
We charge the Exchange a management fee calculated as a percentage, limited to 25%, of the
direct written premiums of the Property and Casualty Group. Management fees accounted for 73.7%,
71.6% and 72.3%, respectively, of our revenues for the three years ended December 31, 2004, 2005
and 2006. The management fee rate was 23.5% from January 1, 2004 through June 30, 2004, 24% from
July 1, 2004 through December 31, 2004, 23.75% during 2005 and 24.75% during 2006. Beginning
January 1, 2007, the rate has been set at 25%.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth as of February 16, 2007 the amount of our outstanding Class B
common stock owned by shareholders known by us to own beneficially more than 5% of our Class B
common stock.
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Shares of Class B |
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Percent of |
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Common Stock |
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Outstanding |
Name of Individual |
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Beneficially |
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Class B |
or Identity of Group |
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Owned(1)(2) |
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Common Stock |
5% or Greater Holders: |
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H.O. Hirt Trusts(3)
Erie, Pennsylvania |
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2,340 |
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90.94 |
% |
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David C. Abrams(4)
Boston, Massachusetts |
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150 |
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5.83 |
% |
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Abrams Capital, LLC(4)
Boston, Massachusetts |
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141 |
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5.48 |
% |
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(1) |
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Unless otherwise noted, information furnished by the named persons. |
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Under the rules of the SEC, a person is deemed to be the beneficial
owner of securities if the person has, or shares, voting power,
which includes the power to vote, or to direct the voting of, such
securities, or investment power, which includes the power to
dispose, or to direct the disposition, of such securities. Under
these rules, more than one person may be deemed to be the beneficial
owner of the same securities. Securities beneficially owned also
include securities owned jointly, in whole or in part, or individually
by the persons spouse, minor children or other relatives who share
the same home. The information set forth in the above table includes
all shares of Class B common stock over which the named individuals,
individually or together, share voting power or investment power. The
table does not reflect shares of Class B common stock as to which
beneficial ownership is disclaimed. |
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There are two H.O. Hirt Trusts, one for the benefit of Mr. Hirt and
one for the benefit of Mrs. Hagen. Jonathan Hirt Hagen, the son of
Mrs. Hagen, and Elizabeth A. Vorsheck, the daughter of Mr. Hirt, are
contingent beneficiaries of the H.O. Hirt Trusts. Each of the H.O.
Hirt Trusts is the record owner of 1,170 shares of Class B common
stock, or 45.47% of the outstanding shares of Class B common stock.
The Co-Trustees of the H.O. Hirt Trusts as of the date of this proxy
statement are Mr. Hirt, Mrs. Hagen and Sentinel. The Co-Trustees
collectively control voting and disposition of the shares of Class B
common stock. A majority of the trustees then in office acting
together are required to take any action with respect to the voting or
disposition of shares of Class B common stock. If the 2,340 shares of
Class B common stock beneficially owned by the H.O. Hirt Trusts were
converted into Class A common stock, the maximum number of shares of
Class A common stock that could be deemed beneficially owned by the
H.O. Hirt Trusts would be 5,616,000 shares of Class A common stock, or
8.87% of the then outstanding shares of Class A common stock. |
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The information regarding Mr. Abrams and Abrams Capital, LLC is
derived from a Schedule 13G filed with the SEC on February 13, 2007.
Shares reported herein for Mr. Abrams include shares that may be
deemed beneficially owned by Abrams Capital, LLC, for which Mr. Abrams
is the managing member, and certain other entities that may be deemed
controlled by Mr. Abrams. Shares reported herein for Abrams Capital,
LLC include shares that may be deemed beneficially owned by certain
private investment partnerships of which Abrams Capital, LLC is the
general partner. |
7
The following table sets forth as of February 16, 2007 the amount of the outstanding shares of
Class A common stock and Class B common stock beneficially owned by (i) each director and candidate
for director nominated by our nominating committee, (ii) each executive officer named in the
Summary Compensation Table and (iii) all of our executive officers and directors as a group.
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Shares of Class A |
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Shares of Class B |
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Common |
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Percent of |
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Common |
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Percent of |
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Stock |
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Outstanding |
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Stock |
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Outstanding |
Name of Individual |
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Beneficially |
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Class A |
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Beneficially |
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Class B |
or Identity of Group |
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Owned(1)(2) |
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Common Stock(3) |
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Owned(1)(2) |
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Common Stock(3) |
Directors and Nominees for Director: |
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Kaj Ahlmann |
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3,135 |
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John T. Baily |
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4,719 |
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J. Ralph Borneman, Jr. |
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53,187 |
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Patricia Garrison-Corbin |
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3,887 |
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John R. Graham |
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4,060 |
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Jonathan Hirt Hagen |
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224,385 |
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1 |
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F. William Hirt(4) |
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1,871,271 |
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3.24 |
% |
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20 |
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Susan Hirt Hagen(5) |
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6,661,987 |
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11.54 |
% |
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12 |
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C. Scott Hartz |
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4,658 |
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Claude C. Lilly, III |
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4,087 |
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Jeffrey A. Ludrof(6) |
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25,471 |
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Lucian L. Morrison |
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535 |
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Thomas W. Palmer |
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535 |
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Elizabeth A. Vorsheck |
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3,014,440 |
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5.22 |
% |
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Robert C. Wilburn |
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5,187 |
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Executive Officers(7): |
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Philip A. Garcia(8) |
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38,553 |
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Thomas B. Morgan |
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2,688 |
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Jan R. Van Gorder(9) |
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3,288 |
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1 |
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Douglas F. Ziegler(10) |
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15,209 |
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All Directors and Executive
Officers as a Group (18
persons)(11) |
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8,926,348 |
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15.47 |
% |
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33 |
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1.28 |
% |
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(1) |
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Information furnished by the named persons. |
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(2) |
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Under the rules of the SEC, a person is deemed to be the beneficial owner of
securities if the person has, or shares, voting power, which includes the
power to vote, or to direct the voting of, such securities, or investment
power, which includes the power to dispose, or to direct the disposition, of
such securities. Under these rules, more than one person may be deemed to be
the beneficial owner of the same securities. Securities beneficially owned
also include securities owned jointly, in whole or in part, or individually by
the persons spouse, minor children or other relatives who share the same
home. The information set forth in the above table includes all shares of
Class A common stock and Class B common stock over which the named
individuals, individually or together, share voting power or investment power.
The table does not reflect shares of Class A common stock and Class B common
stock as to which beneficial ownership is disclaimed. |
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(3) |
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Less than 1% unless otherwise indicated. |
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(4) |
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Mr. Hirt owns 1,871,271 shares of Class A common stock directly. Mr. Hirt
also owns 20 shares of Class B common stock directly. Mr. Hirt disclaims
beneficial ownership of the 1,906,734 shares of Class A common stock owned by
his wife. |
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(5) |
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Mrs. Hagen owns 3,487 shares of Class A common stock directly and 6,658,500
shares of Class A common stock indirectly through a revocable trust of which
Mrs. Hagen was the grantor and is the sole trustee and beneficiary. Mrs.
Hagen owns 12 shares of Class B common stock directly. Thomas B. Hagen, Mrs.
Hagens husband, disclaims beneficial ownership of the shares of Class A and
Class B common stock owned by Mrs. Hagen. Mrs. Hagen disclaims beneficial
ownership of the 5,100 shares of Class A common stock and three shares of
Class B common stock owned by Thomas B. Hagen and the 10,092,900 shares of
Class A common stock and one share of Class B common stock owned by the Hagen
Family Limited Partnership, for which Thomas B. Hagen, as general partner, has
sole voting power and investment power over the shares owned by the
partnership. |
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(6) |
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Includes 24,721 shares of Class A common stock held directly by Mr. Ludrof and
250 shares of Class A common stock held by each of Mr. Ludrofs three sons. |
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(7) |
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Excludes Mr. Ludrof, who is listed under Directors and Nominees for Director.
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(8) |
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Includes 8,653 shares of Class A common stock
held directly by Mr. Garcia and 29,900 shares of Class A common stock held by his wife. |
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(9) |
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Mr. Van Gorder retired as an executive officer effective December 31, 2006. |
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(10) |
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Includes 9,059 shares of Class A common stock held by Mr. Ziegler and 6,150
shares of Class A common stock held by his wife. |
9
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Includes Michael J. Krahe, Executive Vice President, but excludes Jan R. Van
Gorder, who retired as an executive officer effective December 31, 2006. |
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act,
requires that the officers and directors of a corporation, such as us, that has a class of equity
securities registered under Section 12 of the Exchange Act, as well as persons who own 10% or more
of a class of equity securities of such a corporation, file reports of their ownership of such
securities, as well as statements of changes in such ownership, with the corporation and the SEC.
Based upon written representations we received from our officers and directors and 10% or greater
shareholders, and our review of the statements of changes of ownership filed with us by our
officers and directors and 10% or greater shareholders during 2006, we believe that all such
filings required during 2006 were made on a timely basis, except that Louis F. Colaizzo untimely
filed a Form 3 on July 11, 2006 after he became a Regional Vice President on June 15, 2006; Cheryl
A. Ferrie untimely filed a Form 3 on March 16, 2006 after she became a Senior Vice President on
March 2, 2006; Michael J. Krahe, Executive Vice President, untimely filed a Form 4 on September 21,
2006 to report the sales of 700 shares of Class A common stock on September 13, 2006; Timothy G.
NeCastro, Senior Vice President, filed a Form 5 on January 11, 2007 to report the sale of 1,400
shares of Class A common stock sold on November 10, 2006; Lucian L. Morrison untimely filed a Form
3 on May 1, 2006 after he was elected as a director on April 18, 2006; and Thomas W. Palmer
untimely filed a Form 3 on May 16, 2006 after he was elected as a director on April 18, 2006.
10
PROPOSAL 1 ELECTION OF DIRECTORS
Introduction
The election of directors by the holders of our Class B common stock is governed by provisions
of the Pennsylvania Insurance Holding Companies Act or the Holding Companies Act, in addition to
provisions of the BCL, the Pennsylvania Associations Code and our bylaws. The following discussion
summarizes these statutory provisions and describes the process undertaken in connection with the
nomination of candidates for election as directors by the holders of Class B common stock at our
annual meeting.
Background of our Nominating Committee
Section 1405(c)(4) of the Holding Companies Act, which applies to us, provides that the board
of directors of a domestic insurer must 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. Such committee or committees must
have responsibility for, among other things, nominating candidates for election as directors by the
shareholders.
Section 3.09 of our bylaws is consistent with this statutory provision and provides that (i)
our board of directors must appoint annually a nominating committee that consists of not less than
three directors who are not officers or employees of us or of any entity controlling, controlled by
or under common control with us and who are not beneficial owners of a controlling interest in our
voting securities and (ii) our nominating committee must, prior to each annual meeting of
shareholders, determine and nominate candidates for the office of director to be elected by the
holders of Class B common stock to serve terms as established by our bylaws and until their
successors are elected.
In accordance with this bylaw provision, on April 18, 2006, our board of directors designated
a nominating committee consisting of Patricia Garrison-Corbin, chair, Kaj Ahlmann, John R. Graham,
Jonathan H. Hagen and Thomas W. Palmer. Consistent with the Holding Companies Act, none of these
persons is an officer or employee of us or of any entity controlling, controlled by or under common
control with us or a beneficial owner of a controlling interest in our voting stock or any such
entity. Each member of our nominating committee is an independent director as defined in the rules
applicable to companies listed on the NASDAQ Global Select Market®, or NASDAQ.
Nominating Procedures
Under Section 2.07(a) of our bylaws, nominations of persons for election to our board of
directors may be made at any meeting at which directors are to be elected (i) by or at the
direction of our nominating committee or (ii) by any holder of our Class B common stock.
With respect to nominations by or at the direction of our nominating committee, except as is
required by rules promulgated by NASDAQ, the SEC or the Holding Companies Act, there are no
specific, minimum qualifications that must be met by a candidate for our board of directors, and
our
11
nominating committee may take into account such factors as it deems appropriate. Our
nominating committee generally bases its nominations on our general needs as well as the specific
attributes of candidates that would add to the overall effectiveness of our board of directors.
Specifically, among the significant factors that our nominating committee may take into
consideration are judgment, skill, diversity, experience with businesses and other organizations of
comparable size, the interplay of the candidates experience with the experience of other directors
and the extent to which the candidate would be a desirable addition to our board of directors and
any committee of our board of directors.
In identifying and evaluating the individuals that it selects, or recommends that our board of
directors select, as director nominees, our nominating committee utilizes the following process:
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Our nominating committee reviews the qualifications of any candidates who have been
recommended by a holder of Class A common stock or Class B common stock in compliance
with our bylaws; the procedures that a holder of Class A common stock or Class B common
stock must follow to recommend a candidate to our nominating committee are described in
greater detail in under Shareholder Proposals beginning on page 58. |
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Our nominating committee also considers recommendations made by individual members
of our board of directors or, if our nominating committee so determines, a search firm.
Our nominating committee may consider candidates who have been identified by
management, but is not required to do so. |
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Our nominating committee evaluates the performance and qualifications of individual
members of our board of directors eligible for re-election by the holders of Class B
common stock at our annual meeting of shareholders. |
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Our nominating committee considers the suitability of each candidate, including the
current members of our board of directors, in light of the current size and composition
of our board of directors and the above discussed significant factors. |
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After such review and consideration, our nominating committee determines a slate of
director nominees. |
Actions Taken for Nominations
Our nominating committee met on February 20, 21 and 22, 2007 for the purpose of evaluating the
performance and qualifications of the current or proposed members of our board of directors and
nominating candidates for election as directors by the holders of Class B common stock at our
annual meeting. Prior to that meeting, John R. Graham notified the chair of our nominating
committee of his intention to retire from our board of directors and to not seek re-election as a
director at our annual meeting.
Our bylaws provide that our board of directors shall consist of not less than 7, nor more than
16, directors, with the exact number to be fixed from time to time by resolution of our board of
directors.
12
Our nominating committee recommended at its February 22, 2007 meeting that the size of our
board of directors be set at 14 persons and that all directors as of such date, with the exception
of retiring director John R. Graham, be nominated for re-election. Our nominating committee also
recommended that Elizabeth A. Vorsheck, who is the daughter of Mr. Hirt, be added as a nominee for
election as a director. Ms. Vorsheck was recommended as a director candidate to our nominating
committee by Mr. Hirt.
On February 22, 2007, our board of directors accepted the report of our nominating committee,
set the number of directors to be elected at our annual meeting at 14 and approved the nomination
of Kaj Ahlmann, John T. Baily, J. Ralph Borneman, Jr., Patricia Garrison-Corbin, Jonathan Hirt
Hagen, Susan Hirt Hagen, C. Scott Hartz, F. William Hirt, Claude C. Lilly, III, Jeffrey A. Ludrof,
Lucian L. Morrison, Thomas W. Palmer, Elizabeth A. Vorsheck and Robert C. Wilburn for election as
directors by the holders of Class B common stock at our annual meeting. On February 26, 2007, we
issued a press release for the purpose of announcing publicly our nominating committees slate of
director nominees in accordance with Section 2.07(a)(3) of our bylaws.
Candidates for Election
Unless otherwise instructed, the proxy holders will vote the proxies received by them for the
election of the nominees named below. With the exception of Elizabeth A. Vorsheck, all of the
nominees are currently directors. If a nominee becomes unavailable for any reason, it is intended
that the proxies will be voted for a substitute nominee selected by our nominating committee. Our
board of directors has no reason to believe the nominees named will be unable to serve if elected.
The names of the candidates for director nominated pursuant to the procedures discussed above,
together with certain information regarding them, are as follows:
13
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Director |
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Age |
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Principal Occupation |
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of the |
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as of |
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for Past Five Years and |
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Company |
Name |
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4/1/07 |
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Positions with Erie Insurance Group |
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Since |
Kaj Ahlmann
(1)(3)(4)(7)(8C)
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56 |
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Advisory Board Member, Sapiens
International, 2004 to present;
Chairman, Danish Re Group, a
property and casualty reinsurer,
2002 to 2004; Chairman and Chief
Executive Officer, Inreon,
internet reinsurance venture, 2001
to 2003; Chairman of the Board,
Hampton Re, a life reassurance
company, 2001 to 2003; Vice
Chairman, E.W. Blanch Holdings,
Inc., 1999 to 2001.
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2003 |
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John T. Baily
(1)(2C)(6)(8)
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63 |
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Retired since December 31, 2002;
President, Swiss Re Capital
Partners, 1999 to 2002; Partner,
PricewaterhouseCoopers LLP, 1976
to 1999; Director, Endurance
Specialty Holdings, Ltd., NYMAGIC,
Inc. and RLI Corp.
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2003 |
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J. Ralph Borneman, Jr. CIC
(5)(7)(8)
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68 |
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President, Chief Executive Officer
and Chairman of the Board,
Body-Borneman Associates, Inc.,
insurance agency; President,
Body-Borneman, Ltd. and
Body-Borneman, Inc., insurance
agencies, since 1967; Director,
National Penn Bancshares.
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1992 |
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Patricia Garrison-Corbin
(1)(4C)(6)
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59 |
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President, P.G. Corbin & Company,
Inc., financial advisory services
and municipal finance, 1986 to
present; President and Chief
Executive Officer, P.G. Corbin
Asset Management, Inc., fixed
income investment management, 1987
to present; Chairman, Delancey
Capital Group, LP, equity
investment management, 1996 to
present; Chairman, P.G. Corbin
Group, Inc., investment and
financial advisory services, 1996
to present; Director, FairPoint
Communications, Inc.
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2000 |
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Jonathan Hirt Hagen
(3)(4)(8)
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44 |
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Vice Chairman, Custom Group
Industries, machining,
manufacturing and fabrication
companies, 1999 to present;
private investor, 1990 to present.
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2005 |
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Susan Hirt Hagen
(1)(5C)
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71 |
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Co-Trustee of the H.O. Hirt Trusts
since 1967; private investor, 1989
to present.
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1980 |
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C. Scott Hartz
(1)(2)(6)(7C)
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61 |
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Senior Managing Director, SCIUS
Capital Group, LLC, 2002 to
present; Chief Executive Officer,
Hartz Group, IT and technology
consulting, 2002 to present; Chief
Executive Officer, PwC Consulting,
1995 to 2002; Director, Alien
Technologies, Inc.
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2003 |
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Director |
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Age |
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Principal Occupation |
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of the |
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as of |
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for Past Five Years and |
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Company |
Name |
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4/1/07 |
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Positions with Erie Insurance Group |
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Since |
F. William Hirt, CPCU
(1C)(5)
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81 |
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Chairman of our board of
directors, EFL, Erie Insurance
Co., EI P&C and Flagship City
Insurance Company since September
1993; Chairman of the board of
directors of Erie NY since April
1994; Chairman of our executive
committee and EFL since November
1990; Interim President and Chief
Executive Officer of the Company,
EFL, Erie Insurance Co., EI P&C,
Flagship and Erie NY from January
1, 1996 to February 12, 1996;
Chairman of our board of
directors, Chief Executive Officer
and Chairman of our executive
committee, EFL and Erie Insurance
Co. for more than five years prior
thereto; Co-Trustee of the H.O.
Hirt Trusts.
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1965 |
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Claude C. Lilly, III,
Ph.D., CPCU, CLU
(2)(6)(8)
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60 |
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Dean, Belk College of Business
Administration, University of
North Carolina Charlotte, July
1998 to present; James H. Harris
Chair of Risk Management and
Insurance, Belk College of
Business Administration,
University of North Carolina
Charlotte, August 1997 to present;
Director, FairPoint
Communications, Inc. and TIAA
Trust Bank.
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2000 |
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Jeffrey A. Ludrof
(1)(5)(7)(8)
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47 |
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President and Chief Executive
Officer of the Company, EFL, Erie
Insurance Co., Erie NY, EI P&C and
Flagship since 2002; Executive
Vice President Insurance
Operations of the Company, Erie
Insurance Co., Erie NY, EI P&C and
Flagship from 1999 to 2002; Senior
Vice President of the Company,
Erie Insurance Co., Erie NY, EI
P&C and Flagship from 1994 to
1999; an officer in various
capacities from 1989 to 1994.
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2002 |
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Lucian L. Morrison
(2)(3)
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70 |
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Independent trustee and consultant
in trust, estate, probate and
qualified plan matters, 1992 to
present.
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2006 |
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Thomas W. Palmer
(4)(8)
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59 |
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A Managing Partner of the law firm
of Marshall & Melhorn, LLC, 1982
to present.
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2006 |
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Elizabeth A. Vorsheck
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51 |
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Administrator of family limited
partnerships that invest in and
manage real estate, mortgage and
stock assets and a principal of
family charitable foundation for
more than five years.
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Director |
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Age |
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Principal Occupation |
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of the |
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as of |
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for Past Five Years and |
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Company |
Name |
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4/1/07 |
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Positions with Erie Insurance Group |
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Since |
Robert C. Wilburn
(1)(2)(3C)
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63 |
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President and Chief Executive
Officer, Gettysburg National
Battlefield Museum Foundation
since 2000; Distinguished Service
Professor, Carnegie Mellon
University 1999 to 2000; Lead
Director, Harsco, Inc.
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1999 |
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(1) |
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Member of our executive committee. |
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(2) |
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Member of our audit committee. |
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(3) |
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Member of our executive compensation and development committee, or our
compensation committee. |
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(4) |
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Member of our nominating committee. |
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(5) |
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Member of our charitable giving committee. |
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(6) |
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Member of our investment committee. |
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(7) |
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Member of our technology committee. |
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(8) |
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Member of our strategy committee. |
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C |
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Designates committee chairperson. |
Our board of directors has determined that each of the following directors is an independent
director as defined under the rules promulgated by NASDAQ:
Kaj Ahlmann
John T. Baily
Patricia A. Garrison-Corbin
John R. Graham
Jonathan Hirt Hagen
Susan Hirt Hagen
C. Scott Hartz
F. William Hirt
Claude C. Lilly, III
Lucian L. Morrison
Thomas W. Palmer
Robert C. Wilburn
Our board of directors has also determined that Elizabeth A. Vorsheck, a nominee for director,
would also be an independent director as defined under the rules promulgated by NASDAQ. Mr.
Graham is not standing for re-election.
16
Our Board of Directors and its Committees
Our board of directors met 14 times in 2006. The standing committees of our board of
directors are our executive committee, our audit committee, our compensation committee, our
nominating committee, our charitable giving committee, our investment committee, our technology
committee and our strategy committee.
Our executive committee, which did not meet during 2006, has the authority, subject to certain
limitations, to exercise the power of our board of directors between regular meetings.
Our audit committee met eight times in 2006. Consistent with Section 1405(c)(4) of the
Holding Companies Act and the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, our audit committee
has responsibility for the selection of independent registered public accountants, reviewing the
scope and results of their audit and reviewing the adequacy of our accounting, financial, internal
and operating controls. Our audit committee operates pursuant to a written charter, a copy of
which may be viewed on our website at: http://www.erieinsurance.com.
Our compensation committee met five times in 2006. Consistent with Section 1405(c)(4) of the
Holding Companies Act and our bylaws, our compensation committee has responsibility for
recommending to our board of directors, at least annually, the competitiveness and appropriateness
of the salaries, variable compensation, short- and long-term incentive plan awards, terms of
employment, non-qualified retirement plans, severance benefits and perquisites of our chief
executive officer and our executive vice presidents and such other named executives as required by
rules of the SEC or NASDAQ listing standards and such other responsibilities as our board of
directors may designate. See Executive CompensationCompensation Committee Interlocks and Insider
Participation.
Our compensation committee operates pursuant to a written charter, a copy of which may be
viewed on our website at: http://www.erieinsurance.com.
Our nominating committee met 11 times in 2006. Consistent with Section 1405(c)(4) of the
Holding Companies Act and our bylaws, our nominating committee has responsibility for:
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identification of individuals believed to be qualified to become board of directors
members and to recommend to our board of directors nominees to stand for election as
directors; |
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identification of board of directors members qualified to fill vacancies on any
committee of our board of directors; and |
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evaluation of the procedures and process by which each committee of our board of
directors undertakes to self-evaluate such committees performance. |
Our nominating committee operates pursuant to a written charter, a copy of which may be viewed
on our website at: http://www.erieinsurance.com.
17
Our charitable giving committee, which met once in 2006, has responsibility for recommending
to our board of directors and our chief executive officer charitable gifts by us within a budgetary
limit established by our board of directors. The members of our charitable giving committee
voluntarily do not accept meeting fees for their services on this committee.
Our investment committee, which met six times in 2006, has responsibility for assisting our
board of directors in its general oversight of our investments.
Our technology committee, which met five times in 2006, provides strategic oversight of our
development and use of technology and the related electronic information security issues.
Our strategy committee, which met six times in 2006, has responsibility for oversight of our
strategic plan including the establishment of goals and periodic evaluation of the plan within the
financial and operating objectives approved by our board of directors.
All directors hold office until their respective successors are elected or until their earlier
death, resignation or removal. Officers serve at the discretion of our board of directors, subject
to the provisions of certain employment agreements discussed under Executive Compensation
Agreements with Executive Officers. There are no family relationships between any of our
directors or executive officers, except that:
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Mr. Hirt, chairman of our board of directors, chairman of our executive committee
and a director, and Mrs. Hagen, a director, are brother and sister; |
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Jonathan Hirt Hagen, a director, is the son of Mrs. Hagen and the nephew of Mr.
Hirt; and |
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Elizabeth A. Vorsheck, a nominee for election as a director, is the daughter of Mr.
Hirt, the niece of Mrs. Hagen and a first cousin of Jonathan Hirt Hagen. |
During 2006, each director attended more than 75% of the number of meetings of our board of
directors and the standing committees of our board of directors of which such director was a
member.
In February 2006, our board of directors adopted corporate governance guidelines recommended
by our nominating committee, a copy of which may be viewed on our website at:
http://www.erieinsurance.com.
OUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE 14 CANDIDATES FOR DIRECTOR NOMINATED BY
OUR NOMINATING COMMITTEE, AND THE ENCLOSED PROXY CARD WILL BE SO VOTED UNLESS A HOLDER OF CLASS B
COMMON STOCK SPECIFIES OTHERWISE.
18
DIRECTOR SHAREHOLDER COMMUNICATIONS
Our shareholders may communicate with our board of directors through our Secretary.
Shareholders who wish to express any concerns to any of our directors may do so by sending a
description of those concerns in writing addressed to a particular director, or in the alternative,
to Non-management Directors as a group, care of our Secretary at our headquarters, 100 Erie
Insurance Place, Erie, Pennsylvania 16530. All such communications that are received by our
Secretary will be promptly forwarded to the addressee or addressees set forth in the communication.
Recognizing that director attendance at our annual meeting can provide our shareholders with
an opportunity to communicate with directors about issues affecting us, we actively encourage our
directors to attend our annual meeting. In 2006, all of our directors attended our annual meeting
with the exception of Thomas W. Palmer.
COMPENSATION DISCUSSION AND ANALYSIS
During 2006, the SEC adopted new rules regarding the disclosure of executive and director
compensation. As a result, we have added the Compensation Discussion and Analysis and expanded the
disclosures we make under Executive Compensation.
Overview
Our executive compensation program is developed and monitored by our compensation committee.
Our compensation committee determines all compensation for our chief executive officer, our
Chief Financial Officer and our three other most highly compensated executive officers, who we
refer to in this proxy statement as our named executive officers or NEOs. In fulfilling this
role, our compensation committee is responsible for setting our compensation principles that guide
design of compensation programs for each NEO. Our compensation committee reviews the performance
results of each NEO and establishes individual compensation levels. Our compensation committee
regularly meets without officers or employees present to discuss executive compensation matters.
Our compensation committee meets annually without the chief executive officer present and evaluates
his performance compared with previously established financial and non-financial goals. Our
compensation committee discusses its performance evaluation with the independent, non-employee
members of our board of directors in executive session, and then makes any appropriate compensation
adjustments.
In setting the 2006 compensation levels, our compensation committee used our
internally-developed compensation benchmark and survey data. In late 2005, our human resources
personnel conducted a comprehensive review and analysis of market data for base salaries and
incentives and compared them to our salary structures and current rates of pay.
The scope of this review included analyses of the competitiveness of each executives base
salary and administration of short and long-term bonus eligibility. An in-depth review of the
19
competitiveness of our short and long-term incentive pay targets was conducted by Towers
Perrin in 2004; we used the same market data for review and analysis for the 2005 internal review
we performed.
In preparing the 2005 benchmark and survey data for our compensation committees consideration
we followed, as closely as possible, the methodology used by Towers Perrin for the 2004 executive
compensation assessment as outlined below:
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Competitive compensation levels for our executives were developed by matching each
position to survey benchmark positions found in the competitive market; |
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Benchmarks were based on a thorough review of each executives job description; |
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Compensation data was obtained from various published sources, including William M.
Mercer and Watson Wyatt insurance industry surveys; |
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A proxy analysis was performed for a peer group of ten property/casualty insurance
companies, similar to us in terms of lines of business, net premiums written and asset
size. The peer group used in 2005 to set the 2006 base pay remained the same as that
used by Towers Perrin in its 2004 analysis prepared for us. This peer group consisted
of the following insurers: The Chubb Corporation, Cincinnati
Financial Corporation, CNA Financial Corporation, Mercury General
Corporation, Ohio Casualty Corporation, The Progressive Corporation,
SAFECO Corporation, Unitrin Inc., White Mountains Group Ltd. and
W.R. Berkley Corporation; |
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Incumbent compensation levels were analyzed and compared with market median
compensation levels, which represent a competitive level of pay that would be paid to a
hypothetical, seasoned performer in a job having similar responsibilities and scope.
Market rates are based on external references, not internal equity considerations. |
A more complete description of our compensation committees responsibilities and functions is
provided in our compensation committees charter which can be found on our website at:
http://www.erieinsurance.com.
Overall Program Objectives
The goal of our executive compensation program is to attract, motivate, retain and reward
executives in a fiscally responsible manner. To achieve this objective, we attempt to ensure that
our executive compensation programs support our business strategy by clearly communicating what is
expected of executives with respect to goals through rewarding achievement. We also believe our
program creates strong performance alignment when our goals are accomplished with our primary
stakeholders: our shareholders and the policyholders of the Exchange. Compensation is designed to
align actual compensation with financial performance results, delivering more compensation to
executives when we achieve higher performance and thereby delivering increased value to
shareholders and policyholders of the Exchange, with an inverse relationship occurring when we
achieve lower financial performance results. Our compensation committee deliberates among its
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members and consults with its independent advisor to ensure thresholds, targets, weightings
and maximum performance goals are aggressive enough to warrant an incentive payout or a superior
award.
We seek to achieve these objectives by providing several primary executive compensation
elements:
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A base salary that represents cash compensation based on internal equity and
external industry-based competitiveness; |
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A performance-based annual bonus that provides each executive an opportunity to earn
cash awards based upon the achievement of predetermined goals or other performance
objectives during the course of our fiscal year; |
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A longer-term incentive program that provides an opportunity for each executive to
earn a stock award based upon the achievement of performance objectives that create
long-term value for our shareholders; and |
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A supplemental employee retirement program and non-qualified deferred compensation
plan in addition to benefit programs provided to all employees, including health care
benefits, dental, life, vision and defined contribution and defined benefit retirement
programs. |
Benchmarking Practices
We strive to provide a compensation opportunity for each executive that is competitive with
similar companies in the insurance industry. In doing so, our compensation committee considers
competitive market compensation data, including the compensation practices of the peer group that
competes with us, as well as broader industry compensation survey data. The compensation surveys
utilized vary depending on the scope of each executives position, but generally focus on the
insurance industry, covering companies approximately the same size and scale as us. We used an
average of the compensation levels of each of the companies within our peer group in setting each
NEOs compensation level. Companies within the peer group may change over time if circumstances
warrant. Our compensation committee regularly works with its independent advisors to evaluate and
interpret peer group compensation practices.
Our compensation committee and the independent advisors review the nature and extent of each
executives skills, scope of responsibilities, performance and effectiveness in supporting our
long-term goals. In addition to determining appropriate compensation levels, our compensation
committee also focuses on ensuring that the design of our compensation programs reinforces a strong
relationship between performance and pay.
21
Executive Compensation Elements
Total Compensation
Each element of compensation is independently set for each NEO against the peer group
described above. As a result, the allocation of each compensation component can vary by NEO.
Base Salary
Purpose: The purpose of base salary is to reflect each executives job responsibilities,
individual performance and competitive compensation levels.
Considerations: Our compensation committee reviews and determines, on an annual basis, the
base salaries of each of our executive officers. The guiding philosophy behind our executive
compensation program is to establish each NEOs base salary range at the 50th percentile of the
competitive market using the peer group. In each case, our compensation committee takes into
account the base salary range for each executive based on job duties and authority. Individual
base salary levels are based upon years of experience and individual performance. This amount is
not at risk and may be adjusted annually based on merit and external market conditions.
2006 Discussion and Analysis: All of the NEO base salaries were within the salary range set
against the peer group in 2006.
Annual Incentive Bonus
Purpose: The purpose of our Annual Incentive Plan, or AIP, is to align executive performance
with our annual strategic goals while enhancing our shareholder value and promoting the health of
the Exchange. We accomplish this objective by providing incentives in the form of an annual cash
bonus to executives upon the attainment of certain performance goals.
Considerations: At the beginning of each year, our compensation committee establishes a target
AIP award expressed as a percentage of annual base salary. Target AIP awards are established
annually through a discussion and determination of our compensation committee and our board of
directors on key measures that drive strong organizational performance. In addition, survey data
from insurance companies was used as an additional source to benchmark commonly-used industry
success measures. The measures used in 2006 direct written premium growth and adjusted operating
ratio are considered to be industry standard benchmark measures of an insurers performance. We
define adjusted operating ratio as the total profitability of the Property and Casualty Group, us
and EFL. This ratio measures our profitability by calculating operating and investment results in
relation to premiums earned. We established one additional performance measure (asset class
returns) for Mr. Ziegler based upon his functional responsibilities as our Chief Investment
Officer. We established one additional performance measure (property/casualty adjusted combined
ratio) for Mr. Morgan based upon his functional responsibilities as our Executive Vice President of
Insurance Operations.
22
Our board of directors and management consider our current performance, including our
strengths and performance gaps, to determine what areas need to be incented to help us achieve our
strategic objectives for the year. The combination of benchmark insurance measures and our
performance are the basis from which measures and targets are determined. With the appropriate
measures selected, an internal stochastic modeling analysis is applied to each measure resulting in
a statistical probability confidence range of attaining a target point for each measure.
From this analysis, our compensation committee benchmarks target goals for each measure.
Next, our compensation committee sets a maximum and minimum target range for each measure. The
target and maximum and minimum ranges are intended to incent participants performance towards
achieving a maximum performance payout.
All of the bonus determinations for Mr. Ludrof, Mr. Van Gorder and Mr. Garcia are based upon
performance against company performance measures. In addition to our compensation committee
establishing targets, it may also set additional functional performance measures for each NEO.
These functional performance measures allow our compensation committee to reward specific
responsibilities of the NEO. These additional functional performance measures for each NEO are
developed using a multi-year trend incorporating peer group survey data. For Mr. Morgan, 75% of
the bonus determination is based on performance against company measures and the remaining 25% is
based on functional measures. For Mr. Ziegler, 30% of the bonus determination is based on
performance against company measures and the remaining 70% is based on functional measures.
Upon the completion of the fiscal year, our compensation committee determines and certifies in
writing the extent to which company and individual functional performance goals were satisfied.
There is a cap on the AIP payouts of 200% of incentive target. In addition, the maximum annual AIP
award payable in cash to any one executive under the plan is $3.0 million. Our compensation
committee has no discretion to increase any company or individual incentive target, nor any company
nor individual incentive award that would otherwise be due upon attainment of company or individual
functional performance goals, or otherwise modify any company or individual functional performance
goals associated with a performance period. AIP awards are typically paid in early March after the
prior years audited financial results are available and earned amounts are certified by our
compensation committee. See also note 9, Incentive Plans and Deferred Compensation in our notes
to consolidated financial statements contained in our 2006 annual report.
2006 Discussion and Analysis: The two company performance measures established for the 2006
payout were based upon our adjusted operating ratio and direct written premium growth targets. The
purpose of selecting direct written premium growth as one of the measures for 2006 was to incent
management to grow premiums written during a period of softening market conditions in the insurance
industry. This target incents top line growth for the Exchange and thereby grows our management
fee revenues. The operating ratio was also selected for 2006 to help balance written premium
growth targets with underwriting profitability of our property/casualty insurance operations.
For Mr. Ludrof, Mr. Van Gorder and Mr. Garcia, the operating ratio was weighted as 50% of
target AIP while direct written premium growth received 50% of the weighting. Mr. Morgans
23
weighting was set as follows: operating ratio 25%; direct written premium growth 50% and
property/casualty adjusted combined ratio 25%. Mr. Zieglers weighting was set as follows:
operating ratio 15%; direct written premium growth 15% and asset class return 70%. The
excellent underwriting profitability of the Property and Casualty Group led to a very strong
operating ratio, driving the AIP award in 2006 as disclosed in the Summary Compensation Table.
However, due to the increased competition and price decreases implemented in the past two years,
direct written premiums of the Property and Casualty Group declined, thus this measure did not
contribute to the overall AIP awards in 2006. During this time, the Property and Casualty Group
also had asset class returns that exceeded the targets set, which resulted in Mr. Zieglers AIP
award exceeding three of the other NEOs during that time.
Long-term Incentive Bonus
Purpose: The purpose of our Long-term Incentive Plan, or LTIP, is to enhance our growth and
profitability and that of the Exchange and its affiliates by providing longer term rewards to NEOs
who are capable of having a significant impact on our performance. We accomplish this objective by
providing incentives over a multi-year period in the form of restricted stock unit grants of our
Class A common stock to executives upon the attainment of certain performance goals. Stock is used
in this plan to further align the interests of our executives with those of our shareholders.
Considerations: We had two LTIP plans in effect at December 31, 2006: a LTIP plan we adopted
in 1997 (the Pre-2004 LTIP) and a LTIP plan we adopted in 2004 (the Post-2004 LTIP). The
Pre-2004 LTIP awards were determined based upon the achievement of predetermined financial
performance goals compared to the actual growth in our retained earnings. This initial plan did
not benchmark us against a peer group. In 2004, after review by our compensation committee, we
adopted the Post-2004 LTIP. The Post-2004 LTIP allowed us an opportunity to better align our
long-term goals with the executive reward. The award is based on the level of achievement of
objective measures of performance over a three-year period compared to a peer group of property and
casualty insurance companies that write predominantly personal lines insurance. The peer group we
use for the Post-2004 LTIP has remained the same since inception and consists of: Allstate
Insurance Group, Farmers Insurance Group, Government Employees Group (GEICO), Nationwide Insurance
Group, Progressive Insurance Co, State Farm Insurance Group and USAA Group. Actual awards earned
are calculated and paid after performance level certification by our compensation committee once
the performance period ends. See also Note 9, Incentive Plans and Deferred Compensation in our
notes to consolidated financial statements contained in our 2006 annual report.
2006 Discussion and Analysis: Target LTIP awards were established for each NEO at the
beginning of 2006 similar to the methodology used in setting the AIP awards for each NEO as
described above. The performance measures selected reflect the strategic business objectives of
the Property and Casualty Group. The 2006 and 2005 awards were based on the adjusted combined
ratio, growth in direct written premiums and total return on invested assets of the Property and
Casualty Group compared to the same performance measures of the peer group. Given the nature of
our business, underwriting profitability is important to long-term financial strength. The
Property and Casualty Groups direct written premium growth is also important to our financial
results as it is the
24
primary driver of the management fee revenue we earn from the Exchange. In 2006, our
compensation committee awarded long-term compensation for each NEO resulting in awards of
restricted stock units identified in the Summary Compensation Table, Supplemental Stock Awards
Table, Grants of Plan Based Awards Table, Outstanding Equity Awards Table and the Option Exercises
and Stock Vested Table herein. During 2004 and 2005, the Property and Casualty Group experienced
minimal catastrophe activity, unlike some members of our peer group who, particularly in 2005, had
underwriting results adversely impacted by severe hurricane activity in the United States. As a
result, the awards during performance periods covering these calendar years have been favorably
impacted.
Additional Benefits
We believe retirement benefits are an important part of a competitive reward opportunity,
which enables the attraction and retention of top tier managerial talent. As such, we maintain
both a tax-qualified defined benefit pension and the Supplemental Retirement Plan for Certain
Members of the Erie Insurance Group Retirement Plan for Employees, or the SERP. The
tax-qualified defined benefit pension plan is available to all of our salaried employees. The
Internal Revenue Code of 1986, as amended, or the Code, limits the maximum annual pension award
that can be paid to each eligible employee, thus the SERP was developed to provide benefits to each
NEO in excess of earnings limitations imposed by the Code. As illustrated in the Pension Benefits
Table, an older NEO can produce a significantly higher present value compared to a younger, higher
paid NEO. This result occurs primarily because the nearer a NEO is to normal retirement age, the
shorter the discount period used in calculating the present value of the benefits.
The defined benefit pension plan and SERP amounts reflected in the Change in Pension Value
within the Summary Compensation Table result from the use of various actuarial assumptions. One of
the assumptions that can have a significant impact on the pension values is the discount rate
selected. Upon completing our annual bond matching study with our independent consulting actuarial
firm, Watson Wyatt, we supported the selection of a 6.25% discount rate for the 2007 pension and
SERP expense for financial statement purposes and we used this same discount rate in determining
the present value of benefits under these plans for each NEO. Relatively minor changes in this
discount rate may cause significant volatility in the amount reported under this column in the
Summary Compensation Table. As an example, if the discount rate had decreased 50 basis points from
December 31, 2005 to December 31, 2006 (5.75% to 5.25%), the amount shown for Mr. Ludrof would have
been $390,643 instead of the $95,698 that is reported herein. See also the Critical Accounting
Estimates section of our Management Discussion and Analysis of Financial Condition and Results of
Operations contained in our 2006 annual report that discusses this assumption and other
assumptions used in determining these actuarially valued amounts.
Mr. Van Gorders All Other Compensation for 2006 in the Summary Compensation Table includes
life insurance premiums we paid upon his retirement on December 31, 2006. Of the $98,000 total
premiums disclosed, $73,000 reflects additional payments we made to obtain paid-up status upon
retirement. As a result, we paid Mr. Van Gorder $50,290 as a gross-up to the additional life
insurance premiums to cover personal income taxes on this amount.
25
Executives are also entitled to participate in the broad-based benefit plans offered generally
to all of our full-time employees (e.g., the pension plan, 401(k) plan, health insurance and other
employee benefits). Such participation in these benefit plans exists on the same terms for all of
our other employees.
Director Compensation
2006 Discussion and Analysis
Director performance is a key influence factor in organizational performance. Just as
alignment of our strategic objectives for management compensation are critical, so too is
directors compensation. To this end, directors compensation is assessed periodically to monitor
and adjust it, as appropriate, in order to ensure alignment with our strategic objectives.
The analysis and review of directors compensation is the responsibility of our compensation
committee and our board of directors. In undertaking this responsibility, our compensation
committee reviews compensation surveys of the financial services industry. Our compensation
committee also engages, from time to time, consultants who provide supplemental data considered in
establishing the directors compensation. Once our compensation committee has reviewed the data,
it formulates a recommendation for review by our board of directors. Adjustments to directors
compensation were made for implementation on March 1, 2007. The adjustments included increasing
the cash retainer from $25,000 to $30,000 in addition to increasing the stock-based pay from
$35,000 to $40,000. The adjustments were based on the compensation philosophy explained above.
Adjustments are made to maintain each directors compensation at market median or about the
50th percentile of the peer group. Added responsibilities, or additional duties, such
as committee chairperson or presiding director may cause variations in each directors total
compensation earned.
In 2006, our compensation committee engaged Watson Wyatt to evaluate the components of
directors compensation that were implemented in March 2007. These components included: retainer
fees, committee fees, stock grants, committee chair fees and presiding director fees. To assess
these components, survey data was used and our compensation committee determined that, except for
the retainer fee and stock-based pay increases noted above, the remaining elements of directors
compensation were effective and would remain consistent with the 2006 levels.
Director Education Program
In 2005, we implemented a director education program in which all of our directors are
entitled to participate. The program provides each director with access to various resources to
assist him or her in developing the skills and strategies essential for effective directorship. We
then pay for the cost of each directors membership in the National Association of Corporate
Directors, underwrite the cost of attendance at certain educational seminars and conferences and
provide subscriptions to relevant business news journals, magazines and on-line resources. The
cost of this program is included in the All Other Compensation column of the Directors
Compensation Table.
26
Termination and Change in Control Agreements with Executives
Our compensation committee periodically reviews the use and material terms of employment
agreements with our key executives. In 2005, in conjunction with our compensation committees
independent advisor, employment agreements were revised for all of our NEOs. We believe these
agreements are valuable to our stakeholders as they provide benefits to executives if they are
terminated, except termination for cause, and contain non-competition and non-solicitation
provisions. The term of Mr. Ludrofs employment agreement will expire on December 11, 2009. The
term of our employment agreements for Mr. Garcia, Mr. Morgan and Mr. Ziegler will expire on
December 11, 2008.
Mr. Van Gorder retired as an executive officer effective December 31, 2006 under the
voluntary without cause provisions of his employment agreement with us. These provisions
resulted in $1,003,429 of additional present value (using FAS 87 assumptions) attributable to Mr.
Van Gorders receipt of unreduced SERP benefits at his current age rather than normal retirement
age. Also, in accordance with the terms of our employment agreement with Mr. Van Gorder, Mr. Van
Gorder received a tax gross-up totaling $1,353,596 from his receipt of the SERP benefits. Mr. Van
Gorder is also entitled to receive monthly benefits under our tax-qualified retirement plan; 401(k)
and deferred compensation plan account balances; shares of Class A common stock under the Pre-2004
LTIP and the Post-2004 LTIP and an AIP award for 2006 that is payable in 2007.
The remaining four NEO salary and benefits expected under various termination scenarios are
disclosed below. If any of the four NEOs terminated his employment due to disability, no
additional compensation or benefits would be awarded as incremental to amounts already disclosed in
the Summary Compensation Table. The compensation and benefit amounts disclosed in the table below
were developed considering a termination date of December 31, 2006 and represent only incremental
payments estimated in addition to the other compensation disclosed in this proxy statement.
|
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|
Involuntary |
|
Voluntary |
|
Involuntary |
|
Voluntary |
|
|
|
|
Without |
|
Without |
|
With |
|
With |
|
|
Jeffrey A. Ludrof |
|
Cause |
|
Good Reason |
|
Cause |
|
Good Reason |
|
Death |
Cash |
|
|
4,272,504 |
(1) |
|
|
0 |
|
|
|
0 |
|
|
|
4,272,504 |
(1) |
|
|
7,754,136 |
(5) |
SERP/Pension |
|
|
1,729,493 |
(2) |
|
|
1,729,493 |
(2) |
|
|
654,677 |
(4) |
|
|
1,729,493 |
(2) |
|
|
1,349,907 |
(6) |
SERP Tax Gross-Up |
|
|
1,754,217 |
(3) |
|
|
1,754,217 |
(3) |
|
|
0 |
|
|
|
1,754,217 |
(3) |
|
|
1,529,837 |
(7) |
Long Term Incentive Plan |
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|
2,327,158 |
(8) |
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0 |
|
|
|
0 |
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2,327,158 |
(8) |
|
|
0 |
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27
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Involuntary |
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Voluntary |
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Involuntary |
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Voluntary |
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Without |
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Without |
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With |
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With |
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Philip A. Garcia |
|
Cause |
|
Good Reason |
|
Cause |
|
Good Reason |
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Death |
Cash |
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1,710,772 |
(1) |
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0 |
|
|
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0 |
|
|
|
1,710,772 |
(1) |
|
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375,569 |
(5) |
SERP/Pension |
|
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1,026,401 |
(2) |
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1,026,401 |
(2) |
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413,341 |
(4) |
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1,026,401 |
(2) |
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432,008 |
(6) |
SERP Tax Gross-Up |
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973,239 |
(3) |
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973,239 |
(3) |
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0 |
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973,239 |
(3) |
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621,883 |
(7) |
Long Term Incentive Plan |
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785,729 |
(8) |
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0 |
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0 |
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785,729 |
(8) |
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0 |
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Involuntary |
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Voluntary |
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Involuntary |
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Voluntary |
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Without |
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Without |
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With |
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With |
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Thomas B. Morgan |
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Cause |
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Good Reason |
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Cause |
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Good Reason |
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Death |
Cash |
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1,572,318 |
(1) |
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0 |
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0 |
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1,572,318 |
(1) |
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353,440 |
(5) |
SERP/Pension |
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252,170 |
(2) |
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252,170 |
(2) |
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95,742 |
(4) |
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252,170 |
(2) |
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267,493 |
(6) |
SERP Tax Gross-Up |
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230,807 |
(3) |
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230,807 |
(3) |
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0 |
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230,807 |
(3) |
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239,864 |
(7) |
Long Term Incentive Plan |
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616,674 |
(8) |
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0 |
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0 |
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616,674 |
(8) |
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0 |
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Involuntary |
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Voluntary |
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Involuntary |
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Voluntary |
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Without |
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Without |
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With |
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With |
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Douglas F. Ziegler |
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Cause |
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Good Reason |
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Cause |
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Good Reason |
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Death |
Cash |
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1,275,605 |
(1) |
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0 |
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0 |
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1,275,605 |
(1) |
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309,692 |
(5) |
SERP/Pension |
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617,948 |
(2) |
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|
617,948 |
(2) |
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330,581 |
(4) |
|
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617,948 |
(2) |
|
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23,934 |
(6) |
SERP Tax Gross-Up |
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642,241 |
(3) |
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642,241 |
(3) |
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0 |
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642,241 |
(3) |
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291,110 |
(7) |
Long Term Incentive Plan |
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0 |
(8) |
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0 |
|
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0 |
|
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0 |
(8) |
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0 |
|
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|
|
(1) |
|
Cash payment is based on the sum of: |
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the highest annual base salary paid or payable to the NEO in
the current year or any one of the three calendar years preceding the
NEOs termination of employment; and |
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an amount equal to the sum of the higher of the NEOs target
award amount, or actual bonus amount paid, under our AIP for the three
calendar years preceding the date of the NEOs termination divided by
3. |
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Each NEOs 2006 salary from the Summary Compensation Table and his
2003, 2004 and 2005 AIP bonus amounts were used for this table. For
Mr. Ludrof, the sum is multiplied by 3 to determine the amount of the
cash payment. For Mr. Garcia and Mr. Morgan, the sum is multiplied by
2.75 to determine the amount of the cash payment. For Mr. Ziegler,
the sum is multiplied by 2.5 to determine the amount of the cash
payment. |
28
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(2) |
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Amounts disclosed above for the SERP represent the additional present
value attributable to receiving unreduced benefits beginning at age 55
(or current age if the NEO is older than age 55) instead of at the
plans normal retirement age of 65. |
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(3) |
|
Under the terms of the employment agreement, for an NEO who is at
least age 55, an annuity is purchased or a lump sum is paid for the
NEOs SERP benefit within 30 days of his termination and the purchase
price is grossed-up for this taxable event. For an NEO who is not yet
age 55, a deferred to age 55 annuity will be purchased or a lump sum
will be paid upon his attainment of age 55 and the purchase price is
grossed-up for this taxable event. For this table, the NEOs tax
rates as of December 31, 2006 were used. The amount grossed-up was
the sum of the SERP present value shown in the Pension Benefits Table
and the additional SERP present value shown in the table above. |
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(4) |
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The early retirement benefit defined in the tax-qualified retirement
plan and the SERP are considered to be subsidized benefits because
the early retirement reduction factors are more generous than an
actuarially equivalent reduction for the early commencement of
benefits. The amount shown is the additional present value
attributable to receiving a reduced early retirement benefit at age
55, or current age if the NEO is older than age 55, versus an
unreduced benefit at age 65. |
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(5) |
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The cash payment in the event of death is equal to the NEOs current
annual base salary paid to the NEOs beneficiary in 12 monthly
installments. |
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(6) |
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Upon the death of an NEO, an unreduced survivor benefit under the SERP
begins immediately. The amount shown is the additional present value
attributable to the commencement of the 50% survivor benefit based
upon the spouses age at December 31, 2006. |
|
(7) |
|
The amount grossed-up was the sum of the SERP present value shown in
the Pension Benefits Table and the additional SERP present value shown
in the table above. |
|
(8) |
|
The employment agreements provide that for purposes of the Pre-2004
LTIP and the Post-2004 LTIP, the NEO should be treated as if he ceased
to be our employee by reason of death, disability, normal or early
retirement as may be applicable. Without this provision, NEOs who
terminate employment without actually being eligible under one of
these provisions would forfeit his restricted shares and target
shares. The amounts shown are the sum of the amounts shown in the
Outstanding Equity Awards at December 31, 2006 Table for the 2002-2004
and 2003-2005 performance periods under the Pre-2004 LTIP and the
amounts shown in the Supplemental Stock Awards Table for the
2004-2006, 2005-2007 and 2006-2008 performance periods under the
Post-2004 LTIP. We do not show an amount for Mr. Ziegler because he
is already eligible for early retirement under the terms of both
LTIPs. |
29
In addition to the items disclosed in the table above, in the case of involuntary without
cause and voluntary with good reason terminations, the employment agreements provide continuing
coverage for all purposes for a period of three years after the date of termination for the
executive and his eligible dependents under all of our benefit plans in effect as of the date of
termination. The employment agreements also stipulate that for a period of three years after the
date of the executive termination, we will provide such perquisites as were made available to the
executive as of the date of termination.
The employment agreements also provide for certain additional payments by us. In the event
that any payment or distribution by us to or for the benefit of the executive, whether paid or
payable pursuant to the terms of the employment agreement or otherwise, is determined to be subject
to the excise tax imposed by Section 4999 of the Code as an excess parachute payment, as that term
is used and defined in Sections 4999 and 280G of the Code, the executive is entitled to receive an
additional payment (a gross-up payment) in an amount equal to the then current rate of tax under
Section 4999 multiplied by the total of the amounts so paid or payable, including the gross-up
payment, which are deemed to be a part of an excess parachute payment.
EXECUTIVE COMPENSATION
The following table sets forth the compensation during 2006 for our named executive officers.
Compensation disclosed herein is for services rendered in all capacities to us, EFL, the Exchange
and their subsidiaries and affiliates. Compensation is allocated among us, the Exchange, EFL and
their subsidiaries and affiliates according to estimated proportion of the executives time
dedicated to the affairs of various entities. Our share of total compensation expense in 2006 was
52.7%. Amounts indicated are pre-individual income taxes.
30
Summary Compensation Table
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Change |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Pension |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
Nonqual- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
ified |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive |
|
Deferred |
|
All |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan |
|
Compen- |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
Option |
|
Compen- |
|
sation |
|
Compen- |
|
|
Name and |
|
|
|
|
|
|
|
|
|
Bonus |
|
Awards |
|
Awards |
|
sation |
|
Earnings |
|
sation |
|
Total |
Principal Position |
|
Year |
|
Salary($) |
|
($) |
|
($) |
|
($)(1) |
|
($) |
|
($) |
|
($)(2) |
|
($) |
Jeffrey A.
Ludrof, President
and CEO |
|
|
2006 |
|
|
|
754,136 |
|
|
|
0 |
|
|
|
1,776,621 |
|
|
|
0 |
|
|
|
571,701 |
|
|
|
95,698 |
|
|
|
112,253 |
|
|
|
3,310,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan R. Van Gorder,
* Senior Executive
Vice President,
Secretary and
General Counsel |
|
|
2006 |
|
|
|
461,868 |
|
|
|
0 |
|
|
|
759,151 |
|
|
|
0 |
|
|
|
232,209 |
|
|
|
20,355 |
|
|
|
210,986 |
|
|
|
1,684,569 |
|
Philip A. Garcia,
Executive Vice
President and Chief
Financial Officer |
|
|
2006 |
|
|
|
375,569 |
|
|
|
0 |
|
|
|
608,142 |
|
|
|
0 |
|
|
|
189,809 |
|
|
|
46,180 |
|
|
|
60,280 |
|
|
|
1,279,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas B. Morgan,
Executive Vice
President,
Insurance
Operations |
|
|
2006 |
|
|
|
353,440 |
|
|
|
0 |
|
|
|
514,817 |
|
|
|
0 |
|
|
|
233,741 |
|
|
|
28,306 |
|
|
|
35,648 |
|
|
|
1,165,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas F. Ziegler,
Senior Vice
President and Chief
Information Officer |
|
|
2006 |
|
|
|
309,692 |
|
|
|
0 |
|
|
|
481,004 |
|
|
|
0 |
|
|
|
277,717 |
|
|
|
64,913 |
|
|
|
26,868 |
|
|
|
1,160,194 |
|
|
|
|
* |
|
Mr. Van Gorder retired as an executive officer effective December 31, 2006. |
Salary
Salary includes all paid time off such as vacation and company holidays.
Stock Awards: Long-Term Incentive Plans (LTIP)
In 1997, we adopted the Pre-2004 LTIP, which was designed to enhance our growth and
profitability by providing the incentive of long-term rewards to key employees who are capable of
having a significant impact on our performance, to attract and retain employees of outstanding
competence and ability and to further align the interests of such employees with those of our
shareholders. The Pre-2004 LTIP was approved by the holders of our Class B common stock in 1997 as
a performance-based plan under the Code and its continuation was approved by our shareholders at
our 2002 annual meeting in satisfaction of the requirements of the Code. The Pre-2004 LTIP was
amended at our 2003 annual meeting to increase the maximum value of the phantom share units that
could be earned by a participant in any performance award from $500,000 to $1,000,000 and at the
same time was reapproved by our shareholders. Each participant is granted awards of phantom share
units under the Pre-2004 LTIP based upon a target award calculated as a percentage of the
participants base salary. The total value of any phantom share units is determined at the end of
the performance period
31
based upon the growth in our retained earnings. Each participant is then entitled to receive
restricted shares of Class A common stock equal to the dollar value of the phantom share units at
the end of the performance period. The vesting period for the restricted shares of Class A common
stock issued to each executive is three years after the end of the performance period. If a
participant ceases to be an employee prior to the end of the performance period for reasons other
than retirement, death or disability, the participant forfeits all phantom share units awarded. If
a participant ceases to be an employee after the end of the performance period but prior to the end
of the vesting period for reasons other than retirement, death or disability, the participant
forfeits all unvested restricted shares previously granted. Because our board of directors and
holders of Class B common stock approved a new long-term incentive plan described below, no further
awards will be made under the Pre-2004 LTIP and the last performance period under the Pre-2004 LTIP
was 2003-2005.
In 2004, our compensation committee recommended the adoption of the Post-2004 LTIP and, in
accordance with the Code and NASDAQ rules, the holders of Class B common stock approved the
Post-2004 LTIP at our 2004 annual meeting. The Post-2004 LTIP became effective March 2, 2004. The
Post-2004 LTIP is administered by our compensation committee. Our compensation committee is
authorized to grant restricted performance shares to participants. Restricted performance shares
represent a right to receive shares of Class A common stock based on the achievement, or the level
of achievement, during a specified performance period of one or more performance goals established
by our compensation committee at the time of the award. At the time restricted performance shares
are granted, our compensation committee will specify in writing:
|
|
the performance goals applicable to the award, the weighting of such goals and the
performance period during which the achievement, or the level of achievement, of the
performance goals are to be measured; |
|
|
|
the number of shares of Class A common stock that may be earned by the participant
based on the achievement, or the level of achievement, of the performance goals or the
formula by which such amount shall be determined; and |
|
|
|
such other terms and conditions as our compensation committee determines to be
appropriate. |
Following completion of the applicable performance period, our compensation committee will
determine whether the applicable performance goals were achieved, or the level of such achievement,
and the number of shares, if any, earned by the participant based upon such performance. We will
then issue to the participant the number of restricted shares of Class A common stock earned
pursuant to the award for the relevant performance period. If a participant ceases to be an
employee prior to the end of a performance period by reason of death, disability or normal or early
retirement (as defined in our qualified pension plan for employees), the participant may receive
all or such portion of his or her award as may be determined by our compensation committee in its
discretion; however, a participant will not receive less than the total number of restricted shares
of Class A common stock earned pursuant to such participants award based upon performance during a
performance period that is deemed to end on the last day of the year in which employment
terminates. If a participant ceases to
32
be our employee, our subsidiaries and affiliates prior to the end of a performance period for
any reason other than death, disability or normal or early retirement, the participant may receive
all or such portion of his or her award as may be determined by our compensation committee in its
discretion. A participant who is terminated for cause is not entitled to receive payment of any
award for any performance period. The maximum number of shares of Class A common stock that may be
earned under the Post-2004 LTIP by any single participant during any one calendar year is limited
to 250,000 shares.
The table below provides additional detail for the amounts shown in the Stock Awards column of
the Summary Compensation table above. These amounts represent the change in accruals for open
performance periods under our Post-2004 LTIP, as well as the change in market value for unvested
shares under the Pre-2004 LTIP.
Supplemental Stock Awards Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-2004 LTIP |
|
Pre-2004 LTIP |
|
|
|
|
|
|
|
|
2006-2008 |
|
2005-2007 |
|
2004-2006 |
|
Change in |
|
|
|
|
|
|
|
|
Performance |
|
Performance |
|
Performance |
|
Market |
|
|
Name |
|
Year |
|
Period(1) |
|
Period(1) |
|
Period(1) |
|
Value(2) |
|
Total |
Jeffrey A. Ludrof |
|
|
2006 |
|
|
|
36,144 |
|
|
|
588,773 |
|
|
|
1,055,822 |
|
|
|
95,882 |
|
|
|
1,776,621 |
|
Jan R. Van Gorder |
|
|
2006 |
|
|
|
14,314 |
|
|
|
240,006 |
|
|
|
459,560 |
|
|
|
45,271 |
|
|
|
759,151 |
|
Philip A. Garcia |
|
|
2006 |
|
|
|
12,600 |
|
|
|
205,255 |
|
|
|
354,681 |
|
|
|
35,606 |
|
|
|
608,142 |
|
Thomas B. Morgan |
|
|
2006 |
|
|
|
13,640 |
|
|
|
187,370 |
|
|
|
295,877 |
|
|
|
17,930 |
|
|
|
514,817 |
|
Douglas F. Ziegler |
|
|
2006 |
|
|
|
10,281 |
|
|
|
155,523 |
|
|
|
292,098 |
|
|
|
23,102 |
|
|
|
481,004 |
|
|
|
|
(1) |
|
Under the Post-2004 LTIP, the accrual for an open performance period
is calculated by first multiplying the number of target shares awarded
to the NEO by an LTIP performance factor to determine the estimated
number of shares that will be earned for the three-year performance
period. The LTIP performance factor is determined by the difference
between our results under our estimated performance measures and the
results of our peer group over the three-year performance period. The
minimum and maximum LTIP performance factors are 0 and 2.5
respectively. The estimated number of shares that will be earned for
the performance period is then multiplied by the $57.98 share price as
of December 31, 2006 and pro-rated for the completed portion of the
performance period. |
|
(2) |
|
A change in market value is recorded for the unvested shares under
closed performance periods of the Pre-2004 LTIP; the Pre-2004 LTIP has
a three-year performance period followed by a three-year vesting
period. The closing share prices at December 31, 2006 and 2005 were
$57.98 and $53.20, respectively. |
33
Non-Equity Incentive Plan Compensation: Annual Incentive Plan (AIP)
The AIP is a performance-based incentive plan that pays annual cash bonuses to our executive
officers, senior vice presidents and regional vice presidents. The cost of the plan is charged to
operations as the compensation is earned over the performance period of one year. Amounts reported
in the Summary Compensation Table for the AIP represent the estimated amounts payable for the
current annual performance period. Actual payment amounts are not expected to be materially
different and will be calculated and paid in March 2007.
Under the deferred compensation plan, executives can elect to defer 100% of their AIP amounts
earned. Deferral elections must be made before the beginning of the calendar year for which each
bonus is earned. Elected deferral amounts, if any, are reported in the Non-Equity Incentive Plan
Compensation column.
Pension Plan
Change in Pension Value and NQDC Earnings
The Summary Compensation Table above includes the net change in the present value of accrued
benefits from December 31, 2005 to December 31, 2006 under our retirement plan, a tax-qualified
defined benefit pension plan and our SERP, a non-qualified defined benefit arrangement.
The December 31, 2005 present values were calculated using assumptions consistent with those
used for fiscal year 2005 disclosure under FAS 87, Employers Accounting for Pensions, including
a 5.75% discount rate (5% post-retirement discount rate for our SERP). Present values as of
December 31, 2006 were calculated using assumptions consistent with those used for fiscal year 2006
disclosure under FAS 87, including a 6.25% discount rate (5% post-retirement discount rate for our
SERP).
There are no above-market or preferential non-qualified deferred compensation earnings to
disclose in this column. See note 3 to the Nonqualified Deferred Compensation Table below for a
description of the investment funds and earnings.
34
The Pension Benefits Table below includes the present value of accrued benefits under our
defined benefit pension plan and our SERP as of December 31, 2006. Each NEO is 100% vested in our
retirement plan.
Pension Benefits Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
|
|
of Years |
|
Present Value of |
|
|
|
|
|
|
Credited |
|
Accumulated |
|
Payments During |
Name |
|
Plan Name |
|
Service |
|
Benefit ($) |
|
Last Fiscal Year |
Jeffrey A. Ludrof |
|
Retirement |
|
|
26 |
|
|
|
222,646 |
|
|
|
0 |
|
|
|
SERP |
|
|
26 |
|
|
|
1,238,141 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan R. Van Gorder |
|
Retirement |
|
|
26 |
|
|
|
477,252 |
|
|
|
0 |
|
|
|
SERP |
|
|
26 |
|
|
|
1,314,623 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Philip A. Garcia |
|
Retirement |
|
|
26 |
|
|
|
285,539 |
|
|
|
0 |
|
|
|
SERP |
|
|
26 |
|
|
|
620,041 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas B. Morgan |
|
Retirement |
|
|
13 |
|
|
|
70,914 |
|
|
|
0 |
|
|
|
SERP |
|
|
13 |
|
|
|
138,289 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas F. Ziegler |
|
Retirement |
|
|
19 |
|
|
|
305,870 |
|
|
|
0 |
|
|
|
SERP |
|
|
19 |
|
|
|
468,541 |
|
|
|
0 |
|
The present value information presented in the Pension Benefits Table utilizes
assumptions consistent with those used for fiscal year 2006 disclosure under FAS 87, including a
6.25% discount rate (5% post-retirement discount rate for our SERP) and assumes a retirement at age
65 for our retirement plan and our SERP and no pre-retirement decrements.
Normal retirement age under both our retirement plan and our SERP is age 65 because that is
the earliest time that an executive could retire and commence benefit payments under the plans
without any benefit reduction due to age unless the executive is covered by an employment
agreement.
Under our retirement plan, the executives final average earnings are the average of his
highest 36 consecutive months of compensation during his final 120 months of employment. Under our
SERP, the executives final average earnings are the average of his highest 24 consecutive months
of compensation during his final 120 months of employment. For this purpose, compensation includes
base salary and a lump sum paid in lieu of a merit increase but excludes bonuses, deferred
compensation plan payments and severance pay under any severance benefit plan. An executives
compensation that exceeds Internal Revenue Service annual limits is excluded under our retirement
plan but included under our SERP.
Each executives credited service is generally defined as the executives years of
continuous employment with us as a covered employee, up to a maximum of 30 years. For purposes of
35
determining the number of years of credited service that will be used to calculate the amount
of the executives benefit, the executive, as well as all other employees, earns a full year of
credited service for a partial year of employment as a covered employee. The Pension Benefits
Table reflects the recognition of a full year of credited service for a partial year of employment
as of December 31, 2006.
Executive service in our SERP means employment with us as both a covered employee and a senior
vice president or higher-ranking executive.
Our retirement plans benefit formula at normal retirement age is 1.0% of the executives
final average earnings up to the social security covered compensation level plus 1.5% of the final
average earnings in excess of the social security covered compensation level with the resulting sum
multiplied by the executives years of credited service, up to a maximum of 30 years. The social
security covered compensation level is an amount published each year by the Social Security
Administration. Our retirement plans benefit is accrued in the normal form of a single life
annuity with optional actuarially equivalent forms of payment available.
The SERPs benefit formula at normal retirement age is equal to 60% of SERP final average
earnings, reduced proportionately for less than 30 years of credited service. This benefit is
accrued in the normal form of a 10-year certain and life annuity. The executives benefit that is
payable under our retirement plan is subtracted from our SERP benefit. For purposes of this
offset, such monthly benefits which are payable in a form other than a 10-year certain and life
thereafter annuity are converted to a monthly benefit which is the actuarial equivalent of a
10-year certain and life thereafter annuity. Optional actuarially equivalent forms of payment are
available under our SERP.
Each executive may become eligible for a SERP benefit only in the event that:
|
|
|
the executive is vested under our retirement plan; |
|
|
|
|
the executive is entitled to receive a benefit under our retirement plan |
|
|
|
|
prior to his termination of employment, the executive has become vested in our SERP
benefit according to the following schedule: |
|
|
|
|
|
|
|
Vested |
Years of Executive Service |
|
Percentage |
Less than 1 |
|
|
0 |
% |
1 but less than 2 |
|
|
20 |
|
2 but less than 3 |
|
|
40 |
|
3 but less than 4 |
|
|
60 |
|
4 but less than 5 |
|
|
80 |
|
5 or more |
|
|
100 |
|
36
|
|
|
the executives termination of employment with us is either: |
|
|
|
also a termination from executive service; or |
|
|
|
|
a termination occurring within 12 months after the executive transfers from,
or otherwise leaves, executive service. |
Executives in our retirement plan and our SERP are eligible for early retirement after
attaining age 55 and completing at least 15 full years of service as a covered employee. The
executives early retirement benefit under these plans is reduced by .25% for each complete
calendar month up to 60 months and .375% for each complete calendar month in excess of 60 months by
which the executives early retirement benefit commencement date precedes such executives normal
retirement date. Both Mr. Ziegler and Mr. Van Gorder have satisfied the plans eligibility
requirements for early retirement and Mr. Van Gorder retired as of December 31, 2006.
The NEOs listed in the Pension Benefits Table have entered into employment agreements with
us. See Agreements with Executive Officers below. In certain termination situations, the terms
of those employment agreements provide for the payment of SERP benefits that are unreduced for
early commencement after the participant has attained age 55 and completed at least 15 full years
of service as a covered employee. The effect of those provisions for each NEO is disclosed later
in the termination analysis tables.
See also note 8, Postretirement Benefit Plans in the notes to consolidated financial
statements included in our 2006 annual report that describes plan assumptions in more detail.
All Other Compensation
Supplemental Table for All Other Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life |
|
|
|
|
|
Supp |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
401(k) |
|
401(k) |
|
Tax |
|
Member- |
|
|
|
|
|
|
|
|
|
|
Dividends |
|
Premiums |
|
Match |
|
Match |
|
Gross- |
|
ship |
|
Other |
|
|
Name |
|
Year |
|
(1) |
|
(2) |
|
(3) |
|
(4) |
|
Ups (5) |
|
Dues (6) |
|
(7) |
|
Total |
(in dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey A. Ludrof |
|
|
2006 |
|
|
|
26,930 |
|
|
|
24,238 |
|
|
|
8,800 |
|
|
|
21,365 |
|
|
|
21,999 |
|
|
|
6,396 |
|
|
|
2,525 |
|
|
|
112,253 |
|
Jan R. Van Gorder |
|
|
2006 |
|
|
|
15,598 |
|
|
|
98,000 |
|
|
|
8,800 |
|
|
|
9,675 |
|
|
|
71,460 |
|
|
|
5,155 |
|
|
|
2,229 |
|
|
|
210,986 |
|
Philip A. Garcia |
|
|
2006 |
|
|
|
12,193 |
|
|
|
9,737 |
|
|
|
8,800 |
|
|
|
6,223 |
|
|
|
11,497 |
|
|
|
10,780 |
|
|
|
1,050 |
|
|
|
60,280 |
|
Thomas B. Morgan |
|
|
2006 |
|
|
|
5,711 |
|
|
|
5,500 |
|
|
|
8,800 |
|
|
|
5,338 |
|
|
|
6,464 |
|
|
|
1,705 |
|
|
|
2,130 |
|
|
|
35,648 |
|
Douglas F. Ziegler |
|
|
2006 |
|
|
|
7,826 |
|
|
|
0 |
|
|
|
8,800 |
|
|
|
3,588 |
|
|
|
816 |
|
|
|
3,900 |
|
|
|
1,938 |
|
|
|
26,868 |
|
|
|
|
(1) |
|
The Dividends column includes dividends paid on unvested shares under the Pre-2004 LTIP. |
37
|
|
|
(2) |
|
We have insurance bonus agreements that provide life insurance premiums for executive officers. |
|
(3) |
|
We have a tax-qualified 401(k) savings plan for our employees. See also note 8,
Postretirement Benefit Plans in the notes to consolidated financial statements in our 2006
annual report for additional information. |
|
(4) |
|
Included in the Supplemental 401(k) Match column are our contributions that cannot be
credited to the tax-qualified 401(k) plan because of compensation and contribution limits
imposed by the Code. See the Deferred Compensation for additional discussion. |
|
(5) |
|
We pay taxes on behalf of our executives for life insurance premiums, membership dues, spousal
travel and other minor perquisites. |
|
(6) |
|
We provide certain dining and/or country club membership dues to these executives. |
|
(7) |
|
The Other column includes the taxable value of group term life insurance, certain spousal
travel costs, service anniversary awards and a wellness incentive payment. |
Agreements with Executive Officers
In 2005, our compensation committee undertook a review of outstanding employment agreements
with our senior executive officers. With the assistance of a compensation consultant, the
employment agreements were revised for the following officers: Jeffrey A. Ludrof, our President
and Chief Executive Officer; Jan R. Van Gorder, Senior Executive Vice President, Secretary and
General Counsel until his retirement on December 31, 2006; Philip A. Garcia, Executive Vice
President and Chief Financial Officer; John J. Brinling, Jr., Executive Vice President of EFL until
his retirement on January 31, 2007; Douglas F. Ziegler, Senior Vice President, Treasurer and Chief
Investment Officer; Michael J. Krahe, Executive Vice President of Human Development and Leadership
and Thomas B. Morgan, Executive Vice President of Insurance Operations. The revised employment
agreements have the following principal terms:
|
|
|
The term of the employment agreement for Mr. Ludrof remained at four years, expiring
on December 11, 2009. For all other of the above officers, with the exception of
Messrs. Brinling and Van Gorder, both of whom have retired, the term of the employment
agreement was increased from two years to three years and will expire on December 11,
2008, unless the employment agreement is previously terminated in accordance with its
terms, with or without Cause (as defined in the agreement), or due to the disability or
death of the officer or notice of nonrenewal is given by us or the executive 30 days
before any anniversary date; |
|
|
|
|
A minimum annual base salary at least equal to the executives annual base salary at
the time the employment agreement was executed, subject to periodic review to reflect
the |
38
|
|
|
executives performance and responsibilities, competitive compensation levels and the
impact of inflation; |
|
|
|
|
The eligibility of the executive under our incentive compensation programs and
employee benefit plans; |
|
|
|
|
The establishment of the terms and conditions upon which the executives employment
may be terminated by us and the compensation of the executive in such circumstances.
The employment agreements provide generally, among other things, that if the employment
of an executive is terminated without cause by us or by the executive for good reason
(as defined in the agreement) then the executive shall be entitled to receive: (i) for
the chief executive officer an amount equal to the sum of three times the executives
highest annual base salary during the preceding three years, plus an amount equal to
the sum of the higher of the chief executive officers target amount, or actual bonus
paid under our AIP for the three calendar years preceding the date of the termination
of the employment divided by three; for the named Executive Vice Presidents, an amount
equal to the sum of 2.75 times the executives highest annual base salary during the
preceding three years, plus an amount equal to the sum of the higher of the executives
target amount or actual bonus paid under our AIP for the three calendar years preceding
the date of the termination of employment divided by three and for the Senior Vice
Presidents, 2.5 times the officers highest annual base salary during the preceding
three years, plus an amount equal to the sum of the higher of the officers target
amount, or actual bonus paid under our AIP for the three calendar years preceding the
date of the termination of employment divided by three; (ii) any award or other
compensation to which the executive is entitled under any LTIP; (iii) continuing
participation in any employee benefit plans for a period of three years following a
termination to the extent the executive and his or her dependents were eligible to
participate in such programs immediately prior to the executives termination; and (iv)
immediate vesting and nonforfeitability of accrued benefits under our SERP, including
an unreduced benefit for early retirement before age 65, and a gross-up for income
taxes on the annuity and/or lump sum payment of the retirement benefit. Under the
prior agreements, all of the NEOs received three times their highest based salary, and
three times the highest bonus amount paid in the three prior years to termination.
Based on the recommendation of our compensation consultant to our compensation
committee, the severance benefit multiple was reduced from 3.0 times to 2.75 times for
the Executive Vice Presidents and 2.5 times for the Senior Vice President. In
addition, the bonus component of the severance benefit was reduced from the highest
award in the prior three years to the average of the bonus amount in the prior three
years. Deferral options available under the previous employment agreements were
eliminated to conform to the requirements of the American Jobs Creation Act; |
|
|
|
|
A gross-up payment equal to the then current rate of tax under Section 4999 of the
Code multiplied by the total of the amounts paid or payable, including the gross-up
payment, |
39
|
|
|
which are deemed to be a part of an excess parachute payment as that term is
defined in Sections 4999 and 280G of the Code; |
|
|
|
|
Provisions relating to confidentiality and nondisclosure following an executives
termination; and |
|
|
|
|
An agreement by the executive not to compete with us for a period of one year
following his or her termination, unless such termination was effected by us without
Cause. |
Industry data from the survey undertaken by the compensation consultant confirmed the
reasonableness of the term periods as revised.
Additional Executive Compensation Policies
Nonqualified Deferred Compensation
We maintain a deferred compensation plan in which executives are eligible to participate.
This plan is an unfunded, non-qualified, deferred compensation arrangement created for a select
group of our management and highly compensated employees. Each of our NEOs participated in this
plan during 2006.
The deferred compensation plan is an arrangement whereby the participants can elect to defer
receipt of a portion of their compensation until a later date. Executives may elect to defer up to
100% of their annual salary and up to 100% of any cash award under our AIP. Those participating in
the plan select hypothetical investment funds for their deferrals and are credited with the
hypothetical returns generated.
Executives identify:
|
|
|
the percentage of annual salary and bonus to be deferred; |
|
|
|
|
the investment designation; |
|
|
|
|
the method by which the amounts credited to the executives deferred compensation
account are to be paid; |
|
|
|
|
the date on which payment of the amounts credited to the executives deferred
compensation account is to occur (in the event of a lump sum distribution) or commence
(in the event of a form of distribution other than a lump sum); and |
|
|
|
|
the beneficiary designated to receive payment of the amounts credited to the
deferred compensation account in the event the executive dies before distribution of
the amounts credited to the deferred compensation accounts is completed. |
40
The following table summarizes NEO contributions, our contributions, credited earnings,
withdrawals and the aggregate balance as of December 31, 2006.
Nonqualified Deferred Compensation Table for 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive |
|
|
Registrant |
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
|
Contributions |
|
|
Contributions |
|
|
Aggregate |
|
|
Aggregate |
|
|
Balance at |
|
|
|
in 2006 |
|
|
in 2006 |
|
|
Earnings |
|
|
Withdrawals/ |
|
|
December 31, |
|
Name |
|
(1) |
|
|
(2) |
|
|
in 2006 |
|
|
Distributions |
|
|
2006 |
|
|
|
(in dollars) |
|
|
|
|
|
|
|
Jeffrey A. Ludrof |
|
|
98,120 |
|
|
|
21,365 |
|
|
|
61,561 |
|
|
|
0 |
|
|
|
808,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan R. Van Gorder |
|
|
8,093 |
|
|
|
9,675 |
|
|
|
85,366 |
|
|
|
0 |
|
|
|
1,291,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Philip A. Garcia |
|
|
3,779 |
|
|
|
6,223 |
|
|
|
62,020 |
|
|
|
0 |
|
|
|
523,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas B. Morgan |
|
|
49,112 |
|
|
|
5,338 |
|
|
|
10,787 |
|
|
|
0 |
|
|
|
128,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas F. Ziegler |
|
|
6,679 |
|
|
|
3,588 |
|
|
|
37,776 |
|
|
|
0 |
|
|
|
339,089 |
|
|
|
|
(1) |
|
Executive contributions include amounts deferred as supplemental
employee contributions that could not be deferred under our
tax-qualified 401(k) plan, as well as bonus amounts from the AIP that
were deferred. These amounts are disclosed in the Summary
Compensation Table in the Salary and Non-Equity Incentive Plan
Compensation columns, respectively. |
|
(2) |
|
Our contributions are comprised of our match on supplemental employee
contributions. These amounts are disclosed in the Summary
Compensation Table in the All Other Compensation column. |
With the exception of the T. Rowe Price Science and Technology Fund, the plans hypothetical
investment funds mirror investment options that are offered to the executives in our tax-qualified
401(k) plan. As in our 401(k) plan, executives participating in our deferred compensation plan may
exchange investment funds daily. The return credited to their deferred compensation plan accounts
is determined by the investment results of the hypothetical investment funds selected.
Stock Ownership Guidelines
In December 2005, our board of directors approved an executive stock ownership program that
provides guidelines for ownership of our Class A common stock for each executive. The program is
designed to further align the interests of executive management with those of our shareholders and
drive longer-term performance and profitability. Executive officers are required to reach
prescribed stock ownership levels within three years from the programs commencement date of
January 1, 2006.
This program utilizes a fixed base-salary component and a fixed share price component. The
average share price was fixed at December 31, 2005. These two component values and required level
of stock ownership do not change during the three-year period. The ownership guidelines require
the
41
chief executive officer to maintain ownership of Class A common stock in an amount equivalent
in value to 3.0 times his base salary. All other executive officers are required to maintain
ownership of Class A common stock in an amount equal to 1.5 times their respective salaries. Base
salary of each covered executive in effect at January 1, 2006 is used in determining satisfaction
of this guideline. Shares owned outright and deferred and performance-based deferred shares
(earned but not yet paid) count toward the ownership guideline. Restricted stock and shares held
in tax-qualified retirement plans count toward satisfying the guidelines, as well as stock
beneficially owned through a spouse or dependent children.
The table below sets forth the ownership guidelines for each NEO, except Jan R. Van Gorder who
retired as an executive officer effective December 31, 2006, and the number of shares owned as of
February 16, 2007.
|
|
|
|
|
|
|
|
|
Named Executive Officer |
|
Target Number of Shares |
|
Actual Shares Owned(1) |
Jeffrey A. Ludrof |
|
|
40,651 |
|
|
|
25,471 |
|
|
|
|
|
|
|
|
|
|
Philip A. Garcia |
|
|
10,122 |
|
|
|
38,553 |
|
|
|
|
|
|
|
|
|
|
Thomas B. Morgan |
|
|
9,240 |
|
|
|
2,688 |
|
|
|
|
|
|
|
|
|
|
Douglas F. Ziegler(2) |
|
|
n/a |
|
|
|
n/a |
|
|
|
|
(1) |
|
This amount includes stock beneficially owned by the executives spouse or
dependent children, as specified in our executive stock ownership program
guidelines. |
|
(2) |
|
Mr. Ziegler is not required to participate in our executive stock ownership program. |
Our compensation committee reviews and monitors each covered executives progress toward, and
continued compliance with, the approved guidelines once each year. Our compensation committee will
review market best practices regarding executive stock ownership guidelines at least every three
years.
Tax Implications of Executive Compensation
Section 162(m) of the Code, places a limit of $1.0 million on the amount of compensation that
we may deduct in any one year with respect to each of our five most highly paid executive officers.
There is an exception to the $1.0 million limitation for performance-based compensation meeting
certain requirements. AIP and LTIP awards are performance based and therefore excluded from the
$1.0 million limit on deductible compensation. All of our incentive awards and individual
incentive awards are subject to federal income, FICA and other tax withholdings as required by
applicable law.
We believe all compensation paid in 2006 to our NEOs is tax-deductible under Section 162(m)
of the Code. While our compensation committee intends to continue to provide compensation
opportunities to our executives in as tax-efficient a manner as possible, it recognizes that from
time to time it may be in the best interests of shareholders to provide non-tax deductible
compensation.
42
Grants of Plan-Based Awards Table for 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All |
|
All Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
Option |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
Awards: |
|
|
|
|
|
Grant |
|
|
|
|
|
|
|
|
Estimated Future Payouts |
|
Estimated Future Payouts |
|
Awards: |
|
Number |
|
|
|
|
|
Date Fair |
|
|
|
|
|
|
|
|
Under Non-Equity Incentive |
|
Under Equity Incentive |
|
Number |
|
of |
|
Exercise |
|
Value |
|
|
|
|
|
|
|
|
Plan Awards(1) |
|
Plan Awards(2) |
|
of |
|
Securities |
|
or Base |
|
of Stock |
|
|
|
|
|
|
|
|
Thresh- |
|
|
|
|
|
Maxi- |
|
Thresh- |
|
|
|
|
|
Maxi- |
|
Shares |
|
Under- |
|
Price of |
|
and |
|
|
Perfor- |
|
Grant |
|
hold |
|
Target |
|
mum |
|
hold |
|
Target |
|
mum |
|
of Stock |
|
lying |
|
Option |
|
Option |
Name |
|
mance |
|
Date |
|
($) |
|
($) |
|
($) |
|
($) |
|
($) |
|
($) |
|
or Units |
|
Options |
|
Awards |
|
Awards(3) |
Jeffrey A. Ludrof |
|
2006 |
|
|
2/15/06 |
|
|
|
0 |
|
|
|
571,701 |
|
|
|
1,143,400 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
2006-2008 |
|
|
1/1/06 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
0 |
|
|
|
14,386 |
|
|
|
35,965 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
765,335 |
|
Jan R. Van Gorder |
|
2006 |
|
|
2/15/06 |
|
|
|
0 |
|
|
|
232,209 |
|
|
|
464,418 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
2006-2008 |
|
|
1/1/06 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
0 |
|
|
|
5,697 |
|
|
|
14,243 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
303,080 |
|
Philip A. Garcia |
|
2006 |
|
|
2/15/06 |
|
|
|
0 |
|
|
|
189,809 |
|
|
|
379,618 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
2006-2008 |
|
|
1/1/06 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
0 |
|
|
|
5,015 |
|
|
|
12,538 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
266,798 |
|
Thomas B. Morgan |
|
2006 |
|
|
2/15/06 |
|
|
|
0 |
|
|
|
233,741 |
|
|
|
467,482 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
2006-2008 |
|
|
1/1/06 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
|
|
|
|
5,429 |
|
|
|
13,573 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
288,823 |
|
Douglas F. Ziegler |
|
2006 |
|
|
2/15/06 |
|
|
|
0 |
|
|
|
154,846 |
|
|
|
309,692 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
2006-2008 |
|
|
1/1/06 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
|
|
|
|
4,092 |
|
|
|
10,230 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
217,694 |
|
|
|
|
(1) |
|
Amounts awarded under the AIP are disclosed in the Estimated Future
Payouts Under Non-Equity Incentive Plan Awards columns. The maximum
payout is 200% of the target award. See also the AIP discussion
following the Summary Compensation Table and Note 9, Incentive Plans
and Deferred Compensation in the notes to consolidated financial
statements included in our 2006 annual report. |
|
(2) |
|
Under the Post-2004 LTIP, our compensation committee grants
performance-restricted shares to participants. These shares are
disclosed in the Estimated Future Payouts Under Equity Incentive Plan
Awards columns. The maximum payout is 250% of the target award. |
|
(3) |
|
The grant date fair value of the award was calculated as the target
equity incentive plan award multiplied by the December 31, 2005
closing share price of $53.20. Financial markets were closed on date
of the grant, January 1, 2006. Our compensation committee approved
the Post-2004 LTIP design on December 5, 2005 but the target shares
were not ascertainable until December 31, 2005 because the calculation
involves the average share price for December 2005. |
An executives target award is established by our compensation committee. The target number
of performance shares for each executive is based on a competitive total direct compensation target
opportunity and an agreed-upon target pay mix. The target number of LTIP shares for a performance
period is determined by dividing the dollar target by the average share price for the month of
December that precedes the beginning of the performance period. When our compensation committee
43
approves target awards, it also approves the performance measures, performance goals and the
calibration of shares earned at different performance levels above and below the performance goals.
Under the Post-2004 LTIP, the actual number and value of the restricted shares of Class A
common stock paid to an executive at the end of a performance period may be more or less than the
executives target. However, the number of shares of Class A common stock issued to an executive
for restricted performance shares may not exceed 250,000 shares at the end of a performance period.
See also Note 9, Incentive Plans and Deferred Compensation in the notes to consolidated
financial statements contained in our 2006 annual report.
Outstanding Equity Awards at December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Incentive |
|
|
|
|
|
|
|
|
|
|
Equity Incentive |
|
Plan Awards: |
|
|
|
|
|
|
|
|
|
|
Plan Awards: |
|
Market or |
|
|
Number of |
|
Market Value |
|
Number of |
|
Payout Value of |
|
|
Shares or |
|
of Shares or |
|
Unearned Shares, |
|
Unearned Shares, |
|
|
Units of Stock |
|
Units of Stock |
|
Units or Other |
|
Units or Other |
|
|
That Have |
|
That Have |
|
Rights That Have |
|
Rights That Have |
|
|
Not Vested |
|
Not Vested |
|
Not Vested |
|
Not Vested |
Name |
|
(#) |
|
($) |
|
(#) |
|
($) |
Jeffrey A. Ludrof |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002-2004 |
|
|
3,963 |
|
|
|
229,775 |
|
|
|
n/a |
|
|
|
n/a |
|
2003-2005 |
|
|
7,186 |
|
|
|
416,644 |
|
|
|
n/a |
|
|
|
n/a |
|
2004-2006 |
|
|
n/a |
|
|
|
n/a |
|
|
|
39,815 |
|
|
|
2,308,474 |
|
2005-2007 |
|
|
n/a |
|
|
|
n/a |
|
|
|
13,830 |
|
|
|
801,863 |
|
2006-2008 |
|
|
n/a |
|
|
|
n/a |
|
|
|
14,386 |
|
|
|
834,100 |
|
Jan R. Van Gorder |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002-2004 |
|
|
1,651 |
|
|
|
95,725 |
|
|
|
n/a |
|
|
|
n/a |
|
2003-2005 |
|
|
2,942 |
|
|
|
170,577 |
|
|
|
n/a |
|
|
|
n/a |
|
2004-2006 |
|
|
n/a |
|
|
|
n/a |
|
|
|
17,330 |
|
|
|
1,004,793 |
|
2005-2007 |
|
|
n/a |
|
|
|
n/a |
|
|
|
5,637 |
|
|
|
326,833 |
|
2006-2008 |
|
|
n/a |
|
|
|
n/a |
|
|
|
5,697 |
|
|
|
330,312 |
|
Philip A. Garcia |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002-2004 |
|
|
1,307 |
|
|
|
75,780 |
|
|
|
n/a |
|
|
|
n/a |
|
2003-2005 |
|
|
2,370 |
|
|
|
137,413 |
|
|
|
n/a |
|
|
|
n/a |
|
2004-2006 |
|
|
n/a |
|
|
|
n/a |
|
|
|
13,375 |
|
|
|
775,483 |
|
2005-2007 |
|
|
n/a |
|
|
|
n/a |
|
|
|
4,821 |
|
|
|
279,522 |
|
2006-2008 |
|
|
n/a |
|
|
|
n/a |
|
|
|
5,015 |
|
|
|
290,770 |
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Incentive |
|
|
|
|
|
|
|
|
|
|
Equity Incentive |
|
Plan Awards: |
|
|
|
|
|
|
|
|
|
|
Plan Awards: |
|
Market or |
|
|
Number of |
|
Market Value |
|
Number of |
|
Payout Value of |
|
|
Shares or |
|
of Shares or |
|
Unearned Shares, |
|
Unearned Shares, |
|
|
Units of Stock |
|
Units of Stock |
|
Units or Other |
|
Units or Other |
|
|
That Have |
|
That Have |
|
Rights That Have |
|
Rights That Have |
|
|
Not Vested |
|
Not Vested |
|
Not Vested |
|
Not Vested |
Name |
|
(#) |
|
($) |
|
(#) |
|
($) |
Thomas B. Morgan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002-2004 |
|
|
420 |
|
|
|
24,352 |
|
|
|
n/a |
|
|
|
n/a |
|
2003-2005 |
|
|
1,646 |
|
|
|
95,435 |
|
|
|
n/a |
|
|
|
n/a |
|
2004-2006 |
|
|
n/a |
|
|
|
n/a |
|
|
|
11,158 |
|
|
|
646,912 |
|
2005-2007 |
|
|
n/a |
|
|
|
n/a |
|
|
|
4,401 |
|
|
|
255,170 |
|
2006-2008 |
|
|
n/a |
|
|
|
n/a |
|
|
|
5,429 |
|
|
|
314,773 |
|
Douglas F. Ziegler |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002-2004 |
|
|
884 |
|
|
|
51,254 |
|
|
|
n/a |
|
|
|
n/a |
|
2003-2005 |
|
|
1,573 |
|
|
|
91,203 |
|
|
|
n/a |
|
|
|
n/a |
|
2004-2006 |
|
|
n/a |
|
|
|
n/a |
|
|
|
11,015 |
|
|
|
638,650 |
|
2005-2007 |
|
|
n/a |
|
|
|
n/a |
|
|
|
3,653 |
|
|
|
211,801 |
|
2006-2008 |
|
|
n/a |
|
|
|
n/a |
|
|
|
4,092 |
|
|
|
237,254 |
|
All shares in the above table were valued using the closing share price of $57.98 at December
31, 2006.
Under the Pre-2004 LTIP, the three-year performance period is followed by a three-year vesting
period. The shares related to the 2002-2004 performance period will vest at December 31, 2007.
One- half of the shares related to the 2003-2005 performance period under the Pre-2004 LTIP will
vest on each of December 31, 2007 and 2008. Mr. Ludrofs shares include 790 and 855 excess shares
granted outside the Pre-2004 LTIP, related to the 2002-2004 and 2003-2005 performance periods,
respectively.
Under the Post-2004 LTIP, any shares earned vest as of December 31 in the last year of the
performance period. T he awards disclosed for the performance period 2004-2006 presented in the
table above reflect the maximum number of shares available under the Plan, which is 250% of the
target award. The favorable result of this performance period was due in part to significant
weather events that did not impact us due to the regional nature of our business, but did adversely
affect our peer groups combined ratio. Therefore, the actual number of shares expected to be
awarded for this performance period is estimated to be close to the maximum amount. However, we
valued the 2005-2007 and 2006-2008 performance periods at the target level in the table above
because our performance for these periods is likely to approximate industry as a whole. Thus, as
of December 31, 2006, target amounts would best reflect the possible awards earned for each NEO for
the three-year period included in those performance periods.
45
The 2004-2006 performance period is closed and participants have vested in those shares.
However, distribution of the shares will not occur until the spring of 2007 since computations
require peer group data for the year ended December 31, 2006, which is not yet available.
Accordingly, the amounts are reported in this table rather than the Option Exercises and Stock
Vested in Fiscal Year 2006 table that follows.
Option Exercises and Stock Vested in Fiscal Year 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards |
|
Stock Awards |
|
|
Number of |
|
|
|
|
|
Number of |
|
|
|
|
Shares Acquired |
|
Value Realized |
|
Shares Acquired |
|
Value Realized |
|
|
on Exercise |
|
Upon Exercise |
|
Upon Vesting |
|
Upon Vesting |
Name |
|
(#) |
|
($) |
|
(#) |
|
($) |
Jeffrey A. Ludrof |
|
|
n/a |
|
|
|
n/a |
|
|
|
8,910 |
|
|
|
495,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan R. Van Gorder |
|
|
n/a |
|
|
|
n/a |
|
|
|
4,878 |
|
|
|
271,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Philip A. Garcia |
|
|
n/a |
|
|
|
n/a |
|
|
|
3,772 |
|
|
|
209,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas B. Morgan |
|
|
n/a |
|
|
|
n/a |
|
|
|
1,685 |
|
|
|
93,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas F. Ziegler |
|
|
n/a |
|
|
|
n/a |
|
|
|
2,376 |
|
|
|
132,046 |
|
The number of shares acquired upon vesting relates to the Pre-2004 LTIP performance
periods of 2001-2003, 2002-2004 and 2003-2005. The shares were valued using a $55.575 share price,
which was the average of the high and low stock price on January 17, 2007, the date of transfer of
ownership. Mr. Ludrofs vested shares include 1,216 excess shares, valued at $67,579, in addition
to the shares that vested under the Pre-2004 LTIP. We do not offer option awards to our
executives.
Director Compensation
The following table sets forth the compensation earned by our directors for services rendered
in that capacity during 2006. Mr. Ludrof does not receive compensation for serving on our board of
directors as that is considered as part of his duties as our chief executive officer.
46
Director Compensation Table for 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
Change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
Pension |
|
|
|
|
|
|
Fees |
|
|
|
|
|
|
|
|
|
Incentive |
|
Value |
|
|
|
|
|
|
Earned |
|
|
|
|
|
|
|
|
|
Plan |
|
and |
|
All Other |
|
|
|
|
or Paid |
|
Stock |
|
Option |
|
Compen- |
|
NQDC |
|
Compen- |
|
|
|
|
in Cash |
|
Awards |
|
Awards |
|
sation |
|
Earnings |
|
sation |
|
Total |
Name |
|
($)(1) |
|
($)(2) |
|
($) |
|
($) |
|
($)(3) |
|
($)(4) |
|
($) |
Kaj Ahlmann |
|
|
105,000 |
|
|
|
47,839 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
0 |
|
|
|
0 |
|
|
|
152,839 |
|
John T. Baily |
|
|
93,500 |
|
|
|
47,839 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
0 |
|
|
|
0 |
|
|
|
141,339 |
|
J. Ralph Borneman, Jr. |
|
|
69,500 |
|
|
|
50,804 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
696 |
|
|
|
0 |
|
|
|
121,000 |
|
Wilson C. Cooney (5) |
|
|
35,250 |
|
|
|
0 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
0 |
|
|
|
100,556 |
|
|
|
135,806 |
|
Patricia
Garrison-Corbin |
|
|
82,500 |
|
|
|
50,804 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
0 |
|
|
|
0 |
|
|
|
133,304 |
|
John R. Graham* |
|
|
117,000 |
|
|
|
47,839 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
0 |
|
|
|
0 |
|
|
|
164,839 |
|
Jonathan Hirt Hagen |
|
|
76,000 |
|
|
|
41,661 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
0 |
|
|
|
0 |
|
|
|
117,661 |
|
Susan Hirt Hagen |
|
|
54,000 |
|
|
|
50,804 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
0 |
|
|
|
22,697 |
|
|
|
127,501 |
|
C. Scott Hartz |
|
|
82,500 |
|
|
|
47,839 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
0 |
|
|
|
0 |
|
|
|
130,339 |
|
F. William Hirt |
|
|
53,500 |
|
|
|
50,804 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
0 |
|
|
|
114,347 |
|
|
|
218,651 |
|
Claude C. Lilly, III |
|
|
76,000 |
|
|
|
50,804 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
0 |
|
|
|
0 |
|
|
|
126,804 |
|
Jeffrey A. Ludrof |
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Lucian L. Morrison (5) |
|
|
51,750 |
|
|
|
20,068 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
0 |
|
|
|
0 |
|
|
|
71,818 |
|
Thomas W. Palmer (5) |
|
|
50,250 |
|
|
|
20,068 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
0 |
|
|
|
0 |
|
|
|
70,318 |
|
Robert C. Wilburn |
|
|
73,500 |
|
|
|
50,804 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
0 |
|
|
|
0 |
|
|
|
124,304 |
|
|
|
|
* |
|
Mr. Graham served as Presiding Director in 2006 |
|
(1) |
|
Further details on directors compensation follows in the 2006 Director Compensation section. |
|
(2) |
|
Amounts reported in this column represent the change in accrual during 2006 in the directors
vested deferred stock account under the outside directors deferred compensation plan. This
amount reflects changes in share price from 2005 to 2006 for vested share credits, the vesting
of share credits during the year and dividend equivalent credits added to the account when
dividends are paid on shares of our Class A common stock. See 2006 Director Compensation
for a more detailed explanation of the deferred stock account. |
47
|
|
|
(3) |
|
This amount represents the increase in present value from December 31, 2005 to December 31,
2006 for Mr. Borneman, the only outside director who is a participant in a frozen pension plan
for outside directors. The present values were calculated using an annual benefit of $15,000
and discount rates of 5.75% and 6.25% at December 31, 2005 and 2006, respectively. No
pre-retirement decrements are assumed prior to the beginning of the receipt of his benefit at
age 75 (payable for 21 quarters). All other assumptions are the same as used for the FAS 87
valuations. |
|
(4) |
|
Mrs. Hagen and Mr. Hirt received $22,697 and $114,347, respectively, as indemnification for
early repayments on split-dollar life insurance policies. See Related Person Transactions
for further details. Mr. Cooney resigned from our board of directors in April 2006. The
amount reported herein represents the value in his vested deferred stock account that was paid
to him on May 12, 2006. |
|
(5) |
|
Mr. Morrison and Mr. Palmer joined our board of directors in April 2006. Mr. Cooney left our
Board at the same time. As a result, fees earned by them contain only partial year values. |
2006 Director Compensation
The annual retainer in 2006 for our directors for services to all member companies of the Erie
Insurance Group, including us, is $25,000, plus $1,500 for each board of directors or committee
meeting attended. Committee chairpersons each receive an additional $5,000, except for our audit
committee chairperson who receives $8,500 and the presiding director who receives $20,000.
Directors are paid retainers quarterly and all directors are reimbursed for their expenses incurred
for attending meetings.
The discussions herein reflect directors compensation earned in 2006 for services rendered in
all capacities to us, EFL, the Exchange and their subsidiaries and affiliates. Compensation is
allocated among us, the Exchange, EFL and their subsidiaries according to estimated proportion of
the directors time dedicated to the affairs of various entities. Our share of total compensation
expense in 2006 was 60%. Our officers who serve as directors are not compensated for attendance at
meetings of our board of directors and its committees. See also Related Person Transactions. A
director may elect prior to the end of a calendar year to defer receipt of up to 100% of the
directors compensation for the following year, including retainers, meeting fees and chairperson
and presiding director fees. A deferred compensation account is maintained for each outside
director who elects to defer director compensation. A director who defers compensation may select
hypothetical investment options for amounts in the directors deferred compensation account and
such account is credited with hypothetical interest, based on the investment results of the
hypothetical investment options selected. The hypothetical investment funds mirror investment
options that are offered to participants in our tax-qualified 401(k) plan. As in our 401(k) plan,
participants in the outside directors deferred compensation plan may exchange investment funds
daily. The return credited to a participants deferred compensation plan account is determined by
the investment results of the hypothetical investment funds selected by the participant.
48
We also maintain a deferred stock account in the deferred compensation plan for our outside
directors. The purpose of this plan is to further align the interests of outside directors with
shareholders by providing for a portion of annual compensation for directors services in shares of
our Class A common stock. A deferred stock account is maintained for each outside director under
the plan. The account is credited annually with a grant of shares of Class A common stock
determined by dividing $35,000 by the closing price of the Class A common stock on the first
business day after our annual meeting of shareholders. Each director vests in the grant 25% every
three full calendar months over the course of a year, with the final 25% vesting on the day before
the date of the next annual meeting if the next annual meeting is held before the final three full
calendar months have elapsed. Dividends paid by us are reinvested into each directors account
with additional shares of our Class A common stock and such credited shares vest immediately. We
account for the fair value of our grants under the plan in accordance with FAS 148, Accounting for
StockBased Compensation. The annual charge related to this plan to us and our affiliates totaled
approximately $460,945 for 2006; our share of this charge for 2006 was approximately $276,567.
The benefit provided under the pension plan for outside directors equals the annual retainer
fee at the date of retirement. The outside directors plan has been frozen since 1997.
Director Stock Ownership Guidelines
We maintain certain minimum requirements for stock ownership by each of our directors. On
April 19, 2005, our board of directors increased this minimum ownership requirement from $25,000 to
$35,000 of our stock on a cost basis. This guideline requires each director to personally purchase
stock equal to a cost basis of $35,000. Amounts owned by a director at the time this guideline was
adopted count towards the $35,000 requirement.
There is a two-year period from which a director becomes a member of our board of directors to
when they would be required to meet this guideline. As such, because Mr. Morrison and Mr. Palmer
became directors in 2006, they are still within this two-year window of meeting this requirement.
The following table shows the cost of shares purchased by each director as of December 31,
2006. See also Beneficial Ownership of Common Stock for additional information on shares owned
by each director.
|
|
|
|
|
|
|
Cost of Shares |
Name |
|
Purchased ($) |
Kaj Ahlmann |
|
|
25,776 |
|
|
|
|
|
|
John T. Baily |
|
|
92,341 |
|
|
|
|
|
|
J. Ralph Borneman, Jr. |
|
|
* |
|
|
|
|
|
|
Patricia Garrison-Corbin |
|
|
31,584 |
|
|
|
|
|
|
John R. Graham |
|
|
65,964 |
|
|
|
|
|
|
Jonathan Hirt Hagen |
|
|
* |
|
49
|
|
|
|
|
|
|
Cost of Shares |
Name |
|
Purchased ($) |
Susan Hirt Hagen |
|
|
* |
|
|
|
|
|
|
C. Scott Hartz |
|
|
81,238 |
|
|
|
|
|
|
F. William Hirt |
|
|
* |
|
|
|
|
|
|
Claude C. Lilly, III |
|
|
32,281 |
|
|
|
|
|
|
Lucian L. Morrison |
|
|
0 |
|
Thomas W. Palmer |
|
|
0 |
|
|
|
|
|
|
Robert C. Wilburn |
|
|
63,844 |
|
|
* Prior to adoption of the director stock ownership guidelines, these persons owned shares with a
cost basis significantly in excess of the required amount. See Beneficial Ownership of Common
Stock for additional information on shares owned by these directors. |
Compensation Committee Interlocks and Insider Participation
Our compensation committee presently consists of Robert C. Wilburn, Chair, Kaj Ahlmann, John
R. Graham, Jonathan Hirt Hagen and Lucian L. Morrison. No member of our compensation committee is
a former or current officer or employee, the Exchange, EFL or any of their respective subsidiaries
or affiliates. All of the directors that serve on our compensation committee are independent
directors as defined in the NASDAQ rules and the Holding Companies Act. Furthermore, none of our
executive officers serves as a member of a compensation committee of another entity, one of whose
executive officers serves on our compensation committee, or as a director, nor does any of our
executive officers serve as a director of another entity, one of whose executive officers serves on
our compensation committee.
REPORT OF OUR EXECUTIVE COMPENSATION AND DEVELOPMENT COMMITTEE
The following report of our compensation committee does not constitute soliciting material and
shall not be deemed filed or incorporated by reference into any filing by us under the Securities
Act of 1933, or the 1933 Act, or the Exchange Act, except to the extent that we specifically
incorporate this report of our compensation committee.
As part of its oversight of the compensation of our named executive officers, our executive
compensation and development committee:
|
|
|
reviewed the comparative compensation analysis prepared by our independent
compensation consultants and its peer group compensation information we prepared; |
|
|
|
|
met with representatives of our independent compensation consultants; and |
50
|
|
|
discussed with our chief executive officer the performance and compensation of our
named executive officers other than our chief executive officer. |
Based upon the above-described reviews and analysis, the members of our executive compensation
and development committee recommended to our board of directors that our board of directors approve
the inclusion of the compensation disclosure and analysis set forth in this proxy statement under
the caption Compensation Discussion and Analysis for filing with the SEC and the incorporation by
reference of such compensation disclosure and analysis in our annual report on Form 10-K for the
year ended December 31, 2006 for filing with the SEC.
Erie Indemnity Company Executive Compensation and Development Committee:
Robert C. Wilburn, Chair
Kaj Ahlmann
John R. Graham
Jonathan Hirt Hagen
Lucian L. Morrison
February 20, 2007
RELATED PERSON TRANSACTIONS
Recognizing that related person transactions present a heightened risk of conflicts of
interest, or create the appearance of conflicts of interest, on February 22, 2007 our board of
directors adopted a policy recommended by our nominating committee in connection with all related
person transactions involving us and a related person. This policy requires that, within the first
60 days of each fiscal year, all related person transactions from the prior fiscal year be reviewed
by our nominating committee and either approved or disapproved for the current fiscal year. The
policy also requires that any other related person transaction proposed by management, or any
change to a previously approved related person transaction, be presented to our nominating
committee for approval or disapproval. A copy of the policy, as adopted by our board of directors
may be viewed on our website at http://www.erieinsurance.com.
J. Ralph Borneman, Jr., one of our directors, is an officer and principal shareholder of an
insurance agency that receives insurance commissions in the ordinary course of business from the
insurance companies we manage in accordance with their standard commission schedules and agents
contracts. Payments made to the Borneman insurance agency for commissions written on insurance
policies from the Property and Casualty Group and EFL totaled $4,187,296 in 2006.
Pursuant to previously approved compensation arrangements for executive officers, we
maintained split-dollar life insurance arrangements for the following of our former chief executive
officers: Mr. Hirt, the chairman of our board of directors, and Thomas B. Hagen, the husband of
Mrs. Hagen, one of our directors and the father of Jonathan Hirt Hagen, one of our directors. In
2003, we negotiated the termination of these split-dollar arrangements.
51
For all split-dollar insurance policies for which Thomas B. Hagen and Susan Hirt Hagen are the
insureds, the policy owner in each case is an irrevocable trust created by the insured. With
respect to the single life split-dollar insurance policies purchased in 1988 with Thomas B. Hagen
or Susan Hirt Hagen as the insured, the policy owner entered into an agreement to reimburse us on
December 31, 2003 for insurance premiums we previously advanced totaling $258,008. Under the
split-dollar agreement, this reimbursement was not due until the death of the insured for each
policy. The owner of the policies borrowed against the policies to make this repayment. Beginning
in 2004, we agreed to provide annually to the policy owners, as indemnification for the early
repayment, an amount equal to the interest on the policy loans, grossed-up for income taxes. The
amount of this payment for 2006 was $45,415.
With respect to the single life split-dollar insurance policy purchased in 1988 with Mr. Hirt
as the insured, the policy owner entered into an agreement to reimburse us on December 31, 2003 for
insurance premiums we previously advanced totaling $256,662. Under the split-dollar agreement,
this reimbursement was not due until the death of the insured. The owner of the policy borrowed
against the policy to make this repayment. Beginning in 2004, we agreed to provide annually to the
insured, as indemnification for the early repayment, an amount equal to the interest on the policy
loan, grossed-up for income taxes. These payments totaled $43,372 and $43,105 in 2007 and 2006,
respectively. With respect to the second to die split-dollar life insurance policy purchased in
1990 with Mr. Hirt and his wife as the insureds, the policy owner entered into an agreement to
reimburse us on December 31, 2003 for insurance premiums we previously advanced totaling $914,304.
Under the split-dollar agreement, this reimbursement was not due until the deaths of the respective
insureds. The owner of the policy borrowed against the policy to make this repayment. Beginning
in 2004, we agreed to provide annually to the insureds, as indemnification for the early repayment,
an amount equal to the average value of the economic benefit to the insureds for the next five
years. This value was derived from the P.S. 58 rates provided by the Internal Revenue Service to
measure the taxable economic benefit received by employees from the pure insurance protection
provided by split-dollar plans and qualified retirement plans. These payments totaled $71,683 and
$71,242 in 2007 and 2006, respectively.
PROPOSAL 2 APPROVAL OF AN AMENDMENT TO OUR ARTICLES OF INCORPORATION
TO PERMIT HOLDERS OF OUR CLASS B COMMON STOCK TO ACT BY MAJORITY WRITTEN
CONSENT
General. At our annual meeting, we are asking the holders of our Class B common stock to
adopt an amendment to our articles of incorporation to permit the holders of our Class B common
stock to act by majority consent. We are proposing this amendment in connection with an amendment
to our bylaws approved by our board of directors in December 2006 that permits action to be taken
by written consent of the holders of a majority of the outstanding shares of our Class B common
stock.
This amendment, if approved by the holders of our Class B common stock, would become effective
upon our filing an amendment to our articles of incorporation with the Pennsylvania Department of
State, which we anticipate filing as soon as reasonably practicable after our annual meeting.
Pursuant to the amendment, Article 7 of our articles of incorporation would be amended to add a new
subsection (h), the full text of which reads as follows:
52
(h) Any action required or permitted to be taken at a meeting of the
holders of Class B Common Stock may be taken without a meeting if a
consent or consents thereto signed by the holders of a majority of the
holders of Class B Common Stock then outstanding shall be filed in
writing with the Secretary of the Corporation.
Required Vote. Under the BCL, the affirmative vote of the holders of a majority of the
outstanding shares of Class B common stock is required for approval of the amendment to our
articles of incorporation.
Authorization for Shareholder Action by Partial Written Consent. Prior to the December 2006
amendment, other than acting at a shareholders meeting, our bylaws only permitted the holders of
our Class B common stock to act by unanimous written consent. Our board of directors believes the
authorization for shareholder action by less than unanimous written consent would provide us with
the flexibility to act in the future, if the necessity arises, without the delay and expense
associated with calling a special meeting of shareholders. Delays in calling a meeting and
distributing meeting materials, including notice of a meeting, might deny us the flexibility that
our board of directors views as important in facilitating our operations. Our board of directors
believes that the small number of holders of record of our Class B common stock and the ownership
by the H.O. Hirt Trusts of approximately 91% of our Class B common stock enhance the utility of
this provision. Under state law, we are required to provide all non-consenting holders of our
Class B common stock with prompt notice of any action taken by written consent of a majority of the
holders of our Class B common stock. We also will be required to disclose the action in a report
that we file with the SEC.
The proposed amendment to our articles of incorporation, together with the prior bylaw
amendment, would permit the holders of a majority of the shares of our Class B common stock then
outstanding to act without a meeting. Thus, the holders of a majority of the shares of our Class B
common stock then outstanding, acting by written consent and without prior notification to the
holders of our Class A common stock and the other holders of our Class B common stock, could bind
us to any matter to the same extent to which a vote of the holders of a majority of our outstanding
Class B common stock could bind us at a shareholders meeting. This authority would include
amendments to our bylaws and approval of matters requiring a simple majority vote, such as approval
of stock benefit plans. In addition, the holders of a majority of the shares of our Class B common
stock outstanding could bind us to matters such as mergers, consolidations, dissolutions and sales
of all or substantially all of our assets.
An adverse effect of this proposed amendment would be to permit the holder or holders of a
majority of our outstanding shares of Class B common stock to approve proposals that require
shareholder approval without prior notice to the holders of our Class A common stock and the other
holders of our Class B common stock. Accordingly, such other holders would not have an opportunity
to take action in advance of a proposed action at a meeting of shareholders.
The H.O. Hirt Trusts beneficially own approximately 91% of the shares of our Class B common
stock as of the date of this proxy statement. Accordingly, if this amendment is adopted at our
annual
53
meeting, it would permit the H.O. Hirt Trusts to take actions normally conducted at annual or
special meetings of shareholders, including the election of directors, by written consent without
participation of any other of our shareholders, subject to any applicable requirements of the
federal securities laws and state law. The H.O. Hirt Trusts have sufficient votes to approve this
proposed amendment even if all of the other holders of our Class B common stock vote against
approval of the proposed amendment to our articles of incorporation.
The H.O. Hirt Trusts have not indicated to us any intention to act as a shareholder by written
consent without a shareholders meeting if the proposed amendment to our articles of incorporation
is approved at our annual meeting. Accordingly, we currently expect to continue to distribute
proxy statements and solicit proxies for future annual and special meetings of our shareholders.
Our board of directors believes that the amendment to our articles of incorporation is in our
best interests and those of our shareholders. OUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
PROPOSAL TO APPROVE THE PROPOSED AMENDMENT TO OUR ARTICLES OF INCORPORATION, AND THE ENCLOSED PROXY
CARD WILL BE SO VOTED UNLESS A HOLDER OF CLASS B COMMON STOCK SPECIFIES OTHERWISE.
PROPOSAL 3 APPROVAL OF AN AMENDMENT TO OUR BYLAWS TO REQUIRE THE
AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF OUR CLASS B COMMON STOCK TO ELECT DIRECTORS
General. On December 18, 2006, following a review of our bylaws by our nominating committee,
our board of directors voted to amend and restate our bylaws. A description of all of the
amendments to our bylaws and a copy of the amended and restated bylaws is contained in the Current
Report on Form 8-K that we filed with the SEC on December 20, 2006. This Form 8-K report is
available on our website at http://www.erieinsurance.com and on the SEC website at
http://www.sec.gov.
Among the amendments to our bylaws approved by our board of directors was an amendment
providing that a nominee for director must receive the affirmative vote of holders of a majority of
the shares of Class B common stock outstanding for election or re-election to our board of
directors rather than receiving a plurality of votes cast. As amended by our board of directors,
subject to shareholder approval, Section 2.01 of our bylaws provides in its entirety as follows:
Section 2.01. Annual Meeting. The Annual Meeting of
Shareholders shall be held each year during the month of April, at a
day and time fixed by the Board of Directors; provided that if a
majority of the members of the Board of Directors determines that it
is impracticable to hold such meeting during April of such year, then
such meeting may be postponed until May or June of such year; and
provided, further, that if a majority of the members of the Board of
Directors further determines that it is impracticable to hold such
meeting during May or June of such year, then such meeting may be
postponed until July of such year, but only with the prior written
consent of the holders of a majority of the shares of Class B
54
Common Stock, no par value, of the corporation (the Class B Shares)
then outstanding. At the Annual Meeting, the Shareholders then
entitled to vote generally on the election of Directors (the Voting
Shareholders) shall elect Directors and shall transact such other
business as may properly be brought before the meeting. In elections
for Directors, voting need not be by ballot, except upon demand made
by a Voting Shareholder at the election and before the voting begins.
A Director nominee shall only be elected if the total votes cast by
the Voting Shareholders FOR the election of such Director nominee
represents a majority of the Class B shares outstanding and entitled
to vote at such meeting.
At our annual meeting, we are asking the holders of our Class B common stock to approve the
amendment to our bylaws require the vote of a majority of our outstanding shares of Class B common
stock to elect director nominees.
Required Vote. Under our bylaws, the affirmative vote of the holders of a majority of the
outstanding shares of Class B common stock is required for approval of the amendment to our bylaws.
Election of Directors by Majority Vote. Shareholders of many public companies have recently
urged that the necessary vote to elect directors be a majority of the votes cast in favor of their
election, rather than the generally applicable plurality standard, which simply required more votes
than those of any other candidate. In response, a number of public companies have recently adopted
charter or bylaw provisions requiring a majority vote standard and/or bylaws or corporate
governance guidelines requiring that a director not receiving such a majority submit his or her
resignation.
Our board of directors has carefully considered the arguments for and against a majority
voting standard. The difference in standards would not have had any impact on us in the recent
past, because our director nominees have received vote totals exceeding a majority of the shares
outstanding. In addition, the plurality standard provides greater certainty that the annual
election will result in a full and duly elected board of directors. However, our board of
directors also recognizes that requiring a majority of the votes cast ensures that only directors
with acceptability among the voting shareholders will be seated on our board of directors and
enhances the accountability of each board member to our shareholders, and has concluded that on
balance the majority vote standard would be in our best interest. In making this determination,
consideration was given to the fact that the H.O. Hirt Trusts own approximately 91% of the shares
of our Class B common stock as of the date of this proxy statement and would effectively be able to
veto a director nominee by not voting in favor of the nominee without proposing an alternative
candidate. The H.O. Hirt Trusts have sufficient votes to approve this proposed amendment even if
all of the other holders of our Class B common stock vote against approval of the proposed
amendment to our bylaws.
Our board of directors believes that the amendment to our bylaws is in our best interests and
those of our shareholders. OUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO APPROVE
THE PROPOSED AMENDMENT TO OUR BYLAWS, AND THE
55
ENCLOSED PROXY CARD WILL BE SO VOTED UNLESS A HOLDER OF CLASS B COMMON STOCK SPECIFIES
OTHERWISE.
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
Pursuant to our bylaws, our audit committee has sole authority to engage our independent
registered public accountants. Our audit committee annually considers the selection of our
independent registered public accountants. Our audit committee selected Ernst & Young LLP to be
our independent registered public accountants for the fiscal years ended December 31, 2006 and 2005
and Ernst & Young LLP served in that capacity for the fiscal years ended December 31, 2006 and
2005.
Representatives from Ernst & Young LLP are expected to attend our annual meeting and will have
the opportunity to make a statement if they so desire. Such representatives are expected to be
available at our annual meeting to respond to appropriate questions from shareholders.
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 1933 Act or
the Exchange Act, except to the extent we specifically incorporate this report by reference
therein.
The audit committee of our board of directors oversees the quality and integrity of our
accounting, auditing and financial reporting practices. Our audit committee has adopted a written
charter, a copy of which may be viewed on our website at:
http://www.erieinsurance.com. Our audit
committee is presently comprised of five directors, all of whom are independent directors as
defined in the NASDAQ and SEC rules and all of whom satisfy the financial literacy requirements
thereof. In addition, our board of directors has determined that one member of our audit
committee, Mr. Baily, satisfies the financial expertise requirements and has the requisite
experience as defined by rules of the SEC. Our audit committees charter states that members may
not simultaneously serve on our audit committees of more than two other public companies without
approval of our board of directors. Mr. Baily and Mr. Lilly serve on the audit committees of more
than two other public companies and they have received the requisite approval to do so from our
board of directors.
Our audit committee, which met 8 times during 2006, has the responsibility, consistent with
the requirements of Section 1405(c)(4) of the Holding Companies Act and our bylaws, for the
selection of independent registered public accountants, reviewing the scope and results of the
audit and reviewing the adequacy of our accounting, financial, internal and operating controls.
Our audit committee oversees our internal audit department, and accordingly reviews and
approves its audit plans, reviews its audit reports and evaluates its performance.
Our audit committee reviews our financial reporting process on behalf of our board of
directors. In fulfilling its responsibilities, our audit committee reviewed and discussed our
audited consolidated financial statements for the year ended December 31, 2006 with management.
56
Throughout 2006, management continued its documentation, testing and evaluation of our system
of internal control over financial reporting as required by Section 404 of Sarbanes-Oxley and
related regulations. Our audit committee was kept apprised of the progress of the evaluation
through periodic updates from management and Ernst & Young LLP and provided oversight to management
throughout the process. Our audit committee reviewed managements report on the effectiveness of
our internal control over financial reporting. Our audit committee also reviewed Ernst & Young
LLPs reported opinion on managements assessment of the effectiveness of internal control over
financial reporting and its own opinion on the effectiveness of internal control over financial
reporting based on its audit.
Our audit committee discussed with Ernst & Young LLP the matters required to be discussed by
Statement on Auditing Standards No. 61, Communication with Audit Committees, as amended. In
addition, our audit committee received and reviewed the written disclosures and the letter from
Ernst & Young LLP required by Independence Standards Board No. 1, Independence Discussions with
Audit Committees, and has discussed with Ernst & Young LLP matters relating to its independence.
Our audit committee reviews its charter annually. Our audit committee has also established a
procedure whereby persons with complaints or concerns about accounting, internal control or
auditing matters may contact our audit committee anonymously.
Based upon the discussions and reviews referred to above, our audit committee recommended to
our board of directors that (1) our audited consolidated financial statements be included in our
Annual Report on Form 10-K for the year ended December 31, 2006 to be filed with the SEC, and (2)
our board of directors accept managements report on its assessment of the effectiveness of our
internal control over financial reporting.
Erie Indemnity Company Audit Committee:
John T. Baily, Chair
C. Scott Hartz
Claude C. Lilly, III
Lucian L. Morrison
Robert C. Wilburn
February 21, 2007
AUDIT FEES
Our audit committee approves the fees and other significant compensation to be paid to the
independent registered public accountants for the purpose of preparing or issuing an audit report
or related work. We provide appropriate funding, as determined by our audit committee, for payment
of fees and other significant compensation to the independent registered public accountants. Our
audit committee also preapproves all auditing services and permitted non-audit services (including
the fees and terms thereof) to be performed for us by our independent registered public
accountants, subject to the de minimis exceptions for non-audit services described in the Exchange
Act. Our audit committee
57
delegated to our audit committee chairperson preapproval authority for additional audit and
non-audit services subject to subsequent approval by the full audit committee at its next scheduled
meeting.
Our audit committee reviewed and discussed with Ernst & Young LLP the following fees for
services, none of which were deemed to be for consulting services, rendered for the 2006 and 2005
fiscal years and considered the compatibility of non-audit services with Ernst & Young LLPs
independence:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Erie Indemnity |
|
|
Erie Insurance |
|
|
Affiliated |
|
|
|
|
|
|
Company and |
|
|
Exchange and |
|
|
Entities |
|
|
|
|
|
|
Subsidiaries |
|
|
Subsidiary |
|
|
(EFL) |
|
|
Total |
|
Audit fees |
|
$ |
1,261,448 |
|
|
$ |
240,060 |
|
|
$ |
239,607 |
|
|
$ |
1,741,115 |
|
Audit-related fees |
|
|
438,766 |
|
|
|
19,200 |
|
|
|
|
|
|
|
457,966 |
|
Tax fees |
|
|
3,730 |
|
|
|
|
|
|
|
|
|
|
|
3,730 |
|
All other fees |
|
|
6,000 |
|
|
|
|
|
|
|
|
|
|
|
6,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fees |
|
$ |
1,709,944 |
|
|
$ |
259,260 |
|
|
$ |
239,607 |
|
|
$ |
2,208,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Erie Indemnity |
|
|
Erie Insurance |
|
|
Affiliated |
|
|
|
|
|
|
Company and |
|
|
Exchange and |
|
|
Entities |
|
|
|
|
|
|
Subsidiaries |
|
|
Subsidiary |
|
|
(EFL) |
|
|
Total |
|
Audit fees |
|
$ |
1,026,325 |
|
|
$ |
198,030 |
|
|
$ |
357,577 |
|
|
$ |
1,581,932 |
|
Audit-related fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other fees |
|
|
6,000 |
|
|
|
|
|
|
|
|
|
|
|
6,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fees |
|
$ |
1,032,325 |
|
|
$ |
198,030 |
|
|
$ |
357,577 |
|
|
$ |
1,587,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANNUAL REPORT
A copy of our annual report for 2006 is being mailed to all holders of Class A common stock
and Class B common stock together with this proxy statement.
SHAREHOLDER PROPOSALS
Any shareholder 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
2008 annual meeting of shareholders must deliver such proposal in writing to our Secretary at our
principal executive offices at 100 Erie Insurance Place, Erie, Pennsylvania 16530, not later than
November 19, 2007.
58
Pursuant to Section 2.07(a) of our bylaws, the full text of which follows, if a shareholder
desires to present at our 2007 annual meeting of shareholders a proposal to our nominating
committee relating to candidates for consideration as to their nomination for election as directors
by shareholders, such shareholder must comply with the provisions for shareholder proposals set
forth in Section 2.07(a) of our bylaws, including delivery of such proposal in writing to our
Secretary, 100 Erie Insurance Place, Erie, Pennsylvania 16530, no earlier than November 2, 2007 and
no later than December 3, 2007. In addition, holders of Class B common stock may nominate
candidates for election as director at any meeting at which directors
are to be elected.
If a shareholder desires to present a proposal at our 2008 annual meeting of shareholders
relating to other than nominations for and election of directors, otherwise than pursuant to Rule
14a-8 of the proxy rules of the SEC, such shareholder must comply with the provisions for
shareholder proposals set forth in Section 2.07(b) of our bylaws, the full text of which follows,
including the delivery of such proposal in writing to our Secretary, 100 Erie Insurance Place,
Erie, Pennsylvania 16530, no earlier than November 19, 2007 and no later than December 17, 2007.
The full text of Section 2.07 of our bylaws is as follows:
Section 2.07 Shareholder Proposals.
(a) Shareholder Proposals Relating to Candidates for Election as Directors.
(1) Nominations of persons for election to the Board of Directors may be made at any meeting
of Shareholders at which Directors are to be elected (i) by or at the direction of the Nominating
and Governance Committee of the Board of Directors (the Nominating Committee) or (ii) by any
Voting Shareholder.
(2) A Shareholder, whether or not entitled to vote in the election of Directors, may propose
to the Nominating Committee of the Board of Directors for their consideration and review one (1) or
more persons whom the Shareholder believes would be appropriate candidates for election by
Shareholders as a Director at any meeting of Shareholders at which Directors are to be elected (a
Written Proposal). Such Written Proposal shall be made by notice in writing, delivered in person
or by first class United States mail postage prepaid or by reputable overnight delivery service, to
the Nominating Committee of the Board of Directors to the attention of the Secretary of the
corporation at the principal office of the corporation, within the time limits specified in this
clause (2). The Nominating Committee shall consider any such Written Proposal received not less
than 105 calendar days nor more than 135 calendar days before the first anniversary of the date on
which the corporation first mailed its proxy statement to Shareholders for the Annual Meeting of
Shareholders in the immediately preceding year. Notwithstanding the foregoing, in the case of (i)
an Annual Meeting of Shareholders that is called for a date that is not within thirty (30) calendar
days before or after the first anniversary date of the Annual Meeting of Shareholders in the
immediately preceding year or (ii) a special meeting at which Directors will be elected, any such
Written Proposal by a Shareholder must be received by the Nominating Committee within ten (10)
days after the date the corporation first shall
59
have mailed notice to its Shareholders that a meeting of Shareholders will be held, issued a
press release, filed a periodic report with the Securities and Exchange Commission (the SEC) or
otherwise publicly disseminated notice that such annual or special meeting of Shareholders will be
held. The Nominating Committee may consider any other Written Proposal by a Shareholder of a
candidate for election as a Director in its discretion.
(3) The Nominating Committee shall be required to propose a slate of nominees for election as
Directors prior to each election of Directors, whether such election occurs at an Annual or Special
Meeting. Promptly upon the Nominating Committees determining such slate of nominees for election
as Directors, the corporation shall issue a press release, file a report with the SEC or otherwise
publicly disseminate notice of the Nominating Committees nominees for election as Directors (the
Public Notice).
(4) A Written Proposal shall set forth (A) the name and address of the Shareholder who has
made the proposal, (B) the name, age, business address and, if known, residence address of each
person so proposed, (C) the principal occupation or employment of each person so proposed for the
past five (5) years, (D) the number of shares of capital stock of the corporation beneficially
owned within the meaning of SEC Rule 13d-3 by each person so proposed and the earliest date of
acquisition of any such capital stock, (E) a description of any verbal or written arrangement or
understanding between each person so proposed and the proposing Shareholder with respect to such
persons proposal, election as a Director and actions to be proposed or taken by such person if
elected as a Director, (F) the written consent of each person so proposed to serve as a Director if
nominated and elected as a Director and (G) such other information regarding each such person as
would be required under the proxy solicitation rules of the SEC if proxies were to be solicited for
the election as a Director of each person so proposed.
(5) If a Written Proposal submitted to the Nominating Committee fails, in the reasonable
judgment of the Nominating Committee, to contain the information specified in clause (4) hereof or
is otherwise deficient, the Chairman of the Nominating Committee shall, as promptly as is
practicable under the circumstances, provide written notice to the Shareholder of such failure or
deficiency in the Written Proposal or Director Nomination by such Shareholder and such Shareholder
shall have five (5) business days from receipt of such notice to submit a revised Written Proposal
or Director Nomination that corrects such failure or deficiency in all material respects.
(b) Shareholder Proposals Relating to Matters Other Than Candidates for Election as Directors.
(1) A Voting Shareholder of the corporation may bring a matter (other than a nomination of a
candidate for election as a Director which is covered by subsection (a) of this Section 2.07)
before a meeting of Shareholders only if (A) such matter is a proper matter for Voting Shareholder
action regardless of whether such Voting Shareholder complies with the provisions of Rule 14a-8
under the Securities Exchange Act of 1934 (as amended) relating to inclusion of Shareholder
proposals in the corporations proxy statement.
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(2) A Shareholder of the corporation, other than a Voting Shareholder (a Non-Voting
Shareholder), may bring a matter (other than a proposal to the Nominating Committee of a candidate
for election as a Director which is covered by subsection (a) of this Section 2.07) before a
meeting of Shareholders only if such matter is a proper matter for Shareholder action and such
Non-Voting Shareholder shall have provided notice in writing, delivered in person or by first class
United States mail postage prepaid or by reputable overnight delivery service, to the Secretary of
the corporation at the principal office of the corporation, within the time limits specified herein
or (B) the Non-Voting Shareholder complies with the provisions of Rule 14a-8 under the Securities
Exchange Act of 1934 (as amended) relating to inclusion of shareholder proposals in the
corporations proxy statement.
(3) In the case of an annual meeting of Shareholders, any such written notice of presentation
of a matter by a Non-Voting Shareholder must be received by the Secretary of the corporation not
less than 90 calendar days nor more than 120 days before the first anniversary of the date on which
the corporation first mailed its proxy statement to Shareholders for the annual meeting of
Shareholders in the immediately preceding year; provided, however, that in the case of an annual
meeting of Shareholders that is called for a date which is not within 30 calendar days before or
after the first anniversary date of the annual meeting of Shareholders in the immediately preceding
year, any such written notice of presentation by a Non-Voting Shareholder of a matter must be
received by the Secretary of the corporation within five business days after the earlier of the
date the corporation shall have mailed notice to its Shareholders that an annual meeting of
Shareholders will be held, issued a press release, filed a periodic report with the SEC, or
otherwise publicly disseminated that an annual meeting of Shareholders will be held.
(4) In the case of a special meeting of Shareholders, any such written notice of presentation
of a matter by a Non-Voting Shareholder must be received by the Secretary of the corporation within
five business days after the earlier of the date the corporation shall have mailed notice to its
Shareholders that a special meeting of Shareholders will be held, issued a press release, filed a
periodic report with the SEC, or otherwise publicly disseminated notice that a special meeting of
Shareholders will be held.
(5) Such written notice of presentation of a matter by a Non-Voting Shareholder shall set
forth information regarding such matter equivalent to the information regarding such matter that
would be required under the proxy solicitation rules of the SEC if proxies were solicited for
Shareholder consideration of such matter at a meeting of Shareholders.
(6) If a written notice of presentation of a matter submitted by a Non-Voting Shareholder to
the Board of Directors fails, in the reasonable judgment of the Board of Directors, to contain the
information specified in clause (iv) hereof or is otherwise deficient, the Chairperson of the Board
of Directors shall, as promptly as is practicable under the circumstances, provide written notice
to the Non-Voting Shareholder who submitted the written notice of presentation of a matter of such
failure or deficiency in the written notice of presentation of a matter and such Non-Voting
Shareholder shall have five business days from receipt of such notice to submit a revised written
notice of presentation of a matter that corrects such failure or deficiency in all material
respects.
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OTHER MATTERS
Our board of directors does not know of any matter 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, execution of the proxy enclosed herewith shall confer discretionary
authority upon the persons named to vote on any other matter presented at our annual meeting as
directed by a majority of our board of directors unless prohibited by applicable provisions of the
Exchange Act.
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By order of our board of directors, |
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Jan R. Van Gorder, |
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Acting Secretary and General Counsel |
March 16, 2007
Erie, Pennsylvania
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ERIE INDEMNITY COMPANY
CLASS B COMMON STOCK
PROXY
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 17, 2007
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints F. William Hirt, Jan R. Van Gorder and Jeffrey A.
Ludrof and each or any of them, proxies of the undersigned, with full power of substitution, to
vote all of the shares of the Class B Common Stock of Erie Indemnity Company that
the undersigned may be entitled to vote at our annual meeting of shareholders to be
held at the Auditorium of the F. W. Hirt-Perry Square Building, 100 Erie Insurance Place (Sixth and
French Streets), Erie, Pennsylvania 16530 on April 17, 2007 at 9:30 a.m. local time, and at any
adjournment, postponement or continuation thereof, as follows:
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o
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FOR all candidates listed below
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o
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WITHHOLD AUTHORITY
to vote for the candidates
listed below |
INSTRUCTION: To withhold authority to vote for any individual candidate, strike a line through the
candidates name in the list below.
Kaj Ahlmann, John T. Baily, J. Ralph Borneman, Jr., Patricia Garrison-Corbin, Jonathan Hirt Hagen,
Susan Hirt Hagen, C. Scott Hartz, F. William Hirt, Claude C. Lilly, III, Jeffrey A. Ludrof, Lucian
L. Morrison, Thomas W. Palmer, Elizabeth A. Vorsheck, Robert C. Wilburn.
2. |
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PROPOSAL TO APPROVE AN AMENDMENT TO OUR ARTICLES OF INCORPORATION TO PERMIT HOLDERS OF
CLASS B COMMON STOCK TO ACT BY MAJORITY WRITTEN CONSENT. |
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o FOR
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o AGAINST
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o ABSTAIN |
3. |
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PROPOSAL TO APPROVE AN AMENDMENT TO OUR BYLAWS TO REQUIRE THE AFFIRMATIVE VOTE OF THE HOLDERS
OF A MAJORITY OF THE OUTSTANDING SHARES OF OUR CLASS B COMMON STOCK TO ELECT DIRECTORS. |
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o FOR
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o AGAINST
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o ABSTAIN |
In
their discretion, the proxies, on behalf of and at the direction of
our Board of Directors, are authorized to vote with respect to
matters incident to the conduct of our Annual Meeting and upon such other business as may properly come
before our Annual Meeting,
pursuant to Securities and Exchange Commission Rules and any adjournment, postponement or
continuation thereof.
This proxy will be voted as specified. If a choice is not specified, the proxy will be voted FOR
the candidates for Director named above, FOR the proposal to amend our articles of incorporation
and FOR the proposal to amend our bylaws.
This
proxy should be dated, signed by the shareholder(s) and returned
promptly to us in
the enclosed envelope. Persons signing in a fiduciary capacity should so indicate.
_______________________________
(SEAL)
_______________________________
(SEAL)
_____________________________________
Date:
____________________, 2007