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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [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
EMC Insurance Group Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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PERSONS WHO POTENTIALLY ARE TO RESPOND TO THE COLLECTION OF INFORMATION
CONTAINED IN THIS FORM ARE NOT REQUIRED TO RESPOND UNLESS THE FORM DISPLAYS A
CURRENTLY VALID OMB CONTROL NUMBER.
SEC 1913 (02-02)
April 12, 2007
Dear Stockholder:
I am pleased to extend to you my personal invitation to attend the 2007
Annual Meeting of Stockholders of EMC Insurance Group Inc. on May 24, 2007, at
1:30 p.m., at the offices of Employers Mutual Casualty Company, 700 Walnut
Street, Des Moines, Iowa 50309.
The accompanying Notice of Annual Meeting and Proxy Statement contains a
description of the formal business to be acted upon by the stockholders. At the
meeting, I intend to discuss the Company's 2006 performance and its plans for
2007. Certain members of the Company's Board of Directors and Officers of the
Company, as well as representatives of Ernst & Young LLP, the Company's
independent registered public accounting firm, will be available to answer
questions you may have.
While I am looking forward to seeing you at the meeting, it is very
important that those of you who cannot personally attend assure that your shares
are represented. I urge you, therefore, to sign and date the enclosed form of
proxy and return it promptly in the accompanying envelope. If you attend the
meeting, you may, if you wish, withdraw any proxy previously given and vote your
shares in person.
Sincerely,
----------------------------------------
Bruce G. Kelley
President and CEO
EMC INSURANCE GROUP INC.
NOTICE OF
2007 ANNUAL MEETING OF STOCKHOLDERS
MAY 24, 2007
TO THE STOCKHOLDERS OF EMC INSURANCE GROUP INC.:
Notice is hereby given that the Annual Meeting of Stockholders of EMC
Insurance Group Inc., an Iowa corporation, will be held on Thursday, May 24,
2007 at 1:30 p.m. local time, at the offices of Employers Mutual Casualty
Company, 700 Walnut Street, Des Moines, Iowa, for the following purposes:
1. To elect a Board of Directors;
2. To approve the 2007 Employers Mutual Casualty Company Stock
Incentive Plan;
3. To ratify the appointment of Ernst & Young LLP as the Company's
independent registered public accounting firm for the current
fiscal year; and
4. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Each share of the Company's Common Stock will be entitled to one vote upon
all matters described above. Stockholders of record at the close of business on
March 29, 2007 will be entitled to notice of and to vote at the meeting. The
stock transfer books of the Company will not be closed.
April 12, 2007
BY ORDER OF THE BOARD OF DIRECTORS
----------------------------------------
DONALD D. KLEMME, Secretary
PLEASE VOTE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY. AN
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES, IS ENCLOSED
FOR YOUR CONVENIENCE.
EMC INSURANCE GROUP INC.
717 MULBERRY STREET
DES MOINES, IOWA 50309
PROXY STATEMENT
2007 ANNUAL MEETING OF STOCKHOLDERS
MAY 24, 2007
GENERAL INFORMATION
This proxy statement is furnished in connection with the solicitation by
the Board of Directors of EMC Insurance Group Inc. (the "Company") of proxies
from the holders of the Company's $1.00 par value Common Stock (the "Common
Stock") for use at the 2007 Annual Meeting of Stockholders to be held on May 24,
2007, and at any adjournment thereof (the "Annual Meeting").
The Company's 2006 Annual Report to Stockholders was sent to the Company's
stockholders on or about April 2, 2007. This proxy statement, along with the
accompanying form of proxy, was sent to the Company's stockholders on or about
April 12, 2007.
The accompanying proxy may be revoked by the person giving it at any time
before it is voted; such revocation may be accomplished by a letter, or by a
properly signed proxy bearing a later date, filed with the Secretary of the
Company prior to the Annual Meeting. If the person giving the proxy is present
at the meeting and wishes to vote in person, he or she may withdraw his or her
proxy at that time.
The Company has borne all costs of solicitation of proxies. In addition to
solicitation by mail, there may be incidental personal solicitations made by
directors and officers of the Company, its parent, Employers Mutual Casualty
Company ("Employers Mutual"), and their subsidiaries, the costs of which,
including payments to nominees who at the request of the Company mail such
material to their customers, will be borne by the Company.
VOTING SECURITIES
All stockholders of record of the Common Stock at the close of business on
March 29, 2007, are entitled to notice of, and to vote at, the Annual Meeting.
At the close of business on March 29, 2007, there were 13,759,433 shares of
outstanding Common Stock, each entitled to one vote per share on all matters to
be voted upon at the Annual Meeting. The Company's stockholders do not have
cumulative voting rights. Shares of Common Stock of the Company present in
person or represented by proxy at the Annual Meeting will be tabulated for
determination of whether or not a quorum is present. A quorum will be present if
a majority of the outstanding shares entitled to vote is represented at the
Annual Meeting. If a quorum exists, directors will be elected by a plurality of
the votes cast by the shares entitled to vote in the election, and action on
other matters, including ratification of appointment of the Company's
independent registered public accounting firm, will be approved if the votes
cast favoring the action exceed the votes cast opposing the action. Votes
withheld for any director, abstentions and broker non-votes will be treated as
shares that are present and entitled to vote for purposes of determining the
presence of a quorum, but will not be counted as votes cast with respect to any
matter submitted to the stockholders for a vote and will not affect the outcome
of any matter.
1
ELECTION OF DIRECTORS
NOMINEES
At the Annual Meeting, the stockholders will elect a board of seven
directors to serve for terms extending until the 2008 Annual Meeting and until
their respective successors are duly elected and qualified. A By-Law change
adopted by the Company's Board of Directors early in 2007, to be effective May
24, 2007, reduced the number of directors from eight to seven, in connection
with Fredrick A. Schiek's retirement from the Board of Directors as of that
date. Proxies in the accompanying form which are received in response to this
solicitation will, unless contrary instructions are given therein, be voted in
favor of the seven nominees for director listed in the table below. While the
Board of Directors does not anticipate that any of the nominees will be unable
to stand for election as a director at the Annual Meeting, if that occurs,
proxies will be voted in favor of such other person who is recommended by the
Nominating Committee and designated by the Board of Directors.
The table below contains certain information with respect to the Board of
Directors' nominees for election as directors.
NAME AGE DIRECTOR SINCE POSITION WITH THE COMPANY
---- --- -------------- -----------------------------------------------
Margaret A. Ball 69 2004 Director
George C. Carpenter III 79 1981 Director
David J. Fisher 70 1985 Director
Bruce G. Kelley 53 1991 President, Chief Executive Officer and Director
George W. Kochheiser 81 1974 Chairman of the Board
Raymond A. Michel 81 1981 Director
Joanne L. Stockdale 60 2004 Director
Margaret A. Ball was Senior Vice President of Underwriting of the Company
and of Employers Mutual from 1997 until her retirement on January 1, 2001. She
was a Vice President of Employers Mutual from 1983 until 1997. Ms. Ball was
employed by Employers Mutual from 1971 to 2001.
George C. Carpenter III was Executive Director and Chief Executive Officer
of Iowa Public Television from November 1985 until his retirement in 1993. Prior
to that he served as Vice President of Palmer Communications and as Vice
President and General Manager of WHO Broadcasting Company, a division of Palmer
Communications. He was employed by WHO Broadcasting Company for 20 years.
David J. Fisher has been Chairman of the Board and Chief Executive Officer
of Onthank Company, a Des Moines based wholesale distributor of floor, window,
wall covering and countertop products, since 1978 and has been employed by that
firm since 1962.
Bruce G. Kelley has been President and Chief Executive Officer of the
Company and of Employers Mutual since 1992 and was Treasurer of Employers Mutual
from 1996 until 2000, and of the Company from 1996 until 2001. He was President
and Chief Operating Officer of the Company and of Employers Mutual from 1991 to
1992 and was Executive Vice President of both companies from 1989 to 1991. Mr.
Kelley has been employed by Employers Mutual since 1985 and has been a director
of that company since 1984.
George W. Kochheiser has been Chairman of the Board of the Company since
1994, and was President and Chief Operating Officer of the Company and of
Employers Mutual from 1982 until his retirement in 1991. Mr. Kochheiser also
serves as a director of Employers Mutual and was an employee of that company
from 1949 to 1991.
2
Raymond A. Michel is a member of the Board of Directors of Koss
Construction Company, a highway and airport construction firm, and was its
Chairman and Chief Executive Officer from 1972 until his retirement in 1989. He
has been affiliated with that company in one capacity or another since 1955.
Joanne L. Stockdale has been the President and Chief Executive Officer of
Northern Iowa Die Casting Inc., a manufacturer of aluminum die castings for
original equipment manufacturers, since 1983. Since 1988, she has been an
investment trustee of the Iowa Public Employees Retirement System (IPERS) where
she has served as chair or vice-chair since 1995. She is a Certified Public
Accountant.
THE BOARD OF DIRECTORS RECOMMENDS ELECTION OF THE NOMINEES NAMED HEREIN AND A
VOTE "FOR" EACH OF THE OTHER MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING.
INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES
During the year ended December 31, 2006, the Board of Directors of the
Company held four regular meetings. In 2006, each member of the Board of
Directors attended at least 75% of the aggregate of (i) the total number of
meetings of the Board of Directors held and (ii) the total number of meetings
held by all committees of the Board of Directors on which he or she served. All
of the members of the Board of Directors attended the Company's 2006 Annual
Meeting and the Company expects a majority of the members of the Board of
Directors to attend this year's Annual Meeting. The Board has determined that
Board members Ball, Carpenter, Fisher, Michel and Stockdale are independent
directors as defined by the rules of the Nasdaq Stock Market.
The Board of Directors of the Company has five standing committees: the
Executive Committee, the Audit Committee, the Compensation Committee, the
Inter-Company Committee and the Nominating Committee. The Executive Committee
members are Bruce G. Kelley, Fredrick A. Schiek and George W. Kochheiser. This
Committee has authority to exercise all of the authority of the Board of
Directors when the Board of Directors is not in session, with the exception of
certain actions which, under Iowa law and the Company's By-laws, require action
by the Board of Directors; these include amending the Company's Articles of
Incorporation, declaring dividends, adopting a plan of merger or consolidation
of the Company, appointing or removing executive officers, filling officer
vacancies, approving or recommending to the Company's stockholders a voluntary
dissolution or revocation of its Articles of Incorporation, or amending the
Company's By-laws. The Executive Committee did not meet during the year ended
December 31, 2006.
The members of the Audit Committee are Margaret A. Ball, David J. Fisher
and Joanne L. Stockdale. Each member of the Audit Committee is "independent"
under the standards established by the corporate governance rules of the Nasdaq
Stock Market and the rules of the Securities and Exchange Commission. The Board
of Directors has determined that Committee member Joanne L. Stockdale qualifies
and is designated as an "audit committee financial expert" as defined by the
rules of the Securities and Exchange Commission. The functions performed by this
Committee are detailed in the Audit Committee Charter, which is reflected in
Appendix B of this proxy and available on the Company's website at
www.EMCInsurance.com. Their duties are to assist the Board of Directors in its
general oversight of the Company's financial reporting, internal control over
financial reporting and audit functions. The Audit Committee met ten times
during the year ended December 31, 2006.
The Company's Compensation Committee members are George C. Carpenter III,
Raymond A. Michel and Joanne L. Stockdale. Each member of the Compensation
Committee is "independent" under the standards established by the corporate
governance rules of the Nasdaq Stock Market. The actions taken by this Committee
are set forth in the "Compensation Discussion and Analysis" section of this
Proxy Statement. The charter of the Compensation Committee is available on the
Company's web site at www.EMCInsurance.com. The Compensation Committee met five
times during the year ended December 31, 2006.
3
The Company and Employers Mutual have each established an Inter-Company
Committee. None of the three members of the Company's Inter-Company Committee
may be members of Employers Mutual's board of directors, and each are required
to be "independent" under the standards established by the rules of the Nasdaq
Stock Market. Similarly, Employers Mutual's Inter-Company Committee consists of
three directors of Employers Mutual who are not members of the Company's board
of directors. The members of the Company's Inter-Company Committee are Margaret
A. Ball, George C. Carpenter III and Raymond A. Michel. Any new material
agreement or transaction between Employers Mutual and any of its direct or
indirect wholly-owned subsidiaries or affiliate and the Company and any of its
direct or indirect wholly-owned subsidiaries, as well as any proposed material
change to an existing material agreement between such entities, must receive the
approval of both Inter-Company Committees. This approval is granted only if the
members of the Company's Inter-Company Committee unanimously conclude that the
new agreement or transaction, or proposed material change in an existing
agreement, is fair and reasonable to the Company and its stockholders, and the
members of Employers Mutual's Inter-Company Committee unanimously conclude that
the new agreement or transaction, or proposed change in an existing agreement,
is fair and reasonable to Employers Mutual and its policyholders. The two
Inter-Company Committees may meet separately or jointly, but separate votes are
always required. The Company's Inter-Company Committee met one time during the
year ended December 31, 2006.
The members of the Nominating Committee are George C. Carpenter III, David
J. Fisher and Raymond A. Michel. Each of these members are "independent" under
the standards established by the rules of the Nasdaq Stock Market. The
Nominating Committee ensures that the Board of Directors of the Company is
appropriately constituted to meet its fiduciary obligations to stockholders. To
accomplish this purpose, the Nominating Committee assists the Board of Directors
in assessing its membership needs, identifies individuals qualified to become
members of the Board of Directors and makes recommendations regarding potential
director candidates to the Board of Directors. Criteria for the nomination of a
director and the process of consideration of director candidates recommended by
stockholders are set forth in the Nominating Committee Charter, which is
available on the Company's web site at www.EMCInsurance.com. In considering a
nominee for a position on the Company's Board of Directors, the Nominating
Committee will seek to identify individuals who, in addition to having a
reputation for integrity, honesty and adherence to high ethical standards, also
have demonstrated business knowledge, experience and the ability to exercise
sound judgment in matters related to current and long-term objectives of the
Company and a willingness and ability to contribute positively to the
decision-making process of the Company. The Nominating Committee met one time
during the year ended December 31, 2006.
EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
OVERVIEW
The Company has no employees of its own and, consequently, has no payroll
and no employee benefit plans. Approximately fifteen employees of Employers
Mutual devote a portion of their time performing administrative duties for the
Company. Included within these fifteen employees are the named executive
officers of the Company whose compensation is disclosed in the Summary
Compensation Table. The Company's four property and casualty insurance
subsidiaries (Dakota Fire Insurance Company, EMCASCO Insurance Company, Farm and
City Insurance Company and Illinois EMCASCO Insurance Company), along with two
subsidiaries and an affiliate of Employers Mutual, are parties to reinsurance
pooling agreements with Employers Mutual (collectively, the "Pooling
Agreement"). The compensation of Employers Mutual's employees is shared by the
Company's property and casualty insurance subsidiaries in accordance with the
terms of the Pooling Agreement. The aggregate participation of the Company's
property and casualty insurance subsidiaries in the Pooling Agreement during
2006 was 30%. This percentage represents the approximate portion of the
compensation expense of the Company's named executive officers that was
allocated to the Company during the year. The compensation paid to employees of
Employer's Mutual who perform duties for EMC Reinsurance Company and EMC
Underwriters, LLC, the other two subsidiaries of the Company, is not allocated
to the Pooling Agreement and is charged directly to those subsidiaries.
4
For calendar year 2006, the Company's named executive officers included
Bruce G. Kelley, President and Chief Executive Officer, Mark E. Reese, Senior
Vice President and Chief Financial Officer, William A. Murray, Executive Vice
President and Chief Operating Officer, Ronald W. Jean, Executive Vice President
for Corporate Development, and Raymond W. Davis, Senior Vice President -
Investments and Treasurer.
The process for establishing the compensation of Employers Mutual's
executive officers begins with the executive management team of Employers
Mutual, which develops the recommended salary ranges, base salary, bonus plan
performance factors and stock option grants for the ensuing year. These
management recommendations are then submitted to the Employers Mutual Senior
Executive Compensation and Stock Option Committee (the "Employers Mutual
Compensation Committee") for its consideration and approval. After the
compensation arrangements of the executive officers have been finalized and
approved by the Employers Mutual Compensation Committee, they are then submitted
to the Company's Compensation Committee for its independent evaluation and
approval.
If the Company's Compensation Committee does not concur with the
compensation arrangements approved by the Employers Mutual Compensation
Committee, its concerns are referred back to the Employers Mutual Compensation
Committee for additional study and reconsideration. Both committees are
authorized to meet jointly in an attempt to resolve any continuing differences,
but the Company's Compensation Committee is ultimately required by its Charter
to take action independently of the actions taken by the Employers Mutual
Compensation Committee and to approve the compensation arrangements. In 2006,
the compensation recommendations approved by the Employers Mutual Compensation
Committee were subsequently approved by the Company's Compensation Committee.
Once the base salary component of the compensation arrangement for each
executive officer, including the Company's named executive officers, has been
approved by both compensation committees, it is submitted to the full Board of
Directors of Employers Mutual for final approval. Decisions regarding the
designation of the bonus plan performance targets and stock option awards are
final upon approval by both compensation committees.
Due to the Company's structure (a downstream holding company of Employers
Mutual with no employees of its own) and the fact that the Company's operating
results represent a relatively small portion of Employers Mutual's total
operating results, the compensation of Employers Mutual's executive officers is
not, and can not be, directly aligned with the interests of the Company's
stockholders. However, it is the opinion of management and the Company's
Compensation Committee that the compensation program utilized by Employers
Mutual does provide incentives that appropriately align the performance of
Employers Mutual's executive officers with the interests of the Company's
stockholders.
OBJECTIVE OF THE COMPENSATION PROGRAM
The objective of Employers Mutual's compensation program is to provide a
level of compensation that will attract and retain highly-qualified, motivated
executive officers who will enhance the ability of Employers Mutual to continue
its long history of steady growth and financial strength. As the business
activities of Employers Mutual are conducted within the property and casualty
insurance industry, it is believed that the level of compensation paid to its
executive officers must be competitive within this industry and, more
particularly, with an identified peer group of companies which are similar in
size, have comparable insurance products, and are viewed by Employers Mutual as
its competitors in the markets that have been targeted to be the source of its
business.
Employers Mutual's compensation program is designed to be competitive, to
reward its executive officers for individual performance, as well as to enhance
the overall operating performance of the EMC Insurance Companies (which consists
of Employers Mutual and all of its subsidiaries and an affiliate, together with
the Company and all of its subsidiaries) based on the consolidated
statutory-basis financial statements of this group of companies. Employers
Mutual's compensation program also rewards its executive officers for increases
in the market value of the Company's Common Stock through the issuance of
incentive stock options.
5
THE COMPENSATION PROGRAM
The compensation of Employers Mutual's executive officers is provided
primarily through the use of three elements consisting of base salary, a cash
bonus program and incentive stock option awards (consisting of both standard and
discretionary awards). Each of these elements is designed to achieve a
particular result. The combination of these elements is intended to provide an
overall compensation package that promotes both individual and collective
executive officer performance.
The elements of Employers Mutual's compensation program that are subject to
factors directly attributable to the performance of the individual executive
officers are base salary and discretionary incentive stock option awards. Any
compensation received under the cash bonus program or through standard incentive
stock option awards is provided pursuant to the written guidelines of those
plans, and does not take into account the performance of the individual
executive officers. The cash bonus program is the only element of the
compensation program which takes into account corporate performance in
establishing compensation policies and making compensation decisions; however,
individual performance objectives of certain executive officers may be based on
specific corporate performance factors.
The compensation received by Employers Mutual's executive officers pursuant
to each element of the compensation program are not affected by the value or
amount of compensation provided by the other elements of the compensation
program. However, on an annual basis, the compensation committees review the
total compensation earned over a period of years to determine if there is a
proper balance between the three elements of compensation. In addition, there
are no policies requiring a specific allocation between current compensation
(base salary and potential cash bonus awards) and long-term compensation
(incentive stock options), or an allocation between cash compensation and
non-cash compensation.
BASE SALARY. The base salary is intended to compensate the executive
officers for their contribution to the achievement of identified business
objectives, demonstrated leadership skills and overall management effectiveness.
The established salary ranges, the length of time an executive officer has
served in his or her position, the relative position of an executive officer's
salary within the salary range and individual performance are the primary
factors considered in determining base salary. Using this information, Mr.
Kelley made the final salary recommendations to the Employers Mutual
Compensation Committee and the Company's Compensation Committee for himself and
the other named executive officers in 2006.
The performance of each executive officer is measured through a performance
management process, which is applicable to all employees of Employers Mutual.
Through this performance management process, specific performance objectives are
established and communicated to each employee prior to the beginning of a fiscal
year. At the end of the fiscal year, each individual is evaluated as to whether
they met, exceeded or failed to achieve each performance objective. An executive
officer's base salary may also be affected by any demonstrated personal impact
that the officer may have had on major issues affecting the overall performance
of the EMC Insurance Companies, such as introducing new or expanded lines of
business. Mr. Kelley's performance review is conducted by the chairman of
Employers Mutual's board of directors. Mr. Kelley completes the performance
reviews of the other named executive officers.
CASH BONUS PROGRAM. The compensation of the executive officers also
includes eligibility to participate in the Employers Mutual Senior Executive
Compensation Bonus Program. This bonus program is designed to provide short-term
incentives based upon the annual operating performance of EMC Insurance
Companies. Any amounts earned under this bonus program are based on the
statutory-basis consolidated financial statements of EMC Insurance Companies and
are determined by the following performance objectives:
- the percentage increase in net written premiums compared to an
established target,
- the percentage change in policyholders' surplus of the
consolidated group, and
- the combined trade ratio compared to both a target ratio and the
combined trade ratio of the property and casualty insurance
industry.
6
The performance objectives are not specifically weighted; however, the
bonus formula places the most emphasis on the combined trade ratio element,
followed by the change in policyholders' surplus and the increase in net written
premiums.
The performance targets are aligned with Employers Mutual's corporate
objectives, which are established prior to the beginning of each year through a
planning process involving all department heads. If the corporate objectives are
projected to generate a "return on equity" of less than 12.5%, the combined
trade ratio target is reduced to a level necessary to achieve that goal.
The performance targets do not have to be met to achieve a bonus award.
Each performance objective contains a maximum (positive) and minimum (negative)
contribution to the bonus calculation, with the combined result of the three
performance objectives determining the amount of bonus earned; however, no bonus
can be earned under the plan if the combined trade ratio exceeds a predetermined
maximum.
The maximum bonus that may be earned by an executive officer begins at 75%
of base salary for eligible vice presidents. For senior management, this maximum
bonus percentage is subject to a multiplier ranging from 1.1 for senior vice
presidents to 1.2 for executive vice presidents and 1.3 for the president. The
Compensation Committees believe that these maximum bonus percentages are
representative of the contribution that each officer level provides to the
operations of EMC Insurance Companies.
Whether or not an executive officer earns a bonus is strictly a function of
the objective application of the award formula established under the bonus
program. Except for any individual's input or information provided in the
corporate planning process, there is no discretion which can be exercised by any
executive officer in determining either the eligibility for, or the amount of,
any award which may be earned under the bonus program. Additionally, as the
performance targets utilized in the bonus program can not be influenced or
affected by the efforts of any single person, the executive officers do not have
the ability to manipulate the outcome or the determination of whether or not an
award is earned under the bonus program.
The Employers Mutual Compensation Committee may, at its discretion, adjust
the bonus calculation for unusual or extenuating circumstances; however, this
discretion has not been exercised during the past ten years. If bonuses are
earned, 75% of the bonus is paid in late January or early February based upon
the preliminary industry combined trade ratio estimate published by A.M. Best
Company. The remainder of the bonus is paid when the final industry combined
trade ratio is released by A.M. Best Company, generally in March. The Employers
Mutual Compensation Committee may, at its discretion, choose to pay more than
75% of the bonus in late January or early February if the final industry
combined trade ratio will have little or no impact on the bonus calculation.
There is no policy addressing the adjustment or recovery of bonus payments
if the relevant performance measures upon which they are based are restated or
otherwise adjusted. If this situation were to occur, the Employers Mutual
Compensation Committee would review the relevant facts and circumstances and
determine if further action is warranted.
INCENTIVE STOCK OPTIONS. The third element of compensation paid to
Employers Mutual's executive officers is intended to provide for long-term
incentive opportunities through the use of incentive stock option awards. The
Employers Mutual Compensation Committee believes that superior performance by
the executive officers will have a significant impact on the price of the
Company's Common Stock, thereby providing long-term appreciation in the value of
the stock options held by the executive officers.
7
Employers Mutual's incentive stock option plan provides that all stock
options must be granted at prices equal to the fair market value of the
Company's Common Stock on the date of grant, with fair market value determined
as the average of the high and low trading prices of the Common Stock on the
date of grant. Stock options generally have a term of ten years and vest at a
rate of 20% per year, commencing on the second anniversary of the option grant.
Employers Mutual has adopted guidelines that dictate the annual and maximum
number of standard stock options that may be awarded to all classes of
employees, including executive officers. These standard stock option awards are
issued without regard to the performance of Employers Mutual or the
participating executive. For the Company's named executive officers, the annual
and maximum number of standard stock options that may be awarded are as follows:
ANNUAL STANDARD MAXIMUM STANDARD
POSITION OPTION AWARD OPTION AWARD
-------- --------------- ----------------
President and Chief Executive Officer 9,000 150,000
Executive Vice President 7,500 90,000
Senior Vice President 3,000 40,000
Employers Mutual's employees may also receive discretionary awards of stock
options when conditions or activities of Employers Mutual or the participating
employee(s) dictate that an additional award is warranted. These discretionary
awards are totally subjective and are recommended by the chief executive officer
to the Employers Mutual Compensation Committee and the Company's Compensation
Committee for approval. No limits have been imposed on the number of
discretionary stock options that may be awarded to an executive officer.
Following is a historical summary of the total number of stock options that have
been awarded to the Company's named executive officers since the initial awards
in 1979:
TOTAL STANDARD TOTAL DISCRETIONARY
OPTIONS OPTIONS TOTAL OPTIONS
NAME RECEIVED (1) RECEIVED (1) RECEIVED (1)
---- -------------- ------------------- -------------
Bruce G. Kelley 128,430 25,000 153,430
Mark E. Reese 31,250 5,750 37,000
William A. Murray 51,282 17,500 68,782
Ronald W. Jean 57,641 23,000 80,641
Raymond W. Davis 33,000 10,000 43,000
(1) This data reflects all options received by the named executive officers
since such individual became eligible to participate in the incentive stock
option plan. Options that were received but lapsed without being exercised
are not included in the amounts reported.
Employers Mutual does not have any minimum or expected level of Company
Common Stock ownership required of its executive officers. However, the
incentive stock option plan is designed to provide the executive officers with
performance incentives that are comparable and complementary to the interests of
the Company's stockholders.
OTHER COMPENSATION. Employers Mutual's executive officers also receive
other forms of compensation pursuant to certain plans adopted by Employers
Mutual (and in some cases formally adopted by the Company's Board of Directors
as well), some of which are generally available to all employees of Employers
Mutual (subject to standard eligibility requirements) and some of which are
limited to executive officers.
8
Certain executive officers, including all of the Company's named executive
officers, receive other compensation in the form of company-paid supplemental
disability insurance and reimbursement of financial planning services. In
addition, the chief executive officer and the executive vice presidents are
eligible for country club memberships and the use of company-owned automobiles.
Neither the Employers Mutual Compensation Committee nor the Company's
Compensation Committee consider these other forms of compensation in its process
of setting compensation pursuant to the three primary elements of compensation
discussed above.
Spousal travel expenses are not reported as compensation income to
Employers Mutual's executive officers, but are included in the Summary
Compensation Table as a perquisite for disclosure purposes.
RETIREMENT PLANS
DEFINED BENEFIT PLAN. Employers Mutual sponsors a tax-qualified defined
benefit retirement plan covering all employees of Employers Mutual and its
subsidiaries (the "Pension Plan"). Employers Mutual also sponsors a
non-qualified defined benefit supplemental retirement plan (the "SRP") covering
certain of its management and highly compensated employees, including the
Company's named executive officers. Both plans contain a traditional defined
benefit formula pension benefit for certain eligible employees and a cash
balance account benefit for all other eligible employees. Generally,
compensation utilized for pension formula purposes includes base salary and cash
bonus payments. Matching contributions that employees receive under Employers
Mutual's 401(k) plan and Board and Executive Non-Qualified Excess Plan, as well
as amounts related to the exercise of stock options, are not included in the
calculation of compensation for purposes of the pension benefit.
For long-term employees, the traditional defined benefit formula may
produce a significantly larger pension benefit than the cash balance formula.
This is especially true for executive officers when large cash bonuses are
earned in their later years of employment, when base salary and credited years
of service are at their highest levels.
TRADITIONAL FORMULA PENSION PLAN. Employees employed prior to January 1,
1989 and who were age 50 or older on January 1, 2000, have their benefits
determined under the Pension Plan using a traditional defined benefit formula
where benefits are based on (i) a percentage of the employee's average
compensation (using the five consecutive pay years that result in the highest
average), or (ii) $220,000 for 2006 (the limit set by the Internal Revenue Code
of 1986, as amended, (the "Code")), whichever is lower, multiplied by the
employee's credited years of service (maximum of 40 years). The normal form of
benefit is a single life annuity with payment guaranteed for ten years. Various
other types of annuities, as well as a lump sum payment, are also available. All
alternative payment options are the actuarial equivalent of the normal form of
benefit. Normal retirement age is 65 and early retirement can be elected by a
participant who has reached age 55. The benefit paid on early retirement is a
percentage of the benefit payable upon normal retirement and ranges from 52% at
age 55 to 92% at age 64.
TRADITIONAL FORMULA SRP. The SRP provides a benefit to an eligible employee
whenever 100% of his or her pension benefit under the Pension Plan is not
permitted to be funded or paid through the plan because of limits imposed by the
Code (limit on compensation that can be taken into account and limit on benefits
that can be paid) and/or because of elective deferrals of covered compensation
under any non-qualified deferred compensation plan. For those employees eligible
under the traditional defined benefit formula in the Pension Plan, the SRP
benefit is the benefit as calculated under the formula in the Pension Plan
(without regard to compensation or benefit limits), offset by the benefit
payable under the Pension Plan. The accrued benefit under the SRP is calculated
as a single life annuity (with ten years certain) and is converted to an
actuarially equivalent lump sum, which is then paid to the employee over a
period of years, ranging from one year if the present value of the benefit is
less than $50,000 to ten years if the present value of the benefit is $450,000
or greater.
ELIGIBLE PARTICIPANTS. The Company's named executive officers who are
participants in the traditional defined benefit portion of the Pension Plan and
SRP are Messrs. Murray, Jean and Davis.
9
CASH BALANCE FORMULA PENSION PLAN. Those employees who were not employed
prior to January 1, 1989 or who were not at least age 50 on January 1, 2000 have
their pension benefit determined under the cash balance formula in the Pension
Plan. The benefit earned is expressed in the form of an account balance. Benefit
credits accrue monthly at a rate between 3.25% and 13.50% of eligible monthly
compensation, with the rate increasing with age. Interest credits are applied
annually at the end of each year to the prior year's balance and are based on
the yield on 30-year Treasury bonds (as published by the Internal Revenue
Service). The normal form of benefit is a lump sum payment, but an annuity is
also available.
CASH BALANCE FORMULA SRP. As with those employees eligible for the
traditional defined benefit formula in the Pension Plan who accrue additional
benefits under the SRP, the employees eligible under the cash balance formula
under the Pension Plan accrue benefits pursuant to the SRP (using a similar
account balance as under the Pension Plan) to the extent that either
compensation or benefits are limited in the Pension Plan by the Code and/or
because of elective deferrals of covered compensation under any non-qualified
deferred compensation plans.
ELIGIBLE PARTICIPANTS. The Company's named executive officers who are
participants in the cash balance formula portion of the Pension Plan and SRP are
Messrs. Kelley and Reese.
DEFINED CONTRIBUTION PLAN
Employers Mutual sponsors a tax-qualified defined contribution plan, the
401(k) Plan. This plan is available to all employees of Employers Mutual and its
subsidiaries. Under the 401(k) Plan, Employers Mutual matches 50% of the first
6% of covered compensation that an employee defers. With the exception of the
highly compensated group, employee participants can make pre-tax deferrals of up
to 50% of their covered compensation to this plan, subject to an annual limit
under the Code - for 2006, $15,000 for those under age 50 and $20,000 for those
ages 50 and above.
NON-QUALIFIED EXCESS BENEFIT PLAN
Employers Mutual also maintains a Board and Executive Non-qualified Excess
Plan ("BENEP"), which allows certain employees, whose compensation levels limit
their deferral percentage under the 401(k) Plan, to defer up to 25% of their
base salary between the 401(k) Plan and the BENEP. Employers Mutual matches 100%
of the first 5% of covered compensation deferred under the BENEP for vice
presidents and above, including all of the Company's named executive officers.
Executive officers may also defer some or all of their cash bonus awards under
this plan.
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ISSUES
EMPLOYMENT CONTRACTS. Employers Mutual has not entered into any employment
contracts with its executive officers.
INCENTIVE STOCK OPTION PLAN. Under Employers Mutual's incentive stock
option plan, in the event of the termination of employment of a participant for
a reason other than death, cause or disability, the participant has the right,
for a period of three months from the effective date of termination, to exercise
those options previously granted to him or her to the extent that they are
exercisable on the date of termination. If, however, the termination of the
participant is by reason of retirement, the participant has the right during
such three-month period to exercise those options previously granted to him or
her as to all shares, whether or not exercisable on the date of termination,
which had not previously been exercised, terminated, lapsed or expired.
10
If a participant's employment with Employers Mutual is terminated due to a
permanent or total disability, the participant has the right, for a period of
twelve months from the effective date of his or her termination, to exercise all
options previously granted, whether or not exercisable on the date of
termination, excluding those previously exercised, terminated, lapsed or
expired. If a participant's employment is terminated for cause, all unexercised
options, whether or not exercisable on the date of termination, immediately
terminate. The standard of whether a participant may be discharged for "cause"
requires that there be a determination that there has been (i) a willful and
continued failure to substantially perform the participant's assigned duties,
(ii) the willful engaging in conduct which is demonstrably injurious to
Employers Mutual, monetarily or otherwise, including any act of dishonesty,
(iii) the commission of a felony, or (iv) a significant violation of any
statutory or common law duty of loyalty.
Upon the death of a participant, the participant's designated beneficiary
or legal representative has the right, for a period of twelve months from the
date of death, to exercise the participant's rights as to all options, whether
or not exercisable on the date of death, to the extent not previously exercised,
terminated, lapsed or expired.
In addition to an executive officer's rights upon termination of
employment, in the event that there is a "change of control", all outstanding
incentive stock options shall immediately become exercisable in full. A "change
of control" will occur (i) if there has been a merger, consolidation, takeover
or reorganization of Employers Mutual or the Company, unless at least 60% of the
members of the Board of Directors of the entity resulting from such merger,
consolidation, takeover or reorganization were members of the Board of Directors
of either Employers Mutual or the Company immediately prior to the event, or
(ii) upon the occurrence of any other event that is designated as being a
"change of control" by a majority vote of the independent members of the Board
of Directors of Employers Mutual.
BENEP. Participants who separate from service or become disabled or die
while employed by Employers Mutual receive distributions of their deferred
compensation account, in accordance with the payment option selected by them
when they enrolled in the plan, upon the occurrence of the qualifying
distribution event. However, no distribution will be made earlier than six
months after the date of separation from service with respect to a participant
who is a key employee (as defined in the Code).
If Employers Mutual terminates the plan within twelve months of a "change
of control", the deferred compensation account of each participant will become
fully vested and payable to the participants in a lump sum. A "change of
control" will occur if (i) a majority of the members of the Board of Directors
of Employers Mutual is replaced during any twelve-month period by directors
whose appointment or election is not endorsed by a majority of the members of
the Board of Directors prior to the date of appointment or election, or (ii) a
person or group acquires 40% or more of the total gross fair market value of the
assets of Employers Mutual. The plan is considered terminated only if all
substantially similar arrangements are terminated, and all participants under
such arrangements are required to receive all amounts of compensation deferred
under the terminated arrangements within twelve months of the termination of
such arrangements.
The Compensation Committees believe these "termination of employment" and
"change of control" triggers are fair and reasonable to both Employers Mutual
and to the participating employees.
TAX CONSEQUENCES. Section 162(m) of the Code generally disallows a tax
deduction to publicly-held companies for compensation of more than $1.0 million
paid to any officer. Qualifying performance-based compensation is not subject to
the deduction limit if certain requirements are met. Due to the fact that only
30% of the compensation paid to the Company's executive officers is allocated to
the Company through the Pooling Agreement, the tax deduction limitation imposed
by Section 162(m) is not expected to have any impact on the Company for the
foreseeable future.
11
Employers Mutual's incentive stock option plan provides favorable tax
treatment to the participants of the plan. Under applicable federal tax laws,
there are no federal income tax consequences either to Employers Mutual or to
the participant upon the grant of an incentive stock option or the exercise of
an incentive stock option by the participant, except that upon exercise of the
option, the participant may be subject to alternative minimum tax on certain
items of tax preference.
If the participant holds the shares of the Company's Common Stock acquired
upon exercise of the incentive stock option for the greater of two years after
the day the option was granted or one year after the acquisition of the shares,
the difference between the aggregate option price and the amount realized upon
sale of the Common Stock will constitute long-term capital gain or loss, and the
companies in the Pooling Agreement will not be entitled to a federal income tax
deduction. If the shares of Common Stock are disposed of in a sale, exchange or
other disqualifying transaction, the participant will recognize ordinary taxable
income in an amount equal to the excess of the fair market value of the Common
Stock purchased at the time of exercise (or, if less, the amount realized upon
the sale of the Common Stock) over the total option price, and the companies in
the Pooling Agreement will be entitled to a federal income tax deduction equal
to such amount subject to certain federal tax law limitations.
THE 2006 COMPENSATION PROCESS
BASE SALARY. In 2006, the base salary ranges of Employers Mutual's
executive officers were established through a process which started with
insurance industry salary surveys published by Watson Wyatt & Company (an
actuarial firm) and the Property Casualty Insurers Association of America (an
insurance industry trade association) for calendar years 2004 and 2005. These
survey sources provided salary information for various officer titles and
functions that formed the basis for the development of the 2006 salary ranges
for the executive officers through comparison to companies which are similar to
Employers Mutual by the type of business in which they were engaged and premium
volume.
From these two sources, management selected a best match for each executive
officer's job description. This matching process is subjective and attempts to
take into consideration the duties and responsibilities associated with each job
description. Due to the unique job responsibilities associated with some of
Employers Mutual's executive officers' positions, the survey data selected for
these positions reflects a blend of various positions contained in the surveys.
Once the executive officer job description matches were completed, the survey
data was used to establish the salary ranges. Unusually high or low values were
excluded from this calculation.
Average salary amounts from each survey were calculated and inflation
factors of 7.0% for the 2004 data and 3.5% for the 2005 data were applied to
those averages to establish inflation-adjusted averages, which were then
averaged to develop an indicated 2006 salary range mid-point. The Employers
Mutual Compensation Committee follows a policy that the established mid-point of
a salary range for a given year will not be less than the mid-point utilized in
the prior year, and the mid-point will not be allowed to increase more than a
pre-established percentage each year. Once the salary mid-points were
established, a range of compensation for each executive officer was set with the
maximum being 120% of the mid-point and the minimum being 80% of the mid-point.
A recommended salary increase was then determined for each executive officer by
considering the length of time the person had been in his or her position, the
relative position of the person's salary within his or her salary range, and
individual performance.
The indicated and selected 2006 salary mid-points and ranges for the
executive officers were submitted to the members of the Employers Mutual
Compensation Committee and the Company's Compensation Committee for their review
on December 21, 2005. Management's recommended salary increases for 2006 were
presented to the members of the Employers Mutual Compensation Committee on
January 26, 2006 and a formal presentation concerning the process and rationale
for the recommended salary increases was made by management to the Employers
Mutual Compensation Committee on January 27, 2006. (One member of the Company's
Compensation Committee also participated in this meeting to ensure a proper
understanding of the process.) The Employers Mutual Compensation Committee
reviewed and discussed the recommended salary increases, with and without
management present, and approved a 2006 base salary
12
amount for each of the Company's named executive officers on that date. This
process resulted in approved salary increases of 4.0% for Mr. Kelley, 8.0% for
Mr. Reese, 7.0% for Mr. Murray, 5.0% for Mr. Jean and 4.0% for Mr. Davis.
The base salary amounts approved by the Employers Mutual Compensation
Committee were presented to the members of the Company's Compensation Committee
for their review on January 27, 2006 and a formal management presentation was
made to the Company's Compensation Committee on January 28, 2006. The Company's
Compensation Committee reviewed and discussed the base salary amounts approved
by the Employers Mutual Compensation Committee, with and without management
present, and subsequently approved them. The approved salary amounts were
submitted to, and approved by, the Board of Directors of Employers Mutual on
March 8, 2006, with retroactive application to January 1, 2006.
CASH BONUS PLAN. For 2006, the maximum percent of base salary that could be
earned by eligible vice presidents under the cash bonus plan was increased from
50% of base salary to 75% of base salary. When the multipliers utilized for
senior management are applied, the maximum cash bonus that could be earned by
the Company's named executive officers increased as follows:
- Senior Vice Presidents - increased from 55% of base salary to
82.5% of base salary.
- Executive Vice Presidents - increased from 60% of base salary to
90% of base salary.
- President - increased from 65% of base salary to 97.5% of base
salary.
The factors considered by the Employers Mutual Compensation Committee and
the Company's Compensation Committee in approving the change in the maximum cash
bonuses that could be earned by executive officers were as follows:
- The original cash bonus plan design was established on the 75%
maximum payout,
- The intent was to pay the maximum bonus only if the target
objectives were exceeded significantly,
- For 2005, the combined trade ratio was close to target and the
uncapped bonus was above the maximum 50% payout,
- For 2005, a 75% maximum payout would have required a combined
trade ratio of 92.0% if the combined trade ratio was not better
than the industry, or a 95.0% combined trade ratio if it was 3.0
points better than the industry, and
- The 50% maximum provides no incentive to exceed target
objectives.
For 2006, the performance factors to be utilized for determining potential
awards under the cash bonus plan were approved by the Employers Mutual
Compensation Committee at its January 27 meeting and by the Company's
Compensation Committee at its January 28 meeting as follows:
- Net written premium growth target - 1.0%.
- Target combined trade ratio - 100.0%.
- Maximum combined trade ratio - 106.0%.
For calendar year 2006, EMC Insurance Companies reported a decline in net
written premiums of 1.8%, a 20.0% increase in policyholders' surplus and a
combined trade ratio of 93.0%. The application of these results to the 2006
bonus plan resulted in the achievement of maximum bonus awards for 2006. As a
result, the Company's named executive officers earned cash bonuses totaling
$1,609,714. The
13
Compensation Committees approved payment of the entire bonus amounts at their
January 2007 meetings due to the fact that the final industry combined trade
ratio would have no impact on the bonus calculation. The bonus payments were
made on February 2, 2007.
STOCK OPTIONS. Standard stock option grants for 2006 were approved by the
Employers Mutual Compensation Committee on January 27, 2006 and the Company's
Compensation Committee on January 28, 2006. Consistent with recent practices,
the stock option awards were made at least three business days after the
February 23, 2006 public release of the Company's calendar year 2005 earnings.
Pursuant to the terms of Employers Mutual's incentive stock option plan, the
exercise price of the stock options was equal to the fair market value of the
Company's Common Stock on the March 1, 2006 date of grant (with fair market
value being equal to the average of the high and low trading prices on that
date, which was $24.60). Messrs. Davis and Reese received a standard grant of
3,000 stock options each. Prior to the actual issuance of the stock options
authorized for Messrs. Kelley, Jean and Murray, it was determined that there had
been an oversight in the record-keeping for the incentive stock option plan
which precluded a substantial portion of the authorized stock options from being
awarded. Consequently, these three named executive officers did not receive the
stock option grants that were authorized for them as part of their 2006
compensation arrangements. Specifically, for Mr. Kelley there were 9,000 options
authorized but not issued, for Mr. Jean there were 7,500 options authorized but
not issued, and for Mr. Murray there were 37,500 options authorized but not
issued.
Upon the discovery of the inability to issue the stock options as initially
authorized, the Employers Mutual Compensation Committee determined that the
appropriate course of action would be to provide alternative forms of
compensation to these three executive officers in lieu of the 2006 stock options
they did not receive.
For Mr. Jean, a cash payment was made based on the grant-date fair value of
the 2006 stock options, with such value determined by the Black-Scholes-Merton
option-pricing model currently utilized by the Company to determine the expense
to be recognized in its financial statements with respect to stock option
grants. The grant-date fair value of the 2006 stock options (based on the normal
five year vesting period) was $5.84 per option and Mr. Jean received a payment
of $43,800 ($5.84 x 7,500) on October 19, 2006.
Mr. Kelley elected not to receive a cash payment based on his un-issued
2006 stock option grant, but rather requested that the stock options be
re-issued at some time in the future. It is anticipated that the Employers
Mutual Compensation Committee will take that request into consideration in
connection with future compensation decisions for Mr. Kelley.
For Mr. Murray, as background, the 2006 stock option grant initially
authorized was significantly larger than previous years' grants and included a
standard grant of 7,500 options and, in addition, a discretionary award of
30,000 stock options in recognition of his anticipated retirement within the
next five years and the desire of the Employers Mutual Compensation Committee to
have those stock options vest and become exercisable prior to his retirement.
The difference in approach in authorizing the 2006 stock option grant led to a
determination that an alternative compensation arrangement was appropriate for
Mr. Murray. As a result, a stock appreciation rights arrangement was implemented
in substitution for the stock options that were initially authorized to be
granted to him as part of his 2006 compensation package. The stock appreciation
rights arrangement is designed to provide Mr. Murray with the opportunity to
achieve the same approximate level of incentive compensation, based on the
performance of the Company's Common Stock, which would have been possible had
the 2006 stock option grant actually been issued to him. The arrangement has
been incorporated into a Stock Appreciation Rights Agreement that has been
modeled after the terms of Employers Mutual's incentive stock option plan and
involves the issuance of stock appreciation "units" (in lieu of stock options)
that will track the performance of the Company's Common Stock over time.
A total of 37,500 stock appreciation units were granted to Mr. Murray on
October 19, 2006, with 20% of such units vesting on an annual basis, commencing
in 2007. Cash payments on the "value" of the units will be made to Mr. Murray on
an annual basis commencing in 2012 and continuing through 2016. The amount of
annual payments will be determined by reference to the greater of (i) the market
price of the
14
Company's Common Stock (using a formula based on the high and low trading prices
of the stock over the preceding twelve months, excluding black-out periods, less
the exercise price associated with the 2006 option grant ($24.60)), and (ii) an
amount equal to the grant-date fair value of the 2006 stock option grants as
determined by the Black-Scholes-Merton option-pricing model ($5.84 per option),
plus an interest factor applied to such amount commencing in 2006 and continuing
through the date of each annual payment.
Because these stock appreciation units will be settled in cash, they are
considered a liability-classified award under current accounting rules. As a
result, the value of these stock appreciation units must be re-measured at fair
market value at each financial statement reporting date. The October 19, 2006
grant-date fair value of the stock appreciation units, as determined by the
Black-Scholes-Merton option-pricing model, was $546,300. The re-measured fair
value of the stock appreciation units on December 31, 2006 was $662,850, and
this is the compensation amount reported in the 2006 Summary Compensation Table.
The full value of the award was included in the 2006 Summary Compensation Table
because Mr. Murray is currently eligible for retirement and is entitled to keep
the award at retirement. As a result, the award does not have subsequent service
requirements and therefore must be fully expensed in the year of grant.
Subsequent changes in the fair value of the stock appreciation units will be
reflected as compensation income to Mr. Murray in future years until all units
are settled in cash in 2016.
In addition to compensating Messrs. Kelley, Jean and Murray for the 2006
stock option grants they did not receive, Employers Mutual also compensated
these executive officers during 2006 for the surrender of certain stock options
awarded to them in prior years in excess of a limitation contained in Employers
Mutual's incentive stock option plan.
As background, Employers Mutual's incentive stock option plan provides
solely for the granting of stock options that qualify as "incentive stock
options" under Section 422 of the Code. To comply with the requirements of
Section 422, the plan contains certain restrictions, including a restriction
that the aggregate fair market value of Common Stock with respect to which stock
options are exercisable for the first time by an option holder may not exceed
$100,000 during any calendar year (the "$100,000 Limitation"). This restriction,
in effect, places a limitation on the number of stock options that can be
granted to a participant during any given year.
As a result of an oversight in record-keeping with respect to the plan,
stock options exceeding the $100,000 Limitation (the "Excess Options") were
granted during several years to Messrs. Kelley, Jean and Murray. This oversight
in record-keeping became known during 2006 and, upon review of the Excess Option
grants, it was determined that the Excess Options had not been properly granted
in accordance with the terms of the plan. The review also determined that
certain of the Excess Options issued to Mr. Kelley had previously been
exercised, resulting in the issuance of shares of Company Common Stock that were
not properly issued in accordance with the terms of the plan (the "Excess Option
Shares"). The review also determined that none of the Excess Options granted to
Messrs. Jean or Murray had been exercised. The following table indicates, for
each executive officer, the number of Excess Options granted, the number of
Excess Options exercised (resulting in the issuance of a like number of Excess
Option Shares) and the number of Excess Options held prior to surrender to
Employers Mutual:
EXCESS EXCESS EXCESS OPTIONS
OPTIONS OPTIONS HELD PRIOR
NAME GRANTED EXERCISED TO SURRENDER
---- ------- --------- --------------
Bruce G. Kelley 16,123 10,553 5,570
Ronald W. Jean 3,859 0 3,859
William A. Murray 6,218 0 6,218
------ ------ ------
Total 26,200 10,553 15,647
====== ====== ======
Upon discovery that Excess Options had been issued in past years, the
Employers Mutual Compensation Committee determined that the appropriate course
of action would be to arrange for a surrender of the Excess Options and, in the
case of Mr. Kelley, the Excess Option Shares he received upon the exercise of a
portion of his Excess Options, in exchange for a cash payment based on the fair
value of
15
the Excess Options and the Excess Option Shares being surrendered. To achieve
this goal, Employers Mutual, in its capacity as employer of the three executive
officers and sponsor of the incentive stock option plan, and the three executive
officers entered into agreements, following approval of the agreements by both
the Employers Mutual Compensation Committee and the Company's Compensation
Committee. The agreements included the following material terms, as applicable:
- The surrender by each executive officer of the Excess Options
held by him and, in the case of Mr. Kelley, the surrender of the
Excess Option Shares received by him upon the exercise of Excess
Options.
- A cash payment to each executive officer for the fair value of
the Excess Options surrendered. Fair value was determined based
on an estimate of the "bargain element" that would have been
received had the executive officer been able to exercise the
Excess Options, with the bargain element being equal to the
difference between the exercise price of the Excess Options and
the greater of: (i) the average of the high and low market prices
for the Common Stock reported as of the close of trading on
September 15, 2006 (the last trading day prior to the effective
date of the agreements on which the executive officers could have
traded in advance of the black-out period associated with the
release of third quarter earnings); and (ii) the sum of: (a) the
low market price of the Common Stock during the twelve-month
period ending on September 15, 2006 (excluding black-out
periods); and (b) 75% of the difference between the high and low
market prices of the Common Stock during such twelve-month period
(with any high or low market price recorded during any black-out
period being disregarded for purposes of this calculation).
Application of the foregoing formula resulted in the Excess
Options being valued at $29.74 each, from which the exercise
price of the Excess Options was deducted to arrive at the bargain
element to be paid to the executive officers.
- A cash payment to Mr. Kelley for the fair value of the Excess
Option Shares surrendered by him, with such fair value being
determined as the greater of: (i) the average of the high and low
market prices for the Common Stock reported as of the close of
trading on September 15, 2006, (the last trading day prior to the
effective date of the agreements on which Mr. Kelley could have
traded in advance of the black-out period associated with the
release of third quarter earnings); and (ii) the sum of: (a) the
low market price of the Common Stock during the twelve month
period ending on September 15, 2006 (excluding black-out
periods), and (b) 75% of the difference between the high and low
market prices of the Common Stock during such twelve-month period
(with any high or low market price recorded during any black-out
period being disregarded for purposes of this calculation).
Application of the foregoing formula resulted in the Excess
Option Shares being valued at $29.74 each for purposes of the
payment to be made to Mr. Kelley.
- Reimbursement to Mr. Kelley for the amount of alternative minimum
tax (AMT) paid by him on his personal tax returns with respect to
the exercise of the Excess Options.
- A tax "gross-up" payment to each executive officer to take into
account: (i) the differential between the combined federal and
state tax rate applicable to the payments to be received under
the agreements (which will be considered "ordinary income" for
federal and state income tax purposes) and the combined federal
and state tax rate applicable to long-term capital gains that
would have been paid by the executive officers had they been able
to exercise the Excess Options and later sell the shares after
holding them for a period of more than one year; (ii)
FICA/Medicare taxes payable on the amounts to be paid under the
Agreements; and (iii) an additional "gross-up" payment to take
into account the federal and state tax owing on the "gross-up"
payment itself.
- Payments received under the agreements are not eligible for
deferral under any of Employers Mutual's non-qualified plans and
will not trigger contributions on behalf of the executive
officers under any of Employers Mutual's employee or executive
benefit plans.
16
Based on the terms of the agreements as noted above, which also included
provisions related to the authorized but un-issued 2006 stock option grants
previously noted, the following payments were made to the three executive
officers on October 19, 2006:
Mr. Kelley received the sum of $568,238 composed of the following amounts:
Payment for Excess Options Surrendered $ 72,072
Payment for Excess Option Shares Surrendered 313,846
Reimbursement of AMT Paid 26,216
Tax "gross-up" Payment 156,104
--------
Total $568,238
========
Mr. Jean received the sum of $111,837 composed of the following amounts:
Payment for Excess Options Surrendered $ 39,026
Payment in substitution of 2006 Option Grant 43,800
Tax "gross-up" Payment 29,011
--------
Total $111,837
========
Mr. Murray received the sum of $85,816 composed of the following amounts:
Payment for Excess Options Surrendered $63,556
Tax "gross-up" Payment 22,260
-------
Total $85,816
=======
In addition, Mr. Murray will receive a minimum of $318,825 under the terms
of the previously noted Stock Appreciation Rights Agreement during the years
2012 to 2016.
CHANGES FOR 2007
In recognition of the heightened scrutiny placed on executive compensation
in recent months, the Employers Mutual Compensation Committee retained Hay Group
Inc. (a compensation consulting firm) during 2006 to review the executive
officer salary ranges and incentive plans currently in place. This review
validated the compensation structure currently in place, and also provided some
areas for suggested improvement. The Employers Mutual Compensation Committee
does not intend to use a compensation consultant on a continuous basis in the
future; however, the Company's Compensation Committee has determined that it
will utilize Hay Group Inc., commencing in 2007, to help ensure that the
compensation arrangements approved by the Employers Mutual Compensation
Committee are reasonable and appropriate.
Due to the limitations imposed on awarding tax-qualified incentive stock
options, Employers Mutual has developed a new stock incentive plan that allows
the issuance of both qualified and non-qualified stock options, as well as other
types of stock-based awards. The Company's Board of Directors has approved this
new stock incentive plan and is recommending that the Company's stockholders
approve it at the 2007 Annual Meeting of Stockholders.
17
SUMMARY COMPENSATION TABLE
The amounts reported in the Summary Compensation Table reflect the total
amount of compensation received by the Company's named executive officers during
2006. The aggregate participation of the Company's property and casualty
insurance subsidiaries in the Pooling Agreement during 2006 was 30% and this
percentage represents the approximate portion of the total compensation amounts
described below which were allocated to the Company during the year.
CHANGE IN
PENSION VALUE
AND
NON-QUALIFIED
NON-EQUITY DEFERRED ALL
OPTION INCENTIVE PLAN COMPENSATION OTHER
BONUS AWARDS COMPENSATION EARNINGS COMPENSATION
NAME AND PRINCIPAL SALARY ($) ($) ($) ($) ($) TOTAL
POSITION YR ($) (1) (2) (3) (4) (5) ($)
------------------ ---- ------- ----- ------- -------------- ------------- ------------ ---------
Bruce G. Kelley 2006 611,580 -- 20,740 596,291 113,118 664,647 2,006,376
President & CEO
Mark E. Reese 2006 192,540 163 11,433 158,846 27,205 26,785 416,972
Sr. Vice President &
CFO
William A. Murray 2006 363,228 163 678,218 326,905 167,820 145,848 1,682,182
Executive Vice
President & COO
Ronald W. Jean 2006 356,436 163 19,556 320,792 181,571 167,355 1,045,873
Executive Vice
President for
Corporate
Development
Raymond W. Davis 2006 250,764 163 10,906 206,880 162,317 31,095 662,125
Senior Vice President
& Treasurer
(1) Each executive officer other than Mr. Kelley received a holiday bonus of
$163.
(2) These amounts represent the compensation expense recognized in 2006 in
accordance with Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 123 (Revised) (SFAS 123R) for option awards held
by the named executive officers. For a detailed listing of the compensation
expense associated with each option grant and a discussion of the factors
used to calculate the compensation amounts, see the heading entitled
"Narrative Disclosures to Summary Compensation Table and Grants of
Plan-Based Awards Table" in this Proxy Statement. See Note 12 of the Notes
to Consolidated Financial Statements contained in the Company's 2006 Annual
Report to Stockholders for the assumptions used to estimate the fair value
of option awards.
(3) These amounts represent the cash bonuses earned during 2006 under the
Employers Mutual Senior Executive Compensation Bonus Program. The 2006
bonus amounts were paid, or deferred at the election of the named executive
officer, on February 2, 2007.
(4) These amounts represent the aggregate increase in the actuarial present
value of accumulated benefits under Employers Mutual's qualified pension
plan and non-qualified supplemental retirement plan. There were no
above-market or preferential earnings on any deferred compensation amounts.
18
(5) The following table identifies and quantifies each item of compensation
included in the All Other Compensation column:
AMOUNTS EMPLOYER PRO-
RECEIVED CONTRIBUTIONS TO AGGREGATE COMPANY FESSIONAL
FOR ------------------- INCREMENTAL COST OF BENEFITS PAID TAX
EXCESS TAX NON- ----------------------------- SUPPLEMENTAL PLANNING
OPTIONS "GROSS- QUALIFIED CLUB DISABILITY AND
AND UP" PAY- 401(K) EXCESS COMPANY MEMBER- SPOUSAL INSURANCE PREP-
SHARES MENTS PLAN PLAN AUTO SHIP FEES TRAVEL PREMIUMS ARATION TOTAL
NAME ($) (6) ($) (6) ($) (7) ($) (7) ($) (8) ($) (8) ($) (8) ($) ($) ($)
---- -------- -------- ------- --------- ------- --------- ------- ------------- --------- -------
Bruce G. Kelley 412,134 156,104 6,600 60,394 10,056 5,740 5,814 5,485 2,320 664,647
Mark E. Reese -- -- 6,600 17,569 -- -- -- 2,166 450 26,785
William A. Murray 63,556 22,260 6,600 28,785 7,085 4,876 3,059 7,627 2,000 145,848
Ronald W. Jean 82,826 29,011 6,600 33,862 4,983 -- 3,201 6,872 -- 167,355
Raymond W. Davis -- -- 6,600 19,262 -- -- 544 4,364 325 31,095
(6) These amounts represent payments made to three of the named executive
officers in connection with the surrender of certain stock options and
shares of stock issued in excess of a limitation contained in Employers
Mutual's incentive stock option plan. The named executive officers received
the following amounts: Mr. Kelley received $72,072 for the surrender of
excess options granted in prior years, $313,846 for excess option shares
surrendered, $26,216 for the reimbursement of AMT paid and $156,104 as an
income tax gross-up; Mr. Murray received $63,556 for the surrender of
excess option shares granted in prior years and $22,260 as an income tax
"gross-up"; and Mr. Jean received $43,800 as a substitute for a 2006 stock
option grant he did not receive, $39,026 for the surrender of excess
options granted in prior years and $29,011 as an income tax "gross-up".
(7) These amounts represent matching contributions made by Employers Mutual
under its 401(k) plan and non-qualified excess plan.
(8) These amounts represent the aggregate incremental cost Employers Mutual
incurred to provide the listed benefits, which were calculated as follows:
Company-Owned Auto - Total business miles driven in 2006 were multiplied by
the IRS reimbursable rate for personal auto usage (44.5 cents per mile in
2006) and this amount was subtracted from the costs incurred to own and
operate the company-owned auto during 2006. The depreciation amount used in
this calculation was based on the actual purchase price of the auto, with
an estimated useful life of four or five years.
Club Membership Fees - The total amount paid for country club and dinner
club membership fees was reported as the aggregate incremental cost because
the memberships are not used exclusively for business entertainment
purposes.
Spousal Travel - These amounts reflect additional transportation costs,
program fees and meal expenses incurred by Employers Mutual when the named
executive officer's spouse accompanied him on business trips.
19
GRANTS OF PLAN-BASED AWARDS
ALL OTHER
OPTION GRANT
AWARDS: EXERCISE DATE
ESTIMATED FUTURE PAYOUTS UNDER NUMBER OF OR BASE FAIR
NON-EQUITY INCENTIVE PLAN AWARDS SECURITIES PRICE OF VALUE MARKET
COMPENSATION -------------------------------- UNDERLYING OPTION OF PRICE ON
COMMITTEE THRESHOLD TARGET MAXIMUM OPTIONS AWARDS OPTION DATE OF
APPROVAL ($) ($) ($) (#) ($/SH) AWARDS GRANT
NAME GRANT DATE DATE (1) (1) (1) (2) (3) ($) ($/SH)
---- ---------- ------------ ----------- ------- ------- ----------- -------- ------- --------
Bruce G. Kelley -- -- 0 473,975 596,291 -- -- -- --
-- -- -- -- -- -- -- -- --
Mark E. Reese -- -- 0 126,306 158,846 -- -- -- --
3/1/06 1/28/06 -- -- -- 3,000 24.60 17,520 24.69
William A. Murray -- -- 0 259,708 326,905 -- -- -- --
10/19/06 10/17/06 -- -- -- 37,500 24.60 546,300 30.33
Ronald W. Jean -- -- 0 254,852 320,792 -- -- -- --
-- -- -- -- -- -- -- -- --
Raymond W. Davis -- -- 0 164,501 206,880 -- -- -- --
3/1/06 1/28/06 -- -- -- 3,000 24.60 3,570 24.69
(1) These amounts represent potential cash bonus awards available under
Employers Mutual's Senior Executive Compensation Bonus Program for 2006.
The target amounts represent the amount of bonus that would be earned by
each named executive officer if the performance targets for the two
performance objectives that have targets (production increase and combined
trade ratio) were reached. The third performance objective contained in the
bonus plan, which measures the percentage change in statutory surplus for
the year, does not have a performance target. Accordingly, the calculation
of the 2006 target amount for this component of the bonus plan reflects the
amount of bonus generated by this objective in 2005.
(2) Messrs. Reese and Davis were each awarded a standard stock option grant
under Employers Mutual's incentive stock option plan. Mr. Murray was
awarded 37,500 stock appreciation units as a substitute for 37,500
incentive stock options that were initially authorized to be granted to him
as part of his 2006 compensation arrangement, but were not issued to him
due to certain limitations contained in Employers Mutual's incentive stock
option plan.
(3) Under the terms of Employers Mutual's incentive stock option plan, the
exercise price for option awards is based on the average of the high and
low trading prices of the Company's Common Stock on the date of grant,
rather than the closing price. The exercise price for the stock
appreciation units contained in Mr. Murray's Stock Appreciation Rights
Agreement is based on the March 1, 2006 exercise price of the 2006 option
grant that was initially authorized for Mr. Murray as part of his 2006
compensation arrangement, but was not issued to him due to certain
limitations contained in Employers Mutual's incentive stock option plan.
20
NARRATIVE DISCLOSURES TO SUMMARY COMPENSATION TABLE AND GRANTS OF PLAN-BASED
AWARDS TABLE
INCENTIVE STOCK OPTIONS. Employers Mutual's executive officers are eligible
for incentive stock option awards that are intended to provide for long-term
incentive opportunities. Employers Mutual's incentive stock option plan provides
that all stock options must be granted at prices equal to the fair market value
of the Company's Common Stock on the date of grant, with fair market value
determined as the average of the high and low trading prices of the Common Stock
on the date of grant. Stock options generally have a term of ten years and vest
at a rate of 20% per year, commencing on the second anniversary of the option
award; however, all unvested option awards automatically vest upon a
participant's retirement.
Prior to the actual issuance of the 2006 stock option grants authorized for
Messrs. Kelley, Jean and Murray, it was determined that there had been an
oversight in the record-keeping for the incentive stock option plan which
precluded a substantial portion of the authorized stock options from being
awarded. Consequently, these three named executive officers did not receive the
stock option grants that were initially authorized for them as part of their
2006 compensation arrangements. In addition, the three named executive officers
surrendered certain stock options that had been granted to them in prior years
in excess of a limitation contained in the incentive stock option plan.
Effective January 1, 2006, the Company adopted SFAS 123R using the modified
prospective method, which requires compensation expense to be recorded for all
share-based payments made to employees after the date of adoption, as well as
for existing share-based payments for which the requisite service has not been
rendered. The amounts reported in the Option Awards column of the Summary
Compensation Table reflect the amount of compensation expense recognized in 2006
for:
- The Stock Appreciation Rights (SAR) Agreement entered into with
Mr. Murray in 2006,
- Option awards granted to the named executive officers under
Employers Mutual's incentive stock option plan in 2006, and
- Option awards vesting in 2006 that were granted to the named
executive officers under Employers Mutual's incentive stock
option plan in years 2001-2005.
Following is a brief discussion of each compensation expense component:
SAR AGREEMENT. On October 19, 2006, Employers Mutual entered into a SAR
agreement with Mr. Murray. This SAR agreement is a substitute for an incentive
stock option grant Mr. Murray was initially authorized to receive as part of his
2006 compensation arrangement, but was not issued to him due to certain
limitations contained in Employers Mutual's incentive stock option plan. The
grant-date fair value of this award was $546,300 and this is the amount
contained in the Grants of Plan-Based Awards Table. Because the SAR agreement
will be settled in cash, it is considered to be a liability-classified award
under SFAS 123R. As a result, the value of this agreement must be re-measured at
fair value at each financial statement reporting date. The fair value of this
agreement at December 31, 2006 was $662,850, and this is the amount of
compensation expense reported in the Summary Compensation Table. Subsequent
changes in the fair value of this agreement will be reflected as compensation
income to Mr. Murray until the agreement is ultimately settled in 2016. The full
value of this agreement was expensed in 2006 because Mr. Murray is currently
eligible for retirement and is entitled to keep the award at retirement. As a
result, the award does not have any subsequent service requirements.
21
2006 INCENTIVE STOCK OPTION AWARDS. For Employers Mutual's incentive stock
option plan, the requisite service period is the vesting period of the option
awards, which is generally five years. However, since all option awards
automatically vest upon an individual's retirement, option awards are being
expensed over the lesser of five years or the number of years until each
participant reaches the eligible retirement age of 55. If a participant is age
55 or greater, the entire value of the award is expensed in the year of grant.
The grant-date fair value of the 2006 option awards was calculated by grouping
participants receiving awards according to age and establishing separate
assumptions for each group. This methodology results in a lower grant-date fair
value being assigned to option awards granted to participants that are at, or
near, the eligible retirement age of 55. The 2006 option award granted to Mr.
Davis was fully expensed in 2006 since he is currently eligible for retirement.
2001 - 2005 INCENTIVE STOCK OPTION AWARDS. The grant-date fair values of
option awards granted in years 2001-2005 are based on the fair value estimate
and expense recognition method previously used under SFAS 123 (pro forma
disclosure). Under SFAS 123, the grant-date fair value of option awards was
calculated using one set of assumptions for all participants, and all option
awards were expensed over five years regardless of the participants' ages.
SHARE-BASED COMPENSATION RECOGNIZED IN 2006
Compensation expense recognized in 2006 for the named executive officers in
connection with the SAR agreement and incentive stock option awards is as
follows:
INCENTIVE STOCK OPTIONS ($)
SARS ($) -------------------------------------------------------
2006 2006 2005 2004 2003 2002 2001 TOTAL
NAME GRANT GRANT GRANT GRANT GRANT GRANT GRANT ($)
---- -------- ----- ----- ----- ----- ----- ----- -------
Bruce G. Kelley -- -- 9,862 5,328 2,930 2,584 -- 20,704
Mark E. Reese -- 2,920 5,484 888 1,172 969 -- 11,433
William A. Murray 662,850 -- 1,321 4,440 2,930 6,460 217 678,218
Ronald W. Jean -- -- 5,726 4,440 2,930 6,460 -- 19,556
Raymond W. Davis -- 3,570 4,570 888 586 1,292 -- 10,906
22
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
OPTION AWARDS
---------------------------------------------------
NO. OF NO. OF
SECURITIES SECURITIES
UNDERLYING UNDERLYING
UNEXERCISED UNEXERCISED OPTION
OPTIONS OPTIONS (#) EXERCISE OPTION
(#) UNEXERCISABLE PRICE EXPIRATION
NAME EXERCISABLE (1) ($) DATE
---- ----------- ------------- -------- ----------
Bruce G. Kelley 10,000 -- 9.2500 8/1/2010
3,200 800 18.3000 2/1/2012
3,000 2,000 16.8750 2/7/2013
2,400 3,600 22.2800 2/6/2014
2,158 12,272 19.3500 3/1/2015
Mark E. Reese 2,000 -- 12.6875 2/1/2009
2,000 -- 9.2500 8/1/2010
1,200 300 18.3000 2/1/2012
1,200 800 16.8750 2/7/2013
400 600 22.2800 2/6/2014
1,200 4,800 19.3500 3/1/2015
-- 3,000 24.6000 3/1/2016
William A. Murray 4,914 -- 9.2500 8/1/2010
8,200 -- 11.3750 2/1/2011
8,000 2,000 18.3000 2/1/2012
2,240 2,000 16.8750 2/7/2013
1,000 3,000 22.2800 2/6/2014
289 10,253 19.3500 3/1/2015
-- 37,500 24.6000 12/31/2016
Ronald W. Jean 1,000 -- 13.6875 2/1/2008
1,000 -- 12.6875 2/1/2009
8,579 -- 9.2500 8/1/2010
8,000 2,000 18.3000 2/1/2012
3,000 2,000 16.8750 2/7/2013
1,635 3,000 22.2800 2/6/2014
1,253 10,253 19.3500 3/1/2015
Raymond W. Davis 1,000 -- 13.6875 2/1/2008
1,600 400 18.3000 2/1/2012
600 400 16.8750 2/7/2013
400 600 22.2800 2/6/2014
1,000 4,000 19.3500 3/1/2015
-- 3,000 24.6000 3/1/2016
(1) Stock options generally have a term of ten years and vest at a rate of 20%
per year, commencing on the second anniversary of the option award. The
37,500 stock appreciation units granted to Mr. Murray in 2006 vest at the
rate of 20% per year beginning March 9, 2007. All unvested stock options
and stock appreciation units automatically vest upon retirement of the
named executive officer.
23
OPTION EXERCISES
OPTION AWARDS
-------------------------
NO. OF
SHARES VALUE
ACQUIRED ON REALIZED ON
EXERCISE EXERCISE
NAME (#) ($)
---- ----------- -----------
Bruce G. Kelley 14,000 201,165
Mark E. Reese 4,006 43,462
William A. Murray 4,783 70,132
Ronald W. Jean 3,534 56,372
Raymond W. Davis 4,200 69,055
PENSION BENEFITS
PRESENT
NUMBER OF YEARS VALUE OF
CREDITED SERVICE ACCUMULATED
NAME PLAN NAME (#) (1) BENEFIT ($)
---- --------- ---------------- -----------
Bruce G. Kelley Pension Plan 21 529,342
Supplemental Retirement Plan 21 679,712
Mark E. Reese Pension Plan 21 260,916
Supplemental Retirement Plan 21 8,916
William A. Murray Pension Plan 20 646,797
Supplemental Retirement Plan 20 502,272
Ronald W. Jean Pension Plan 27 718,277
Supplemental Retirement Plan 27 543,307
Raymond W. Davis Pension Plan 27 854,593
Supplemental Retirement Plan 27 330,944
(1) The number of years of credited service for Messrs. Kelley and Reese is not
relevant in the calculation of their pension benefits because their
benefits are determined under the cash balance formula of the pension plan.
Employers Mutual sponsors a tax-qualified defined benefit plan covering all
employees of Employers Mutual (the "Pension Plan"). Employers Mutual also
sponsors a non-qualified defined benefit supplemental retirement plan (the
"SRP") covering certain of its management and highly compensated employees,
which group includes the Company's named executive officers. The SRP provides a
benefit to eligible employees whenever 100% of their pension benefit under the
Pension Plan is not permitted to be funded or paid through the Pension Plan
because of limits imposed by the Code (limit on compensation that can be taken
into account and limit on benefits that can be paid) and/or because of elective
deferrals of covered compensation under any non-qualified deferred compensation
plan.
24
Both plans contain a traditional defined benefit formula pension benefit
(traditional formula) for certain eligible employees, and a cash balance account
benefit formula (cash balance formula) for all other eligible employees.
Employees employed prior to January 1, 1989 and who were 50 years old, or older,
on January 1, 2000, have their benefits determined under the Pension Plan and
SRP using the traditional formula, based on a combination of average pay and
years of service. Employees who do not meet this criteria have their pension
benefit determined under the cash balance formula in the Pension Plan and SRP.
For long-term employees, the traditional formula may produce a significantly
larger pension benefit than the cash balance formula. This is especially true
for executive officers when large cash bonuses are earned in their later years
of employment, when base salary and credited years of service are at their
highest levels. Messrs. Murray, Jean and Davis have their Pension Plan and SRP
benefits determined using the traditional formula. Messrs. Kelley and Reese have
their Pension Plan and SRP benefits determined using the cash balance formula.
Normal retirement age for participants under the Pension Plan's traditional
formula is age 65. Early retirement can be elected by a participant who has
reached age 55. The benefit paid on early retirement is a percentage of the
benefit that would be payable upon normal retirement and ranges from 52% at age
55 to 92% at age 64. All of the named executive officers under the Pension
Plan's traditional formula are currently eligible for early retirement at the
following benefit levels: Mr. Murray at 70% of his normal retirement benefit,
Mr. Jean at 57% of his normal retirement benefit, and Mr. Davis at 75% of his
normal retirement benefit. There are no early or normal retirement ages for
participants under the cash balance formula of the Pension Plan. Upon completion
of five years of service, a participant's pension benefit becomes vested and
they are entitled to receive the current value of their pension account upon
termination of employment for any reason, including retirement.
The normal form of benefit under the Pension Plan's traditional formula is
a single life annuity with payment guaranteed for ten years. Various other types
of annuities, as well as a lump sum payment, are also available. The normal form
of benefit under the Pension Plan's cash balance formula is a lump sum payment,
but an annuity is also available. All alternative payment options are the
actuarial equivalent of the normal form of benefit. The accrued benefit under
the SRP is calculated as a single life annuity (with ten years certain) and is
converted to an actuarially equivalent lump sum, which is then paid to the
employee over a period of one to ten years, depending on the amount of the
benefit.
Generally, compensation utilized for pension formula purposes includes base
salary and cash bonus payments.
The actuarial valuation method used to determine the present value of
accumulated pension benefits is the unit cost method, which is the same method
used to calculate the Company's accumulated benefit obligation under SFAS 87.
Inherent in the actuarial valuation of pension benefits are several key
assumptions, including the discount rate and the expected long-term rate of
return on plan assets. For a discussion of the key assumptions utilized by the
Company to value pension benefits, see the heading entitled "Critical Accounting
Policies" contained in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of the Company's 2006 Annual Report
to Stockholders.
25
NON-QUALIFIED DEFERRED COMPENSATION TABLE
EXECUTIVE REGISTRANT AGGREGATE AGGREGATE
CONTRIBUTIONS IN CONTRIBUTIONS IN EARNINGS BALANCE AT
LAST FY LAST FY IN LAST FY LAST FY
NAME ($) ($)(1) ($) ($)
---- ---------------- ---------------- ---------- ----------
Bruce G. Kelley 60,394 60,394 43,343 504,718
Mark E. Reese 17,569 17,569 22,696 248,705
William A. Murray 150,740 28,785 49,731 569,921
Ronald W. Jean 33,862 33,862 26,816 303,631
Raymond W. Davis 122,561 19,262 75,218 567,264
(1) These amounts are included as compensation income in the Summary
Compensation Table under the "All Other Compensation" column.
NON-QUALIFIED DEFERRED COMPENSATION
Employers Mutual maintains a Board and Executive Non-qualified Excess Plan
(BENEP), which allows certain employees, whose compensation levels limit their
deferral percentage under the 401(k) Plan, to defer up to 25% of their base
salary between the 401(k) Plan and the BENEP. Employers Mutual matches 100% of
the first 5% of covered compensation deferred under the BENEP for vice
presidents and above, including all of the Company's named executive officers.
Executive officers may also defer some or all of their cash bonus awards under
this plan. Participants in the BENEP have an array of investment options
available from which to select, and they may change their selections at any
time. All of the named executive officers participate in the BENEP.
Prior to December 31, 2004, Employers Mutual had an Executive and Directors
Option-It Plan that allowed executive officers to defer some or all of their
cash bonus awards. Effective January 1, 2005, this plan was amended to comply
with the requirements of Section 409A of the Internal Revenue Code. As a result,
the plan was frozen so that no cash bonus awards earned after December 31, 2004
could be deferred under the plan; however, the plan continues to operate
pursuant to the terms in existence on October 3, 2004. Prior to the plan being
frozen, participants had an array of investment options available from which to
select, and their selections could be changed at any time. When the plan was
frozen, the selected investment options were also frozen. Messrs. Reese and
Murray have deferred compensation into this plan.
Prior to January 1, 2001, Employers Mutual had a Deferred Bonus
Compensation Plan that allowed executive officers to defer some or all of their
cash bonus awards. Effective December 31, 2000, this plan was frozen and
replaced with the Executive Option-It Plan. The plan continues to operate
pursuant to the terms in existence on December 31, 2000. Participants are
credited with interest compounded annually based on the effective yield of the
ten year U.S. Treasury note. Mr. Murray has deferred compensation into this
plan, at interest rates ranging from 4.12% to 6.65%.
26
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed the disclosures contained in the
Compensation Discussion and Analysis and discussed such disclosures with
management of the Company. Based on its review and discussions with management,
the Compensation Committee has recommended to the Board of Directors of the
Company that the Compensation Discussion and Analysis be included in the Proxy
Statement and in the Annual Report on Form 10-K to be filed by the Company with
the Securities and Exchange Commission.
The undersigned members of the Compensation Committee have submitted this
report.
COMPENSATION COMMITTEE
Joanne L. Stockdale, Chair
George C. Carpenter III
Raymond A. Michel
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The non-employee directors who serve as members of the Compensation
Committee are identified above. No member of the Compensation Committee is a
former or current officer or employee of the Company or any of the Company's
subsidiaries. To the Company's knowledge, there were no other relationships
involving members of the Compensation Committee requiring disclosure in this
section of this Proxy Statement pursuant to applicable SEC regulations. No
executive officer of the Company has served on the board of directors or
compensation committee of any company that has, or has had, one or more of its
executive officers serving as a director of the Company.
DIRECTOR COMPENSATION TABLE
FEES EARNED OR PAID ALL OTHER
IN CASH COMPENSATION TOTAL
NAME ($) ($)(1) ($)
---- ------------------- ------------ ------
Margaret A. Ball 32,400 -- 32,400
George C. Carpenter III 24,600 -- 24,600
David J. Fisher 34,600 -- 34,600
George W. Kochheiser 16,800 -- 16,800
Raymond A. Michel 26,400 -- 26,400
Fredrick A. Schiek 13,800 -- 13,800
Joanne L. Stockdale 38,400 2,999 41,399
(1) Non-employee directors of the Company are eligible to participate in
Employers Mutual's Non-Employee Director Stock Option Plan. Under this
plan, directors are granted an option to purchase the Company's Common
Stock in an amount up to 100% of their annual retainer, at an option price
equal to 75% of the fair market value of the Common Stock on the option
exercise date. The amount reported for Ms. Stockdale reflects the discount
she received on the purchase of 403 shares of the Company's Common Stock
under this plan.
27
In 2006, each member of the Company's Board of Directors who was not an
officer or employee of the Company was paid $1,200, plus expenses, for each
board meeting, committee meeting or continuing education seminar attended,
plus a $9,000 annual retainer. In addition, the chair of the Audit
Committee was paid a $4,000 annual fee, the chair of the Board of Directors
was paid a $3,000 annual fee, and the chairs of all other board committees
were paid a $3,000 annual fee.
SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS
The following information is furnished as to the Common Stock of the
Company owned beneficially as of March 29, 2007, by each of the Company's
directors, director nominees and named executive officers individually, and the
directors and executive officers of the Company as a group. The information
concerning beneficial ownership has been furnished by the persons listed below
or was determined by the Company from reports filed by such persons with the
Securities and Exchange Commission regarding such ownership.
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME OWNERSHIP (1) OF CLASS
---- ----------------- --------
Margaret A. Ball 2,005 *
George C. Carpenter III 5,490 *
Raymond W. Davis 20,976(2) *
David J. Fisher 2,482 *
Ronald W. Jean 43,352(3) *
Bruce G. Kelley 144,459(4) 1.0%
George W. Kochheiser 55,000 *
Raymond A. Michel 5,450 *
William A. Murray 40,982(5) *
Mark E. Reese 14,706(6) *
Fredrick A. Schiek 16,991 *
Joanne L. Stockdale 1,049 *
All Directors and Executive Officers
as a Group (21 persons, including
those listed above) 467,306 3.4%
----------
* Less than one percent
(1) All named holders of the Common Stock listed in this table have sole voting
and investment power with respect to the shares held, except as stated
otherwise below.
(2) Raymond W. Davis directly owns 13,976 shares of Common Stock and has
presently exercisable options to purchase 7,000 shares, which shares are
included in the table.
(3) Ronald W. Jean directly owns 13,632 shares of Common Stock and has
presently exercisable options to purchase 29,720 shares, which shares are
included in the table.
(4) Bruce G. Kelley owns 92,345 shares of Common Stock directly and 26,198
shares indirectly. Of the 26,198 shares indirectly owned, 1,500 are owned
by his spouse and 24,698 are owned by his children. In addition, he owns
presently exercisable options to purchase 25,916 shares, which shares are
included in the table.
(5) William A. Murray directly owns 11,087 shares of Common Stock and has
presently exercisable options to purchase 29,895 shares, which shares are
included in the table.
28
(6) Mark E. Reese directly owns 4,006 shares of Common Stock and has presently
exercisable options to purchase 10,700 shares, which shares are included in
the table.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding those entities
known to the Company to own beneficially more than five (5) percent of the
Company's Common Stock:
AMOUNT AND
NATURE
TITLE OF NAME AND ADDRESS OF BENEFICIAL PERCENT
CLASS OF BENEFICIAL OWNER OWNERSHIP OF CLASS
-------- --------------------------------- ------------- --------
Common Employers Mutual Casualty Company 7,782,351(1) 56.6%
717 Mulberry Street
Des Moines, Iowa 50309
Common Dimensional Fund Advisors Inc. 1,243,072(2) 9.03%
1299 Ocean Avenue
Santa Monica, California 90401
----------
(1) On March 29, 2007, Employers Mutual owned 56.6% of the outstanding Common
Stock of the Company. Employers Mutual intends to retain ownership of a
majority of the Company's Common Stock in the foreseeable future. This
majority stock ownership will give Employers Mutual the right to determine
whether or not all of the proposals presented at the Annual Meeting are
carried and will enable it to control the election of the Board of
Directors of the Company. The Company's operations are integrated with the
operations of Employers Mutual and are largely dependent upon a continuing
relationship with Employers Mutual. The Company does not anticipate any
disruptions in this relationship.
(2) The information shown is based upon a Schedule 13G, dated February 9, 2007,
filed with the Securities and Exchange Commission by Dimensional Fund
Advisors Inc., a registered investment advisor. Dimensional Fund Advisors
Inc. reported sole voting power and sole disposition power with respect to
all of the shares.
29
CERTAIN RELATIONSHIPS AND RELATED PERSONS TRANSACTIONS
The operations of the Company are highly integrated with those of Employers
Mutual through participation in a property and casualty insurance pooling
agreement (the "Pooling Agreement") and a reinsurance quota share agreement (the
"Quota Share Agreement"). In addition, the Company is completely dependent upon
Employers Mutual's employees, facilities and information technology systems to
conduct its business. As a result of these operational relationships, there are
numerous transactions between the Company and Employers Mutual that occurred on
an ongoing basis in the ordinary course of business during 2006 and that will
continue to occur on an ongoing basis in the ordinary course of business during
2007.
The Company's four property and casualty insurance subsidiaries, along with
Employers Mutual and its two property and casualty insurance subsidiaries and an
affiliate, are parties to the Pooling Agreement under which the property and
casualty insurance business written by the participating companies is pooled.
Under the terms of the Pooling Agreement, each participant cedes to Employers
Mutual all of its property and casualty insurance business, with the exception
of any voluntary reinsurance business assumed from non-affiliated insurance
companies, and assumes from Employers Mutual an amount equal to its designated
participation percentage in the pool. All premiums, losses, settlement expenses
and other underwriting and administrative expenses, excluding the voluntary
reinsurance business assumed by Employers Mutual from non-affiliated insurance
companies, are pooled and then prorated among the parties to the Pooling
Agreement on the basis of their respective participation percentages. The
Company's four property and casualty insurance subsidiaries together share an
aggregate 30% participation interest in the pool, with the remaining 70%
allocated to Employers Mutual and its subsidiaries and affiliate. Employers
Mutual negotiates reinsurance agreements that provide protection to the pool and
each of its participants, including protection against losses arising from
catastrophic events. Operations of the pool give rise to inter-company balances
between the Company and Employers Mutual, which are settled on a quarterly
basis. The investment and income tax activities of the pool participants are not
subject to the Pooling Agreement.
The purpose of the Pooling Agreement is to spread the risk of an exposure
insured by any of the participants among all the companies participating in the
pool. The Pooling Agreement produces a more uniform and stable underwriting
result from year to year for all companies in the pool than might be experienced
on an individual basis. In addition, each company benefits from the capacity of
the entire pool, rather than being limited to the policy exposures of a size
commensurate with its own assets, and from the wide range of policy forms, lines
of insurance written, rate filings and commission plans offered by each of the
companies.
During 2006, the Company's four property and casualty insurance
subsidiaries ceded direct premiums earned of $188,426,941, direct losses and
settlement expenses incurred of $95,639,897, direct underwriting expenses
incurred of $32,825,282 and direct policyholder dividends incurred of $3,740,204
to Employers Mutual pursuant to the terms of the Pooling Agreement. The four
property and casualty insurance subsidiaries assumed from Employers Mutual their
aggregate 30% participation interest in the pool, which included premiums earned
totaling $318,416,718, losses and settlement expenses incurred totaling
$178,305,327, underwriting expenses incurred totaling $109,046,208 and
policyholder dividends totaling $8,663,715. The Pooling Agreement remains in
effect during 2007 and will continue to function in accordance with the terms
described above, although the specific amounts to be ceded by the Company's
subsidiaries to Employers Mutual and to be assumed by the subsidiaries from
Employers Mutual will not be determined prior to year-end 2007. Additional
information concerning the Pooling Agreement is contained in the Annual Report
on Form 10-K filed by the Company with the Securities and Exchange Commission
("SEC") on March 15, 2007 (the "2006 Form 10-K").
The Company's reinsurance subsidiary and Employers Mutual are parties to
the Quota Share Agreement under which the reinsurance subsidiary assumes a 100%
quota share portion of Employers Mutual's assumed reinsurance business,
exclusive of certain reinsurance contracts, including all premiums and related
losses and settlement expenses of the assumed business, subject to a maximum
loss of $2 million per event. Employers Mutual retains 10.5% of the gross
assumed written premiums subject to cession to the reinsurance subsidiary as
compensation for the $2 million cap on losses assumed per event. During
30
2006, the reinsurance subsidiary assumed from Employers Mutual premiums earned
totaling $73,198,723 and losses and settlement expenses incurred totaling
$50,147,165. Total premiums retained by Employers Mutual in 2006 as compensation
for the cap protection amounted to $7,774,480. It is customary in the
reinsurance business for the assuming company to compensate the ceding company
for the acquisition expenses incurred in the generation of the business and the
reinsurance subsidiary reimbursed Employers Mutual for acquisition expenses
incurred of $14,665,622 with respect to business assumed in 2006. Employers
Mutual retained losses and settlement expenses under the Quota Share Agreement
totaling $1,029,236 in 2006. The reinsurance subsidiary also assumes all foreign
currency exchange gains/losses associated with contracts incepting on January 1,
2006 and thereafter that are subject to the Quota Share Agreement. The net
foreign currency exchange loss assumed by the reinsurance subsidiary in 2006 was
$61,055. Operations of the Quota Share Agreement give rise to inter-company
balances between the Company and Employers Mutual, which are settled on a
quarterly basis. The investment and income tax activities of the reinsurance
subsidiary are not subject to the Quota Share Agreement. The Quota Share
Agreement remains in effect during 2007 and will continue to function in
accordance with the terms described above, although the specific amounts to be
assumed by the Company's subsidiary will not be determined prior to year-end
2007. Additional information concerning the Quota Share Agreement is contained
in the 2006 Form 10-K.
Employers Mutual utilizes its employees, facilities and information
technology systems to provide various services to all of its subsidiaries and
affiliates, including the Company and its subsidiaries. These services include
data processing, claims, financial, legal, actuarial, auditing, marketing and
underwriting. Employers Mutual allocates a portion of the cost of these services
to its subsidiaries that do not participate in the Pooling Agreement based upon
a number of criteria, including usage of the services and the number of
transactions. The remaining costs are allocated to the pool and each pool
participant shares in the total costs in accordance with its participation
percentage as established under the terms of the Pooling Agreement. Costs
allocated to the Company by Employers Mutual for services provided to the
Company and its subsidiaries that do not participate in the Pooling Agreement
amounted to $2,081,688 in 2006. Costs allocated to the Company based on the
aggregate participation percentage of the Company's subsidiaries that
participate in the Pooling Agreement amounted to $89,055,823 in 2006. The
allocation of costs to the Company and its subsidiaries that do not participate
in the Pooling Agreement, as well as the allocation of costs to the Company
based on the aggregate participation percentage of its subsidiaries that do
participate in the Pooling Agreement, will occur in 2007, although the specific
amounts will not be determined prior to year-end.
The Company's investment expenses are based on actual expenses directly
incurred by the Company or its subsidiaries plus an allocation of other
investment expenses incurred by Employers Mutual, with the allocation being
based on a weighted average of total invested assets and number of investment
transactions executed during the year. Investment expenses allocated to the
Company by Employers Mutual amounted to $1,310,193 in 2006. Investment expenses
will again be allocated to the Company by Employers Mutual in 2007, although the
specific amount will not be determined prior to year-end.
Three of the Company's insurance subsidiaries and its reinsurance
subsidiary have issued an aggregate of $36 million of surplus notes to Employers
Mutual, with such notes bearing a fixed interest rate of 3.09% per annum. No
principal payments have been made on the notes to date. Interest in the amount
of $1,112,400 (for calendar year 2005) was paid by the subsidiaries to Employers
Mutual in 2006 and interest in the amount of $1,112,400 (for calendar year 2006)
was accrued at December 31, 2006 to be paid in 2007 upon receipt of approval of
such payment by insurance regulatory authorities. The surplus notes do not have
a stated maturity date and interest will continue to accrue on the surplus notes
during 2007.
The Company operates an excess and surplus lines insurance agency through a
subsidiary. This subsidiary received $516,896 of commission income from
Employers Mutual during 2006 as compensation for its duties as managing
underwriter for excess and surplus lines insurance for several of the insurance
companies participating in the Pooling Agreement. This subsidiary, which does
not participate in the Pooling Agreement, also received an allocation of
operating expenses from Employers Mutual as noted above. The payment of premiums
from Employers Mutual to the subsidiary, and an allocation of operating
31
expenses to the subsidiary, will occur in 2007, although the specific amounts
will not be determined prior to year-end.
During 2006, Employers Mutual repurchased shares of Company common stock
owned by an executive officer of the Company to correct a deficiency in the
issuance of such shares resulting from the invalid issuance of stock options
underlying such shares. Upon the repurchase of such shares from the executive
officer, Employers Mutual transferred the shares back to the Company for
cancellation and received a payment from the Company in the amount of $216,612
to reimburse it for the amount received by the Company upon the original
issuance of the shares.
As a result of the numerous transactions between the Company and Employers
Mutual that occur on an ongoing basis, the Company has established procedures
whereby independent directors of the Company review and approve and/or ratify
these transactions, as well as other transactions qualifying as a "related
persons transaction" as defined under SEC rules. The procedures for the review
of "related persons transactions" are as follows:
- Any new "material contract", proposed material change to an
existing "material contract" or transaction resulting from a
"material contract" involving the Company or its subsidiaries and
Employers Mutual or its subsidiaries or affiliate is subject to
review and approval by the Inter-Company Committee in accordance
with procedures set forth in the committee charter. The
Inter-Company Committee is composed of three directors of the
Company who have been determined by the Board of Directors to
qualify as "independent" directors under the NASDAQ corporate
governance standards applicable to the Company. Under the
Committee's charter, these contracts or transactions must be
approved by the unanimous consent of the committee members based
on a finding that the transaction is "fair and reasonable" to the
Company and its stockholders. Material contracts subject to
review and approval by the Inter-Company Committee include the
Pooling Agreement and the Quota Share Agreement, both of which
have previously been reviewed and approved by the Inter-Company
Committee. Commencing in 2007, a "material contract" subject to
review by the Inter-Company Committee will include, in addition
to the Pooling Agreement and the Quota Share Agreement, any
contract or transaction involving the Company or its subsidiaries
and Employers Mutual or its subsidiaries or affiliate that is
required to be filed as an exhibit to the Company's Annual Report
on Form 10-K on the basis that it constitutes a material contract
under SEC rules.
- Any other new contract, proposed change to an existing contract
or transaction resulting from a contract involving the Company or
its subsidiaries and Employers Mutual or its subsidiaries or
affiliate that involves a dollar amount in excess of $120,000,
but which does not arise to the level of a "material contract",
is subject to review and approval by the Audit Committee in
accordance with the terms of its charter. The Audit Committee is
comprised of three directors of the Company who have been
determined by the Board of Directors to qualify as "independent'
directors under the NASDAQ corporate governance and SEC rules
applicable to the Company. The charter of the Audit Committee
does not designate any particular standard to be applied by the
committee members in approving these contracts or transactions.
- Any new contract or transaction, or an amendment thereto,
involving a dollar amount in excess of $120,000 and otherwise
meeting the definition of a "related person transaction" as
defined by SEC rules, and not involving Employers Mutual or its
subsidiaries or affiliate, is subject to review and approval by
the Audit Committee in accordance with the terms of its charter.
The charter does not designate any particular standard to be
applied by the committee members in approving these contracts or
transactions.
Each of the transactions described above was reviewed and approved or
ratified by the Inter-Company Committee or the Audit Committee, as applicable.
As noted above, most of the related person transactions described above
involving the Company or its subsidiaries and Employers Mutual or its
subsidiaries or affiliate are ongoing in nature and will continue throughout
2007 in the ordinary course of business. These transactions will be presented to
the Inter-Company Committee or the Audit Committee, as applicable, in
32
accordance with the procedures described above, for review and approval and/or
ratification at such time as the amounts involved in the transactions have been
determined.
APPROVAL OF THE 2007 EMPLOYERS MUTUAL CASUALTY COMPANY
STOCK INCENTIVE PLAN
INTRODUCTION
The Boards of Directors of Employers Mutual and the Company believe that
the compensation paid to officers and other key employees should create
incentives for them to achieve superior performance and enhance policyholder and
stockholder value. Currently, the only stock-based awards that can be granted to
Employers Mutual's senior officers and other key employees to encourage stock
ownership and to indirectly align their economic interests with those of
Employers Mutual's policyholders and the Company's stockholders are incentive
stock options issued under the 2003 Employers Mutual Casualty Company Incentive
Stock Option Plan (the "2003 Plan"). The Boards have determined that limitations
present under the 2003 Plan will hinder their ability to provide future
incentive awards, and that the broader type of awards that would be available
under the new plan being proposed to stockholders would help Employers Mutual
and the Company to attract, retain and motivate officers and other key
employees. Based on the success achieved in using incentive stock option awards,
the Boards of Employers Mutual and the Company believe that it is appropriate to
have the ability to grant other types of stock-based awards, such as
non-qualified stock options, stock appreciation rights ("SARs"), restricted
stock and restricted stock units, as authorized under the proposed 2007
Employers Mutual Casualty Company Stock Incentive Plan (the "2007 Plan"). In
addition, the Boards believe that it would be beneficial to have the authority
under a single plan to grant stock-based and cash-denominated awards that will
become vested, if at all, upon the achievement of designated performance
criteria.
Accordingly, in March 2007, Employers Mutual's Senior Executive
Compensation and Stock Option Committee recommended and Employers Mutual's Board
adopted, and the Company's Compensation Committee recommended and the Company's
Board adopted, subject to final approval by the Company's stockholders, the 2007
Plan. This plan provides for the awarding of performance shares, performance
units, and other stock-based awards, in addition to qualified (incentive) and
non-qualified stock options, SARs, restricted stock and restricted stock units.
As is the case with the 2003 Plan, the 2007 Plan provides for the grant of
awards to officers and other key employees of Employers Mutual, who are selected
for participation based on their ability to affect the overall performance of
Employers Mutual and the Company. Approximately 175 officers and employees of
Employers Mutual received awards under the 2003 Plan, and it is expected that
approximately the same number of officers and employees will receive awards
under the 2007 Plan, if approved by the Company's stockholders. Participant
eligibility under the 2007 Plan has been expanded to include the possibility of
granting stock-based awards to agents and non-employee directors in order to
provide greater flexibility in future compensation decisions.
Upon approval of the 2007 Plan by the Company's stockholders, no new grants
will be made under the 2003 Plan. However, in the event that the 2007 Plan is
not approved by the Company's stockholders at the 2007 Annual Meeting, the
Employers Mutual Senior Executive Compensation and Stock Option Committee may
continue to make grants under the 2003 Plan from the shares previously
authorized for issuance thereunder.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF THE
2007 EMPLOYERS MUTUAL CASUALTY COMPANY STOCK INCENTIVE PLAN. PROXIES SOLICITED
BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF DIRECTION TO THE
COMPANY.
SUMMARY OF THE 2007 EMPLOYERS MUTUAL CASUALTY COMPANY STOCK INCENTIVE PLAN
The following summary of the 2007 Plan is qualified in its entirety by
reference to the complete text of the plan, which is attached to this Proxy
Statement as Appendix A.
33
SHARES AVAILABLE FOR ISSUANCE
Subject to adjustment upon the occurrence of certain events described
below, a maximum of 2,000,000 shares of the Company's Common Stock may be issued
under the 2007 Plan. Authorized but unissued shares or treasury shares may be
used to satisfy awards under the 2007 Plan.
Shares subject to awards granted under the 2007 Plan that lapse, are
forfeited or cancelled, or are settled without the issuance of stock (in each
case after the effective date of the 2007 Plan) will be available for awards
under the 2007 Plan. This includes shares that are withheld from an award to
satisfy a participant's tax obligations. Additionally, shares owned by
participants that are delivered to pay all, or a portion, of the exercise price
of any award, or to satisfy the participant's tax obligations with respect to an
award, and shares that are purchased by the Company using cash proceeds received
in connection with the exercise of an option, will increase the number of shares
available for awards under the 2007 Plan.
In the event of any stock dividend, stock split, recapitalization,
extraordinary dividend, merger, consolidation, combination, spin-off,
distribution of assets to stockholders (other than ordinary cash dividends),
exchange of shares or other similar corporate event that affects the shares, the
Employers Mutual Senior Executive Compensation and Stock Option Committee (the
"Employers Mutual Compensation Committee") has discretion to make equitable
adjustments to the number and kind of shares which thereafter may be awarded or
exercised under the 2007 Plan, the number and kind of shares subject to
outstanding options and awards, and the respective grant or exercise prices.
If, pursuant to the agreements governing the acquisition of a business by
either Employers Mutual or the Company, or one of their subsidiaries, Employers
Mutual or the Company grants substitution options or other equity-based awards
to employees of the acquired business, the shares subject to such substitute
awards shall neither count against the number of shares available for issuance
under the 2007 Plan, nor be added to the number of awards issuable pursuant to
the 2007 Plan. In addition, the generally applicable provisions of the 2007 Plan
-- such as the limitations that an option must (i) have an exercise price at
least equal to the fair market value of the Company's Common Stock on the date
of grant; and (ii) have a minimum period of service before the option could
become exercisable -- that would limit Employers Mutual's or the Company's
ability to grant such substitute awards (which may have already become
in-the-money or have become exercisable) will not apply with respect to such
substitute grants.
ADMINISTRATION
The 2007 Plan will be administered by the Employers Mutual Compensation
Committee. The Employers Mutual Compensation Committee will have sole and
complete authority: (i) to establish, amend, and rescind rules and regulations
relating to the 2007 Plan; (ii) to provide for conditions deemed necessary or
advisable to protect the interests of Employers Mutual or the Company; (iii) to
construe the terms of any award or any document evidencing the grant of an
award; and (iv) to make all other determinations necessary and advisable for the
administration and interpretation of the 2007 Plan in order to carry out its
provisions and purposes. Subject to the express terms of the 2007 Plan, the
Employers Mutual Compensation Committee has discretion as to the specific terms
and conditions of each award and any rules applicable thereto including, but not
limited to, the effect thereon of the death, retirement or other termination of
employment of the participants.
The Employers Mutual Compensation Committee may delegate to the Chief
Executive Officer, or one or more officers of Employers Mutual, the power to
grant awards to any participant whose title is junior to Vice President, and is
not a member of Employers Mutual's "Policy Committee". However, only the
Employers Mutual Compensation Committee may grant awards to executive officers
or exercise other discretion under the 2007 Plan with respect to awards granted
to executive officers. The Employers Mutual Compensation Committee may also
appoint agents (who may be officers of the Company) to assist in the
administration of the 2007 Plan and may grant authority to such persons to
execute agreements or other documents on its behalf.
34
The Employers Mutual Compensation Committee may condition the grant of any
award upon the recipient's agreement to conditions or covenants in favor of
Employers Mutual or the Company, and/or one or more of their subsidiaries, that
might have effect following the termination of the recipient's employment and
after the shares of the Company's Common Stock subject to the award have been
transferred to the participant. These conditions and covenants may include
restrictions on the ability to transfer the underlying shares of the Company's
Common Stock or covenants not to compete, not to solicit employees and
customers, and not to disclose confidential information. The Employers Mutual
Compensation Committee may also require that, after an option or other award has
been exercised, the recipient disgorges any profit, gain or other benefit
received from the award if the participant breaches any of these commitments.
The Employers Mutual Compensation Committee may make grants to any eligible
employees or any of the employees of the Company's or Employers Mutual's
subsidiaries, and to any natural person who provides services to the Company,
Employers Mutual or a subsidiary, including an agent or a non-employee director.
However, during any one year period, no individual may be granted options or
stock appreciation rights (with tandem options and stock appreciation rights
being counted only once with respect to this limit), restricted stock,
restricted stock units, performance shares and/or other stock-based awards of
more than 100,000 shares. These limits are subject to adjustments in connection
with a change in capitalization, as described in "Shares Available for
Issuance." The maximum dollar value payable to any individual in any 12-month
period with respect to performance units and/or other stock-based awards that
are valued with reference to cash or property other than shares is $1,000,000.
Awards may not be assigned or transferred, except (i) by will or the laws of
descent and distribution, (ii) pursuant to a qualified domestic relations order,
or (iii) to the participant's immediate family or to other permitted transferees
under rules established by the Employers Mutual Compensation Committee.
STOCK OPTIONS AND SARS
The Employers Mutual Compensation Committee may grant non-qualified stock
options to officers, employees, agents and non-employee directors and may also
grant stock options qualifying as incentive stock options under the Internal
Revenue Code to officers and employees, including agents who are statutory
employees. The maximum number of shares that may be issued pursuant to incentive
stock options that may be awarded under the 2007 Plan is 1,500,000, and no
incentive stock options may be granted after the tenth anniversary of the
effective date of the 2007 Plan. Except for certain limited situations, options
will have a minimum vesting period of one year. The exercise price per share of
the Company's Common Stock subject to either a non-qualified stock option or an
incentive stock option will be not less than 100% of the fair market value, as
defined in the 2007 Plan, of such share on the date of grant. Further, the
Employers Mutual Compensation Committee is not permitted to subsequently reduce
the exercise price or otherwise re-price outstanding options without stockholder
approval, except for adjustments in connection with a change in capitalization,
as described in "Shares Available for Issuance." The Employers Mutual
Compensation Committee has discretion as to the terms and conditions upon which
options will be exercisable, including the exercise schedule, but under no
circumstances may an option have a term exceeding ten years from the date of
grant.
An option holder may satisfy the exercise price in cash or by exchanging
shares of the Company's Common Stock previously owned, or by a combination
thereof, or by any other procedure permitted by the Employers Mutual
Compensation Committee. Additionally, to the extent permitted by the Employers
Mutual Compensation Committee at or after the time of grant, an option holder
may also "net exercise" an option. Pursuant to a net exercise, the option holder
is not required to pay the exercise price of the portion of the option being
exercised. Instead, the Company will issue to the person exercising the option
the number of shares that would be issued "net" of the exercise price. This
means that such person will receive the greatest number of whole shares of the
Company's Common Stock having a value equal to the excess of the then fair
market value of the number of shares for which the option is being exercised
over the exercise price of such options.
35
In the event an employee terminates service by reason of disability or
death, all options, whether or not then exercisable, will become immediately
exercisable and will generally remain exercisable for a period of one year, or
for such shorter period as the Employers Mutual Compensation Committee shall
determine at the time of grant. In the event an employee terminates service by
reason of a normal or approved early retirement, all options will become
immediately exercisable and will remain exercisable for a period of three months
from the date of retirement, or for such shorter period following the
participant's retirement as the Employers Mutual Compensation Committee shall
determine at the time of the grant. In the event an employee's service
terminates for cause or by resignation, other than in the circumstances
addressed above, he or she will forfeit all of his or her outstanding options,
whether or not then exercisable. In general, in the event an employee terminates
service for any reason other than those listed above, all options then held by
the employee that are then exercisable will remain exercisable for a period of
three months. Of course, in no event may any option be exercisable after its
stated maximum term, regardless of whether the above described rules might
otherwise permit a longer period to exercise an option.
The Employers Mutual Compensation Committee may also grant SARs to
employees, officers, non-employee directors and agents that can either be
freestanding awards or awards that are related to a stock option in such a way
that the exercise of either the SAR or the stock option will cause the
cancellation of the other award. The terms and conditions applicable with
respect to any grant of a SAR will be substantially the same as applies to the
grant of a stock option. This means that the vesting of a SAR, and the time that
a recipient of a SAR will have to exercise the SAR after termination of his or
her service to Employers Mutual, the Company or a subsidiary, will be
substantially the same as applies to a stock option.
RESTRICTED STOCK OR UNITS
The Employers Mutual Compensation Committee also has the right to grant
awards of restricted stock to employees, officers, non-employee directors and
agents at such times and for such number of shares of the Company's Common Stock
and subject to such terms and conditions of such awards, including the
establishment of performance goals for the grant of such awards based on one or
more of the performance criteria described below for performance shares and
units, as the Employers Mutual Compensation Committee may determine. The
Employers Mutual Compensation Committee may elect to grant any such person
restricted stock units, which are contractual rights to receive shares of the
Company's Common Stock or cash in an amount equal to the value of a specified
number of shares of the Company's Common Stock in the future, after the
satisfaction of specified vesting conditions, that is the economic equivalent of
an award of restricted stock. Any such award of restricted stock units shall be
made on substantially the same terms as an award of restricted stock.
The Employers Mutual Compensation Committee will determine the terms and
conditions applicable to a grant of restricted shares or restricted stock units.
Shares of restricted stock may not be sold, assigned, transferred, pledged or
otherwise encumbered until the restrictions have lapsed. Generally, the period
of restriction will not be less than three years, but at the discretion of the
Employers Mutual Compensation Committee, the restrictions may lapse ratably over
such three-year period. Any shares of restricted stock held by an employee,
officer, agent or non-employee director whose service terminates due to normal
or approved early retirement will generally vest at the time such shares would
have vested had such participant's service continued. Unless the Employers
Mutual Compensation Committee otherwise specifies at the time of grant, any
shares of restricted stock held by an employee, officer, agent or non-employee
director whose service terminates due to his or her death or disability will
vest at the time of such termination. Upon any other termination, any shares of
restricted stock that have not previously vested will be forfeited unless the
Employers Mutual Compensation Committee otherwise determines.
Subject to the forfeiture and transfer restrictions applicable to the
award, a participant will have all of the rights of a stockholder with respect
to any award of restricted stock, including the right to vote such shares and
receive dividends thereon and other distributions. However, if any dividends or
distributions are paid in shares of the Company's Common Stock, the shares
received as a dividend or distribution will be subject to the same forfeiture
restrictions and restrictions on transferability as apply to the restricted
stock with respect to which they were paid. The Employers Mutual Compensation
Committee shall determine whether, and to what extent, a participant shall be
entitled to receive the payment of dividend equivalents
36
with respect to the number of shares of the Company's Common Stock underlying a
grant of restricted stock units. Unless otherwise determined by the Employers
Mutual Compensation Committee at or after the grant, any shares credited with
respect to any dividend equivalents will become vested and non-forfeitable upon
the same terms and conditions applicable to the shares underlying the restricted
stock units with respect to which they are payable.
PERFORMANCE SHARES OR UNITS
The Employers Mutual Compensation Committee may grant officers, employees,
non-employee directors and agents awards of performance shares or performance
units, which awards will become earned and payable based on the achievement of
performance goals, as established by the Employers Mutual Compensation
Committee, during the applicable performance cycle. Performance cycles may not
be shorter than 12 months. The 2007 Plan permits the Employers Mutual
Compensation Committee to establish performance goals based on the total return
to Employers Mutual's policyholders or the Company's stockholders (whether in
absolute terms or relative to the performance of other companies or a published
index) or upon the attainment of a goal related to one or more of the following
criteria: stock price, operating earnings, net earnings, return on equity,
income, market share, combined ratio, level of expenses, growth in revenue, cash
flow, earnings per share, return on invested capital, return on assets, economic
value added, and improvements in or attainment of working capital levels. In the
case of persons who are not executive officers of the Company, the Employers
Mutual Compensation Committee has discretion to establish other performance
criteria. The Employers Mutual Compensation Committee also has the discretion to
condition payment of amounts with respect to performance shares and performance
units on such additional factors as it shall determine on the grant date.
The Employers Mutual Compensation Committee will determine the value of
each performance share and unit, the number of such shares and units for each
performance cycle, the duration of each performance cycle and the number of
performance shares and units that have been earned based on performance relative
to the performance goals discussed above, but subject to the maximum award
limits outlined above. Performance shares and units may also be deemed earned
upon the occurrence of certain events, such as a change of control. Unless the
Employers Mutual Compensation Committee otherwise determines, performance shares
and units for in-progress performance cycles will be forfeited and terminated if
a participant's employment terminates. However, unless the Employers Mutual
Compensation Committee otherwise determines, if a participant's employment
terminates due to death, disability or normal or early approved retirement, the
participant or the participant's representative will receive all of the
performance shares and units.
On the grant date, the Employers Mutual Compensation Committee may,
depending on actual performance measured against the stated performance goals,
provide for the amount to be payable with respect to performance shares if
actual performance exceeds targeted levels. Payment of earned performance share
and unit awards may, at the discretion of the Employers Mutual Compensation
Committee, be distributed in the form of cash, shares of the Company's Common
Stock, or a combination thereof. Except to the extent that the exercise of (or
the ability to exercise) such discretion in the case of awards to executive
officers intended to qualify as other performance-based compensation under
Section 162(m) (4) of the Internal Revenue Code would cause them to fail to
satisfy that requirement, the Employers Mutual Compensation Committee may also
adjust the performance criteria for any performance period as it deems equitable
in recognition of unusual or non-recurring events affecting Employers Mutual or
the Company, changes in applicable tax laws or accounting principles, or such
other factors as the Employers Mutual Compensation Committee may determine.
OTHER STOCK-BASED AWARDS
The Employers Mutual Compensation Committee may also grant to employees,
officers, non-employee directors and agents other stock-based awards including,
but not limited to, grants of the Company's Common Stock. Such awards shall be
granted on such terms and conditions as the Employers Mutual Compensation
Committee shall determine. The Employers Mutual Compensation Committee may, for
example, use this authority under the 2007 Plan to issue the Company's Common
Stock in satisfaction of
37
the obligations of Employers Mutual and its subsidiaries under other
compensatory plans or programs, such as pursuant to an annual bonus plan or
deferred compensation program.
CHANGE OF CONTROL
Except as provided below, if Employers Mutual experiences a "change of
control" (as defined in the 2007 Plan), each option and SAR and each award of
restricted stock, each restricted stock unit grant and each other stock-based
award will be treated as fully vested and will no longer be subject to
forfeiture and transfer restrictions. Additionally, all outstanding performance
shares and performance units will be deemed earned and be immediately payable,
in an amount equal to 100% of the applicable target grant for each such award,
regardless of the portion of the applicable performance period that will have
elapsed prior to the date of such change of control. The Employers Mutual
Compensation Committee may, at its discretion, provide that in connection with a
change of control each option and SAR will be cancelled in exchange for an
amount equal to the excess, if any, of the price paid in the change of control
transaction over the exercise price or base value of such award.
For purposes of the 2007 Plan, "change of control" includes any one or more
of the following events, IF APPLICABLE TO EMPLOYERS MUTUAL:
- a change in the ownership of Employers Mutual.
- a change in the effective control of Employers Mutual which
occurs on the date on which either a person, or more than one
person acting as a group, acquires ownership of stock of
Employers Mutual possessing 35% or more of the total voting power
of the stock of Employers Mutual, or a majority of members of
Employers Mutual's Board of Directors is replaced during any
12-month period by directors whose appointment or election is not
endorsed by a majority of the members of Employers Mutual's Board
of Directors prior to the date of the appointment or election.
- a change in the ownership of a substantial portion of Employers
Mutual's assets which occurs on the date on which any one person,
or more than one person acting as a group, acquires assets from
Employers Mutual that have a total gross fair market value equal
to or more than 40% of the total gross fair market value of all
of the assets of Employers Mutual immediately prior to such
acquisition or acquisitions.
However, in the event that a "change of control" occurs that does not
constitute a change of control within the meaning of Section 409A of the
Internal Revenue Code, no payment or distribution will be made with respect to
an outstanding award if such payment or distribution would result in the
imposition of an additional tax on the recipient, though other modifications
triggered by the change of control (including accelerated vesting) would still
apply. In such an event, the participant would receive the value of such an
award, as determined by the Employers Mutual Compensation Committee prior to the
change of control, on the day after the six month anniversary of the
participant's termination of employment or, if earlier, upon (i) the date that
such award would have vested due to the passage of time, (ii) the last day of
the performance period or (iii) if the award is vested at the time of the change
of control, the date on which the award would have expired in accordance with
its terms, as applicable.
Notwithstanding the foregoing, (i) there will be no acceleration of the
vesting or lapsing of restrictions of any options, SARs, restricted stock,
restricted stock units, or other stock-based awards, (ii) performance shares and
performance units will not be deemed earned, and (iii) there will be no payment
made with respect to such awards by reason of the change of control if the
Employers Mutual Compensation Committee (as constituted before the change of
control) determines that each of the following conditions are satisfied:
- all outstanding awards will be honored or assumed by the
participant's new employer or one of its affiliated companies;
38
- the honored or assumed awards will have substantially equivalent
or greater economic value, at the time of the change of control,
to the awards with respect to the Company's Common Stock;
- the honored or assumed awards will relate to securities that are
publicly traded on an established United States securities
market;
- the terms and conditions (such as vesting and ability to
exercise) of the honored or assumed awards are at least equal to
or better than the terms of the awards related to the Company's
Common Stock; and
- the honored or assumed awards must provide that, upon the
involuntary termination (or certain specified types of
constructive termination) of the award recipient's employment,
the awards will be deemed vested or exercisable, as the case may
be.
TERM OF THE PLAN AND AMENDMENTS
No award may be granted under the 2007 Plan after the tenth anniversary of
the date, if any, that the plan is approved by the Company's stockholders. The
2007 Plan may be amended or terminated at any time by the Board of Directors of
Employers Mutual, except that no amendment may adversely affect existing awards.
In addition, none of the following amendments may be made without stockholder
approval: (i) an increase in the number of shares available for issuance under
the plan; (ii) a decrease in the minimum exercise or base price at which an
option or SAR is granted or any other re-pricing of outstanding options or SARs,
except as the result of a change in capitalization; (iii) an extension of the
maximum term for options or SARs granted under the plan; or (iv) any other
amendment for which stockholder approval is otherwise necessary to comply with
any tax, statutory or regulatory requirement, including any approval requirement
which is imposed by the rules of the Nasdaq Stock Market, that the Employers
Mutual Compensation Committee determines to be applicable.
DESCRIPTION OF FEDERAL INCOME TAX CONSEQUENCES UNDER THE PLAN
The following discussion summarizes the federal income tax consequences of
the 2007 Plan based on current provisions of the Internal Revenue Code, as
amended, which are subject to change. The summary does not cover any foreign,
state or local tax consequences of participation in the plan.
NON-QUALIFIED OPTIONS AND SARS. No income is recognized upon the grant of a
non-qualified stock option. When a participant exercises a non-qualified option,
the excess of the fair market value of the shares on the date of exercise over
the exercise price will be ordinary income to the participant and will be
allowed as a deduction for federal income tax purposes to the companies in the
Pooling Agreement. When a participant disposes of shares acquired by the
exercise of the non-qualified option, he or she will recognize a long or
short-term capital gain (loss), depending upon the holding period of the shares.
No income is generally recognized upon the grant of a SAR that is to be
settled in stock. Upon exercise, the grantee of the SAR will recognize taxable
ordinary income in an amount equal to the amount of cash and fair market value
of any shares of the Company's Common Stock received upon such exercise.
INCENTIVE STOCK OPTIONS. No income is recognized upon the grant of an
incentive stock option. When a participant exercises an incentive stock option
while employed by Employers Mutual or a subsidiary, or within the three-month
(one year for death or disability) period after termination of employment by
reason of retirement, no ordinary income will be recognized by the participant
at that time, but the excess (if any) of the fair market value of the shares
acquired upon such exercise over the exercise price will be an adjustment to
taxable income for purposes of the federal alternative minimum tax applicable to
individuals. If the shares acquired upon exercise are not disposed of prior to
the expiration of one year after the date of exercise and two years after the
date of grant of the option, the excess (if any) of the sales proceeds over the
aggregate exercise price of such shares will be a long-term capital gain. The
companies in the Pooling Agreement will not be entitled to any tax deduction
with respect to the amount treated as long-term capital
39
gain. If the shares are disposed of prior to the expiration of such period (a
"disqualifying disposition"), the excess of the fair market value of such shares
at the time of exercise over the aggregate exercise price (or if lower, the
spread between the exercise price and sale price), will be ordinary income at
the time of such disqualifying disposition and the companies in the Pooling
Agreement will be entitled to a federal income tax deduction equal to such
amount, subject to certain federal tax law limitations.
RESTRICTED STOCK. Unless a participant makes the election described below,
a grant of restricted stock will not result in taxable income to the participant
or a deduction for the companies in the Pooling Agreement in the year of grant.
The value of such restricted stock will be taxable to the participant as
ordinary income in the year in which the restrictions lapse. Alternatively, the
participant may elect to treat as income in the year of grant the fair market
value of the restricted stock on the date of grant, provided the participant
makes the election within 30 days after the date of such grant. If such an
election were made, the participant would not be allowed to deduct at a later
date the amount included as taxable income if the participant should forfeit the
shares of restricted stock. The amount of ordinary income recognized by the
participant is deductible by the companies in the Pooling Agreement in the year
such income is recognized by the participant. If the election described above is
not made then, prior to the lapse of restrictions, dividends paid on the shares
subject to such restrictions will be taxable to the participant as additional
compensation in the year received, and the companies in the Pooling Agreement
will be allowed a corresponding deduction.
PERFORMANCE SHARES. When payment is made to a participant with respect to
earned performance shares granted under the 2007 Plan, the participant will have
taxable ordinary income in an amount equal to the amount of cash and the fair
market value of any shares of the Company's Common Stock that such participant
receives in payment on such award. The companies in the Pooling Agreement will
receive a federal income tax deduction in an amount equal to the amount paid to
the participant.
PERFORMANCE UNITS AND RESTRICTED STOCK UNITS. Generally, when a participant
receives payment with respect to earned performance units or restricted stock
units granted under the 2007 Plan, the amount of cash and the fair market value
of the shares received will be ordinary income to such participant, and the
companies in the Pooling Agreement will be allowed a corresponding deduction for
federal income tax purposes.
OTHER INFORMATION
As the administration of the 2007 Plan allows discretionary choices to be
made by the Employers Mutual Compensation Committee, awards to be granted under
the 2007 Plan in fiscal 2007 are not now determinable. Awards granted during
2006 under the 2003 Plan are disclosed and discussed under the heading "2006
Incentive Stock Option Awards" elsewhere in this Proxy Statement.
While the 2007 Plan contains many rights and features that are similar to
those in effect during 2006 under the 2003 Plan, the 2007 Plan authorizes the
use of non-qualified stock options, stock appreciation rights, restricted stock
and units, and performance shares or units and other stock-based awards that
have not been previously authorized under the 2003 Plan. The Employers Mutual
Compensation Committee and the Company's Compensation Committee will be
conducting a full review of the executive compensation program, including equity
and performance-based awards, and may decide upon a different mix of awards to
be granted. Therefore, it is not reasonably possible to provide the data
required to be included in the New Plan Benefits Table.
As of March 29, 2007, the closing price per share of the Company's Common
Stock was $25.99.
If the 2007 Plan is approved by the Company's stockholders, it will become
effective on the date of such approval. If the Company's stockholders do not
approve the 2007 Plan, the 2007 Plan will not go into effect and Employers
Mutual will not grant any awards under the plan. In such event, the Employers
Mutual Compensation Committee and the Company's Compensation Committee will
consider whether to adopt alternative arrangements based on their assessment of
the needs of Employers Mutual and the Company.
40
EQUITY COMPENSATION PLAN INFORMATION
The 2003 Plan is the only compensation plan under which the Company's
equity securities are authorized for issuance to employees of Employers Mutual.
The following table shows the number of shares of the Company's Common Stock
issuable upon exercise of options outstanding at December 31, 2006, the
weighted-average exercise price of those options, and the number of shares of
the Company's Common Stock remaining available for future issuance at December
31, 2006, excluding shares issuable upon exercise of outstanding options. If the
proposed 2007 Plan is adopted, no further awards will be made under the 2003
Plan.
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE PRICE EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, WARRANTS OF OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
PLAN CATEGORY (a) (b) (c)
------------- ----------------------------- ----------------------- -------------------------
Equity compensation plans approved by
security holders 741,718 $19.23 893,722
Equity compensation plans not approved
by security holders -- N/A N/A
------- ------ -------
Total 741,718 $19.23 893,722
======= ====== =======
41
RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP audited the financial statements of the Company for the
year ended December 31, 2006, and audited the effectiveness of the Company's
internal control over financial reporting as of December 31, 2006. The Audit
Committee of the Board of Directors has selected Ernst & Young LLP as the
Company's independent registered public accounting firm for the fiscal year
ending December 31, 2007 and the stockholders are asked to ratify that
selection. During 2006, in connection with its audit function, Ernst & Young LLP
provided services to the Company which included the examination of the annual
consolidated financial statements, assistance with requirements of the
Securities and Exchange Commission under the Securities Exchange Act of 1934 and
advisory services regarding various financial and accounting matters.
A representative of Ernst & Young LLP will be present at the Annual Meeting
and will have the opportunity to make a statement if he or she desires to do so,
and will be available to respond to appropriate questions.
We are asking our stockholders to ratify the selection of Ernst & Young LLP
as our independent registered public accounting firm. Although this ratification
is not required by current laws, rules and regulations, or the Company's
By-Laws, Audit Committee Charter or otherwise, the Board of Directors is
submitting the selection of Ernst & Young LLP to our stockholders for
ratification as a matter of good corporate practice. Even if the selection is
ratified, the Audit Committee, in its discretion, may select a different
independent registered public accounting firm at any time during the year if it
determines that such a change would be in the best interests of the Company and
its stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THIS
APPOINTMENT. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE
ABSENCE OF DIRECTION TO THE COMPANY.
AUDIT COMMITTEE REPORT
As reported earlier, the Audit Committee (the "Committee") of the Board of
Directors is composed of three members. All members of the Committee are
independent under "Nasdaq" Corporate Governance Rules and Securities and
Exchange Commission Rules. The Committee's responsibilities are described in a
written charter. A copy of the Committee's written charter may be viewed on the
Company's website at www.EMCInsurance.com and is also included as Appendix B.
Management is responsible for the internal controls and financial reporting
processes of the Company. The independent registered public accounting firm is
responsible for performing an independent audit of the consolidated financial
statements in accordance with generally accepted auditing standards and issuing
a report to the Company's stockholders and Board of Directors on the results of
this audit. Beginning in 2005, the independent registered public accounting firm
is also responsible for performing an independent audit of the effectiveness of
the Company's internal control over financial reporting in accordance with
standards established by the Public Company Accounting Oversight Board and
issuing a report to the Company's stockholders and Board of Directors on the
results of this audit. The Committee's responsibility is to monitor and oversee
these processes.
At each of its ten meetings during calendar year 2006, the Committee met
and held discussions with management and Ernst & Young LLP ("Ernst & Young"),
the independent registered public accounting firm for the Company. Two of these
meetings included sessions at which management was not present. The Committee
discussed with Ernst & Young the results of its examination of the consolidated
financial statements and its assessment of the effectiveness of the Company's
internal control over financial reporting.
42
During 2006, management documented, tested and evaluated the Company's
internal control over financial reporting pursuant to the requirements of the
Sarbanes-Oxley Act of 2002. The Committee was kept apprised of the Company's
progress by management and Ernst & Young at each regularly scheduled Committee
meeting. Management has provided the Committee with a report of the
effectiveness of the Company's internal control over financial reporting. The
Committee reviewed management's and Ernst & Young's evaluation of the Company's
internal control over financial reporting to be included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2006. The Committee also
reviewed and discussed the consolidated financial statements with management and
Ernst & Young. In addition, the Committee discussed with Ernst & Young matters
related to the financial reporting process required to be discussed by Statement
on Auditing Standards No. 61 (Communication with Audit Committees) issued by and
as amended by the Auditing Standards Board of the American Institute of
Certified Public Accountants.
Ernst & Young provided to the Committee the written disclosures and the
letter required by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees), and the Committee reviewed with Ernst &
Young that firm's independence. The Committee determined that the non-audit
services provided by Ernst & Young during the 2006 calendar year are compatible
with maintaining its independence.
Based on the Committee's discussions with management and Ernst & Young, the
Committee's review of the representations of management, and the reports of
Ernst & Young to the Committee, the Committee recommended that the Board of
Directors include the audited consolidated financial statements in the Company's
Annual Report on Form 10-K to be filed with the Securities and Exchange
Commission for the year ended December 31, 2006. The Committee also has
recommended that the stockholders ratify the Committee's selection of Ernst &
Young as the Company's independent registered public accounting firm for
calendar year 2007.
AUDIT COMMITTEE
David J. Fisher, Chair
Margaret A. Ball
Joanne L. Stockdale
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S FEES
The following table sets forth the Independent Registered Public Accounting
firm's fees for professional audit services rendered by Ernst & Young for the
audit of the Company's annual financial statements for the years ended December
31, 2006 and 2005, the audit of the Company's internal control over financial
reporting as of December 31, 2006 and 2005, and fees billed for other services
rendered by Ernst & Young during 2006 and 2005.
2006 2005
-------- --------
Audit Fees (1) $487,974 $463,719
Audit Related Fees (2) 14,610 13,650
Tax Fees (3) 15,696 18,792
All Other Fees (4) 5,525 --
-------- --------
Total Fees $523,805 $496,161
======== ========
----------
Notes:
(1) Audit fees consist of fees for the audit of the Company's annual financial
statements, review of financial statements included in the Company's
quarterly reports on Form 10-Q, the audit of the
43
Company's internal control over financial reporting and services normally
provided by the independent registered public accounting firm in connection
with statutory and regulatory filings or engagements.
(2) Audit related fees consist primarily of services related to the audit of
Employers Mutual's employee benefit plans.
(3) Tax fees consist of fees for tax advisory and compliance services for the
Company and Employers Mutual's employee benefit plans.
(4) All other fees consist of fees for all other services other than those
reported above.
The Committee pre-approves all audit and permissible non-audit services
provided by the independent registered public accounting firm. These services
may include audit services, audit-related services, tax services and other
services. Pre-approval is generally provided for up to one year and any
pre-approval is detailed with regard to each particular service and its related
fees. In addition, the Committee may pre-approve any services not anticipated or
services whose costs exceed the previously pre-approved amounts. In addition,
the Committee has delegated its pre-approval authority to the Chairman of the
Committee, who has the authority to pre-approve any services not anticipated or
services whose costs exceed previously pre-approved amounts, provided all
pre-approval decisions made by the Chairman are reported to the Committee at its
next meeting.
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE INFORMATION
The Company's executive officers, Directors and 10% stockholders are
required under the Securities Act of 1934 to file reports of ownership and
changes in ownership with the Securities and Exchange Commission and Nasdaq.
Copies of these reports must also be furnished to the Company.
Based solely on a review of copies of reports furnished to the Company, or
written representations that no reports were required, the Company believes that
during 2006 its executive officers, directors and 10% stockholders complied with
all filing requirements.
OTHER MATTERS
The Board, in addition to the Company's Code of Corporate Conduct, has
adopted a Code of Ethics applicable to the Company's senior financial officers,
including the Company's Chief Executive Officer, Chief Financial Officer,
Treasurer, and principal accounting officer or controller, and persons
performing similar functions. The Company's Code of Ethics for senior financial
officers is available on the Company's website at www.EMCInsurance.com.
The Board of Directors knows of no matters other than those described above
that may come before the Annual Meeting. As to other matters, if any, that
properly may come before the Annual Meeting, the Board of Directors intends that
proxies in the accompanying form will be voted in respect thereof in accordance
with the judgment of the person or persons voting the proxies.
STOCKHOLDER PROPOSALS FOR 2008 ANNUAL MEETING
AND STOCKHOLDER COMMUNICATIONS WITH THE BOARD OF DIRECTORS
Stockholder proposals for inclusion in the Company's Proxy Statement for
the 2008 Annual Meeting of Stockholders must be received by the Company no later
than December 17, 2007. The person submitting the proposal must have been a
record or beneficial owner of the Company's Common Stock for at least one year,
the securities so held must have a market value of at least $2,000 and the
securities must be held on the date of the meeting. Any such proposal will be
included in the Proxy Statement for the 2008 Annual Meeting if the rules of the
Securities and Exchange Commission are satisfied with respect to the timing and
44
form of such proposal, and if the content of such stockholder proposal is
determined by the Company to be appropriate under the rules promulgated by the
Securities and Exchange Commission.
The Board has implemented a process whereby stockholders may send
communications directly to the Board's attention. Any stockholder wanting to
communicate with the Board, or one or more specific members thereof, should send
his or her written communication to the Office of the General Counsel, EMC
Insurance Group Inc., P.O. Box 712, Des Moines, Iowa 50306. The General Counsel
of the Company has been instructed by the Board to screen such communications
for validation and then promptly forward all such communications to the
specified addressee thereof.
April 12, 2007
BY ORDER OF THE BOARD OF DIRECTORS
----------------------------------------
DONALD D. KLEMME, Secretary
45
APPENDIX A
2007 EMPLOYERS MUTUAL CASUALTY COMPANY
STOCK INCENTIVE PLAN
SECTION 1
PURPOSE
The purpose of the "2007 EMPLOYERS MUTUAL CASUALTY COMPANY STOCK INCENTIVE
PLAN" (the "Plan") is to foster and promote the long-term financial success of
Employers Mutual Casualty Company (the "Company") and its policyholders, and the
interests of its subsidiaries and affiliates (as each is hereinafter defined),
including EMC Insurance Group Inc. ("EMC Group") and its subsidiaries, and the
interest of the stockholders of EMC Group, by (a) motivating superior
performance by means of performance-related incentives, (b) encouraging and
providing for the acquisition of an ownership interest in EMC Group, and (c)
enabling the Company to attract and retain the services of outstanding employees
and non-employee directors upon whose judgment, interest, and special efforts
the successful conduct of its operations is largely dependent.
SECTION 2
DEFINITIONS
Whenever used herein, the following terms shall have the respective
meanings set forth below:
(1) "Agent" means each insurance agent (whether or not a statutory
employee) and each other individual providing personal service to the
Company or any Subsidiary who, in either case, is not an Employee.
(2) "Approved Retirement" means termination of a Participant's
employment or service (i) on or after the normal retirement date or any
early retirement date established under any defined benefit pension plan
maintained by the Company or a Subsidiary and in which the Participant
participates, (ii) with the approval of the Committee (which may be given
at or after grant), on or after attaining age 50 and completing such period
of service as the Committee shall determine from time to time, or (iii) for
a Non-Employee Director, the termination of service as a director of the
Company or a Subsidiary.
(3) "Award" means an Option, SAR, award of Restricted Stock or
Performance Shares, an award of Restricted Stock Units or Performance Units
or an Other Stock-Based Award.
(4) "Beneficial Owner" means such term as defined in Rule 13d-3 under
the Exchange Act.
(5) "Board" means the Board of Directors of the Company.
(6) "Cause" means (i) dishonesty, fraud or misrepresentation, (ii) the
Participant's engaging in conduct that is injurious to the Company or any
Subsidiary in any way, including, but not limited to, by way of damage to
its reputation or standing in the industry, (iii) the Participant's having
been convicted of, or entered a plea of nolo contendere to, a crime that
constitutes a felony, or (iv) the breach by the Participant of any written
covenant or agreement with the Company or any Subsidiary not to disclose or
misuse any information pertaining to, or misuse any property of, the
Company or any Subsidiary or not to compete or interfere with the Company
or any Subsidiary.
A-1
(7) "Change of Control" occurs on the date on which there is (i) a
change in the ownership of the Company, (ii) a change in the effective
control of the Company or (iii) a change in the ownership of a substantial
portion of the Company's assets, if any such event is applicable to the
Company. For purposes of this Section, a change in ownership of the Company
occurs on the date on which any one person, or more than one person acting
as a group, acquires ownership of stock of the Company that, together with
stock held by such person or group, constitutes more than 50% of the total
fair market value or total voting power of the stock of the Company. A
change in the effective control of the Company occurs on the date on which
either (i) a person, or more than one person acting as a group, acquires
ownership of stock of the Company possessing 35% or more of the total
voting power of the stock of the Company or (ii) a majority of members of
the Company's Board of Directors is replaced during any 12-month period by
directors whose appointment or election is not endorsed by a majority of
the members of the Company's Board of Directors prior to the date of the
appointment or election. A change in the ownership of a substantial portion
of assets occurs on the date on which any one person, or more than one
person acting as a group, acquires assets from the Company that have a
total gross fair market value equal to or more than 40% of the total gross
fair market value of all of the assets of the Company immediately prior to
such acquisition or acquisitions.
(8) "Change of Control Price" means the highest price per share of
Common Stock offered in conjunction with any transaction resulting in a
Change of Control (as determined in good faith by the Committee if any part
of the offered price is payable other than in cash).
(9) "Code" means the Internal Revenue Code of 1986, as amended.
(10) "Committee" means the Senior Executive Compensation and Stock
Option Committee of the Board or such other committee of the Board as the
Board shall designate from time to time. The Committee shall consist of no
fewer than three (3) members of the Board who are Non-Employee Directors as
defined in Rule 16b-3 of the Exchange Act.
(11) "Common Stock" means the Common Stock of EMC Group, par value
$1.00 per share.
(12) "Disability" means, with respect to any Participant, long-term
disability as defined under any long-term disability plan maintained by the
Company or a Subsidiary in which the Participant participates. In the event
of any question as to whether a Participant has a Disability, the plan
administrator of the relevant long-term disability plan shall determine
whether a disability exists, in accordance with such plan.
(13) "Employee" means any employee (including each officer) of the
Company or any Subsidiary.
(14) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(15) "Executive Officer" means any officer of the Company or any
Subsidiary who is subject to the reporting requirements under Section 16(b)
of the Exchange Act.
(16) "Fair Market Value" means, on any date, the average of the high
and low trading prices of the Common Stock on such date on the Nasdaq
Global Market or, if at the relevant time, the Common Stock is not listed
to trade on the Nasdaq Global Market, on such other recognized quotation
system on which the trading prices of the Common Stock are then quoted (the
"applicable exchange"). In the event that (i) there are no Common Stock
transactions on the applicable exchange on any relevant date, Fair Market
Value for such date shall mean the average
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price on the immediately preceding date on which Common Stock transactions
were so reported or (ii) the applicable exchange adopts a trading policy
permitting trades after 4 P.M. Eastern Standard Time ("EST"), Fair Market
Value shall mean the average of the high and low trading prices reported on
or before 4 P.M. EST (or such earlier or later time as the Committee may
establish from time to time).
(17) "Family Member" means, as to a Participant, any (i) child,
stepchild, grandchild, parent, stepparent, grandparent, spouse,
mother-in-law, father-in-law, son-in-law or daughter-in-law (including
adoptive relationships) of such Participant, (ii) trusts for the exclusive
benefit of one or more such persons and/or the Participant and (iii) other
entity owned solely by one or more such persons and/or the Participant.
(18) "Incentive Stock Option" (ISO) means an option within the meaning
of Section 422 of the Code.
(19) "Net Exercised" shall mean the exercise of an Option or any
portion thereof by the delivery of the greatest number of whole shares of
Common Stock having a Fair Market Value on the date of exercise not in
excess of the difference between the aggregate Fair Market Value of the
shares of Common Stock subject to the Option (or the portion of such Option
then being exercised) and the aggregate exercise price for all such shares
of Common Stock under the Option (or the portion thereof then being
exercised), with any fractional share that would result from such equation
to be payable in cash.
(20) "Non-Employee Director" means a member of the Boards of Directors
of the Company or a Subsidiary who is not an employee of the Company or a
Subsidiary.
(21) "Non-Qualified Stock Option" (NSO) means an option which is not
an Incentive Stock Option within the meaning of Section 422 of the Code.
(22) "Option" means the right to purchase Common Stock at a stated
price for a specified period of time. For purposes of the Plan, an Option
may be either (i) an "Incentive Stock Option" (ISO) within the meaning of
Section 422 of the Code or (ii) an option which is not an Incentive Stock
Option (a " Non-Qualified Stock Option" (NSO)).
(23) "Other Stock-Based Award" means an award of, or related to,
shares of Common Stock other than an Award of Options, SARs, Restricted
Stock, Performance Shares, Restricted Stock Units or Performance Units, as
granted by the Committee in accordance with the provisions of Section 9
hereof.
(24) "Participant" means any Non-Employee Director, Employee, or Agent
designated by the affirmative action of the Committee (or its delegate) to
participate in the Plan.
(25) "Performance Criteria" means the objectives established by the
Committee for a Performance Period pursuant to Section 7(c) of the Plan for
the purpose of determining the extent to which an award of Performance
Shares or Performance Units has been earned.
(26) "Performance Period" means the period selected by the Committee
during which performance is measured for the purpose of determining the
extent to which an award of Performance Shares or Performance Units has
been earned.
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(27) "Performance Share" means an award granted pursuant to Section 7
of the Plan of a contractual right to receive one share of Common Stock (or
the Fair Market Value thereof in cash or any combination of cash and Common
Stock, as determined by the Committee), upon the achievement, in whole or
in part, of the applicable Performance Criteria.
(28) "Performance Unit" means an award of a contractual right to
receive a fixed or variable dollar denominated unit, granted pursuant to
Section 7 of the Plan, upon the achievement, in whole or in part, of the
applicable Performance Criteria. The Committee shall determine whether the
earned portion of any such Performance Units shall be payable in cash,
Common Stock or any combination thereof.
(29) "Period of Restriction" means the period specified by the
Committee or established pursuant to the Plan during which a Restricted
Stock or Restricted Stock Unit award is subject to forfeiture.
(30) "Restricted Stock" means an award of Common Stock made pursuant
to Section 6 of the Plan that is forfeitable by the Participant until the
completion of a specified period of future service, the achievement of
pre-established performance objectives or until otherwise determined by the
Committee or in accordance with the terms of the Plan.
(31) "Restricted Stock Unit" means a contractual right awarded
pursuant to Section 6 of the Plan that entitles the holder to receive
shares of Common Stock (or the value thereof in cash) upon the completion
of a specified period of future service or the achievement of
pre-established performance objectives or at such other time or times
determined by the Committee or in accordance with the terms of the Plan.
(32) "SAR" means a stock appreciation right granted under Section 8 of
the Plan with respect to one or more shares of Common Stock that entitles
the holder thereof to receive, in cash (unless otherwise determined by the
Committee at the time of grant), an amount equal to the excess, if any, of
the Fair Market Value of a share of Common Stock on the date the SAR is
exercised over the Fair Market Value of a share of Common Stock on the date
the SAR is granted.
(33) "SEC Person" means any person (as such term is defined in Section
3(a) (9) of the Exchange Act) or group (as such term is used in Rule 13d-5
under the Exchange Act), or any employee benefit plan (or any related
trust) of the Company or any subsidiary.
(34) "Subsidiary" means (i) any corporation in which the Company owns,
directly or indirectly, at least 50% of the total combined voting power of
all classes of stock of such corporation, (ii) any partnership or limited
liability company in which the Company owns, directly or indirectly, at
least 50% of the capital or profit interests of such partnership or limited
liability company and (iii) any other business entity in which the Company
owns at least 50% of the equity interests thereof, provided that, in any
such case, the Company is in effective control of such corporation,
partnership, limited liability company or other entity.
(35) "Surviving Corporation" means the corporation resulting from a
Change of Control or, if securities representing at least 50% of the
aggregate voting power of such resulting corporation are directly or
indirectly owned by another corporation, such other corporation.
(36) "Voting Securities" means, with respect to any corporation,
securities of such corporation that are entitled to vote generally in the
election of directors of such corporation.
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SECTION 3
POWERS OF THE COMMITTEE; GENERAL TERMS OF AWARDS
(a) Power to Grant. The Committee shall determine those Non-Employee
Directors, Employees, or Agents, to whom an Award shall be granted and the terms
and conditions of any and all such Awards. The Committee may establish different
terms and conditions for different Awards and different Participants and for the
same Participant for each Award such Participant may receive, whether or not
granted at different times.
(b) Rules, Interpretations and Determinations. The Plan shall be
administered by the Committee. The Committee shall have full authority to
interpret and administer the Plan, to establish, amend, and rescind rules and
regulations relating to the Plan, to provide for conditions deemed necessary or
advisable to protect the interests of the Company, to construe the terms of any
Award or any document evidencing the grant of such Award and to make all other
determinations necessary or advisable for the administration and interpretation
of the Plan in order to carry out its provisions and purposes. Unless otherwise
expressly provided hereunder, any power, discretion or authority conveyed to or
reserved to the Committee may be exercised by it in its sole and absolute
discretion. Determinations, interpretations, or other actions made or taken by
the Committee shall be final, binding, and conclusive for all purposes and upon
all persons.
(c) Delegation of Authority. The Committee may delegate to the Company's
Chief Executive Officer and/or to other officer(s) of the Company the power and
authority to make and/or administer Awards under the Plan with respect to
individuals who are below the position of Vice President and not a member of the
"Policy Committee" (or any analogous committee), pursuant to such conditions and
limitations as the Committee may establish; provided that only the Committee or
the Board may select, and grant Awards to, Executive Officers or exercise any
other discretionary authority under the Plan with respect to Awards granted to
such Executive Officers. Unless the Committee shall otherwise specify, any
delegate shall have the authority and right to exercise (within the scope of
such person's delegated authority) all of the same powers and discretion that
would otherwise be available to the Committee pursuant to the terms hereof. The
Committee may also appoint agents (who may be officers or employees of the
Company) to assist in the administration of the Plan and may grant authority to
such persons to execute agreements or other documents on its behalf. All
expenses incurred in the administration of the Plan, including, without
limitation, for the engagement of any counsel, consultant or agent, shall be
paid by the Company.
(d) Restrictive Covenants and Other Conditions. Without limiting the
generality of the foregoing, the Committee may condition the grant of any Award
under the Plan, upon whom such Award would be granted, to his/her agreement in
writing to certain conditions (such as restrictions on the ability to transfer
the underlying shares of Common Stock) or covenants in favor of the Company
and/or one or more Subsidiaries (including, without limitation, covenants not to
compete, not to solicit employees and customers and not to disclose confidential
information, that may have effect following the termination of the Participant's
employment or service with the Company and/or its Subsidiaries and after the
Common Stock subject to the Award has been transferred to the Participant),
including, without limitation, the requirement that the Participant disgorge any
profit, gain or other benefit received in connection with the Award prior to any
breach of any such covenant.
(e) Maximum Individual Grants. Subject to adjustment as provided in Section
4(c), no Participant shall be granted Options or SARs (with tandem Options and
SARs being counted only once with respect to this limit), Restricted Stock,
Restricted Stock Units, Performance Shares and/or Other Stock-Based Awards
during any 12-month period with respect to more than 100,000 shares of Common
Stock.
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In addition to the foregoing, the maximum dollar value payable to any
Participant in any 12-month period with respect to Performance Units and/or
Other Stock-Based Awards that are valued with reference to cash or property
other than shares of Common Stock is $1,000,000.
(f) Dividends and Dividend Equivalents. Unless otherwise determined by the
Committee at the time of grant, to the extent that shares of Common Stock are
issued at the time of grant of any Award under the Plan, the Participant shall
be entitled to receive all dividends and other distributions paid with respect
to those shares, provided that if any such dividends or distributions are paid
in shares of Common Stock, such shares shall be subject to the same forfeiture
restrictions and restrictions on transferability as apply to the shares subject
to such Award on which such dividends or distributions were paid. To the extent
that shares of Common Stock are not issued at the time of the grant of any
Award, the Committee shall determine whether, and to what extent, the
Participant shall be entitled to receive the payment of dividend equivalents
with respect to that number of outstanding shares of Common Stock corresponding
to the shares subject to such Award. Unless otherwise determined by the
Committee at or after grant, any additional shares credited with respect to any
dividends or dividend equivalents payable with respect to any shares of Common
Stock subject to any Award shall become vested and nonforfeitable upon the same
terms and conditions as are applicable to the shares underlying the Award with
respect to which they are payable (including, with respect to any Award that
will become earned and vested upon the attainment of Performance Criteria, the
achievement of such Performance Criteria).
SECTION 4
COMMON STOCK SUBJECT TO PLAN
(a) Number. Subject to Section 4(c) below, unless the stockholders of the
EMC Group approve an increase in such number by a stockholder vote, the maximum
number of shares of Common Stock that may be made issuable or distributable
under the Plan is 2,000,000. The number of shares of Common Stock subject to an
Option or SAR shall be counted against such limit as one share for each share
issued or issuable, provided that when a SAR is granted in tandem with an
Option, so that only one may be exercised with the other terminating upon such
exercise, the number of shares of Common Stock subject to the tandem Option and
SAR award shall only be taken into account once (and not as to both awards) for
purposes of this limit (and for purposes of the provisions of Section 4(b)
below).Without limiting the generality of the foregoing, the maximum number of
shares as to which Incentive Stock Options may be granted shall not exceed
1,500,000. The shares to be delivered under the Plan may consist, in whole or in
part, of Common Stock (i) owned by the Company, (ii) purchased by the Company on
the open market, or (iii) acquired by the Company through means other than open
market purchases, including direct purchases from EMC Group. All Common Stock
owned or acquired by Company which is used to fund Awards under the Plan will be
transferred to EMC Group for issuance to the Participants.
(b) Canceled or Terminated Awards. Any shares of Common Stock subject to an
Award (as determined under Section 4(a)) which for any reason expire without
having been exercised, or are canceled or terminated or are otherwise settled
without the issuance of any Common Stock, shall again be available for grant
under the Plan. In applying the immediately preceding sentence, (i) shares
otherwise issuable or issued with respect to, or as part of, any Award that are
withheld to cover taxes shall not be treated as having been issued under the
Plan and (ii) if any SARs are settled in shares of Common Stock or any Options
are Net Exercised, only the net number of shares of Common Stock issued with
respect to such SARs or Options shall be deemed issued under the Plan. In
addition, shares of Common Stock tendered to exercise outstanding Options or
other Awards or to cover taxes shall also be available for issuance under the
Plan (and shall be counted as one share for purposes of Section 4(a)), except
and unless such shares are tendered more than ten years after the effective date
of the Plan.
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(c) Adjustment Due to Change in Capitalization. In the event of any Common
Stock dividend or Common Stock split, recapitalization (including, but not
limited to, the payment of an extraordinary dividend to the stockholders of EMC
Group), merger, consolidation, combination, spin-off, distribution of assets to
stockholders (other than ordinary cash dividends), exchange of shares, or other
similar corporate change, the aggregate number of shares of Common Stock
available for grant under Section 4(a) or subject to outstanding Awards, and the
respective exercise prices or base prices, if any, applicable to outstanding
Awards, may be appropriately adjusted by the Committee, in its discretion, and
the Committee's determination shall be conclusive.
(d) Assumption of Options and Other Equity-Based Awards. In the event that
there is a merger, stock purchase or other transaction whereby the Company or
any of its Subsidiaries acquires another business or any portion thereof, and
that pursuant to the arrangements governing such acquisition, the Company agrees
to provide options and/or other awards with respect to the Common Stock upon the
assumption, or in substitution, of existing equity-based awards for other
securities held by employees of the acquired business, the shares of Common
Stock subject to such assumed or substituted awards shall not be counted against
the limits set forth under Section 4(a) (and no shares related to any such
assumed or substituted awards shall be added to the number of awards issuable
under this Plan pursuant to Section 4(b)), and none of the provisions of the
Plan that would otherwise limit or constrain the ability of the Company to make
such assumption or substitution (such as the provisions hereof that require the
issuance of Options with an exercise price at least equal to the Fair Market
Value on the date of grant) shall apply to the awards issued in substitution of
the awards granted with respect to the employees of such acquired business.
SECTION 5
STOCK OPTIONS
(a) Grant of Options. Subject to the provisions of Section 3(f) and Section
4 above, Options may be granted to Participants at such time or times as shall
be determined by the Committee. Options granted under the Plan may be of two
types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. Any
Option granted as an Incentive Stock Option that nevertheless fails (either at
the time of grant or any time thereafter as a result of accelerated vesting or
otherwise) to meet the requirements of Section 422 of the Code, in whole or in
part, shall be treated as an Option that is not an Incentive Stock Option to the
extent of such failure. Except as otherwise provided herein, the Committee shall
have complete discretion in determining the number of Options, if any, to be
granted to a Participant, except that Incentive Stock Options may only be
granted to Employees. The terms and conditions of each Option grant, including,
but not limited to, the type of Option granted, the exercise price, the duration
of the Option, and the number of shares of Common Stock to which the Option
pertains, shall be evidenced in writing. Each such Option grant may also contain
such other terms and conditions not inconsistent with the provisions of the Plan
as the Committee shall determine. No Participant shall be granted an Option if,
immediately before the Option is to be granted, the Participant owns, directly
or indirectly, more than ten percent (10%) of the Common Stock and other stock
(if any) of EMC Group, thereby possessing more than ten percent (10%) of the
total combined voting power or value of all classes of stock of EMC Group, or of
any Subsidiary of the Company or EMC Group; provided, however, that the
limitation stated in this paragraph shall not apply if at the time such Option
is granted the option price is not less than one hundred ten percent (110%) of
the Fair Market Value (at the time the Option is granted) of the Common Stock
subject to the Option, and such Option by its terms is not exercisable after the
expiration of five (5) years from the date such Option is granted.
(b) Exercise Price. Incentive Stock Options and Non-Qualified Stock Options
granted pursuant to the Plan shall have an exercise price no less than the Fair
Market Value of a share of Common Stock on the date on which the Option is
granted. No Option granted hereunder may have its exercise price reduced (other
than pursuant to the provisions of Section 4(c)) unless such action is expressly
authorized by stockholder action in accordance with Section 11.
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(c) Exercise of Options. The Committee shall determine the exercise
schedule applicable with respect to any Option granted hereunder. Such schedule
may require a minimum period of service that must be completed before all, or a
portion of such Option shall be exercisable, and may establish performance-based
conditions to the exercise of such Option which are in addition to, in lieu of,
or as an alternative to any service requirement. Except as otherwise expressly
provided in the Plan (i) upon a termination of employment due to death,
Disability or Approved Retirement or (ii) in connection with a Change of
Control, and unless the Committee shall determine that special circumstances
(including, but not limited to, the achievement of performance objectives)
justify an exception, the minimum period of service required to exercise an
Option, in whole or in part, shall be one year. Subject to the provisions of
this Section 5, once any portion of any Option has become exercisable it shall
remain exercisable for its full term. The Committee shall determine the term of
each Non-Qualified Stock Option or Incentive Stock Option granted hereunder,
but, except as expressly provided below, in no event shall any such Option be
exercisable for more than ten (10) years after the date on which it is granted.
The minimum number of shares of previously acquired Common Stock which may be so
surrendered is 100, and only one such surrender shall be permitted in any thirty
(30) day period. No shares shall be issued or delivered until full payment
therefore has been made.
(d) Payment. The Committee shall establish procedures governing the
exercise of Options. No shares shall be delivered pursuant to any exercise of an
Option unless arrangements satisfactory to the Committee have been made to
assure full payment of the exercise price therefore. Without limiting the
generality of the foregoing, payment of the exercise price may be made (i) in
cash or its equivalent; (ii) by exchanging shares of Common Stock (which are not
the subject of any pledge or other security interest) which are owned by the
person exercising the Option; (iii) by any combination of the foregoing;
provided that the combined value of all cash and cash equivalents paid and the
Fair Market Value of any such Common Stock tendered to the Company, valued as of
the date of such tender, is at least equal to such exercise price; or (iv) in
accordance with any other procedure or arrangement approved by the Committee.
Additionally, to the extent authorized by the Committee (whether at or after
grant), Options may be Net Exercised subject to such terms and conditions as the
Committee may from time to time impose.
(e) Incentive Stock Options. Notwithstanding anything in the Plan to the
contrary, no Option that is intended to be an Incentive Stock Option may be
granted after the tenth (10th) anniversary of the effective date of the Plan and
no term of this Plan relating to Incentive Stock Options shall be interpreted,
amended or altered, nor shall any discretion or authority granted under the Plan
be so exercised, so as to disqualify the Plan under Section 422 of the Code, or,
without the consent of any Participant affected thereby, to disqualify any
Incentive Stock Option under such Section 422. The terms of any Incentive Stock
Option shall require the Participant to notify the Committee or its designee of
any "disqualifying disposition" (as defined in Section 421(b) of the Code) of
any Common Stock issued pursuant to the exercise of the Incentive Stock Option
within two (2) days after such disposition.
(f) Termination of Employment or Service.
(i) Due to Death. In the event a Participant's employment or service
terminates by reason of death, any Options granted to such Participant
shall become immediately exercisable in full and may be exercised by the
Participant's designated beneficiary or, if none is named, by the person
determined in accordance with Section 12(b) below, at any time prior to the
earlier to occur of (i) the expiration of the term of the Options or (ii)
the first (1st) anniversary (or such earlier date as the Committee shall
determine at the time of grant) of the Participant's death.
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(ii) Due to Disability. In the event a Participant's employment or
service is terminated by reason of Disability, any Options granted to such
Participant shall become immediately exercisable in full and may be
exercised by the Participant (or, in the event of the Participant's death
after termination of employment or service when the Option is exercisable
pursuant to its terms by the Participant's designated beneficiary or, if
none is named, by the person determined in accordance with Section 12(b)
below), at any time prior to the earlier to occur of (i) the expiration of
the term of the Options or (ii) the first (1st) anniversary (or such
earlier date as the Committee shall determine at the time of grant) of the
Participant's termination of employment or service.
(iii) Approved Retirement. In the event a Participant's employment or
service terminates by reason of Approved Retirement, any Options granted to
such Participant shall become immediately exercisable in full and may be
exercised by the Participant (or, in the event of the Participant's death
after termination of employment or service when the Option is exercisable
pursuant to its terms by the Participant's designated beneficiary or, if
none is named, by the person determined in accordance with Section 12(b)
below), at any time prior to a period of three (3) months from the date of
retirement (or such shorter period following the Participant's Approved
Retirement as the Committee shall determine at the time of grant).
(iv) Termination of Employment for Cause or Resignation. In the event
a Participant's employment or service is terminated by the Company or any
Subsidiary for Cause, or by the Participant other than due to the
Participant's death, Disability or Approved Retirement, any Options granted
to such Participant that have not yet been exercised shall expire at the
time of such termination of employment and shall not be exercisable
thereafter.
(v) Termination of Employment for Any Other Reason. Unless otherwise
determined by the Committee at or following the time of grant, in the event
the employment or service of the Participant shall terminate for any reason
other than one described in Section 5(f)(i), (ii), (iii), or (iv) above,
any Options granted to such Participant which are exercisable at the date
of the Participant's termination of employment or service may be exercised
by the Participant (or, in the event of the Participant's death after
termination of employment or service when the Option is exercisable
pursuant to its terms by the Participant's designated beneficiary, or, if
none is named, by the person determined in accordance with Section 12(b)),
at any time prior to the expiration of the term of the Options or the date
that is three (3) months following the Participant's termination of
employment or service, whichever period is shorter, and any Options that
are not exercisable at the time of termination of employment or service
shall expire at the time of such termination and shall not be exercisable
thereafter.
SECTION 6
RESTRICTED STOCK AND RESTRICTED STOCK UNITS
(a) Grant of Restricted Stock. The Committee may grant Restricted Stock or
Restricted Stock Units to Participants at such times and in such amounts, and
subject to such other terms and conditions not inconsistent with the Plan as it
shall determine. If Restricted Stock is evidenced by the issuance of stock
certificates, the Committee shall require that such stock certificates be held
in the custody of the Secretary of the Company or its designee until the Period
of Restriction lapses, and that, as a condition of such Restricted Stock award,
the Participant shall have delivered a stock power, endorsed in blank, relating
to the Common Stock covered by such award. The terms and conditions of each
grant of Restricted Stock or Restricted Stock Units shall be evidenced in
writing.
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(b) Restrictions on Transferability. Except as provided in Section 12(a),
no Restricted Stock may be sold, transferred, pledged, assigned, or otherwise
alienated or hypothecated until the lapse of the Period of Restriction. The
Committee shall determine the Period of Restriction applicable with respect to
any award of Restricted Stock; provided, however, that, except as otherwise
expressly provided in the Plan the Period of Restriction with respect to any
such Award shall not be less than three (3) years, but may lapse ratably over
such three (3) year Period of Restriction. Notwithstanding the foregoing, such
minimum three (3) year Period of Restriction shall not be applicable with
respect to any grant made to a newly-hired employee made to compensate for
equity-based or other forms of compensation forfeited from a prior employer or
grants made in satisfaction of incentive or other compensation payable to the
Participant in respect of service to the Company or any of its Subsidiaries. The
Committee may provide that the Period of Restriction on Restricted Stock shall
lapse, in whole or in part, upon the achievement of Performance Criteria (and
without regard to the minimum service requirement), which criteria shall be
selected from those available to the Committee under Section 7(c), provided,
however, that any Award of Restricted Stock made to any Executive Officer that
is intended to qualify as other performance based compensation under Section
162(m) of the Code shall be subject to the same restrictions and limitations
applicable to Performance Share Awards under Section 7(d) and subject to the
certification required under Section 7(e).
(c) Rights as a Stockholder. Unless otherwise determined by the Committee
at the time of grant and subject to Section 3(f), Participants holding shares of
Restricted Stock may exercise full voting rights and other rights as a
stockholder with respect to those shares during the Period of Restriction.
(d) Termination of Employment Due to Approved Retirement, Disability or
Death. Unless otherwise determined by the Committee at the time of grant, in the
event a Participant's employment or service terminates by reason of Approved
Retirement, any shares related to Restricted Stock held by such Participant
shall become non-forfeitable at the time the restrictions would have lapsed had
the Participant continued in employment; provided, however, that the Committee
may waive any forfeiture and transfer restrictions with respect to such portion
of the Award as is necessary for the Participant to satisfy any applicable tax
withholding obligations in connection with such Award arising at the time of
such termination of employment. Unless otherwise determined by the Committee at
the time of grant, in the event a Participant's employment or service terminates
by reason of Disability or death, any shares related to Restricted Stock held by
such Participant shall become non-forfeitable on the date of termination.
(e) Termination of Employment for Any Other Reason. Unless otherwise
determined by the Committee at or after the time of grant, in the event the
employment or service of the Participant shall terminate for any reason other
than one described in Section 6(d), any Restricted Stock awarded to such
Participant as to which the Period of Restriction has not lapsed shall be
forfeited.
(f) Restricted Stock Units. The Committee may elect to grant any
Participant Restricted Stock Units, which are intended to be the economic
equivalent of an award of Restricted Stock. Any such Restricted Stock Units
Award shall be made on substantially the same terms as apply to an Award of
Restricted Stock under this Section 6, except that a Participant receiving such
Award shall not have any rights as a stockholder prior to the actual issuance of
such Common Stock (although, pursuant to Section 3(f), the Committee may
authorize the payment of dividend equivalents on such rights equal to the
dividends that would have been payable had the corresponding equity rights been
outstanding shares of Common Stock).
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SECTION 7
PERFORMANCE SHARES AND PERFORMANCE UNITS
(a) Generally. The Committee shall have the authority to determine the
Participants who shall receive Performance Shares and Performance Units, the
number of Performance Shares and the number and value of Performance Units each
Participant receives for each or any Performance Period, and the Performance
Criteria applicable with respect to such Performance Shares and Performance
Units for each Performance Period. The Committee shall determine the duration of
each Performance Period (the duration of Performance Periods may differ from
each other), and there may be more than one Performance Period in existence at
any one time as to any Participant, or all or any class of Participants.
Performance Periods may be no shorter than twelve months. Each grant of
Performance Shares and Performance Units shall be evidenced in writing and shall
specify the number of Performance Shares and the number and value of Performance
Units awarded to the Participant, the Performance Criteria applicable thereto,
and such other terms and conditions not inconsistent with the Plan as the
Committee shall determine. No shares of Common Stock will be issued at the time
an Award of Performance Shares is made, and the Company shall not be required to
set aside a fund for the payment of Performance Shares or Performance Units.
(b) Earned Performance Shares and Performance Units. Performance Shares and
Performance Units shall become earned, in whole or in part, based upon the
attainment of specified Performance Criteria or the occurrence of any event or
events, including a Change of Control, as the Committee shall determine, either
at or after the time of grant. In addition to the achievement of the specified
Performance Criteria, the Committee may, at the grant date, condition payment of
Performance Shares and Performance Units on the Participant completing a minimum
period of service following the date of grant or on such other conditions as the
Committee shall specify.
(c) Performance Criteria. At the discretion of the Committee, Performance
Criteria may be based on the total return to the Company's policyholders or EMC
Group's stockholders, inclusive of dividends paid, during the applicable
Performance Period (determined either in absolute terms or relative to the
performance of one or more similarly situated companies or a published index
covering the performance of a number of companies), or upon the attainment of
one or more of the following criteria, whether in absolute terms or relative to
the performance of one or more similarly situated companies or a published index
covering the performance of a number of companies: stock price, operating
earnings, net earnings, return on equity, income, market share, combined ratio,
level of expenses, growth in revenue, cash flow, earnings per share, return on
invested capital, return on assets, economic value added, improvements in or
attainment of working capital levels, and, in the case of persons who are not
Executive Officers, such other criteria as may be determined by the Committee.
Performance Criteria may be established on a Company-wide basis or with respect
to one or more business units or divisions or Subsidiaries. When establishing
Performance Criteria for a Performance Period, the Committee may exclude any or
all "extraordinary items" as determined under statutory accounting principles
including, without limitation, the charges or costs associated with
restructurings of the Company or any Subsidiary, discontinued operations, other
unusual or non-recurring items, and the cumulative effects of accounting
changes. Except to the extent that the exercise of (or the ability to exercise)
such discretion in the case of Awards to Executive Officers intended to be other
performance-based compensation under Section 162(m) of the Code would cause them
to fail to satisfy that requirement, the Committee may also adjust the
Performance Criteria for any Performance Period as it deems equitable in
recognition of unusual or non-recurring events affecting the Company, changes in
applicable tax laws or accounting principles, or such other factors as the
Committee may determine.
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(d) Special Rule for Performance Criteria. If, at the time of grant, the
Committee intends a Performance Share Award or Performance Unit to qualify as
other performance based compensation within the meaning of Section 162(m) of the
Code, the Committee must establish Performance Criteria for the applicable
Performance Period no later than the 90th day after the Performance Period
begins (or by such other date as may be required under Section 162(m) of the
Code), and the Committee shall not have the authority in respect of such Awards
to exercise any discretion applicable to a grant of Performance Shares or
Performance Units otherwise conveyed by this Section 7, if the ability to
exercise such discretion would cause such Award not to qualify as other
performance based compensation.
(e) Certification of Attainment of Performance Criteria. As soon as
practicable after the end of a Performance Period and prior to any payment in
respect of such Performance Period, the Committee shall certify in writing the
number of Performance Shares and the number and value of Performance Units which
have been earned on the basis of performance in relation to the established
Performance Criteria.
(f) Payment of Awards. Earned Performance Shares and the value of earned
Performance Units shall be distributed to the Participant or, if the Participant
has died, to the Participant's beneficiary, as soon as practicable after the
expiration of the Performance Period and the Committee's certification under
paragraph 7(e) above, provided that (i) earned Performance Shares and the value
of earned Performance Units shall not be distributed to a Participant until any
other conditions on payment of such Awards established by the Committee have
been satisfied, and (ii) any amounts payable in respect of Performance Shares or
Performance Units pursuant to Section 10 shall be distributed in accordance with
such Section 10. The Committee shall determine whether Performance Shares and
the value of earned Performance Units are to be distributed in the form of cash,
shares of Common Stock or in a combination thereof, with the value or number of
shares payable to be determined based on the Fair Market Value of Common Stock
on the date of the Committee's certification under paragraph 7(e) above.
(g) Newly Eligible Participants. Notwithstanding anything in the section to
the contrary, the Committee shall be entitled to make such rules, determinations
and adjustments as it deems appropriate with respect to any Participant who
becomes eligible to receive Performance Shares or Performance Units after the
commencement of a Performance Period.
(h) Termination of Employment.
(i) Termination of Employment due to Approved Retirement, Disability
or Death. Unless otherwise determined by the Committee at or after the time
of grant, a Participant whose employment or service terminates by reason of
Approved Retirement, Disability or death shall be entitled to receive the
same payment or distribution with respect to Performance Shares and
Performance Units (without pro-ration) that would have been payable for the
Performance Period had his or her employment continued until the end of the
applicable Performance Period. Any Performance Shares or value of
Performance Units becoming payable in accordance with the preceding
sentence shall be paid at the same time as Performance Shares and the value
of Performance Units are paid to other Participants (or at such earlier
time as the Committee may permit). Any rights that a Participant or
beneficiary may have with respect to any Performance Shares or Performance
Units outstanding at the date of such termination of employment that may
not be earned (or that are eligible to be earned, but are not earned) in
accordance with this section 7(h)(i) shall be forfeited and canceled,
effective as of the date of the Participant's termination of employment or
service (or, if eligible to be earned, but are not earned, the date of the
Committee's certification pursuant to Section 7(e)).
(ii) Termination for any Other Reason. Unless otherwise determined by
the Committee at or after the time of grant, in the event the employment or
service of the Participant shall terminate during a Performance Period for
any reason other than the one described in Section 7(h) (i), all of the
Participant's rights to Performance Shares and Performance Units related to
such Performance Period shall be immediately forfeited and canceled as of
the date of such termination of employment.
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(iii) Cause. Notwithstanding anything in this Section 7 to the
contrary, a Participant's rights with respect to unearned Performance
Shares and Performance Units shall in all events be immediately forfeited
and canceled as of the date of the Participant's termination of employment
for Cause.
SECTION 8
STOCK APPRECIATION RIGHTS
(a) Grant of SARs. SARs may be granted to any Participant, all
Participants, or any class of Participants at such time or times as shall be
determined by the Committee. SARs may be granted in tandem with an Option, or
may be granted on a freestanding basis, not related to any Option. The term and
conditions of any SAR grant shall be evidenced in writing, and shall include
such provisions not inconsistent with the Plan as the Committee shall determine.
(b) Terms and Conditions of SARs. Unless the Committee shall otherwise
determine, the terms and conditions (including, without limitation, the exercise
period of the SAR, the vesting schedule applicable thereto and the impact of any
termination of service on the Participant's rights with respect to the SAR)
applicable with respect to (i) SARs granted in tandem with an Option shall be
substantially identical (to the extent possible taking into account the
differences related to the character of the SAR) to the terms and conditions
applicable to the tandem Options and (ii) freestanding SARs shall be
substantially identical (to the extent possible taking into account the
differences related to the character of the SAR) to the terms and conditions
that would have been applicable under Section 5 above were the grant of the SARs
a grant of an Option.
(c) Exercise of Tandem SARs. SARs which are granted in tandem with an
Option may only be exercised upon the surrender of the right to exercise such
Option for an equivalent number of shares and may be exercised only with respect
to the shares of Common Stock for which the related Option is then exercisable.
(d) Payment of SAR Amount. Upon exercise of a SAR, the holder shall be
entitled to receive payment, in cash, in shares of Common Stock or in a
combination thereof, as determined by the Committee, of an amount determined by
multiplying:
(i) the excess, if any, of the Fair Market Value of a share of Common
Stock at the date of exercise over the Fair Market Value of a share of
Common Stock on the date of grant, by
(ii) the number of shares of Common Stock with respect to which the
SARs are then being exercised.
SECTION 9
OTHER STOCK-BASED AWARDS
(a) Other Stock-Based Awards. The Committee may grant other types of
equity-based and equity-related awards in addition to Options, Restricted Stock,
Restricted Stock Units, Performance Shares, Performance Units and SARs.
Notwithstanding the immediately preceding sentence, except in the case of Other
Stock-Based Awards issued in satisfaction of an obligation of the Company or any
Subsidiary to make a payment in cash in respect of a Participant (including, but
not limited to, when an annual or long-term incentive compensation award is
satisfied with the issuance of shares of Common Stock instead of cash or in
respect of a Participant's accrued benefit under a deferred compensation plan),
or as provided under Section 10, no Participant shall be entitled to vest in any
such Other Stock-Based Award on a schedule which is more favorable to the
Participant than ratably over a period of three years from the date of grant.
Each such Other Stock-Based Award shall be evidenced in writing and specify the
terms and
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conditions applicable thereto. Any such Other Stock-Based Award may entail the
transfer of actual shares of Common Stock or the payment of the value of such
Award in cash based upon the value of a specified number of shares of Common
Stock, or any combination of the foregoing, as determined by the Committee. The
terms of any Other Stock-Based Award need not be uniform in application to all
(or any class of) Participants, and each Other Stock-Based Award granted to any
Participant (whether or not at the same time) may have different terms.
(b) Termination of Employment or Service. In addition to any other terms
and conditions that may be specified by the Committee but subject to the
limitations set forth in Section 9(a), each Other Stock-Based Award shall
specify the impact of termination of employment upon the rights of a Participant
with respect to such Award. At the discretion of the Committee, such conditions
may be the same as apply with respect to Restricted Stock or Restricted Stock
Units, or may be contain terms that are more or less favorable to the
Participant.
SECTION 10
CHANGE OF CONTROL
(a) Accelerated Vesting and Payment. Subject to the provisions of Section
10(b) below, in the event of a Change of Control (i) each Option and SAR then
outstanding shall be fully exercisable regardless of the exercise schedule
otherwise applicable to such Option and/or SAR, (ii) the Period of Restriction
shall lapse as to each share of Restricted Stock then outstanding, (iii) each
outstanding Restricted Stock Unit shall become fully vested and payable, (iv)
each outstanding Performance Share Award and Performance Unit Award shall be
deemed earned at the target level of performance for such Award, and (v) each
outstanding Other Stock-Based Award shall become fully vested and payable. In
addition, in connection with such a Change of Control, the Committee may, in its
discretion, provide that each Option and/or SAR shall, upon the occurrence of
such Change of Control, be canceled in exchange for a payment per share in cash
(the "Settlement Payment") in an amount equal to the excess, if any, of the
Change of Control Price over the exercise price for such Option or the base
price of such SAR. Should the Committee authorize any Settlement Payments in
respect of Options, the Committee may determine that any Options which have an
exercise price per share below the Change of Control Price shall be deemed
cancelled and satisfied in full for a deemed Settlement Payment of zero. The
Committee may also direct that each Restricted Stock Unit, Other Stock-Based
Award, Performance Share and/or Performance Unit shall be settled in cash with
its value determined based on the Change of Control Price.
(b) Alternative Awards. Notwithstanding Section 10(a), no cancellation,
acceleration of exercisability, vesting, cash settlement or other payment shall
occur with respect to any Award if the Committee reasonably determines in good
faith, prior to the occurrence of a Change of Control, that such Award shall be
honored or assumed, or new rights substituted therefor (such honored, assumed or
substituted award hereinafter called an "Alternative Award"), by a Participant's
employer (or the parent of such employer) immediately following the Change of
Control; provided that any such Alternative Award must:
(i) be based on stock which is traded on an established U.S.
securities market;
(ii) provide such Participant with rights and entitlements
substantially equivalent to or better than the rights, terms and conditions
applicable under such Award, including, but not limited to, an identical or
better exercise or vesting schedule and identical or better timing and
methods of payment;
(iii) have substantially equivalent economic value to such Award
(determined at the time of the Change of Control); and
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(iv) have terms and conditions which provide that in the event that,
during the 24-month period following the Change of Control, the
Participant's employment or service is involuntarily terminated for any
reason (including, but not limited to a termination due to death,
Disability or without Cause) or Constructively Terminated (as defined
below), all of such Participant's Options and/or SARs shall be deemed
immediately and fully exercisable, the Period of Restriction shall lapse as
to each of the Participant's outstanding Restricted Stock awards, each of
the Participant's outstanding Restricted Stock Unit awards and Other
Stock-Based Awards shall be payable in full and each such Alternative Award
shall be settled for a payment per each share of stock subject to the
Alternative Award in cash, in immediately transferable, publicly traded
securities or in a combination thereof, in an amount equal to, in the case
of an Option or SAR, the excess of the Fair Market Value of such stock on
the date of the Participant's termination over the corresponding exercise
or base price per share and, in the case of any Restricted Stock,
Restricted Stock Unit, or Other Stock-Based Award, the Fair Market Value of
the number of shares of Common Stock subject or related thereto.
For this purpose, a Participant's employment or service shall be deemed to
have been Constructively Terminated if, without the Participant's written
consent, the Participant terminates employment or service within 120 days
following either (x) a material reduction in the Participant's base salary or a
Participant's incentive compensation opportunity, or (y) the relocation of the
Participant's principal place of employment or service to a location more than
35 miles away from the Participant's prior principal place of employment or
service.
(c) Section 409A. Should any event constitute a Change of Control for
purposes of the Plan, but not constitute a change of control within the meaning
of Section 409A of the Code, if necessary to avoid the imposition of an
additional tax on the recipient, no payment or distribution shall be made to any
affected Participant by reason of such Change of Control (although any other
modification or enhancement to the Award, such as accelerated vesting, shall
still apply) and the value of such Award as determined by the Committee prior to
such Change of Control shall be paid to the affected Participant on the earlier
to occur of (i) the day after the six month anniversary of such Participant's
termination of employment or(ii) whichever of the following is applicable to
such Award: (A) with respect to any unvested Award that would have become vested
solely upon the passage of time and the continued performance of service, the
date the Award would have otherwise become vested without regard to the Change
of Control; (B) with respect to any unvested Award that would have become vested
upon the achievement of specified Performance Criteria, on the last day of the
applicable Performance Period; or (C) if the Award was already vested at the
time the Change of Control occurs, on the date on which the Award would have
expired in accordance with its terms.
SECTION 11
AMENDMENT, MODIFICATION, AND TERMINATION OF PLAN
The Board may, at any time and from time to time, amend, modify, suspend,
or terminate this Plan, and the Committee may from time to time amend, modify,
suspend or terminate Awards in whole or in part, without notice to or the
consent of any Participant, provided, however, that any amendment which would
(i) increase the number of shares available for issuance under the Plan, (ii)
lower the minimum exercise price at which an Option (or the base price at which
a SAR) may be granted or otherwise permit the repricing of any outstanding
Options or SARs (other than in the context of a transaction referenced in
Section 4(c)), (iii) extend the maximum term for Options or SARs granted
hereunder or (iv) otherwise amend the Plan in a material fashion that would
require the approval of stockholders under the applicable rules and regulations
of any exchange or automated quotation system on which the Common Stock is
listed to trade shall be subject to the approval of EMC Group's stockholders.
Notwithstanding the foregoing, however, no amendment, modification, or
termination of the Plan shall in any manner adversely affect any Award
theretofore granted under the Plan, without the consent of the Participant.
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SECTION 12
MISCELLANEOUS PROVISIONS
(a) Transferability. No Award granted under the Plan may be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than in accordance with Section 12(b) below, provided that the Committee may
permit transfers of Awards (other than Incentive Stock Options) to Family
Members (including, without limitation, transfers effected by a domestic
relations order) subject to such terms and conditions as the Committee shall
determine.
(b) Beneficiary Designation. Each Participant under the Plan may from time
to time name any beneficiary or beneficiaries (who may be named contingently or
successively) to whom any benefit under the Plan is to be paid or by whom any
right under the Plan is to be exercised in case of the Participant's death;
provided that, if the Participant shall not have designated any beneficiary
under this Plan, the Participant's beneficiary shall be deemed to be the person
designated by the Participant under the group life insurance plan of the Company
or a Subsidiary in which such Participant participates (unless such designated
beneficiary is not a Family Member). Each designation made hereunder will revoke
all prior designations by the same Participant with respect to all Awards
previously granted (including, solely for purposes of this Plan, any deemed
designation), shall be in a form prescribed by the Committee, and will be
effective only when received by the Committee in writing during the
Participant's lifetime. In the absence of any such effective designation
(including a deemed designation), benefits remaining unpaid at the Participant's
death shall be paid to or exercised by the Participant's surviving spouse, if
any, or otherwise to or by the Participant's estate. Except as otherwise
expressly provided herein, nothing in this Plan is intended or may be construed
to give any person other than Participants any rights or remedies under this
Plan.
(c) Deferral of Payment. At the time any Award is granted (or such earlier
time as the Committee may require), the Committee may permit a Participant to
elect, upon such terms and conditions as the Committee may establish, to defer
receipt of shares of Common Stock that would otherwise be issued in connection
with an Award.
(d) No Guarantee of Employment or Participation. The existence of this
Plan, as in effect at any time or from time to time, or any grant of an Award
under the Plan shall not interfere with or limit in any way the rights of the
Company or any Subsidiary to terminate any Participant's employment or other
service provider relationship at any time, nor confer upon any Participant any
rights to continue in the employ or service of the Company or any Subsidiary of
the Company. The existence of the Plan shall not be deemed to constitute a
contract of employment between the Company and the Participant, nor shall it
constitute a right to remain in the employ or service of the Company. Except as
may be provided in a separate written agreement, employment with or service for
the Company is at-will and either party may terminate the Participant's
employment or other service provider relationship at any time, for any reason,
with or without Cause or notice.
(e) Tax Withholding. The Company shall have the right to deduct from all
payments or distributions hereunder any federal, state, foreign or local taxes
or other obligations required by law to be withheld with respect thereto. The
Company may defer issuance of Common Stock in respect of any Award until such
requirements are satisfied. The Committee may, in its discretion, permit a
Participant to elect, subject to such conditions as the Committee shall impose,
(i) to have shares of Common Stock otherwise issuable under the Plan withheld by
the Company or (ii) to deliver to the Company previously acquired shares of
Common Stock, in either case for the greatest number of whole shares having a
Fair Market Value on the date immediately preceding the date on which the
applicable tax liability is determined not in excess of the minimum amount
required to satisfy the statutory withholding tax obligations with respect to
any Award.
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(f) No Limitation on Compensation; Scope of Liabilities. Nothing in the
Plan shall be construed to limit the right of the Company to establish other
plans if and to the extent permitted by applicable law. The liability of the
Company under this Plan is limited to the obligations expressly set forth in the
Plan, and no term or provision of this Plan may be construed to impose any
further or additional duties, obligations, or costs on the Company thereof or
the Committee not expressly set forth in the Plan.
(g) Requirements of Law. The granting of Awards and the issuance of shares
of Common Stock shall be subject to all applicable laws, rules, and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required.
(h) Term of Plan. The Plan shall be effective upon the date, if any, on
which it is approved by EMC Group's stockholders. The Plan shall continue in
effect, unless sooner terminated pursuant to Section 11 above, until the tenth
anniversary of the date of such stockholder approval.
(i) Governing Law. The Plan, and all Awards granted hereunder (and the
terms and conditions of any document evidencing any such grant), shall be
construed in accordance with and governed by the laws of the State of Iowa,
without regard to principles of conflict of laws.
(j) No Impact on Benefits. Except as may otherwise be specifically stated
under any employee benefit plan, policy or program, Awards shall not be treated
as compensation for purposes of calculating an Employee's, Agent's or
Non-Employee Director's right or benefits under any such plan, policy or
program.
(k) No Constraint on Corporate Action. Except as provided in Section 11
above, nothing contained in this Plan shall be construed to prevent the Company
from taking any corporate action (including, but not limited to, the Company's
right or power to make adjustments, reclassifications, reorganizations or
changes of its capital or business structure, or to merge or consolidate, or
dissolve, liquidate, sell, or transfer all or any part of its business or
assets) which is deemed by it to be appropriate, or in its best interest,
whether or not such action would have an adverse effect on this Plan, or any
awards made under this Plan. No Non-Employee Director, beneficiary, or other
person shall have any claim against the Company, as a result of any such action.
(l) Indemnification. Each member of the Board and each member of the
Committee shall be indemnified and held harmless by the Company and EMC Group
against and from any loss, cost, liability, or expense that may be imposed upon
or reasonably incurred by such member of the Board or Committee in connection
with or resulting from any claim, action, suit or proceeding to which such
member may be made a party or in which such member may be involved by reason of
any action taken or failure to act under the Plan (in the absence of bad faith)
and against and from any and all amounts paid by such member in settlement
thereof, with the Company's approval, or paid by such member in satisfaction of
any judgment in any such action, suit or proceeding against such member,
provided that such member shall give the Company an opportunity, at its own
expense, to handle and defend the same before such member undertakes to handle
and defend it individually. The foregoing right of indemnification shall not be
exclusive and shall be independent of any other rights of indemnification to
which any such person may be entitled under the Company's Restated Articles of
Incorporation or By-Laws, by contract, as a matter of law, or otherwise.
(m) Rights as a Stockholder. A Participant shall have no rights as a
stockholder with respect to any shares of Common Stock covered by any Award
until the Participant shall have become the holder of record of such shares.
(n) Captions. The headings and captions appearing herein are inserted only
as a matter of convenience. They do not define, limit, construe or describe the
scope or intent of the provisions of the Plan.
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APPENDIX B
EMC INSURANCE GROUP INC.
AUDIT COMMITTEE CHARTER
PURPOSE
The purpose of the Audit Committee (the "Committee") of EMC Insurance Group Inc.
(the "Company") is to assist the Company's Board of Directors (the "Board") in
fulfilling its oversight responsibilities for (1) the integrity of the Company's
financial statements, (2) the Company's compliance with legal and regulatory
requirements, (3) the independent auditor's qualifications and independence, and
(4) the performance of the Company's internal audit function and independent
auditors. The Committee will also prepare the report required by the rules of
the Securities and Exchange Commission to be included in the Company's annual
proxy statement.
AUTHORITY
The Committee shall have the authority granted to it in Article V, Section 3 of
the Company's By-Laws. The primary responsibility of the Committee is to oversee
the Company's financial controls and reporting processes on behalf of the Board,
and to report the results of its activities to the Board. The Committee's
responsibilities are set forth more fully below. Management of the Company is
responsible for preparing the Company's financial statements, and the external
auditors are responsible for auditing those financial statements. The Committee
may perform such other duties or activities and may assume such other
responsibilities as are consistent with its purpose and as the Board or the
Committee deems appropriate. The following shall be the principal recurring
processes of the Committee in carrying out its oversight responsibilities:
- Appoint, determine funding for, and oversee the work of the external
auditors employed by the Company to conduct the annual audit. The external
auditors will report directly to the Committee.
- Resolve any disagreements between management and the external auditors
regarding financial reporting.
- Pre-approve all audit and permitted non-audit services to be performed by
the Company's external auditors.
- Retain and determine funding for independent counsel, accountants, or
others to advise the Committee or assist in the conduct of an
investigation.
- Seek any information it requires from employees--all of whom are directed
to cooperate with the Committee's requests.
- Meet with Company officers, external auditors or outside counsel, as
necessary.
COMPOSITION
The Audit Committee will consist of three or more members of the Board of
Directors. The full Board will appoint the Committee members and the Committee
chair.
Each Committee member will be both independent and financially literate. At
least one member shall be designated as the "Audit Committee financial expert,"
as defined by applicable rules and regulations.
No Committee member shall simultaneously serve on the audit committees of more
than two other public companies.
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MEETINGS
The Committee will meet at least four times a year, with authority to convene
additional meetings as circumstances require. All Committee members are expected
to attend each meeting, in person or via tele-conference. The Committee will
invite members of management, the external auditors or others to attend meetings
and provide pertinent information, as necessary. It will meet separately with
management, with internal auditors and with external auditors. It will also meet
periodically in executive session.
Meetings may occur jointly with meetings of the audit committees of one or more
affiliated companies, in which case a chairman of the joint meeting shall be
elected by the members of the audit committees in attendance.
Special meetings may be called by any member of the Committee or by the Chief
Executive Officer of the Company at any time circumstances dictate the need,
pursuant to the notice provisions set forth in the By-Laws of the Company.
Meeting agendas will be prepared and provided in advance to members, along with
appropriate briefing materials. Minutes will be prepared.
RESPONSIBILITIES
The Committee will have the following responsibilities:
FINANCIAL STATEMENTS
- Review significant accounting and reporting issues and understand their
impact on the financial statements of the Company. These issues include:
- Complex or unusual transactions
- Major issues regarding accounting principles and financial statement
presentations, including any significant changes in the Company's
selection or application of accounting principles
- Review and approval of all related party transactions (as defined by
the National Association of Securities Dealers, Inc.) to which the
Company is a party (with the exception of those related party
transactions that are subject to the review and approval of the
Inter-Company Committee of the Board)
- The effect of regulatory and accounting initiatives, as well as
off-balance sheet structures, on the financial statements of the
Company
- Review analyses prepared by management and/or the external auditor setting
forth significant financial reporting issues and judgments made in
connection with the preparation of the financial statements, including
analyses of the effects of alternative GAAP methods on the financial
statements.
- Review with management and the external auditors the results of each audit,
including any difficulties encountered. This review will include any
restrictions on the scope of the external auditor's activities or on access
to requested information, and any significant disagreements with
management.
- Discuss the annual audited financial statements and quarterly financial
statements with management and the external auditors, including the
Company's disclosures under "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
- Review disclosures and certifications made by the Chief Executive Officer
and the Chief Financial Officer in the Company's Forms 10-K and 10-Q
concerning controls and procedures for financial reporting.
- Discuss earnings press releases (particularly use of "pro forma," or
"adjusted" non-GAAP, information), as well as financial information and
earnings guidance provided to analysts and rating agencies. This review may
be general (i.e., the types of information to be disclosed and the type of
presentations to be made).
B-2
INTERNAL CONTROL
- Review any reports prepared by the internal or external auditors regarding
the effectiveness of the Company's internal control system, including
information technology security and controls.
- Understand the scope of internal and external auditor reviews of internal
controls over financial reporting, and obtain reports on significant
findings and recommendations, together with management's responses.
INTERNAL AUDIT
- Review with management and the Chief Audit Officer the charter, plans,
activities, staffing and organizational structure of the internal audit
function.
- Ensure there are no unjustified restrictions or limitations placed upon,
and review and concur in the appointment, replacement or dismissal of, the
Chief Audit Officer.
- Review the effectiveness of the internal audit function, including
compliance with The Institute of Internal Auditors' Standards for the
Professional Practice of Internal Auditing.
- Meet separately with the Chief Audit Officer on a regular basis, to discuss
any matters that the Committee or the internal audit department believes
should be discussed privately.
EXTERNAL AUDIT
- Review the external auditor's proposed audit scope and approach, including
coordination of audit effort with internal audit.
- Review the performance of the external auditors. In performing this review,
the Committee will:
- Obtain and review, at least annually, a report by the external
auditors describing the firm's internal quality-control procedures
- Assess the external auditor's independence and review any
relationships between the external auditor(s) and the Company
- Take into account the opinions of management and internal audit
- Review and evaluate the lead partner of the external auditor
- Present to the Board its conclusions with respect to the external
auditor
- Ensure the rotation of the lead and concurring audit partners every five
years and other audit partners every seven years, and consider whether
there should be regular rotation of the audit firm itself.
- Set clear hiring policies for employees or former employees of the external
auditors.
- Meet separately with the external auditors on a regular basis, to discuss
any matters that the Committee or the external auditors believe should be
discussed privately.
COMPLIANCE
- Review any reports prepared by internal audit, General Counsel or the
external auditors regarding (i) the effectiveness of the Company's system
for monitoring compliance with laws and regulations, and/or (ii) the
results of management's investigation and follow-up (including disciplinary
action) of any instances of noncompliance.
- Establish procedures for: (i) the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal controls,
or auditing matters; and (ii) the confidential, anonymous submission by
employees of the Company or its affiliates of concerns regarding
questionable accounting or auditing matters.
- Review the findings of any examinations by regulatory agencies, as well as
any auditor observations.
- Review and discuss with management, the internal auditors, and the external
auditors the adequacy and effectiveness of the Company's legal, regulatory
and ethical compliance programs, including the Company's Code of Corporate
Conduct and/or its Guide to Ethical Corporate Conduct (or similar
documents), and its Code of Ethics.
- Obtain regular updates from management and the Company's legal counsel
regarding compliance matters.
B-3
REPORTING RESPONSIBILITIES
- Report regularly to the Board of Directors about Committee activities and
issues that arise with respect to the quality or integrity of the Company's
financial statements, the Company's compliance with legal or regulatory
requirements, the performance and independence of the Company's external
auditors, and the performance of the internal audit function.
- Provide an open avenue of communication between internal audit, the
external auditors, and the Board of Directors.
- Report annually to the stockholders, describing the Committee's
composition, its responsibilities and how they were discharged, and any
other information required by regulation or rule, including approval of
non-audit services.
- Review any other reports the Company issues that relate to Committee
responsibilities.
OTHER RESPONSIBILITIES
- Discuss with management the Company's major policies with respect to risk
assessment and risk management.
- Perform other activities related to this Charter as requested by the Board
of Directors.
- Institute and oversee special investigations as needed.
- Maintain financial literacy through formal seminars, self-study programs or
professional experience.
- Review and assess annually the adequacy of this Committee Charter, consider
any recommended changes to this Charter which might be received, request
Board approval for proposed changes, and ensure that appropriate
disclosures have been made, as may be required by law or regulation.
- Confirm annually that all responsibilities outlined in this Charter have
been carried out.
As Amended August 2006
B-4
c/o UMB Bank, n.a.
(EMC LOGO) P.O. Box 419064
EMC Insurance Group Inc. Kansas City, MO 64141-6064
YOUR VOTE IS IMPORTANT
Regardless of whether you plan to attend the Annual Meeting of
Stockholders, you can be sure your shares are represented at the
meeting by promptly returning your proxy in the enclosed envelope.
(ARROW) PLEASE FOLD AND DETACH CARD AT PERFORATION BEFORE MAILING. (ARROW)
--------------------------------------------------------------------------------
EMC INSURANCE GROUP INC.
ANNUAL MEETING OF STOCKHOLDERS - MAY 24, 2007
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Bruce G. Kelley and George W. Kochheiser, or
either of them, as Proxies, each with the power to appoint his substitute, and
hereby authorizes them to represent and to vote, as designated, all the shares
of stock of EMC Insurance Group Inc. held of record by the undersigned on March
29, 2007 at the Annual Meeting of Stockholders to be held on May 24, 2007 or any
adjournment thereof.
Date: 2007
----------------------------,
----------------------------------------
Signature
----------------------------------------
Signature if held jointly
Please sign exactly as your name
appears. When shares are held by joint
tenants, both should sign. When signing
as attorney, executor, administrator,
trustee or guardian, please give full
title as such. If a corporation, please
sign in full corporate name by President
or other authorized officer. If a
partnership, please sign in partnership
name by authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY,
USING THE ENCLOSED ENVELOPE.
(ARROW) PLEASE FOLD AND DETACH CARD AT PERFORATION BEFORE MAILING. (ARROW)
--------------------------------------------------------------------------------
EMC INSURANCE GROUP INC. PROXY FOR COMMON STOCK
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1, 2, AND 3.
1. ELECTION OF DIRECTORS
Nominees: (1) Margaret A. Ball (2) George C. Carpenter III (3) David J. Fischer (4) Bruce G. Kelley
(5) George W. Kochheiser (6) Raymond A. Michel (7) Joanne L. Stockdale
[ ] FOR all nominees listed above [ ] WITHHOLD AUTHORITY
(except as marked to the contrary below) to vote for all nominees listed above
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE
THAT NOMINEE'S NAME OR NUMBER ON THE SPACE PROVIDED BELOW.)
________________________________________________________________________________
2. PROPOSAL TO APPROVE THE 2007 EMPLOYERS MUTUAL CASUALTY COMPANY STOCK
INCENTIVE PLAN.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. PROPOSAL TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP AS THE INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM OF THE COMPANY.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. OTHER BUSINESS In their discretion, the proxies are authorized to vote upon
such other business as may properly come before the meeting.
CONTINUED ON REVERSE SIDE