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 //
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)
/ X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-12
RLI CORP.
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(Name of Registrant as Specified In Its Charter) |
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant) |
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
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(4) Date Filed:
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| RLI Corp. | 9025 N. Lindbergh Drive |Peoria, IL
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RLI Corp.
9025 North Lindbergh Drive
Peoria, Illinois 61615
March 20, 201426, 2015
Dear Shareholders:
Please consider this letter your personal invitation to attend the 20142015 RLI Corp. Annual Shareholders Meeting. It will be held at the Company’s office at 9025Mt. Hawley Country Club, 7724 North Lindbergh Drive,Knoxville Avenue, Peoria, Illinois 61615,61614, on May 1, 2014,7, 2015, at 2 p.m. CDT.
Business scheduled to be considered at the meeting includes the election of directors, approval of the amendment to the 2005 RLI Corp. Omnibus Stock Plan, approval of the amendment to the 2010 RLI Corp. Long-Term Incentive Plan, approval of the 2015 RLI Corp. Long-Term Incentive Plan, ratification of KPMG LLP as our independent registered public accounting firm for the current year, and an advisory vote on executive compensation. In addition, we will review significant events of 20132014 and their impact on you and your Company.
Again, this year we are furnishing our proxy materials via the Internet. Shareholders will receive a mailed notice card with instructions on how to view our proxy materials over the Internet and other information.
Thank you for your interest in RLI as well as your confidence in, and support of, our future.
Sincerely,
Jonathan E. Michael
Chairman & Chief Executive Officer
RLI Corp. | 9025 N. Lindbergh Drive | Peoria, Illinois 61615 |
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS |
May |
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To the Shareholders of RLI Corp.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of RLI Corp. (“Company”) will be held at 9025the Mt. Hawley Country Club, 7724 North Lindbergh Drive,Knoxville Avenue, Peoria, Illinois 61615,61614, on Thursday, May 1, 2014,7, 2015, at 2 p.m. Central Daylight Time for the following purposes:
1. to elect eleven (11)twelve (12) directors for a one-year term expiring at the 20152016 Annual Meeting;
2.to approve the Amendment to the 2005 RLI Corp. Omnibus Stock Plan;
3.to approve the Amendment to the 2010 RLI Corp. Long-Term Incentive Plan;
4.to approve the 2015 RLI Corp. Long-Term Incentive Plan;
5. to ratify the selection of KPMG LLP as the independent registered public accounting firm of the Company for the current year;
3.6. to hold an advisory vote on executive compensation (the “Say-on-Pay” vote); and
4.7. to transact such other business as may properly be brought before the meeting.
Only holders of Common Stock of the Company of record at the close of business on March 3, 2014,9, 2015, are entitled to notice of and to vote at the Annual Meeting.
| By Order of the Board of Directors |
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| Daniel O. Kennedy |
| Vice President, General Counsel |
Peoria, Illinois
March 20, 201426, 2015
It is important, regardless of the number of shares you hold, that you personally be present or be represented by proxy at the Annual Meeting. Even if you expect to attend, it is important that you submit your proxy by any method described below:
· By Internet: by submitting your proxy over the Internet in accordance with the instructions provided on your proxy card or Notice of Internet Availability of Proxy Materials;
· By Phone: by submitting your proxy by telephone, toll-free, in accordance with the instructions provided on your proxy card, or
· By Mail: if you received your proxy card by mail, by completing the proxy card and signing, dating and returning it as promptly as possible.
You have the right to revoke your proxy at any time prior to its use by filing a written notice of revocation with the Corporate Secretary of the Company prior to the convening of the Annual Meeting, or by presenting another proxy card with a later date or voting by telephone or over the Internet at a later date. If you attend the Annual Meeting and desire to vote in person, your proxy may be withdrawn upon request.
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PROPOSAL TWO: |
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PROPOSAL THREE: APPROVE THE AMENDMENT TO THE 2010 RLI CORP. | 17 |
PROPOSAL FOUR: APPROVE THE 2015 RLI CORP. LONG-TERM INCENTIVE PLAN | 19 |
PROPOSAL FIVE: RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED | 27 |
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2|RLI Corp. 2015 Proxy Statement
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RLI Corp. | 9025 N. Lindbergh Drive | Peoria, Illinois 61615
PROXY STATEMENT |
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Annual Meeting of Shareholders to be held May 7, 2015
This Proxy Statement is furnished to the shareholders of RLI Corp., an Illinois corporation (“Company”), in connection with the solicitation, by the Board of Directors of the Company (“Board” or “Board of Directors”), of proxies to be used at the Annual Meeting of Shareholders (“Annual Meeting”) to be held at 2 p.m. Central Daylight Time on Thursday, May 7, 2015, at the Mt. Hawley Country Club, 7724 North Knoxville Avenue, Peoria, Illinois, 61614, and at any adjournments of the Annual Meeting.
This year, we are pleased to again be taking advantage of a Securities and Exchange Commission (“SEC”) rule that allows companies to furnish their proxy materials over the Internet. As a result, we are mailing to our shareholders a Notice of Internet Availability of Proxy Materials (“E-Proxy Notice”) instead of a paper copy of the proxy materials. The E-Proxy Notice contains instructions that will enable shareholders receiving the E-Proxy Notice to access these materials over the Internet and, if so desired, to request a paper copy of these proxy materials by mail. Shareholders who do not receive the E-Proxy Notice will receive a paper copy of the proxy materials by mail. The Company intends to mail the E-Proxy Notice to shareholders on or about March 26, 2015.
This Proxy Statement is furnished to the shareholders of RLI Corp., an Illinois corporation (“Company”), in connection with the solicitation, by the Board of Directors of the Company (“Board” or “Board of Directors”), of proxies to be used at the Annual Meeting of Shareholders (“Annual Meeting”) to be held at 2 p.m. Central Daylight Time on Thursday, May 1, 2014, at the Company’s office at 9025 North Lindbergh Drive, Peoria, Illinois, 61615, and at any adjournments of the Annual Meeting.
This year, we are pleased to again be taking advantage of a Securities and Exchange Commission (“SEC”) rule that allows companies to furnish their proxy materials over the Internet. As a result, we are mailing to our shareholders a Notice of Internet Availability of Proxy Materials (“E-Proxy Notice”) instead of a paper copy of the proxy materials. The E-Proxy Notice contains instructions that will enable shareholders receiving the E-Proxy Notice to access these materials over the Internet and, if so desired, to request a paper copy of these proxy materials by mail. Shareholders who do not receive the E-Proxy Notice will receive a paper copy of the proxy materials by mail. The Company intends to mail the E-Proxy Notice to shareholders on or about March 20, 2014.
Because many shareholders cannot attend the Annual Meeting in person, it is necessary that a large number of our voting shares be represented at the Annual Meeting by proxy to achieve a quorum. Pursuant to the Company’s By-Laws, at least a majority of the outstanding voting shares must be present (in person or by proxy) at the Annual Meeting to conduct the meeting, which is known as a “quorum” of shares. Even if you expect to attend, it is important that you vote your shares in advance.
Whether you hold your shares directly as the shareholder of record or through a broker, trustee, or other nominee (“in street name”), you may vote by proxy without attending the Annual Meeting in three different ways:
· Internet: Shareholders may submit their proxy over the Internet by following the instructions provided on the proxy card or on the E-Proxy Notice. Shareholders will need to have the control number appearing on their proxy card or E-Proxy Notice available in order to submit their proxy over the Internet.
· Telephone: Shareholders may submit their proxy by telephone, toll-free, by following the instructions provided on the proxy card. Shareholders will need to have the control number appearing on their proxy card or E-Proxy Notice available in order to submit their proxy by telephone.
· Mail: Shareholders who receive a paper copy of a proxy card by mail may submit their proxy by signing, dating and returning the proxy card as promptly as possible in the envelope enclosed for that purpose.
Shareholders can save the Company expense by submitting their proxy by telephone or over the Internet. If you submit your proxy by telephone or over the Internet, you do not need to also submit a proxy card, although you may do so as one method of changing your vote as described below. The method of voting will not limit a shareholder’s right to attend the Annual Meeting.
Each proxy will be voted in accordance with the shareholder’s specifications. If you return a signed proxy card without providing voting instructions or do not designate a voting preference when using the other methods, your shares will be voted as recommended by the Board of Directors. All proxies delivered pursuant to this solicitation are revocable at any time prior to the meeting at the option of the shareholder either by giving written notice to the Corporate Secretary at 9025 North Lindbergh Drive, Peoria, Illinois, 61615, or by timely delivery of a properly completed proxy, whether by proxy card or by Internet or telephone vote, bearing a later date, or by voting in person at the Annual Meeting. All shares represented by valid, unrevoked proxies will be voted at the Annual Meeting.
Assuming the presence, in person or by proxy, of a quorum, the election of directors requires the affirmative vote of a majority of the shares represented in person or by proxy at the Annual Meeting and entitled to vote. With respect to the election of directors, shareholders may vote in favor of all nominees, or withhold their votes as to all nominees, or withhold their votes as to specific nominees. Votes withheld are deemed present at the meeting and thus will be counted for quorum purposes and have the effect of a vote against the director.
Assuming the presence, in person or by proxy, of a quorum, the affirmative vote of a majority of the shares represented in person or by proxy at the meeting and entitled to vote shall be required to approve Proposal Two. The Proposal Three (“Say-on-Pay”) vote is advisory (not binding) in nature so there is no specified voting requirement for approval. However, the Board of Directors will consider that the shareholders have approved executive compensation on an advisory basis if this agenda item receives the affirmative vote of a majority of the votes cast (in person or by proxy).
With respect to Proposals Two and Three, shareholders may vote “For,” “Against” or “Abstain” on each proposal. Abstentions are deemed present at the meeting, and thus will be counted for quorum purposes, but will have the same effect as a vote against the matters respectively set forth in Proposals Two and Three.
Brokers who hold shares for the accounts of their clients “in street name” may vote such shares either as directed by their clients or at their own discretion if permitted by the New York Stock Exchange (“NYSE”) and other organizations of which they are members. If an executed proxy is returned by a broker on behalf of its client that indicates the broker does not have discretionary authority as to certain shares to vote on one or more matters (a “broker non-vote”), such shares will be considered present at the Annual Meeting for purposes of determining a quorum, but are not considered entitled to vote on that matter. Therefore, broker non-votes will not have any effect on any of the proposals being voted upon at the meeting. If your broker holds your shares “in street name” and you do not instruct your broker how to vote, your broker will have discretion to vote your shares on routine matters, such as Proposal Two, the ratification of the selection of the Company’s independent public accounting firm.
Your broker will not, however, have discretion to vote on non-routine matters absent direction from you. Among other matters, brokers are not entitled to use their discretion to vote uninstructed proxies in director elections or executive compensation matters. As a result, your broker will not be able to vote your shares on Proposals One and Three without your direction. Therefore, it is important that you provide your broker with voting instructions on all proposals. If your shares are held by your broker “in street name,” you will receive a voting instruction form from your broker or the broker’s agent asking you how your shares should be voted. Please complete the form and return it as instructed by the broker or agent.
Shareholders of record at the close of business on March 3, 2014, the record date, shall be entitled to vote at the 2014 Annual Meeting. As of the record date, the Company had 42,986,521 shares of Common Stock outstanding and entitled to vote. Common share ownership entitles the holder to one vote per share upon each matter to be voted at the 2014 Annual Meeting.
The Company will bear the cost of solicitation of proxies. In addition to the use of the mail, proxies may be solicited in person or by telephone, facsimile or other electronic means, by directors, officers or employees of the Company. No additional compensation will be paid to such persons for their services. In accordance with the regulations of the SEC and the NYSE, the Company will reimburse banks, brokerage firms, investment advisors and other custodians, nominees, fiduciaries and service bureaus for their reasonable out-of-pocket expenses for forwarding soliciting material to beneficial owners of the Company’s Common Stock and obtaining their proxies or voting instructions.
ELECTRONIC ACCESS TO PROXY MATERIALS AND ANNUAL REPORT TO SHAREHOLDERS
This Notice of Annual Meeting and Proxy Statement and the Company’s 2013 Annual Report to Shareholders are available on the Company’s website at www.rlicorp.com and at www.proxyvote.com.
SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The Company has reported the Company’s founder, Mr. Gerald D. Stephens’ beneficial stock ownership for over thirty years. As of December 31, 2013, Mr. Stephen’s beneficial ownership dropped slightly below 5 percent and, therefore, the Company is no longer required to report his Company stock ownership.
Following are the persons or entities known to the Company who beneficially own more than 5 percent of the Company’s Common Stock as of December 31, 2013 (pre-January 15, 2014 two-for-one stock split):
Name and Address |
| Number of Shares |
| Percent of Outstanding |
of Beneficial Owner |
| Beneficially Owned |
| Common Stock |
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State Street Corporation (1) |
| 2,153,047 |
| 10.00% |
One Lincoln Street |
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Boston, Massachusetts 02111 |
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BlackRock, Inc.(2) |
| 1,693,262 |
| 7.90% |
40 East 52nd Street |
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New York, New York 10022 |
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Neuberger Berman Group LLC (3) |
| 1,688,077 |
| 7.87% |
605 Third Avenue |
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New York, New York 10158 |
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Kayne Anderson Rudnick |
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Investment Management LLC(4) |
| 1,532,183 |
| 7.04% |
1800 Avenue of the Stars |
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2nd Floor |
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Los Angeles, California 90067 |
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The Vanguard Group, Inc. (5) |
| 1,288,818 |
| 6.00% |
100 Vanguard Boulevard |
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Malvern, Pennsylvania 19355 |
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(1)The information shown is based solely on a Schedule 13G dated February 3, 2014, filed with the SEC by State Street Corporation (“State Street”), which filing indicates that State Street Bank and Trust Company (“Trustee”), a subsidiary of State Street, in its capacity as trustee of the Company’s Employee Stock Ownership Plan (“ESOP”), held 1,691,457 shares on behalf of participants in such plan. State Street further disclosed no sole voting or sole dispositive power with respect to the shares, and shared voting and shared dispositive power with respect to 2,153,047 shares. Each ESOP participant or beneficiary may direct the Trustee as to the manner in which the shares allocated to each participant under the ESOP are to be voted. The Trustee has sole voting power with respect to all unallocated shares and sole investment power as to all allocated and unallocated shares. With respect to allocated shares for which no votes are received, the Trustee will vote such shares in proportion to the votes cast on behalf of allocated shares for which votes are received.
(2)The information shown is based solely on a Schedule 13G dated January 17, 2014, filed with the SEC by BlackRock, Inc. (“BlackRock”). According to the Schedule 13G, BlackRock is the beneficial owner of 1,693,262 shares, and has sole voting with respect to 1,630,530 shares and sole dispositive power with respect to 1,693,262 shares.
(3)The information shown is based solely on a Schedule 13G dated February 13, 2014, filed with the SEC by Neuberger Berman Group LLC (“Neuberger”). According to the Schedule 13G, Neuberger is the beneficial owner of 1,688,077 shares, has shared voting power with respect to 1,685,177 shares and shared dispositive power with respect to 1,688,077 shares.
(4)The information shown is based solely on a Schedule 13G dated January 10, 2014, filed with the SEC by Kayne Anderson Rudnick Investment Management LLC (“Kayne”). According to the Schedule 13G, Kayne is the beneficial owner of 1,532,183 shares, and has sole voting and sole dispositive power with respect to 1,532,183 shares.
(5)The information shown is based solely on a Schedule 13G dated February 6, 2014, filed with the SEC by The Vanguard Group, Inc. (“Vanguard”). According to the Schedule 13G, Vanguard is the beneficial owner of 1,288,818 shares, and has sole voting with respect to 29,947 shares, sole dispositive power with respect to 1,260,171 shares, and shared dispositive power with respect to 28,647
SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Following are the persons or entities known to the Company who beneficially own more than 5 percent of the Company’s Common Stock as of December 31, 2014:
Name and Address |
| Number of Shares |
| Percent of Outstanding |
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of Beneficial Owner |
| Beneficially Owned |
| Common Stock |
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State Street Corporation (1) |
| 4,410,332 |
| 10.3% |
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State Street Financial Center |
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One Lincoln Street |
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Boston, Massachusetts 02111 |
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BlackRock, Inc.(2) |
| 3,457,872 |
| 8.00% |
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55 East 52nd Street |
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New York, New York 10022 |
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Kayne Anderson Rudnick |
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Investment Management LLC(3) |
| 3,218,387 |
| 7.48% |
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1800 Avenue of the Stars |
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2nd Floor |
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Los Angeles, California 90067 |
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Neuberger Berman Group LLC (4) |
| 2,837,048 |
| 6.59% |
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605 Third Avenue |
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New York, New York 10158 |
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The Vanguard Group, Inc. (5) |
| 2,793,152 |
| 6.49% |
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100 Vanguard Boulevard |
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Malvern, Pennsylvania 19355 |
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(1)The information shown is based solely on a Schedule 13G dated February 11, 2015, filed with the SEC by State Street Corporation (“State Street”), which filing indicates that State Street Bank and Trust Company (“Trustee”), a subsidiary of State Street, in its capacity as trustee of the Company’s Employee Stock Ownership Plan (“ESOP”), held 3,512,474 shares on behalf of participants in such plan. State Street further disclosed no sole voting or sole dispositive power with respect to the shares, and shared voting and shared dispositive power with respect to 4,410,332 shares. Each ESOP participant or beneficiary may direct the Trustee as to the manner in which the shares allocated to each participant under the ESOP are to be voted. The Trustee has sole voting power with respect to all unallocated shares and sole investment power as to all allocated and unallocated shares. With respect to allocated shares for which no votes are received, the Trustee will vote such shares in proportion to the votes cast on behalf of allocated shares for which votes are received.
(2)The information shown is based solely on a Schedule 13G dated January 12, 2015, filed with the SEC by BlackRock, Inc. (“BlackRock”). According to the Schedule 13G, BlackRock is the beneficial owner of 3,457,872 shares, and has sole voting with respect to 3,358,115 shares and sole dispositive power with respect to 3,457,872 shares.
(3)The information shown is based solely on a Schedule 13G dated February 4, 2015, filed with the SEC by Kayne Anderson Rudnick Investment Management LLC (“Kayne”). According to the Schedule 13G, Kayne is the beneficial owner of 3,218,387 shares, and has sole voting and sole dispositive power with respect to 3,218,387 shares.
(4)The information shown is based solely on a Schedule 13G February 11, 2015, filed with the SEC by Neuberger Berman Group LLC (“Neuberger”). According to the Schedule 13G, Neuberger is the beneficial owner of 2,837,048 shares, has shared voting power with respect to 2,830,348 shares and shared dispositive power with respect to 2,837,048 shares.
(5)The information shown is based solely on a Schedule 13G dated February 9, 2015, filed with the SEC by The Vanguard Group, Inc. (“Vanguard”). According to the Schedule 13G, Vanguard is the beneficial owner of 2,793,152 shares, and has sole voting with respect to 57,113 shares, sole dispositive power with respect to 2,738,639 shares, and shared dispositive power with respect to 54,513 shares.
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The following is information regarding beneficial ownership of the Company’s Common Stock by each director and named executive officer (whose compensation is disclosed in this Proxy Statement), and the directors and executive officers of the Company as a group, as of January 16, 2014. Ownership has been adjusted to reflect the two-for-one stock split that occurred on January 15, 2014.
Name of Individual or |
| Number of Shares |
| Percent of Outstanding | |
Number of Persons in Group |
| Beneficially Owned (1) |
| Common Stock | |
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Kaj Ahlmann(2) (3) |
| 3,044 |
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| * |
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Barbara R. Allen(3) |
| 20,759 |
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| * |
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Michael E. Angelina |
| - |
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| * |
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John T. Baily (2) (3) (4) |
| 51,478 |
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| * |
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Thomas L. Brown(5) (6) (7) |
| 20,369 |
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| * |
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Jordan W. Graham (2) (3) |
| 39,248 |
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| * |
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Daniel O. Kennedy (5) (6) (7) |
| 49,436 |
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| * |
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Craig W. Kliethermes (5) (6) (7) |
| 104,083 |
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| * |
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Gerald I. Lenrow (2) (3) (8) |
| 156,096 |
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| * |
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Charles M. Linke (2) (3) |
| 73,896 |
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| * |
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F. Lynn McPheeters (2) (3) |
| 78,816 |
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| * |
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Jonathan E. Michael (5) (6) (7) (9) |
| 1,203,982 |
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| 2.8% |
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Michael J. Stone (5) (6) (7) (10) |
| 471,058 |
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| 1.1% |
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Robert O. Viets (2) (3) (11) |
| 194,048 |
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| * |
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Directors and executive officers |
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as a group (16 persons) (5) (6) (7) |
| 2,508,223 |
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| 5.7% |
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*Less than 1% of Class.
(1)Unless otherwise noted, each person has sole voting power and sole investment power with respect to the shares reported.
(2)Includes shares held by a bank trustee under an irrevocable trust established by the Company pursuant to the RLI Corp. Nonemployee Director Deferred Compensation Plan (“Deferred Plan”) for the benefit of the following: Mr. Ahlmann 1,185 shares; Mr. Baily 22,701 shares; Mr. Graham 35,557 shares; Mr. Lenrow 141,138 shares; Mr. Linke 34,298 shares; Mr. McPheeters 36,234 shares; and Mr. Viets 110,570 shares. Each participating director has no voting or investment power with respect to such shares.
(3)Includes 290 restricted shares awarded to the named persons in February 2013, to which such persons have sole voting and no investment power.
(4)Includes 6,000 shares held by Mr. Baily’s spouse.
(5)Includes shares allocated to the named persons under the ESOP with respect to which such persons have sole voting power and no investment power. As of January 16, 2014, the following shares were allocated under the ESOP: Mr. Brown 488 shares; Mr. Kennedy 7,499 shares; Mr. Kliethermes 7,504 shares; Mr. Michael 194,670 shares; and Mr. Stone 46,092 shares. During 2013, Messrs. Michael and Stone were eligible to elect to diversify their respective ESOP shares.
(6)Includes shares allocated to the named persons which shares are held by a bank trustee under an irrevocable trust established by the Company pursuant to the Deferred Agreement for the benefit of the following: Mr. Brown 2,263 shares; Mr. Kennedy 1,141 shares; Mr. Kliethermes 12,955 shares; Mr. Michael 42,674 shares; and Mr. Stone 52,327 shares. Each participant has no voting or investment power with respect to such shares.
6| RLI Corp. 2015 Proxy Statement(7)Includes shares that may be acquired by the named persons within 60 days after January 16,
The following is information regarding beneficial ownership of the Company’s Common Stock by each director and named executive officer (whose compensation is disclosed in this Proxy Statement), and the directors and executive officers of the Company as a group, as of February 9, 2015. James J. Scanlan was appointed to the Company’s Board on January 1, 2015.
Name of Individual or |
| Number of Shares |
| Percent of Outstanding |
| |
Number of Persons in Group |
| Beneficially Owned (1) |
| Common Stock |
| |
|
|
|
|
|
| |
|
|
|
|
|
| |
Kaj Ahlmann(2) (3) |
| 5,372 |
|
| * |
|
|
|
|
|
|
|
|
Barbara R. Allen(3) |
| 21,534 |
|
| * |
|
|
|
|
|
|
|
|
Michael E. Angelina (2) (3) |
| 2,852 |
|
| * |
|
|
|
|
|
|
|
|
John T. Baily (2) (3) (4) |
| 58,373 |
|
| * |
|
|
|
|
|
|
|
|
Thomas L. Brown(5) (6) (7) |
| 42,439 |
|
| * |
|
|
|
|
|
|
|
|
Jordan W. Graham (2) (3) |
| 42,591 |
|
| * |
|
|
|
|
|
|
|
|
Daniel O. Kennedy (5) (6) (7) |
| 65,832 |
|
| * |
|
|
|
|
|
|
|
|
Craig W. Kliethermes (5) (6) (7) |
| 123,367 |
|
| * |
|
|
|
|
|
|
|
|
Gerald I. Lenrow (2) (3) |
| 159,355 |
|
| * |
|
|
|
|
|
|
|
|
Charles M. Linke (2) (3) |
| 82,304 |
|
| * |
|
|
|
|
|
|
|
|
F. Lynn McPheeters (2) (3) |
| 83,590 |
|
| * |
|
|
|
|
|
|
|
|
Jonathan E. Michael (5) (6) (7) (8) |
| 1,325,674 |
|
| 3.0% |
|
|
|
|
|
|
|
|
James J. Scanlan |
| 5,500 |
|
| * |
|
|
|
|
|
|
|
|
Michael J. Stone (5) (6) (7) (9)(10) |
| 519,721 |
|
| 1.2% |
|
|
|
|
|
|
|
|
Robert O. Viets (2) (3) (11) |
| 205,449 |
|
| * |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and executive officers |
|
|
|
|
|
|
as a group (17 persons) (5) (6) (7) |
| 2,808,697 |
|
| 6.4% |
|
|
|
|
|
|
|
*Less than 1% of Class.
(1)Unless otherwise noted, each person has sole voting power and sole investment power with respect to the shares reported.
(2)Includes shares held by a bank trustee under an irrevocable trust established by the Company pursuant to the RLI Corp. Nonemployee Director Deferred Compensation Plan (“Director Deferred Plan”) for the benefit of the following: Mr. Ahlmann 3,116 shares; Mr. Angelina 1,001 shares; Mr. Baily 27,562 shares; Mr. Graham 38,341 shares; Mr. Lenrow 152,189 shares; Mr. Linke 39,337 shares; Mr. McPheeters 39,071 shares; and Mr. Viets 119,531 shares. Each participating director has no voting or investment power with respect to such shares.
(3)Includes 233 restricted shares awarded to the named persons in February 2014, to which such persons have sole voting and no investment power.
(4)Includes 6,000 shares held by Mr. Baily’s spouse.
(5)Includes shares allocated to the named persons under the ESOP with respect to which such persons have sole voting power and no investment power. As of January 1, 2015, the following shares were allocated under the ESOP: Mr. Brown 1,158 shares; Mr. Kennedy 8,121 shares; Mr. Kliethermes 8,685 shares; Mr. Michael 210,325 shares; and Mr. Stone 50,285 shares. During 2014, Messrs. Michael and Stone were eligible to elect to diversify their respective ESOP shares.
(6)Includes shares allocated to the named persons which shares are held by a bank trustee under an irrevocable trust established by the Company pursuant to the RLI Corp. Executive Deferred Compensation Plan (“Deferred Plan”) for the benefit of the following: Mr. Brown 4,431 shares; Mr. Kennedy 1,230 shares; Mr. Kliethermes 14,926 shares; Mr. Michael 46,015 shares; and Mr. Stone 56,424 shares. Each participant has no voting or investment power with respect to such shares.
(7)Includes shares that may be acquired by the named persons within 60 days after December 31, 2014, under the Omnibus Stock Plan and the Long-Term Incentive Plan, upon the exercise of outstanding stock options as follows: Mr. Brown 11,200 shares; Mr. Kennedy 4,000 shares; Mr. Kliethermes 59,200 shares; Mr. Michael 325,200 shares; and Mr. Stone 67,200 shares.
(8)Includes 406 shares held by Mr. Lenrow’s daughter, as to which Mr. Lenrow disclaims any beneficial interest.
(9)Includes 105,740 shares allocated under the Key Plan, over which Mr. Michael has no voting or investment power; and 21,339 shares owned by the Jonathan E. Michael Grantor Retained Annuity Trusts, over which Mr. Michael, as Trustee, has sole voting and sole investment power.
(10)Includes 78,344 shares owned by the Michael J. Stone Grantor Retained Annuity Trusts, over which Mr. Stone, as Trustee, has sole voting and sole investment power.
(11) Includes 950
28,400 shares; Mr. Kennedy 16,000 shares; Mr. Kliethermes 64,800 shares; Mr. Michael 418,400 shares; and Mr. Stone 115,200 shares.
(8)Includes 114,020 shares allocated under the Key Plan, over which Mr. Michael has no voting or investment power; and 54,851 shares owned by the Jonathan E. Michael Grantor Retained Annuity Trusts, over which Mr. Michael, as Trustee, has sole voting and sole investment power.
(9)Includes 12,550 shares held by Mr. Stone’s wife and 630 shares held by Mr. Stone’s wife, as Custodian — UTMA-FL, as to which Mr. Stone disclaims any beneficial interest.
(10) Includes 67,905 shares owned by the Michael J. Stone Grantor Retained Annuity Trusts, over which Mr. Stone, as Trustee, has sole voting and sole investment power.
(11) Includes 965 shares held in the Karen Viets Revocable Trust Agreement, and 5,244 shares held in the Karen M. Viets Grantor Retained Annuity Trust, over which Mr. Viets, as Co-Trustee, has shared voting and investment power.
The information with respect to beneficial ownership of Common Stock of the Company is based on information furnished to the Company by each individual included in the table.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors, executive officers and beneficial owners of more than 10 percent of the Common Stock of the Company to file with the SEC certain reports regarding their ownership of Common Stock or any changes in such ownership.
Based solely on its review of the copies of such reports received by it, and/or written representations from certain reporting persons, the Company believes that during the year ended December 31, 2014, the reporting persons have complied with all filing requirements of Section 16(a) (except one). The Company filed a voluntary Form 4 with the SEC in March 2014, to report shares which were exempt from current reporting, but had been acquired through an Executive Officer’s automated dividend reinvestment plan in 2013. Such amounts should have been included in the Executive Officer’s direct holding’s ending balance at 2013 the reporting persons have complied with all filing requirements of Section 16(a) (except one). The Company filed a voluntary Form 4 with the SEC in November 2013, to report shares which were exempt from current reporting, but had been acquired through a Director’s automated dividend reinvestment plan from 2010 through September 2013. Such amounts should have been included in the Director’s direct holdings’ ending balance at each respective year end.
PROPOSAL ONE: ELECTION OF DIRECTORS
At this year’s Annual Meeting, all (eleven) directors are to be elected, each to hold office for a one-year term expiring at the 2015 Annual Meeting unless that director dies, resigns or is removed prior to that time. Unless otherwise instructed, the shares represented by a signed proxy card will be voted for the election of the eleven nominees named below. The affirmative vote of a majority of the shares of common stock of the Company present in person or represented by proxy at the Annual Meeting and entitled to vote is required for the election of directors. Votes will be tabulated by an Inspector of Election appointed at the Annual Meeting. Shares may be voted for, or withheld from, each nominee. Cumulative voting for the directors is not permitted under the Company’s Articles of Incorporation.
Mr. Michael E. Angelina was appointed to the Board on December 20, 2013. Messrs. Kaj Ahlmann, Michael E. Angelina, John T. Baily, Jordan W. Graham, Gerald I. Lenrow, Charles M. Linke, F. Lynn McPheeters, Jonathan E. Michael, Michael J. Stone and Robert O. Viets and Ms. Barbara R. Allen, each a current director, are standing for election. Each is nominated to serve for a one-year term expiring in 2015.
The Board of Directors has no reason to believe that any nominee will be unable to serve if elected. In the event that any nominee shall become unavailable for election, the shares represented by a proxy will be voted for the election of a substitute nominee selected by the persons appointed as proxies and recommended by the Board, unless the Board should determine to reduce the number of directors pursuant to the Company’s By-Laws or allow the vacancy to stay open until a replacement is designated by the Board.
The Board of Directors recommends the shareholders vote “For” election of all eleven nominees listed below.
Below are specific qualifications, skills, attributes and experience with respect to the director nominees to the Board of Directors furnished to the Company by such individuals, summarized herein and more fully detailed in the individual professional history below, which information led to the conclusion they are qualified to serve as a director and are beneficial to the Company. The Nominating/Corporate Governance Committee and the Board considered, in particular, the following with respect to each director: Mr. Ahlmann — his broad reinsurance and insurance expertise as well as his global experience. Ms. Allen — her extensive executive management skills as well as her strategy background. Mr. Angelina — his significant insurance
|
industry experience including his extensive risk management background; Mr. Baily — his extensive experience in accounting and auditing in the insurance and reinsurance industries. Messrs. McPheeters and Viets — their significant experience, expertise and background regarding accounting matters, together with their various executive management experience. Mr. Graham — his strong financial services, strategy, merger/acquisition and advisory experience as well as deep information technology and internet background. Mr. Lenrow — his significant experience, expertise and knowledge of the insurance industry including accounting matters and insurance taxation. Mr. Linke — his many years of experience in the financial field including the broad perspective brought by Mr. Linke’s experience in consulting to clients in many diverse industries. The Board also considered the over 31 years of experience with the Company represented by Mr. Michael (our Chairman, President & Chief Executive Officer) and over 36 years of insurance industry experience (18 years at the Company) represented by Mr. Stone.
|
|
|
| DIRECTOR |
|
|
NAME |
| AGE |
| SINCE |
| PRINCIPAL OCCUPATION AND BACKGROUND |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kaj Ahlmann |
| 63 |
| 2009 |
| Joined Deutsche Bank in October 2009 as Global Head, Strategic Services and Chair, Advisory Board after having provided independent services to the Council of Global Insurance Asset Management, Deutsche Asset Management, since 2006. Mr. Ahlmann brings nearly 35 years of experience with various companies related to the reinsurance and insurance industries and asset management. From 2001 to 2003, Mr. Ahlmann was the Chairman and CEO of inreon, a global electronic reinsurance venture created by Munich Re, Swiss Re, Internet Capital Group and Accenture. He was Vice Chairman and Executive Officer of E.W. Blanch Holdings, Inc., a provider of integrated risk management and distribution services, from 1999 to 2001. Prior to that, from 1993 to 1999, he was Chairman, President and CEO of Employers Reinsurance Corporation, a global reinsurance company and served as a director of the parent organization, GE Capital Services. He served on the boards of Erie Indemnity Company, Erie Insurance Group from 2003 to 2008 and SCPIE Holdings, Inc., from 2006 to 2008. Mr. Ahlmann, with his family, owns and operates the Six Sigma Ranch & Winery in Lower Lake, California, which produces artisanal wines for retail distribution. Mr. Ahlmann currently serves on the boards of the American Institute for CPCU and the Advisory Board of Six Sigma Academy. He has a Bachelor’s degree in Mathematics and a Master’s degree in Mathematical Statistics and Probability and Actuarial Science, both from the University of Copenhagen. |
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barbara R. Allen |
| 61 |
| 2006 |
| Retired after serving from November 2005 through August 2008 as President of Proactive Partners, a division of Tennis Corporation of America, which owns and operates athletic facilities in North America. Former Partner with The Everest Group, a strategy and general management consulting firm, from 2003 through October 2005. For 23 years, Ms. Allen held various executive management positions with The Quaker Oats Company including Executive Vice President, International Foods responsible for Quaker’s food business outside the United States; Vice President, Corporate Strategic Planning responsible for development of worldwide strategic plans and annual operating budgets; and, President, Frozen Foods Division and Vice President Marketing. Additionally, Ms. Allen served as President of the Corporate Supplier Division for Corporate Express and as CEO for the women’s pro-soccer league start-up, the WUSA. Ms. Allen is a former director for Maytag Corporation, Tyson Foods, Inc., Converse Inc., Chart House Enterprises, Inc., Lance, Inc., and Coty, Inc., serving on audit and compensation committees. Ms. Allen currently serves as Director for Hooray Puree and is on the advisory board at The University of Arizona Eller College of Management. She has a Bachelor’s degree in Psychology from the University of Illinois-Champaign and a Master’s degree in Marketing and Finance from the University of Chicago. |
|
|
|
| |||
|
|
|
|
|
|
|
At this year’s Annual Meeting, all (12) directors are to be elected, each to hold office for a one-year term expiring at the 2016 Annual Meeting unless that director dies, resigns or is removed prior to that time. Unless otherwise instructed, the shares represented by a signed proxy card will be voted for the election of the 12 nominees named below. The affirmative vote of a majority of the shares of common stock of the Company present in person or represented by proxy at the Annual Meeting and entitled to vote is required for the election of directors. Votes will be tabulated by an Inspector of Election appointed at the Annual Meeting. Shares may be voted for, or withheld from, each nominee. Cumulative voting for the directors is not permitted under the Company’s Articles of Incorporation. Mr. James J. Scanlan was appointed to the Board on January 1, 2015. Messrs. Kaj Ahlmann, Michael E. Angelina, John T. Baily, Jordan W. Graham, Gerald I. Lenrow, Charles M. Linke, F. Lynn McPheeters, Jonathan E. Michael, James J. Scanlan, Michael J. Stone and Robert O. Viets and Ms. Barbara R. Allen, each a current director, are standing for election. Each is nominated to serve for a one-year term expiring in 2016. The Board of Directors has no reason to believe that any nominee will be unable to serve if elected. In the event that any nominee shall become unavailable for election, the shares represented by a proxy will be voted for the election of a substitute nominee selected by the persons appointed as proxies and recommended by the Board, unless the Board should determine to reduce the number of directors pursuant to the Company’s By-Laws or allow the vacancy to stay open until a replacement is designated by the Board. The Board of Directors recommends the shareholders vote “For” election of all 12 nominees listed below. Below are specific qualifications, skills, attributes and experience with respect to the director nominees to the Board of Directors furnished to the Company by such individuals, summarized herein and more fully detailed in the individual professional history below, which information led to the conclusion they are qualified to serve as a director and are beneficial 8| RLI Corp. 2015 Proxy Statement to the Company. The Nominating/Corporate Governance Committee and the Board considered, in particular, the following with respect to each director: Mr. Ahlmann — his broad reinsurance and insurance expertise as well as his global experience. Ms. Allen — her executive management experience, which includes profit & loss, balance sheet responsibility, budgeting and strategic planning for major lines of business worldwide. Mr. Angelina — his significant insurance industry experience including his extensive risk management background; Messrs. Baily and Scanlan — their extensive experience in accounting and auditing in the insurance and reinsurance industries. Messrs. McPheeters and Viets — their significant experience, expertise and background regarding accounting matters, together with their various executive management experience. Mr. Graham — his strong financial services, strategy, merger/acquisition and advisory experience as well as deep information technology and internet background. Mr. Lenrow — his significant experience, expertise and knowledge of the insurance industry including accounting matters and insurance taxation. Mr. Linke — his many years of experience in the financial field including the broad perspective brought by Mr. Linke’s experience in consulting to clients in many diverse industries. The Board also considered the over 32 years of experience with the Company represented by Mr. Michael and over 37 years of insurance industry experience (19 years at the Company) represented by Mr. Stone.
|
|
* Chair of Committee
** Mr. Scanlan joined the Board on January 1, 2015
BOARD MEETINGS AND COMPENSATION
During 2014, six meetings of the Board of Directors were held with all directors in attendance, except two directors missed one meeting each. No director attended fewer than 75 percent of the aggregate number of meetings of the Board and Board committees on which he or she served. In connection with each Board meeting, the independent directors meet in executive
session with no members of management present. Effective May 5, 2011, the Lead Director position was established, which position exists when the Company’s CEO is also the Board Chairman. Pursuant to the Charter for the Lead Director position, the Chairman of the Board’s Nominating/Corporate Governance Committee also serves as Lead Director of the Board. Among other responsibilities, the Lead Director presides at the Board’s executive sessions.
During 2014, the Independent Directors were compensated as follows: | ||
| ||
Annual Board Retainer: | $ | 95,000 |
Annual Committee Retainer: |
|
|
Audit | $ | 15,000 |
All Other Committees | $ | 10,000 |
Additional Annual Committee Chair Retainer: |
|
|
Audit | $ | 20,000 |
Executive Resources | $ | 20,000 |
All Other Committees | $ | 10,000 |
Effective February 28, 2014, the Independent Directors received an annual award of $10,000 in Company stock, which vests on the first to occur of: the one year anniversary from date of issuance or when a Director leaves the Board. Effective January 1, 2015, the $10,000 annual reward was terminated and the Annual Board Retainer increased from $95,000 to $105,000.
Effective January 1, 2014, the Lead Director (if a Nonemployee Director) will receive a $10,000 annual retainer.
Directors are also reimbursed for actual travel and related expenses incurred and are provided a travel accident policy funded by the Company.
The following table provides the compensation of the Company’s Board of Directors earned for the fiscal year ended December 31, 2014.
|
|
|
|
|
|
|
|
|
| Change in Pension |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Value and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nonqualified |
|
|
|
|
|
|
|
| Fees Earned |
|
|
|
|
| Non-Equity |
| Deferred |
|
|
|
|
|
|
|
| or Paid in |
| Stock |
| Option |
| Incentive Plan |
| Compensation |
| All Other |
|
|
|
|
Name |
| Cash ($)(1) |
| Awards ($) |
| Awards ($) |
| Compensation ($) |
| Earnings |
| Compensation ($) |
| Total ($) |
|
|
(a) |
| (b) |
| (c) |
| (d) |
| (e) |
| (f) |
| (g) |
| (h) |
|
|
Kaj Ahlmann |
| 125,000 |
| 10,000 |
|
|
|
|
|
|
|
|
| 135,000 |
|
|
Barbara R. Allen |
| 140,000 |
| 10,000 |
|
|
|
|
|
|
|
|
| 150,000 |
|
|
Michael E. Angelina |
| 118,323 |
| 10,000 |
|
|
|
|
|
|
|
|
| 128,323 |
|
|
John T. Baily |
| 140,000 |
| 10,000 |
|
|
|
|
|
|
|
|
| 150,000 |
|
|
Jordan W. Graham |
| 115,000 |
| 10,000 |
|
|
|
|
|
|
|
|
| 125,000 |
|
|
Gerald I. Lenrow |
| 116,675 |
| 10,000 |
|
|
|
|
|
|
|
|
| 126,675 |
|
|
Charles M. Linke |
| 135,000 |
| 10,000 |
|
|
|
|
|
|
|
|
| 145,000 |
|
|
F. Lynn McPheeters |
| 125,000 |
| 10,000 |
|
|
|
|
|
|
|
|
| 135,000 |
|
|
Jonathan E. Michael (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James J. Scanlan(3) |
| – |
|
|
|
|
|
|
|
|
|
|
| – |
|
|
Michael J. Stone (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert O. Viets |
| 130,000 |
| 10,000 |
|
|
|
|
|
|
|
|
| 140,000 |
|
|
(1)Outside directors elect the form of their Annual Board Retainer, Annual Committee Retainer and Annual Committee Chair Retainer, if applicable, which may be received either in cash or in Company stock, or a combination of both, in accordance with the Director Deferred Plan. Amounts shown include the value of fees taken in the form of Company stock.
(2)Mr. Michael, as Chairman of the Board and a management director, does not receive director fees. His compensation as President & CEO is disclosed under the Executive Compensation Summary Compensation Table.
(3)Mr. Scanlan was appointed to the Board on January 1, 2015.
|
(4)Mr. Stone, as a management director, does not receive director fees. His compensation as President, Chief Operating Officer of the Company’s principle insurance subsidiaries is disclosed under the Executive Compensation Summary Compensation Table.
NONEMPLOYEE DIRECTOR DEFERRED COMPENSATION PLAN (DIRECTOR DEFERRED PLAN)
Prior to the beginning of each year, an outside director may elect to defer the compensation otherwise payable or awarded to the director during the succeeding year pursuant to the Director Deferred Plan. Under the Director Deferred Plan, the Company transfers to a bank trustee, under an irrevocable trust established by the Company, such number of shares of the Company as are equal to the compensation deferred by the director during the relevant year. The deferred compensation is used to purchase an equivalent amount of Company Common Stock. Dividends on these shares are reinvested quarterly under the Company’s Dividend Reinvestment Plan. In general, Director Deferred Plan benefits are distributable, in the form of Company Common Stock, beginning when the director’s status terminates.
Outside Directors are encouraged to, within five years of their initial appointment as a Company director, own shares of the Common Stock of the Company having a value of not less than 500 percent of such director’s Annual Board Retainer, which Retainer was $95,000 in 2014. Effective January 1, 2015, the Annual Board Retainer is $105,000. Shares held directly and in Company benefit plans are counted to satisfy the guideline.
The Nominating/Corporate Governance Committee monitors directors’ share ownership and may make allowances to accommodate periodic adjustments to the Annual Board Retainer, and other factors affecting a director’s share ownership level.
Immediately following the 2014 Annual Shareholders Meeting, Mr. Michael was re-appointed Chairman of the Board in addition to his current position of President & CEO.
The Company does not have a formal policy regarding separation of the offices of chairman of the board and chief executive officer. The Board believes that the decision whether to combine or separate such positions will vary from company to company and depends upon a company’s particular circumstances at a given point in time.
The Board believes that a joint board chairman and chief executive officer position is advisable and in the best interests of the Company and its shareholders given our current Board and Lead Director configuration. This structure promotes unified leadership, continuity and direction for the Company. This combined position also provides a clear focus for management to execute the Company’s strategy and business plan, while fostering clear accountability and decision-making in such roles. The Board believes the designation of an empowered “Lead Director” provides a counterbalancing governance structure and enables an appropriate balance between strategic execution and independent oversight of management.
The Lead Director (an independent director) is the Chairperson of the Board’s Nominating/Corporate Governance Committee and is elected/confirmed by the Board’s independent directors. The Lead Director (a) presides over executive sessions of the independent directors, (b) serves as a liaison between the Chairman and the independent directors, (c) assists in setting Board meeting agendas and schedules, (d) assists in determining information sent to directors for meetings, (e) may call meetings of the independent directors, (f) may consult with major shareholders if requested by the Chairman or the Board, and (g) consults with the Chairman/CEO regarding results of annual performance reviews of the Board Committees, Board members and CEO, all as set forth in the charter for the Lead Director position.
Several factors promote a strong and independent Board at our Company. Currently, all directors except for Messrs. Michael and Stone are independent as defined in the applicable NYSE listing standards (as adopted by the Company). The Audit, Executive Resources and Nominating/Corporate Governance committees of our Board are comprised entirely of independent directors. Also, our independent directors meet quarterly in executive session without management present. Consequently, with our Lead Director position, we believe our Board continues to be strong and independent and provides appropriate counterbalance to a combined Chairman/CEO position.
The following report by the Audit Committee (the “Committee”) of the Company’s Board of Directors is required by the rules of the SEC to be included in this Proxy Statement and shall not be considered incorporated by reference in other filings by the Company with the SEC. The Committee is composed of five independent directors and operates under a written charter adopted by the Board of Directors. |
| |
The primary role of the Committee is to assist the Board of Directors in its oversight of (a) the Company’s corporate accounting and reporting practices, (b) the quality and integrity of the Company’s financial statements, (c) the performance of the Company’s system of internal accounting and financial controls, (d) the Company’s compliance with related legal and regulatory requirements, (e) the Company’s risk management program, (f) the qualifications, independence and performance of the independent registered public accounting firm (“Auditor”), and (g) the performance of the Company’s internal audit function. In addition to those primary roles, the Committee also performs other roles and functions as outlined in its charter, including preliminary review of earnings releases and other activities. The Committee also acts as the audit committee for each of the Company’s insurance company subsidiaries. A more detailed description of the Committee’s roles, functions and activities is set forth in the description of Board committees elsewhere in this Proxy Statement and in the Committee’s charter, which is available on our corporate website.
The Board of Directors has determined that each of the members of the Audit Committee qualifies as “independent” within the meaning of the NYSE Listing Standards and the rules of the SEC. The Board of Directors has further determined that each of Ms. Allen and Messrs. Angelina, Baily, Scanlan and Viets is an “audit committee financial expert” within the meaning of the SEC rules.
The Committee reviews the internal audit function of the Company, including the independence and authority of its reporting obligations, the proposed audit plans for the coming year and the coordination of such plans with the Auditor. The Company’s Internal Audit Services department provides the internal audit function, which provides objective assurance and consulting services designed to add value and improve the organization’s operations. The Committee oversees the Internal Audit Services department and the overall internal audit function at the Company. The Company’s internal audit function operates under the terms of the RLI Internal Audit Services Charter which is reviewed by the Committee and is signed by the Committee’s chair as well as the Company’s CEO. To assist with this oversight, RLI’s Internal Audit Services provides an annual risk-based audit plan to the Audit Committee and periodic reports are additionally made to the Committee summarizing results of internal audit activities.
The Committee appoints and annually evaluates the performance of the Company’s Auditor and provides assistance to the members of the Board of Directors in fulfilling their oversight functions of the financial reporting practices, including satisfying obligations imposed by Section 404 of the Sarbanes Oxley Act of 2002, and financial statements of the Company. It is not the duty of the Committee, however, to plan or conduct audits or to determine that the Company’s financial statements are complete and accurate and are in accordance with U.S. generally accepted accounting principles. The Company’s Auditor is responsible for planning and conducting audits of the financial statements and internal controls over financial reporting; and the Company’s management is responsible for preparing the financial statements, designing and assessing the effectiveness of internal control over financial reporting and determining that the Company’s financial statements are complete and accurate and in accordance with U.S. generally accepted accounting principles and applicable laws and regulations.
The Company’s current independent registered public accounting firm is KPMG LLP (“KPMG”). KPMG has been the Company’s independent registered public accounting firm since 1983 and the Audit Committee has selected KPMG to be the Company’s independent registered public accounting firm for fiscal 2015.
The Committee contracts with and sets the fees paid to the independent registered public accounting firm. The fees for KPMG’s audit services the past two fiscal years are set forth on pages 27.
Audit fees relate to professional services rendered for the audit of consolidated financial statements of the Company, audits of the statutory financial statements of certain subsidiaries, review of quarterly consolidated financial statements and assistance with review of documents filed with the SEC, including attestation as required under Section 404 of the Sarbanes Oxley Act of 2002.
There are no non-audit services currently being provided by KPMG. Any non-audit services must be reviewed and pre-approved by the Chair of the Audit Committee. The Chair will report such hiring to the Committee no later than the next scheduled Committee meeting.
The Committee annually conducts evaluations of the Company’s Auditor to determine if it will recommend the retention of the Auditor for the next year. As part of the evaluation of the Auditor, the Committee conducts two surveys to determine if the Auditor is meeting Committee expectations and providing appropriate audit services. The first survey was created by a group of professional accounting and auditing organizations, including the National Association of Corporate Directors and the Center for Audit Quality. This survey is completed by select RLI management and the Chair of the Committee. This Auditor evaluation includes topics such as: (a) quality of services and sufficiency of resources provided by the auditor; (b) communication and interaction with the auditor; and (c) Auditor independence, objectivity and professional skepticism. The second survey is initiated by KPMG and completed by the Committee and select members of RLI management. This evaluation generally assesses management’s satisfaction with KPMG’s engagement team, resources, communication and audit execution. The results of both surveys, including any resulting action items, are presented to and discussed by the Committee and assist
the Committee in the decision regarding reappointment of the Auditor. Also, the results of the surveys are discussed with the Auditor by the Committee. In addition, the Committee obtains and reviews, at least annually, a report by the Auditor describing; the firm’s internal quality-control procedures; any material issues raised by the most recent internal quality-control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues; and (to assess the Auditor’s independence) all relationships between the Auditor and the Company. Based upon the results of such evaluations, the Committee makes its recommendation regarding retention of the Auditor.
The Committee received reports and reviewed and discussed the audited financial statements with management and the Auditor. The Committee also discussed with the Auditor the Section 404 obligations and matters required to be discussed by Public Company Accounting Oversight Board (“PCAOB”) Standard No. 16, Communication with Audit Committees. The Committee received from the Company’s Auditor the written disclosures and letter required by the applicable PCAOB requirements for independent registered public accounting firm’s communications with the Audit Committee concerning auditor independence. The Committee discussed with the Auditor that firm’s independence and any relationships that may impact that firm’s objectivity and independence including audit and non-audit fees. Additionally, the Committee promotes the Auditor’s independence by ensuring that the lines of communication are always open and constant between the Auditor and the Committee. The Committee Chair is in contact with the Auditor numerous times throughout the year. This includes normal in-person meetings, executive sessions, telephonic meetings and periodically in between normally scheduled meetings. The purpose of this is to allow open and unobstructed access to the Committee should the Auditor need to bring anything to the Committee’s attention.
Pursuant to the Sarbanes Oxley Act of 2002 and the rules of the PCAOB, the Auditor’s lead engagement partner is required to rotate every five years. The current KPMG lead engagement partner is in the 5th year of the five year rotation requirement for the 2014 audit. During 2014, KPMG senior management introduced a proposed successor lead engagement partner candidate to the Audit Committee for consideration. Among the criteria used by the Audit Committee to evaluate the proposed partner candidate included relevant industry and technical experience, communication skills and ability to efficiently and effectively transition into the lead engagement partner role. Based on meetings to assess these criteria, the proposed individual was accepted and will begin the first year of a five year rotation in 2015.
Based on the Committee’s discussion with and review of reports from management, the Company’s internal auditors and the Company’s Auditor and the Committee’s reliance on the representation of management that the Company’s consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles, the Committee recommended to the Board of Directors that the audited financial statements of the Company be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, as filed with the SEC.
The foregoing report has been approved by all members of the Audit Committee.
MEMBERS OF THE AUDIT COMMITTEE
John T. Baily (Chair)
Barbara R. Allen
Michael E. Angelina
James J. Scanlan
Robert O. Viets
EXECUTIVE RESOURCES COMMITTEE REPORT
The Executive Resources Committee has reviewed and discussed with management of the Company the Compensation Discussion and Analysis section of this Proxy Statement. Based on the Executive Resources Committee’s review and discussions, it recommended to the Board, and the Board approved, that the Compensation Discussion and Analysis be included in the Company’s 2015 Proxy Statement.
MEMBERS OF THE EXECUTIVE RESOURCES COMMITTEE
Barbara R. Allen (Chair)
Kaj Ahlmann
Jordan W. Graham
F. Lynn McPheeters
During 2013, the Independent Directors were compensated as follows:
Annual Board Retainer: |
| $ | 95,000 |
|
Annual Committee Retainer: |
|
|
| |
Audit |
| $ | 15,000 |
|
All Other Committees |
| $ | 10,000 |
|
Additional Annual Committee Chair Retainer: |
|
|
| |
Audit |
| $ | 20,000 |
|
Executive Resources |
| $ | 20,000 |
|
All Other Committees |
| $ | 10,000 |
|
Effective February 6, 2013, the Independent Directors receive an annual award of $10,000 in Company stock, which vests on the first to occur of: the one year anniversary from date of issuance or when a Director leaves the Board.
Effective January 1, 2014, the Lead Director will receive a $10,000 annual retainer.
Directors are also reimbursed for actual travel and related expenses incurred and are provided a travel accident policy funded by the Company.
The following table provides the compensation of the Company’s Board of Directors earned for the fiscal year ended December 31, 2013.
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| Change in Pension |
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| Value and |
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| Nonqualified |
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| Fees Earned |
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| Non-Equity |
| Deferred |
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| or Paid in |
| Stock |
| Option |
| Incentive Plan |
| Compensation |
| All Other |
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Name |
| Cash ($)(1) |
| Awards ($) |
| Awards ($) |
| Compensation ($) |
| Earnings |
| Compensation ($) |
| Total ($) |
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(a) |
| (b) |
| (c) |
| (d) |
| (e) |
| (f) |
| (g) |
| (h) |
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|
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|
|
|
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|
|
|
|
|
|
Kaj Ahlmann |
| 125,000 |
| 10,000 |
|
|
|
|
|
|
|
|
| 135,000 |
|
Barbara R. Allen |
| 140,000 |
| 10,000 |
|
|
|
|
|
|
|
|
| 150,000 |
|
Michael E. Angelina |
| 3,466 (2) |
|
|
|
|
|
|
|
|
|
|
| 3,466 |
|
John T. Baily |
| 140,000 |
| 10,000 |
|
|
|
|
|
|
|
|
| 150,000 |
|
David B. Duclos |
| 17,958 (3) |
|
|
|
|
|
|
|
|
|
|
| 17,958 |
|
Jordan W. Graham |
| 115,000 |
| 10,000 |
|
|
|
|
|
|
|
|
| 125,000 |
|
Gerald I. Lenrow |
| 120,000 |
| 10,000 |
|
|
|
|
|
|
|
|
| 130,000 |
|
Charles M. Linke |
| 125,000 |
| 10,000 |
|
|
|
|
|
|
|
|
| 135,000 |
|
F. Lynn McPheeters |
| 125,000 |
| 10,000 |
|
|
|
|
|
|
|
|
| 135,000 |
|
Jonathan E. Michael (4) |
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Michael J. Stone (5) |
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|
|
|
|
|
|
|
|
|
|
|
|
Robert O. Viets |
| 120,000 |
| 10,000 |
|
|
|
|
|
|
|
|
| 130,000 |
|
|
|
|
|
|
|
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|
(1)Outside directors elect the form of their Annual Board Retainer, Annual Committee Retainer and Annual Committee Chair Retainer, if applicable, which may be received either in cash or in Company stock, or a combination of both, in accordance with the Directors Deferred Compensation Plan (“Deferred Plan”). Amounts shown include the value of fees taken in the form of Company stock.
(2)Mr. Angelina was appointed to the Board on December 20, 2013.
(3)Mr. Duclos was appointed to the Board on August 16, 2012. He resigned from the Board effective February 26, 2013, to become CEO of QBE-North America.
(4)Mr. Michael, as Chairman of the Board and a management director, does not receive director fees. His compensation as President and CEO is disclosed under the Executive Compensation Summary Compensation Table.
(5)Mr. Stone, as a management director, does not receive director fees. His compensation as President, Chief Operating Officer of the Company’s principle insurance subsidiaries is disclosed under the Executive Compensation Summary Compensation Table.
NONEMPLOYEE DIRECTOR DEFERRED COMPENSATION PLAN (DEFERRED PLAN)
Prior to the beginning of each year, an outside director may elect to defer the compensation otherwise payable or awarded to the director during the succeeding year pursuant to the Deferred Plan. Under the Deferred Plan, the Company transfers to a bank trustee, under an irrevocable trust established by the Company, such number of shares of the Company as are equal to the compensation deferred by the director during the relevant year. The deferred compensation is used to purchase an equivalent amount of Company Common Stock. Dividends on these shares are reinvested quarterly under the Company’s Dividend Reinvestment Plan. In general, Deferred Plan benefits are distributable, in the form of Company Common Stock, beginning when the director’s status terminates.
Outside Directors are encouraged to, within five years of their initial appointment as a Company director, own shares of the Common Stock of the Company having a value of not less than 500 percent of such director’s Annual Board Retainer, which Retainer was $95,000 in 2013. Shares held directly and in Company benefit plans are counted to satisfy the guideline.
The Nominating/Corporate Governance Committee monitors directors’ share ownership and may make allowances to accommodate periodic adjustments to the Annual Board Retainer, and other factors affecting a director’s share ownership level.
Immediately following the 2013 Annual Shareholders Meeting, Mr. Michael was re-appointed Chairman of the Board in addition to his current position of President and Chief Executive Officer.
The Company does not have a formal policy regarding separation of the offices of chairman of the board and chief executive officer. The Board believes that the decision whether to combine or separate such positions will vary from company to company and depends upon a company’s particular circumstances at a given point in time.
The Board believes that a joint board chairman and chief executive officer position is advisable and in the best interests of the Company and its shareholders given our current Board and Lead Director configuration. This structure promotes unified leadership, continuity and direction for the Company. This combined position also provides a clear focus for management to execute the Company’s strategy and business plan, while fostering clear accountability and decision-making in such roles. The Board believes the designation of an empowered “Lead Director” provides a counterbalancing governance structure and enables an appropriate balance between strategic execution and independent oversight of management.
The Lead Director (an independent director) is the Chairperson of the Board’s Nominating/Corporate Governance Committee and is elected/confirmed by the Board’s independent directors. The Lead Director (a) presides over executive sessions of the independent directors, (b) serves as a liaison between the Chairman and the independent directors, (c) assists in setting Board meeting agendas and schedules, (d) assists in determining information sent to directors for meetings, (e) may call meetings of the independent directors, (f) may consult with major shareholders if requested by the Chairman or the Board, and (g) consults with the Chairman/CEO regarding results of annual performance reviews of the Board Committees, Board members and CEO, all as set forth in the charter for the Lead Director position.
Several factors promote a strong and independent Board at our Company. Currently, all directors except for Messrs. Michael and Stone are independent as defined in the applicable NYSE listing standards (as adopted by the Company). The Audit, Executive Resources and Nominating/Corporate Governance committees of our Board are comprised entirely of independent directors. Also, our independent directors meet quarterly in executive session without management present. Consequently, with our Lead Director position, we believe our Board continues to be strong and independent and provides appropriate counterbalance to a combined Chairman/CEO position.
The following report by the Audit Committee (the “Committee”) of the Company’s Board of Directors is required by the rules of the SEC to be included in this Proxy Statement and shall not be considered incorporated by reference in other filings by the Company with the SEC.
The Committee is composed of four independent directors and operates under a written charter adopted by the Board of Directors.
The primary role of the Committee is to assist the Board of Directors in its oversight of (a) the Company’s corporate accounting and reporting practices, (b) the quality and integrity of the Company’s financial statements, (c) the performance of the Company’s system of internal accounting and financial controls, (d) the Company’s compliance with related legal and regulatory requirements, (e) the Company’s risk management program, (f) the qualifications, independence and performance of the independent registered public accounting firm (“Auditor”), and (g) the performance of the Company’s internal audit function.
| ||
In addition to those primary roles, the Committee also performs other roles and functions as outlined in its charter, including preliminary review of earnings releases and other activities. The Committee also acts as the audit committee for each of the Company’s insurance company subsidiaries. A more detailed description of the Committee’s roles, functions and activities is set forth in the description of Board committees elsewhere in this Proxy Statement and in the Committee’s charter, which is available on our corporate website.
The Board of Directors has determined that each of the members of the Audit Committee qualifies as “independent” within the meaning of the NYSE Listing Standards and the rules of the SEC. The Board of Directors has further determined that each of Ms. Allen and Messrs. Baily, Lenrow and Viets is an “audit committee financial expert” within the meaning of the SEC rules.
The Committee reviews the internal audit function of the Company, including the independence and authority of its reporting obligations, the proposed audit plans for the coming year and the coordination of such plans with the Auditor. The Company’s Internal Audit Services department provides the internal audit function, which provides objective assurance and consulting services designed to add value and improve the organization’s operations. The Committee oversees the Internal Audit Services department and the overall internal audit function at the Company. The Company’s internal audit function operates under the terms of the RLI Internal Audit Services Charter which is reviewed by the Committee and is signed by the Committee’s chair as well as the Company’s Chief Executive Officer. To assist with this oversight, RLI’s Internal Audit Services provides an annual risk-based audit plan to the Audit Committee and periodic reports are additionally made to the Committee summarizing result of internal audit activities.
The Committee appoints and annually evaluates the performance of the Company’s Auditor and provides assistance to the members of the Board of Directors in fulfilling their oversight functions of the financial reporting practices, including satisfying obligations imposed by Section 404 of the Sarbanes Oxley Act of 2002, and financial statements of the Company. It is not the duty of the Committee, however, to plan or conduct audits or to determine that the Company’s financial statements are complete and accurate and are in accordance with U.S. generally accepted accounting principles. The Company’s Auditor is responsible for planning and conducting audits of the financial statements and internal controls over financial reporting; and the Company’s management is responsible for preparing the financial statements, designing and assessing the effectiveness of internal control over financial reporting and determining that the Company’s financial statements are complete and accurate and in accordance with U.S. generally accepted accounting principles and applicable laws and regulations.
The Company’s current independent registered public accounting firm is KPMG LLP (“KPMG”). KPMG has been the Company’s independent registered public accounting firm since 1983 and the Audit Committee has selected KPMG to be the Company’s independent registered public accounting firm for fiscal 2014.
The Committee contracts with and sets the fees paid to the independent registered public accounting firm. The fees for services for KPMG’s audit services the past two fiscal years are set forth in Proposal Two on pages 13-14.
Audit fees relate to professional services rendered for the audit of consolidated financial statements of the Company, audits of the statutory financial statements of certain subsidiaries, review of quarterly consolidated financial statements and assistance with review of documents filed with the SEC, including attestation as required under Section 404 of the Sarbanes Oxley Act of 2002.
There are not currently any non-audit services being provided by KPMG. Any non-audit services must be reviewed and pre-approved by the Chair of the Audit Committee. The Chair will report such hiring to the Committee no later than the next scheduled Committee meeting.
The Committee annually conducts an evaluation of the Auditor to determine if they will recommend the retention of the Auditor. As part of the evaluation of the Auditor, the Committee surveys select RLI management and all members of the Committee to determine if the Auditor is meeting Company expectations. The results of the survey are presented to the Committee and assist the Committee in the decision to recommend reappointment of the Auditor. The Auditor evaluations include whether the Auditor : 1) maintains independence, integrity and objectivity combined with an attitude of professional skepticism; 2) maintains candid and open dialog, communicates in a timely, forthright manner with sufficient clarity and frequency; and 3) understands the Company’s business operations and strategy. In addition, the Committee obtains and reviews, at least annually, a report by the Auditor describing; the firm’s internal quality-control procedures; any material issues raised by the most recent internal quality-control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues; and (to assess the Auditor’s independence) all relationships between the Auditor and the Company. Based upon the results of the evaluations mentioned, the Committee recommends the retention of the Auditor based upon the quality of audit services and sufficiency of resources provided.
The Committee received reports and reviewed and discussed the audited financial statements with management and the Auditor. The Committee also discussed with the Auditor the Section 404 obligations and matters required to be discussed by Public Company Accounting Oversight Board (“PCAOB”) Standard No. 16, Communication with Audit Committees.
The Committee received from the Company’s Auditor the written disclosures and letter required by the applicable PCAOB requirements for independent registered public accounting firm’s communications with the Audit Committee concerning auditor independence. The Committee discussed with the Auditor that firm’s independence and any relationships that may impact that firm’s objectivity and independence including audit and non-audit fees. Additionally, the Committee promotes the Auditor’s independence by ensuring that the lines of communication are always open and constant between the Auditor and the Committee. The Committee Chair is in contact with the Auditor numerous times throughout the year. This includes normal in-person meetings, executive sessions, telephonic meetings and periodically in between normally scheduled meetings. The purpose of this is to allow open and unobstructed access to the Committee should the Auditor need to bring anything to the Committee’s attention.
Pursuant to the Sarbanes Oxley Act of 2002 and the rules of the PCAOB, the Auditor’s lead engagement partner is required to rotate every five years. In 2014, KPMG’s current lead engagement partner for the Company’s audit is in the fifth year of a five year rotation period. Among the Committee’s responsibilities during such a rotation include reviewing desirable partner attributes with KPMG management and conducting telephonic and in-person meetings in order to ensure the new lead engagement partner makes a smooth transition into the new position.
Based on the Committee’s discussion with and review of reports from management, the Company’s internal auditors and the Company’s Auditor and the Committee’s reliance on the representation of management that the Company’s consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles, the Committee recommended to the Board of Directors that the audited financial statements of the Company be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the SEC.
The foregoing report has been approved by all members of the Audit Committee.
MEMBERS OF THE AUDIT COMMITTEE
John T. Baily (Chair)
Barbara R. Allen
Gerald I. Lenrow
Robert O. Viets
EXECUTIVE RESOURCES COMMITTEE REPORT
The Executive Resources Committee has reviewed and discussed with management of the Company the Compensation Discussion and Analysis section of this Proxy Statement. Based on the Executive Resources Committee’s review and discussions, it recommended to the Board, and the Board approved, that the Compensation Discussion and Analysis be included in the Company’s 2014 Proxy Statement.
MEMBERS OF THE EXECUTIVE RESOURCES COMMITTEE
Barbara R. Allen (Chair)
Jordan W. Graham
Gerald I. Lenrow
F. Lynn McPheeters
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Executive Resources Committee is a current or former employee or officer of the Company or otherwise had any relationships to be disclosed within the scope of SEC regulations.
COMPENSATION DISCUSSION & ANALYSIS The Executive Resources Committee (“ERC”) of the Company’s Board of Directors, with the review and approval of the Board of Directors, administers specific compensation programs for senior executive officers and oversees other executive compensation programs and management succession and development processes. Our Results in 2014: 2014 2013 Gross Written Premium $863.9 million $843.2 million Operating Earnings $114.5 million $111.9 million (Net Earnings minus Realized Investment Gains Net of Tax) Combined Ratio 84.5 83.1 (Net Loss and Operating Expense/Net Premiums Earned) Operating Return on Equity 13.9% 14.1% (Operating Earnings/Shareholder’s Equity) Market Value Potential (MVP) $99.7 million $133.8 million (After Tax Returns Above Cost of Capital) Five-Year Growth in Book Value: Rank Among Peer Companies 2/14 2/14 In 2014, we achieved improvement in key absolute and relative financial metrics in the face of difficult market conditions. Growth in gross written premium was $20.7 million, or 2.4 percent. Operating earnings were up 2.3 percent for the year, resulting in a strong Operating Return on Equity of 13.9 percent, slightly below the previous year. Our combined ratio, a measure of our expenses, increased modestly to 84.5 percent in 2014, which nonetheless remained the best among our peer companies. Our net earnings combined with the positive unrealized appreciation on our equity portfolio, drove after tax returns above our cost of capital to $99.7 million versus $133.8 million last year (also known as Market Value Potential (“MVP”), explained in more detail on page 41). Finally, we compare our relative growth in book value over a five-year period to our peer companies and use that performance as a factor in calculating incentive compensation. For the five-year period ending in 2014, our relative rank among peer companies for this metric remained at second among 14 companies, the same as in 2013. With the exception of gross written premium, the financial metrics above are used as targets in our incentive plans and actual results are used to calculate annual incentives for our senior executive officers. These financial measures (other than gross written premium) are non-GAAP and should not be considered substitutes for GAAP measures. We consider them key performance indicators and employ them as well as other factors in determining senior management incentive compensation. The calculation of these non-GAAP metrics can be found in the discussions below with respect to the incentive plans in which those metrics are used. KEY ATTRIBUTES OF RLI EXECUTIVE COMPENSATION ·Performance-based compensation: Total executive compensation is directly linked to Company performance. As in prior years, all executives participate in an incentive plan, through which they are eligible to earn compensation based on achievement of Company financial objectives and personal objectives that are aligned with shareholder value creation. ·At risk compensation: A significant portion of annual incentive compensation for our CEO, COO, CFO, Executive Vice President, Operations and each product group vice president is paid over time through a bonus bank concept to provide an incentive for sustained shareholder value creation. Amounts credited to the bonus bank are reduced dollar-for-dollar, should negative results occur in a future period. As a result, net losses in a future period reduce the amount available in |
38| RLI Corp. 2015 Proxy Statement | ||
the bonus bank and could result in a negative balance. There will be no bonus payout in any year in which a bonus bank has a negative balance.
·Compensation based on relative company performance: Each year we conduct a review of executive compensation within an insurance peer group to ensure that the Company’s executive compensation remains fair, competitive and consistent with the Company’s absolute and relative performance. The MVP Program for the CEO, COO, CFO and Executive Vice President, Operations includes an adjustment factor (positive and negative) for relative company performance.
·Significant executive stock ownership: Our compensation programs encourage our employees to build and maintain an ownership interest in the Company. We have established specific executive stock ownership guidelines and our executive officers whose compensation is included in the Summary Compensation Table (referred to herein collectively as “named executive officers” or “NEOs”), as well as our other executive officers, currently maintain significant share ownership in the Company. As reflected on page 7, as of February 9, 2015, executive officers and Directors beneficially held 6.4 percent of Company shares, providing strong alignment with shareholders.
The ERC believes that the Company’s overall compensation approach provided meaningful incentives for the talented management team at the Company to provide outstanding results for shareholders again this year. In 2014, the Company returned capital to our shareholders through our 39th consecutive year of increasing and paying regular dividends and a $3.00 per share special dividend.
COMPENSATION DISCUSSION & ANALYSIS
The Executive Resources Committee (“ERC”) of the Company’s Board of Directors, with the review and approval of the Board of Directors, administers specific compensation programs for senior executive officers and oversees other executive compensation programs and management succession and development processes.
Our Results in 2013:
|
| 2013 |
| 2012 |
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|
|
|
|
Gross Written Premium |
| $843.2 million |
| $784.8 million |
Operating Earnings |
| $111.9 million |
| $ 86.9 million |
(Net Earnings minus Investment Gains Net of Tax) |
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Combined Ratio |
| 83.1 |
| 89.0 |
(Net Loss and Operating Expense/Net Premiums Earned) |
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Operating Return on Equity |
| 14.1% |
| 11.0% |
(Operating Earnings/Shareholder’s Equity) |
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Market Value Potential (MVP) |
| $133.8 million |
| $ 82.7 million |
(After Tax Returns Above Cost of Capital) |
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Five-Year Growth in Book Value: Rank Among Peer Companies |
| 2/14 |
| 3/14 |
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As shown above, our results for 2013 were outstanding. We achieved improvements in key absolute and relative financial metrics. Growth in gross written premium was $58.4 million, or 7.4 percent. Operating earnings were up 28.9 percent for the year, which resulted in a strong Operating Return on Equity of 14.1 percent. Our combined ratio, a measure of our expenses, improved in 2013. Investment returns on our equity portfolio were favorable which, combined with operating earnings, drove after tax returns above our cost of capital to $133.8 million versus $82.7 million last year (also known as Market Value Potential (“MVP”), explained in more detail on page 28). Finally, we compare our relative growth in book value over a five-year period to our peer companies and use that performance as a factor in calculating incentive compensation. For the five-year period ending in 2013, our relative rank among peer companies for this metric improved.
With the exception of gross written premium, the financial metrics above are used as targets in our incentive plans and actual results are used to calculate annual incentives for our senior executive officers. These financial measures (other than gross written premium) are non-GAAP and should not be considered substitutes for GAAP measures. We consider them key performance indicators and employ them as well as other factors in determining senior management incentive compensation. The calculation of these non-GAAP metrics can be found in the discussions below with respect to the incentive plans in which those metrics are used.
KEY ATTRIBUTES OF RLI EXECUTIVE COMPENSATION
·Performance-based compensation: Total executive compensation is directly linked to Company performance. As in prior years, all executives participate in an incentive plan, through which they are eligible to earn compensation based on achievement of Company financial objectives and personal objectives that are aligned with shareholder value creation.
·At risk compensation: A significant portion of annual incentive compensation for our CEO, COO, CFO, Executive Vice President, Operations and each product group vice president is paid over time through a bonus bank concept to provide an incentive for sustained shareholder value creation. Amounts credited to the bonus bank are reduced dollar-for-dollar, should negative results occur in a future period. As a result, net losses in a future period reduce the amount available in the bonus bank and could result in a negative balance. There will be no bonus payout in any year in which a bonus bank has a negative balance.
·Compensation based on relative company performance: Each year we conduct a review of executive compensation within an insurance peer group to ensure that the Company’s executive compensation remains fair, competitive and consistent with the Company’s absolute and relative performance. The MVP Program for the CEO, COO, CFO and Executive Vice President, Operations includes an adjustment factor (positive and negative) for relative company performance.
·Significant executive stock ownership: Our compensation programs encourage our employees to build and maintain an ownership interest in the Company. We have established specific executive stock ownership guidelines and our executive officers whose compensation is included in the Summary Compensation Table (referred to herein collectively as “named executive officers” or “NEOs”), as well as our other executive officers, currently maintain significant share ownership in the Company. As reflected on page 7, as of January 16, 2014, executive officers and Directors beneficially held 5.7 percent of Company shares, providing strong alignment with shareholders.
The ERC believes that the Company’s overall compensation approach provided meaningful incentives for the talented management team at the Company to provide outstanding results for shareholders again this year. In 2013, the Company returned capital to our shareholders through our 38th consecutive year of paying regular dividends and a $1.50 per share special dividend (adjusted for the two-for-one stock split on January 15, 2014).
In 2013,From January 1, 2014 through May 1, 2014, the members of the ERC were Ms. Allen (Chair) and Messrs. Graham, Lenrow and McPheeters. Starting May 2, 2014, the members of the ERC were Ms. Allen (Chair) and Messrs. Ahlmann, Graham and McPheeters. ERC members are nominated by the Nominating/Corporate Governance Committee, elected by the Board and may be removed from the ERC by the Board at any time, with or without cause. The members of the ERC are independent directors under the independence standards developed by the Board, which incorporate all of the NYSE independence standards which are applicable to directors generally, and which are set out under the section entitled CORPORATE GOVERNANCE AND BOARD MATTERSCorporate Governance and Board Matters on page 15.28. The Board annually determines the independence of each member of the ERC under those independence standards.
The ERC operates under a Charter, which can be found on the Company’s website at www.rlicorp.com. The ERC Charter is reviewed annually by the ERC and any proposed changes to the Charter are submitted to the Nominating/Corporate Governance Committee for recommendation to the full Board for approval. The ERC is responsible to the Board for (1) reviewing and providing advice regarding the Company’s executive compensation; (2) reviewing and providing advice regarding the Company’s management succession and development processes; (3) monitoring compensation actions by management below the executive level; (4) producing an annual report on executive compensation for approval by the Board for inclusion in the Company’s proxy statement and (5) reviewing the Company’s employee benefit plans.
The ERC held sevensix meetings in 2013.2014. The ERC also held a joint meeting with the Audit Committee of the Board of Directors to discuss safeguards against unnecessary or excessive risk that could arise from the Company’s executive compensation policies and practices. The agenda for each ERC meeting is established by the Chair of the ERC in consultation with other ERC members, and with Mr. Michael and JeffreyMr. Fick, the Company’s Vice President, Human Resources. ERC materials are prepared by Messrs. Michael and Fick and are reviewed and approved by the ERC Chair in advance of distribution to ERC members. The ERC meetings are attended by Messrs. Michael and Fick, who are excused from the meeting during the Committee’s executive session.
At the May 20132014 annual shareholder’s meeting, we held a shareholder advisory vote on the compensation of our named executive officers, referred to as a Say-on-Pay vote, with over 9591 percent of shareholder votes cast on that item in favor of our executive compensation programs. We considered this vote to represent strong support by shareholders for our long-standing executive compensation policies and practices. In 2013,2014, therefore, the ERC continued its general approach to executive compensation, as described above in “KEY ATTRIBUTES OF RLI EXECUTIVE COMPENSATION.”
Mr. Michael plays an important role in the ERC’s consideration of executive compensation levels and the design of executive compensation plans and programs for other senior executive officers. For these individuals, Mr. Michael recommends the following components of executive compensation to the ERC for review and recommendation to the Board:
· annual base salary levels;
· annual incentive targets and financial and personal goals; and
· the form and amount of long-term incentives.
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Mr. Michael makes such compensation recommendations based on external market data; achievement of respective performance criteria by each executive; and his judgment related to internal pay equity among Company executives, potential for advancement, and contribution to team initiatives. Mr. Michael also relies upon the input of the senior leadership team when making such recommendations.
The ERC Charter specifically provides that if a compensation consultant is to assist in the evaluation of CEO or senior executive compensation, the ERC has sole authority to retain and terminate the consulting firm including sole authority to approve the firm’s fees and retention terms. Management also has authority to retain a compensation consultant, but may not retain the same compensation consulting firm retained by the ERC without approval in advance by the ERC. TheNeither the Committee did not retainnor management retained a compensation consultant in 2013.
Management retained Towers Watson in 2013 to assist in the evaluation of the Company’s short-term and long-term incentive programs. Towers Watson has not performed work on behalf of the Committee in the past. Towers Watson did not review or offer opinions with respect to the Market Value Potential Incentive Program, explained in greater detail on page 28, which program is within the exclusive purview of the Committee.2014.
OVERVIEW OF RLI EXECUTIVE COMPENSATION
The objective of the Company’s executive compensation program is to provide a competitive total executive compensation program linked to Company performance that will attract, retain and motivate talented executives critical to the Company’s long-term success.
ELEMENTS OF COMPANY EXECUTIVE COMPENSATION
The Company’s total executive compensation program is comprised of the following components, each of which is described in greater detail below:
(1)Total annual cash compensation consisting of:
(a) Base salary;
(b) Annual Incentive awards under the MVP Program, which incorporates annual and long-term design features, for the CEO; COO; CFO; and Executive Vice President, Operations;
(c) Annual incentive awards under the Management Incentive Program (“MIP”) for other home office executives;
(d) Annual incentive awards under the Underwriter Profit Program for product group executives;
(2) Long-term incentive compensation granted under the Long-Term Incentive Plan (“LTIP”); and under the MVP Program for the CEO; COO; CFO; and Executive Vice President, Operations.Operations;
(3) Limited perquisites. All Company executives are provided with travel accident insurance and are reimbursed for out of pocket costs for an annual health examination not covered by the Company’s health plan. The CEO and COO are permitted to use the Company’s fractionally-owned aircraft for personal use for an hourly rate approved by the Board of Directors, with maximum annual use limited to total charges of 6.5 percent of annual base salary. The Company does not provide any income tax gross-ups.
BALANCE OF SHORT-TERM AND LONG-TERM COMPENSATION
The ERC works to balance short-term and long-term elements of total compensation, as described in the following sections. The goal is to provide a meaningful level of long-term compensation to align with long-term value creation and mitigate the risk that management make decisions or take actions solely to increase short-term compensation while adding excessive risk to the Company. In that regard, the ERC believes that a greater percentage of total compensation should be in the form of long-term compensation the more senior the role is. The Committee also takes into account the significant ownership in Company stock by Messrs. Michael and Stone when determining their respective long-term incentive awards.
We consider those salary and annual incentive amounts earned and paid in 20132014 to be short-term compensation, while MVP Program payments made from amounts credited to the bonus bank for prior year MVP Program awards and the grant date fair value of stock options awards in 20132014 to be long-term compensation. The following table compares the percentage of total compensation which is short-term in nature, to the percentage which is long-term.long-term in nature.
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| Long-Term as % of Total Compensation | |
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| Short-Term as % of Total Compensation |
| (Payment from Bonus Bank for Prior Years and | |
Name |
| (Salary and Annual Incentive Earned and Paid in 2013) |
| Grant Date Fair Value of Stock Options Awarded) | |
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Jonathan E. Michael |
| 53% |
| 47% |
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Michael J. Stone |
| 53% |
| 47% |
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Thomas L. Brown |
| 69% |
| 31% | (1) |
Craig W. Kliethermes |
| 61% |
| 39% |
|
Daniel O. Kennedy |
| 79% |
| 21% | (2) |
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40| RLI Corp. 2015 Proxy Statement |
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| Long-Term as % of Total Compensation |
|
| Short-Term as % of Total Compensation |
| (Payment from Bonus Bank for Prior Years and |
Name
|
| (Salary and Annual Incentive Earned and Paid in 2014) |
| Grant Date Fair Value of Stock Options Awarded) |
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Jonathan E. Michael |
| 46% |
| 54% |
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Michael J. Stone |
| 47% |
| 53% |
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Thomas L. Brown |
| 56% |
| 44% |
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Craig W. Kliethermes |
| 50% |
| 50% |
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Daniel O. Kennedy |
| 82% |
| 18% (1) |
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(1)Mr. Brown joined the company in 2011 and has less long-term compensation than the other NEOs because of fewer contributions to his MVP Program bonus bank, which pays out over time.
(2) Mr. Kennedy does not participate in the MVP Program, but instead participates in the MIP, which does not have a bonus bank or long-term payout feature, and consequently his long-term percentage is less than the other NEOs.
MARKET VALUE POTENTIAL EXECUTIVE INCENTIVE PROGRAM (MVP PROGRAM) — GENERAL
MVP Defined. As discussed in further detail below, the MVP Program provides a mechanism with which the ERC can correlate incentive compensation to long-term shareholder value creation. The MVP Program uses an economic profit measure called “Market Value Potential” (“MVP”), which measures the after-tax returns earned by the Company above its cost of capital, as a gauge of shareholder value creation. MVP is defined as (1) the Actual Return (the increase in U.S. generally accepted accounting principles “GAAP” book value), less (2) the Required Return (beginning capital multiplied by the blended cost of capital). If the Company does not earn the Required Return in a given year and MVP is negative, no incentive award is made pursuant to the MVP Program for that year.
For the purposes of the MVP Program, the increase or decrease in GAAP book value is calculated as ending capital less beginning capital. Ending capital is defined as ending GAAP book value, less unrealized gains or losses net of tax on available-for-sale fixed maturity investments, plus outstanding long-term debt instruments at the end of the period; and adjusted for capital transactions during the year. Beginning capital is defined as beginning GAAP book value, less unrealized gains or losses net of tax on available-for-sale fixed maturity investments, plus outstanding long-term instruments at the beginning of the period. The Company’s blended cost of capital is defined as the weighted average of the cost of equity capital and the cost of debt capital. The cost of equity capital is the average ten year U.S. Treasury Note rate, plus a market risk premium multiplied by the Company’s beta. The Company’s cost of debt capital is the forward market rate on debt outstanding on the outstanding long-term debt.
MVP Program ParticipationParticipation.. Participation in the MVP Program, percentage incentive awards and the formula to calculate MVP are recommended by the ERC and approved annually by the independent Directors of the Board for Mr. Michael and by the entire Board for other participants. Mr. Stone does not approve Mr. Michael’s or his own percentage award. In 2013,2014, participation in the MVP Program was limited to Messrs. Michael, Stone, Brown and Kliethermes. The Board has concluded based on the position responsibilities and ongoing assessment of individual performance against operational and financial goals that the senior executive management team (the CEO, COO, CFO and Executive Vice President, Operations) is most responsible for the operating and investment decisions and actions that directly impact the creation of long-term shareholder value, and, therefore, should be rewarded with a portion of their incentive compensation being directly and exclusively tied to the creation of MVP.
As discussed in more detail below, there are two components to the MVP Program. The first component, based on strategic objectives, represents annual compensation. The second component, based on financial objectives, is paid out over time out of amounts credited to a bonus bank, which is at risk of forfeiture based on future performance and as such represents long-term compensation.
For 2013,2014, each participant in the MVP Program received a MVP incentive award expressed as a percentage of MVP created by the Company in that calendar year. Each year the ERC confirms that the percentage awards remain appropriate by reviewing historical incentive award payouts, projected future payouts and resulting total compensation for MVP Program participants, which in turn, is compared to the performance of the Company necessary to achieve such payouts. The ERC compares the
| ||
performance of the Company and total compensation of the MVP Program participants with comparable performance metrics and compensation at companies in the peer group. The MVP percentage award, expressed as a percentage of MVP, for each participant for 20132014 was as follows: 2.7 percent for Mr. Michael, 1.8 percent for Mr. Stone and 1.0 percent each for Messrs. Brown and Kliethermes. The percentage award for Mr. Michael was reduced from 3.0 percent in 2012 to 2.7 percent in 2013, and the percentage award for Mr. Stone was reduced from 2.01.9 percent in 2012 to 1.8 percent in 2013. The ERC set the percentage incentive awards for 20132014 based on the factors described above and based on the range of expected MVP to be created by the Company in 20132014 and the projected incentive awards and incentive payouts that would result. The reductions
in the percentage awards for Messrs. Michael and Stone were made at Mr. Michael’s request to maintain annual awards in a competitive range in light of the positive trend of increasing annual MVP created by the Company, on which such awards are based.
Individual MVP Award payments during any fiscal year, including payments from amounts credited to a bonus bank in prior years, are capped at $7.5 million under the terms of the RLI Corp. Annual Incentive Compensation Plan approved by Shareholders in 2011. Pursuant to the Annual Incentive Plan, under which the MVP Program operates, the Board of Directors may exercise discretion to decrease MVP Awards based on such objective or subjective criteria it deems appropriate.
Executive base salaries are targeted to be at the median base salary for comparable positions in the insurance industry, taking into account performance, experience, potential and the level of base salary necessary to attract and retain top executive talent.
In 2013,2014, the ERC set base salary ranges for the CEO, CFO and COO based on publicly available executive compensation data for 20122013 from the following peer companies: Alleghany Corp.; AmTrust Financial Services; Argonaut Group, Inc.; Baldwin & Lyons Inc.; Endurance Specialty Holdings LTD.; Global Indemnity; HCC Insurance Holdings, Inc.; Markel Corp.; Meadowbrook Insurance Group Inc.; National Interstate Corp.; Navigators Group Inc.; Old Republic International Corp.; and OneBeacon Insurance Group Ltd. The ERC selected these peer companies based on its judgment. Each of the peer companies competes within the property and casualty insurance industry and sells a variety of specialty insurance products that serve both commercial entities and individuals that can generally be defined as specialty in nature, or targeted toward niche markets. The peer companies have established records of financial performance, and most have been publicly traded for at least five years, facilitating the comparison of the Company’s financial performance to that of the peer companies. The ERC also reviews the market capitalization of the Company compared to the peer companies to ensure that the Company is at or near the median market capitalization among those companies. For the peer company comparison performed in 2013, RLI’s2014, the Company’s market capitalization was seventh among the 14 companies compared.
Each year, the ERC compares the relative ranking among the Company and peer companies based on the most recently available public data (2012(2013 data reviewed in 20132014 comparison) for base salaries and total compensation for the CEO, COO and CFO positions to the relative performance ranking for the following publicly available performance metrics for the prior year: price-to-book ratio; return on equity; combined ratio; and total return to shareholders for one, three and five-year time frames to determine the overall competitiveness of the Company’s executive compensation. The Company’s rank among the peer companies is shown in the table below:
Performance Metric | Price/Book | Return on Equity | Combined Ratio | One-Year TSR | Five-Year TSR | Ten-Year TSR | Market Cap | Price/Book | Return on Equity | Combined Ratio | One-Year TSR | Three-Year TSR | Five -Year TSR |
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RLI Rank | 1 | 2 | 3 | 12 | 2 | 7 | 1 | 2 | 1 | 2 | 2 | 3 |
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Base salaries and total compensation for other NEOs and executive positions are established by reference to the publicly available survey data, including median base salary levels, for comparable executives in the insurance industry.
At the May 20132014 Board meeting, when the annual review of base salaries was conducted by the ERC, Mr. Michael recommended no base salarya 1.94 percent increase for Mr. Stone or himself. He recommended an 8.3Stone; a 3.85 percent increase for Mr. Brown reflective of his base salary level being low among peer companies, and an 11.1a 7.5 percent increase for Mr. Kliethermes reflective of his increased responsibility associated with his promotion to Executive Vice President.responsibility. Mr. Michael recommended a 3.02.9 percent increase for Mr. Kennedy consistent with the overall merit increase budget for the company. The ERC and Board approved Mr. Michael’s recommendations.
Table of Contents In addition, the ERC and Board approved a 3.33 percent increase for Mr. Michael.
MARKET VALUE POTENTIAL EXECUTIVE INCENTIVE PROGRAM — ANNUAL INCENTIVE
COMPENSATION COMPONENT
Twenty percent of the preliminary MVP award calculated for each participant is evaluated against annual objectives and an achievement rating of 0 to 100 percent is assigned to that portion of the award. This amount represents the annual compensation component of the MVP Program award. For 2013,2014, Messrs. Michael, Stone, Brown and Kliethermes had shared annual objectives related to the ongoing implementation of a company-wide executive succession and development process; strategy; relative annual financial performance; and growth initiatives. The annual objectives component of an MVP award will only be paid if objectives are achieved and if positive MVP is created for shareholders. If MVP is positive and annual objectives
42| RLI Corp. 2015 Proxy Statement |
are achieved, the annual objectives component of the award will be paid annually to provide direct linkage of annual incentive compensation for the achievement of those annual goals. IfHowever, if MVP is negative for a year, no MVP award will be made for that year with respect to the annual objectives component.
For 2013,2014, annual objectives were evaluated by the Committee and an 8087.5 percent overall achievement factor was applied. The following annual incentive compensation was paid to each participant under the MVP Program:
Calculation of MVP Program Annual Incentive Award
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| (A) |
| (B) |
| (C = A x B) |
| (D = C x 20%) |
| (E = % Achieved) |
| (F = D x E) |
|
|
| 2014 MVP |
| Percentage |
| 2014 Preliminary |
| 20% Annual Component |
| Achievement |
| 2014 Annual |
|
Participant |
| Created |
| Award |
| MVP Award |
| Based on Strategic Goals |
| Rating |
| Incentive Award |
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J. Michael |
| $99.7 million |
| 2.7% |
| $2,692,683 |
| $538,537 |
| 87.5% |
| $471,220 |
|
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M. Stone |
| $99.7 million |
| 1.8% |
| $1,795,122 |
| $359,024 |
| 87.5% |
| $314,146 |
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T. Brown |
| $99.7 million |
| 1.0% |
| $997,290 |
| $199,458 |
| 87.5% |
| $174,526 |
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C. Kliethermes |
| $99.7 million |
| 1.0% |
| $997,290 |
| $199,458 |
| 87.5% |
| $174,526 |
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| (A) |
| (B) |
| (C = A x B) |
| (D = C x 20%) |
| (E = % Achieved) |
| (F = D x E) |
|
| 2013 MVP |
| Percentage |
| 2013 Preliminary |
| 20% Annual Component |
| Achievement |
| 2013 Annual |
Participant |
| Created |
| Award |
| MVP Award |
| Based on Strategic Goals |
| Rating |
| Incentive Award |
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J. Michael |
| $133.8 million |
| 2.7% |
| $3,612,168 |
| $722,434 |
| 80% |
| $577,947 |
M. Stone |
| $133.8 million |
| 1.8% |
| $2,408,112 |
| $481,622 |
| 80% |
| $385,298 |
T. Brown |
| $133.8 million |
| 1.0% |
| $1,337,840 |
| $267,568 |
| 80% |
| $214,054 |
C. Kliethermes |
| $133.8 million |
| 1.0% |
| $1,337,840 |
| $267,568 |
| 80% |
| $214,054 |
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MANAGEMENT INCENTIVE PROGRAM (MIP)
Participants in the MIP include home office vice presidents, assistant vice presidents and other senior managers. Awards are granted annually and expressed as a percentage of year-end base pay based on targets for three financial goals: operating return on equity (“ROE”), combined ratio and MVP; and personal objectives for each participant.MVP. Awards are based on actual results for these metrics and achievement of personal objectives.
ROE and combined ratio are used as financial goals to provide an incentive to increase annual profitability. ROE is a ratio calculated as our operating earnings divided by our beginning equity adjusted for capital transactions such as share repurchases and special dividends. Operating earnings, in turn, are our net earnings minus realized investment gains or losses net of tax. Combined ratio is an expense measure and is calculated as the sum of our incurred losses and settlement expenses plus our policy acquisition costs and operating expenses, divided by our net premiums earned. The difference between the combined ratio and 100 reflects the per-dollar rate of underwriting income or loss. MVP is used as a financial goal as a proxy for shareholder value creation and is explained on page 28.41.
Actual awards for a year are paid in the first quarter of the following year. The ERC approves award levels for MIP participants at the vice president level, who are designated as executive officers under Section 16 of the Securities Exchange Act of 1934. Mr. Michael approves award levels for other MIP participants.
For 2013,2014, Mr. Michael recommended, and the ERC approved, a MIP maximum annual incentive opportunity for Mr. Kennedy of 75 percent of his respective year-end base salary, 60 percent of which was based on the achievement of financial goals of MVP, ROE and combined ratio and 15 percent of which was based on personal objectives related to strategic legal projects.
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Targets levels and corresponding achievement levels for actual results for financial goals are measured according to the following schedules.
MIP Maximum 75 Percent
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Target ROE % |
| Bonus % |
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| Target MVP |
| Bonus % |
| Combined Ratio |
| Bonus % |
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Less than |
| 6.0 |
| 0.000 |
| Less than |
| $ | 0 |
| 0.000 |
| Greater than |
| 100.0 |
| 0.000 |
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| 7.0 |
| 2.222 |
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| 15,000,000 |
| 3.333 |
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| 99.0 |
| 1.010 |
| |
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| 8.0 |
| 4.444 |
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| 25,000,000 |
| 5.556 |
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| 97.0 |
| 3.030 |
| |
|
| 9.0 |
| 6.667 |
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| 35,000,000 |
| 7.778 |
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| 95.0 |
| 5.051 |
| |
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| 10.0 |
| 8.889 |
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| 45,000,000 |
| 10.000 |
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| 92.6 |
| 7.475 |
| |
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| 11.0 |
| 11.111 |
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| 55,000,000 |
| 12.222 |
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| 90.0 |
| 10.101 |
| |
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| 12.0 |
| 13.333 |
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| 65,000,000 |
| 14.444 |
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| 87.6 |
| 12.526 |
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| 13.0 |
| 15.556 |
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| 75,000,000 |
| 16.667 |
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| 85.0 |
| 15.152 |
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| 14.0 |
| 17.778 |
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| 85,000,000 |
| 18.889 |
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| 82.6 |
| 17.576 |
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Max |
| 15.0 |
| 20.000 |
| Max |
| 90,000,000 |
| 20.000 |
| Max |
| 80.0 |
| 20.000 |
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Target ROE % |
| Bonus % |
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| Target MVP |
| Bonus % |
| Combined Ratio |
| Bonus % |
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Less than |
| 6.0 |
| 0.000 |
| Less than |
| $ 0 |
| 0.000 |
| Greater than |
| 100.0 |
| 0.000 |
|
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| 8.0 |
| 3.333 |
|
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| 15,000,000 |
| 3.333 |
|
|
| 99.0 |
| 1.010 |
|
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| 10.0 |
| 6.667 |
|
|
| 25,000,000 |
| 5.556 |
|
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| 97.0 |
| 3.030 |
|
|
| 12.0 |
| 10.000 |
|
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| 35,000,000 |
| 7.778 |
|
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| 95.0 |
| 5.051 |
|
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| 13.0 |
| 11.667 |
|
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| 45,000,000 |
| 10.000 |
|
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| 92.6 |
| 7.475 |
|
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| 14.0 |
| 13.333 |
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| 55,000,000 |
| 12.222 |
|
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| 90.0 |
| 10.101 |
|
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| 15.0 |
| 15.000 |
|
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| 65,000,000 |
| 14.444 |
|
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| 87.6 |
| 12.526 |
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| 16.0 |
| 16.667 |
|
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| 75,000,000 |
| 16.667 |
|
|
| 85.0 |
| 15.152 |
|
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| 17.0 |
| 18.333 |
|
|
| 85,000,000 |
| 18.889 |
|
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| 82.6 |
| 17.576 |
|
Max |
| 18.0 |
| 20.000 |
| Max |
| 90,000,000 |
| 20.000 |
| Max |
| 80.0 |
| 20.000 |
|
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|
|
|
|
|
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In 2013,2014, the Company achieved the following actual results: ROE of 14.113.9 percent, MVP of $133.8$99.7 million, and a combined ratio of 83.1.84.5. Mr. Kennedy received a 20132014 MIP award of $207,370,$227,511, reflective of 13.517.554 percent of year-end base salary for the ROE goal, 20.020.000 percent for the MVP goal, 17.015.657 percent for the combined ratio goal and 12.714.100 percent for personal objectives.
MARKET VALUE POTENTIAL EXECUTIVE INCENTIVE PROGRAM — LONG-TERM INCENTIVE COMPENSATION COMPONENT
The MVP Program is described above on pages 28 and 30.41-45. Eighty percent of the preliminary MVP award calculated under that program (which will be positive if MVP is positive, or negative if MVP is negative) is subject to an assessment of Company performance compared to peer companies (the “financial component”). This represents the long-term component of the MVP award. The financial component of a preliminary award will be adjusted in a range from a 20 percent reduction (minimum) to a 25 percent increase (maximum) based on the Company’s long-term performance relative to peers measured by five-year growth in book value per share. RLI’s relative growth in book value is calculated by comparing its compound annual growth rate (“CAGR”) in GAAP comprehensive earnings over the applicable five-year period to that of its Peer Companies. CAGR in comprehensive earnings is calculated based on publicly disclosed comprehensive earnings of Peer Companies for the five-year period ending at the third quarter of the fifth year. The adjustment to the financial component is made according to the following schedule:
RLI’s Relative Five-Year Book Value per Share Growth | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
As noted above, the Company must perform at the 60th percentile, above the median of long-term performance of peer companies, in order for 100 percent of the long-term financial component of an MVP award to be made.
The financial component of an MVP award earned is not immediately paid to participants; rather it is credited (if positive) or charged (if negative) to each participant’s long-term bonus bank. A bonus bank, in turn, may be positive or negative based on prior year results. The bonus bank is paid annually at a rate of 33 percent of a positive bank balance, meaning that it will take more than bank, effectively causing a forfeiture of such positive balance. If a bonus bank is negative after the financial component of an MVP award is credited or charged to a bonus bank, no award will be paid from the bank until it is positive as a result of future positive amounts credited to the bank.
The forfeiture provision in the MVP Program bonus bank concept in the event of negative MVP, in effect, operates as a clawback for negative shareholder results by reducing the amount payable from the bonus bank when the Company has negative MVP.
The Company’s MVP in
(1) Under the terms of the MVP Program, interest at the three-year U.S. Government Treasury Note rate
DEFERRED COMPENSATION PLAN (DEFERRED PLAN)
Under the Company’s Deferred Plan, an executive officer may elect to defer up to 100 percent of total cash compensation after payroll deductions. Upon an election by an executive officer to defer compensation, the Company transfers cash equal to the amount deferred to a bank trustee under an irrevocable trust established by the Company, and the trustee purchases a number of shares of Common Stock of the Company representing an amount equal to the compensation deferred by the executive officer. Pursuant to the Deferred Plan, dividends paid on the shares in such trust are used by the trustee to purchase additional shares of Common Stock of the Company, which are placed in the trust. The trust is considered to be a “Rabbi Trust” or grantor trust for tax purposes. The assets of the trust are subject to claims by the Company’s creditors. The Deferred Plan generally provides that the shares credited to the participant’s account will be transferred to the participant upon termination of employment over five years. Mr. Kliethermes and Mr. Brown deferred income under the Deferred Plan in Stone, Brown, Kliethermes, and Kennedy have deferred income under the Deferred Plan in prior years and their respective accounts are credited with dividends on shares held in their account, which are used to purchase additional shares.
OMNIBUS STOCK PLAN (OMNIBUS PLAN)
Under the Company’s Omnibus Plan, which was adopted in 2005, certain employees, officers, consultants and directors of the Company were eligible to receive long-term incentive compensation in a variety of forms including non-qualified stock options, incentive stock options, stock appreciation rights, performance units, restricted stock awards and other equity awards. The Long-Term Incentive Plan, described immediately below, was adopted in 2010 and replaced the Omnibus Plan. Messrs. Michael, Stone, Kliethermes and Kennedy have outstanding stock option awards under the Omnibus Plan.
LONG-TERM INCENTIVE PLAN (LTIP)
The purpose of the LTIP is to promote the interests of the Company and its shareholders by providing key personnel of the Company with an opportunity to acquire an equity interest in the Company and rewarding them for achieving or exceeding the Company’s performance goals. The grant of equity awards, the value of which is related to the value of the Company’s Common Stock, aligns the interests of the Company’s executive officers with that of the shareholders. The ERC believes this arrangement develops a strong incentive for Company executives to put forth maximum effort for the continued creation of shareholder value and long-term growth of the Company.
Under the Company’s LTIP, certain employees, officers and directors of the Company are eligible to receive equity awards in a variety of forms including non-qualified stock options, incentive stock options, stock appreciation rights, performance units, restricted stock awards and other equity awards. All executives at the Company are required to own a significant level of Company stock, stated as a multiple of base salary. Equity grants provide a means for executives to meet their ownership requirement. As explained further on page
The ERC believes equity awards serve as incentives to executives to maximize long-term growth and profitability of the Company, an arrangement that benefits both the executives and shareholders. Equity awards also provide a means to attract and retain key employees. The ERC establishes and recommends to the independent Directors of the Board the annual equity award for Mr. Michael, which is established based on a review of long-term incentive compensation of CEO positions among the peer companies described above, an assessment of his performance and initiatives underway and a comparison of his equity awards compared to awards to other executives. A target range of the value of annual equity awards, expressed as a percentage of base salary, has been established for all other Company executives.
In
The Company targets long-term incentives at approximately the median of competitive market data. Mr. Michael recommends to the ERC proposed stock option awards within the target range for each executive officer based on the executive officer’s position and a subjective assessment of the executive officer’s individual performance and anticipated future contributions to the Company. The ERC considers Mr. Michael’s recommendations and then recommends stock option awards to the Board for approval. Options granted prior to May 2009 expire The change in 2009 to an eight-year term for stock options was implemented to reduce the expense of option grants. Stock options vest over five years at the rate of 20 percent per year, or upon termination of employment due to the death, disability, or qualified retirement of the recipient. Upon termination of employment (other than due to death, disability, or retirement), vested options must be exercised within the earlier of 90 days of termination or expiration of the option award, except that all unexercised options granted in May 2006 and thereafter are forfeited in the event the employment of an option recipient is terminated for cause. Stock options awarded by the Company prior to May 2014 do not include provisions that would automatically vest stock options in the event of a change in control of the Company (single trigger), although the Board has discretion pursuant to the LTIP in the event of a fundamental change, such as a change in control, to make adjustments to the number, kind and exercise price of options to prevent inappropriate dilution or enlargement of the rights of an
Beginning in May 2014, to clarify the rights of options upon a change in control, stock option award agreements include a provision requiring the Board to take one of two actions. Under the first alternative, the Board must make adjustments to the number, kind and exercise price of such options upon a fundamental change as described above, with full vesting for qualifying terminations, such as involuntary termination by the Company or termination by the employee with good reason, in either case, within two years following the fundamental change. Alternatively, the Board must permit the options to be exercised prior to the fundamental change, or cashed out as part of the fundamental change, as described above.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The Company’s ESOP offers another performance-based means of retaining and motivating employees, including executive officers, who work 1,000 or more hours per year, by offering ownership in the Company on a long-term basis. The Board may approve an annual contribution to the ESOP based on the profitability of the Company that is used by the ESOP to purchase Common Stock on behalf of participating employees, including executive officers. All ESOP participants, including executive officers, may receive an annual contribution expressed as a percentage of eligible compensation (limited for an individual employee to an annual cap of
The Company sponsors a 401(k) Plan in which all employees, including executive officers, scheduled to work 1,000 or more hours per year, are entitled to participate. All participants receive a “safe harbor” annual contribution by the Company to their 401(k) accounts of 3 percent of eligible compensation (limited for an individual employee to an annual cap of
KEY EMPLOYEE EXCESS BENEFIT PLAN (KEY PLAN)
The purpose of the Key Plan is to restore benefits lost to certain executive officers under the ESOP and 401(k) Plan due to limitations on benefits contained in the Internal Revenue Code. The Company transfers to a bank trustee under an irrevocable trust established by the Company such number of shares of Common Stock of the Company representing an amount equal to the benefits the participant would have earned in the 401(k) and ESOP but for the limitation in the Internal Revenue Code on the maximum compensation on which those benefits may be calculated. The trust is considered to be a “Rabbi Trust” or grantor trust for tax purposes. The assets of the trust are subject to claims by the Company’s creditors. The Key Plan generally provides that dividends are credited to the participant’s account and reinvested in shares of Common Stock of the Company. The shares credited to the participant’s account pursuant to the Key Plan will be paid upon termination of employment in five annual installments. Mr. Michael ceased active participation in the Key Plan in 2005. Dividends on his shares held in the Key Plan continue to be credited to his account in the Key Plan. No other employee participates or has participated in the Key Plan and the plan is now frozen.
ELEMENTS OF POST-TERMINATION COMPENSATION AND BENEFITS
The following table shows potential amounts payable to each NEO had their employment terminated on December 31,
(1) Messrs. Michael and Stone have met the requisite age and years of service to automatically qualify for retirement upon their departure from the Company. Except as described below, the Company has not entered into any employment or severance agreements or arrangements with any of its executive officers that would compensate the executive officers for or after departing the Company. MVP/MIP. Under the Company’s Annual Incentive Plan (which governs MVP and MIP), an employee must be employed on the last calendar day of the year, unless the employee’s termination of employment was due to death, disability, or retirement. Retirement requires: (1) the termination of employment of an employee who has reached age and years of service equal to or greater than 75 at the time of departure; or (2) the termination of employment of an employee who satisfies a non-competition covenant or other terms and conditions specified by the Company. The amounts in the above table show annual incentives payable upon termination of employment in the event of a death, disability, or retirement assuming all NEOs would have met the definition of retirement at year-end 2014, although only Messrs. Michael and Stone automatically met the definition based on age and years of service. Upon the termination of employment of a participant qualifying as retirement, a positive MVP bonus bank calculated on the last day of the quarter during which the participant’s employment ended will be paid to a participant in a lump sum on the first day of the seventh month after termination if the participant is age 65 or older, and as a quarterly annuity to age 65 using the interest rate for the five-year Treasury Note in effect at the date of retirement if the Participant’s age is less than 65. A bonus bank balance will also be calculated at the end of the quarter prior to a participant’s termination of employment and the Company may, in its discretion, pay the lower of the calculated bonus banks. All such payments upon a termination of employment qualifying as retirement are subject to ongoing restrictions on: the participant’s employment in the insurance industry; solicitation of Company employees for employment elsewhere; solicitation of business away from the Company; and disclosure of confidential information of the Company.
The following information is provided as to each current executive officer of the Company:
(1)Mr. Brown joined RLI in September 2011. Prior to joining RLI, he was a partner at the accounting firm of PricewaterhouseCoopers LLP (“PwC”), where he specialized in the financial services and insurance industries. Mr. Brown was at PwC from 1980 through 2011. (2)Mr. Bryant was promoted to Vice President, Finance, and Controller in November 2014. Prior to his promotion Mr. Bryant had been Vice President, Controller of the Company since February 2009, and had been Assistant Vice President, Financial Reporting since August 2006, and previously held various managerial and accounting positions since he joined the Company in 1993. (3)Mr. Diefenthaler was promoted to Vice President, Chief Investment Officer, and Treasurer in November 2014. Prior to his promotion Mr. Diefenthaler had been Vice President, Chief Investment Officer since
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