<PAGE>
Schedule 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant / /
Filed by a party other than the Registrant /X/
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2)
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c)
or Section 240.14a-12
RLI CORP.
..............................................................................
(Name of Registrant as Specified In Its Charter)
MERRILL CORPORATION
..............................................................................
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-
6(i)(1) and 0-11
(1) Title of each class of securities to which transaction
applies:
(2) Aggregate number of securities to which transaction
applies:
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state
how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/ / Fee paid previously with preliminary materials.
<PAGE>
/ / 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:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
(LOGO)
RLI CORP.
9025 North Lindbergh Drive
Peoria Illinois 61615
-------------------------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 7, 1998
-------------------------------------------------------
To the Shareholders of RLI Corp.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of the Shareholders of RLI
Corp. ("Company") will be held at 9025 North Lindbergh Drive, Peoria, Illinois,
61615, on Thursday, May 7, 1998, at 2:00 P.M., Central Daylight Time, to:
1. Elect three (3) directors for a three-year term expiring in 2001 or
until their successors are elected and qualified;
2. Consider and act upon a proposal to approve an arrangement with Centre
Reinsurance (U. S.) Limited to issue Preferred Stock in the event of a
qualifying catastrophic event; and
3. Transact such other business as may properly be brought before the
meeting.
Only holders of Common Stock of the Company, of record at the close of
business on March 9, 1998, are entitled to notice of and to vote at the Annual
Meeting.
By Order of the Board of Directors
Camille J. Hensey
Corporate Secretary
Peoria, Illinois
March , 1998
--
It is important, regardless of the number of shares you hold, that you
personally be present or be represented by proxy at the Annual Meeting.
Accordingly, whether or not you plan to attend the Annual Meeting, it is
requested you promptly sign and date the enclosed proxy and return it in the
envelope provided that requires no postage if mailed in the United States. If
you attend the Annual Meeting, your proxy may be withdrawn upon request.
<PAGE>
(LOGO)
RLI CORP.
9025 NORTH LINDBERGH DRIVE
PEORIA, ILLINOIS 61615
March , 1998
Dear Shareholder:
Please consider this letter your personal invitation to attend the 1998 RLI
Corp. Annual Shareholders Meeting. It will be held at 9025 North Lindbergh
Drive, Peoria, Illinois, 61615, the Company's principal office, on May 7, 1998
at 2:00 P.M. CST.
Business scheduled to be considered at the meeting includes the election of
Class II directors and a proposal to approve an arrangement with Centre
Reinsurance (U.S.) Limited to issue convertible preferred stock in the event of
a qualifying catastrophic event. Additional information concerning these
matters is included in the Notice of Meeting and Proxy Statement.
In addition, we will review significant events in 1997 and their impact on you
and your Company. Directors, officers and representatives of KPMG Peat Marwick
will be available before and after the meeting to talk with you and answer any
questions you may have.
We were pleased with the response of our shareholders at the 1997 Annual
Meeting, at which 95.4% of the Common Stock was represented in person or by
proxy. We hope that participation by our shareholders in the affairs of the
Company will continue.
Even if you do not plan to attend, it is important that you date, sign and
return the enclosed proxy card in the envelope provided for your convenience.
Your vote is vital no matter how many shares you own. If you do attend the
Annual Meeting and desire to vote in person, you may do so, even though you have
previously sent in a proxy.
Thank you for your interest in your Company as well as your confidence and
support in our future.
Sincerely,
Gerald D. Stephens, CPCU
President
<PAGE>
PRELIMINARY
RLI CORP.
9025 NORTH LINDBERGH DRIVE
PEORIA, ILLINOIS 61615
-----------------------------------
PROXY STATEMENT
-----------------------------------
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD
MAY 7, 1998
-----------------------------------
<PAGE>
GENERAL INFORMATION
This Proxy Statement is furnished to the shareholders of RLI Corp.
("Company") in connection with the solicitation, by the Board of Directors of
the Company, of proxies to be used at the Annual Meeting of Shareholders to be
held at 2:00 P.M., Central Daylight Time, on Thursday, May 7, 1998, at 9025
North Lindbergh Drive, Peoria, Illinois, 61615, and at any adjournments of the
Meeting.
PROXY SOLICITATION. The Company will bear the cost of solicitation of
proxies. In addition to the use of the mail, proxies may be solicited
personally or by telephone or telefax, by officers or regular employees of
the Company. No additional compensation will be paid to such persons for
their services. The Company will reimburse banks, brokerage firms,
investment advisors and other custodians, nominees, fiduciaries and service
bureaus for their reasonable out-of-pocket expenses for forwarding soliciting
material to the beneficial owners of the stock and obtaining their proxies or
voting instructions.
VOTING. Each proxy will be voted in accordance with the shareholder's
specifications thereon. If there are no such specifications, it will be voted
in favor of the election of directors, and in accordance with the Board of
Directors' recommendations on other proposals. All proxies delivered pursuant
to this solicitation are revocable at any time at the option of the shareholder
either by giving written notice to the Corporate Secretary at 9025 North
Lindbergh Drive, Peoria, Illinois, 61615, or by delivering a proxy bearing a
later date, or by voting in person at the Annual Meeting. All shares
represented by valid, unrevoked proxies will be voted at the Annual Meeting.
If an executed proxy card is returned and the shareholder has abstained from
voting on any matter, the shares represented by such proxy will be considered
present at the Annual Meeting for purposes of determining a quorum and for
purposes of calculating the vote, but will not be considered to have been voted
in favor of such matter. If an executed proxy is returned by a broker holding
shares in street name which indicates that the broker does not have
discretionary authority as to certain shares to vote on one or more matters,
such shares will be considered present at the Annual Meeting for purposes of
determining a quorum, but will not be considered to be represented at the Annual
Meeting for purposes of calculating the vote with respect to such matter.
MAILING. This Proxy Statement and enclosed Proxy are first being mailed to
shareholders entitled to notice of and to vote at the Annual Meeting on or about
March , 1998.
SHAREHOLDER PROPOSALS. To be included in the Board of Directors' proxy
statement for the 1999 Annual Meeting of the Shareholders, a shareholder
proposal must be received by the Company on or before November 25, 1998.
Proposals should be directed to the attention
1
<PAGE>
of the Corporate Secretary at 9025 North Lindbergh Drive, Peoria, Illinois,
61615.
SHAREHOLDERS ENTITLED TO VOTE. At the close of business on March 9, 1998, the
record date for the determination of shareholders entitled to vote at the Annual
Meeting, the Company had shares of Common Stock outstanding and
entitled to vote. Common share ownership entitles the holder to one vote per
share upon each matter to be voted at the Annual Meeting.
SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
PRINCIPAL SHAREHOLDERS. The only persons known to the Company who beneficially
own more than five percent of the Company's Common Stock as of December 31,
1997, are as follows:
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
- ------------------- -------------------- --------
<S> <C> <C>
Franklin Resources, Inc. 590,960 6.4%
777 Mariners Island Boulevard
6th Floor
San Mateo, California 94404
(1)
Oak Value Capital Management, Inc. 1,214,427 14.07%
3100 Tower Boulevard
Suite 800
Durham, North Carolina 27707
(2)
RLI Corp. 1,060,467 12.3%
Employee Stock Ownership Plan &
Trust
c/o Bank One
124 Southwest Adams Street
Peoria, Illinois 61649
(3)
Gerald D. Stephens 661,182 7.7%
493 East High Point Drive
Peoria, Illinois 61614
(4)
</TABLE>
(1) The information shown is based solely on a Schedule 13G dated February 6,
1998, filed by Franklin Resources, Inc. ("Franklin"), Charles B. Johnson, Rupert
H. Johnson, Jr., and Franklin Advisory Services, Inc., which filing indicates
that one or more open or closed-end investment companies or other managed
accounts which are advised by direct and indirect investment advisory
subsidiaries of Franklin have sole voting power with respect to 533,398 shares
and sole dispositive power with respect to 590,960 shares. Messrs. Johnson and
Johnson are the principal shareholders of Franklin.
2
<PAGE>
(2) The information shown is based solely on a Schedule 13G dated February 3,
1998, filed by Oak Value Capital Management, Inc., ("Oak Value"), which filing
indicates that Oak Value has sole voting power with respect to 1,092,377 shares
and sole dispositive power with respect to 1,214,427 shares.
(3) Each Employee Stock Ownership Plan ("ESOP") participant or beneficiary may
direct the ESOP trustee as to the manner in which the shares allocated to each
under the ESOP are to be voted. The ESOP Administrative Committee
("Committee"), comprised of outside members of the Board of Directors, may
direct the ESOP trustee as to the manner in which unallocated shares are to be
voted. The Committee has sole investment power as to all allocated and
unallocated shares, except as to those shares which are the subject of a
participant's diversification election.
(4) Includes 202,429 shares allocated to Mr. Stephens under the ESOP over which
Mr. Stephens has sole voting power and no investment power; 26,846 shares
allocated under the RLI Corp. Key Employee Excess Benefit Plan ("Stephens Key
Plan") over which Mr. Stephens has no voting or investment power; 28,143 shares
owned by Mr. Stephens' spouse, over which Mr. Stephens has no voting or
investment power; 8,923 shares held in custodian accounts for the benefit of Mr.
Stephens' grandchildren, over which Mr. Stephens has the sole voting and
investment power; 1,343 shares in the H. O. Stephens Trust for the benefit of
Mr. Stephens' mother, over which Mr. Stephens, as trustee, has the sole voting
and investment power; 20,825 shares owned by the Gerald D. and Helen M. Stephens
Foundation, over which Mr. Stephens, as President, has sole voting and
investment power; and 15,290 exercisable stock options.
DIRECTORS AND OFFICERS. The following information is furnished as to the
beneficial ownership of the shares of the Company's Common Stock by each current
director, nominee for director and named executive officer, and the directors
and executive officers of the Company as a group, as of December 31, 1997:
<TABLE>
<CAPTION>
Amount and
Name of Individual or Nature of Percent
Number of Persons in Beneficial of
Group Ownership (1) Class
- --------------------- ------------- -----
<S> <C> <C>
Bernard J. Daenzer (2) (9) 90,452 1.0%
Joseph E. Dondanville (7) (10) 15,746 *
Richard J. Haayen (8) (9) 6,495 *
William R. Keane (3) (8) (9) 73,813 *
Gerald I. Lenrow (4) (8) (9) 9,269 *
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Jonathan E. Michael (5) (7) (10) 30,887 *
Edwin S. Overman (8) (9) 22,062 *
Gerald D. Stephens (6) (7) (10) 661,182 7.7%
Michael J. Stone (7) (10) 2,756 *
Edward F. Sutkowski (8) (9) 70,835 *
Robert O. Viets (8) (9) 7,594 *
Terry L. Younghanz (7) (10) 10,865 *
Directors and executive
officers as a group
(15 persons) (7) (10) 1,044,401 12.10%
</TABLE>
*Less than 1% of Class.
(1) Unless otherwise noted, each person has sole voting power and sole
investment power with respect to the shares reported.
(2) Includes 22,071 shares owned by Mr. Daenzer's spouse, and 22,163 shares
held in a trust for the benefit of Mr. Daenzer's adult children and
grandchildren, of which a bank and Mr. Daenzer's spouse act as co-trustees, as
to which Mr. Daenzer disclaims any beneficial interest.
(3) Includes 16,560 shares owned by Mr. Keane's spouse, Evelyn Corral, an
honorary Vice President of the Company, as to which Mr. Keane claims beneficial
interest.
(4) Includes 325 shares held by Mr. Lenrow's spouse in a custodian account for
the benefit of their minor daughter, as to which Mr. Lenrow disclaims any
beneficial interest.
(5) Includes 26,159 shares allocated to Mr. Michael under the ESOP and 1,171
shares allocated under the RLI Corp. Key Employee Excess Benefit Plan ("Michael
Key Plan"), over which Mr. Michael has no voting or investment power.
(6) Includes 202,429 shares allocated to Mr. Stephens under the ESOP over which
Mr. Stephens has sole voting power and no investment power; 26,846 shares
allocated under the Stephens Key Plan, over which Mr. Stephens has no voting or
investment power; 28,143 shares owned by Mr. Stephens' spouse, over which Mr.
Stephens has no voting or investment power; 8,923 shares held in custodian
accounts for the benefit of Mr. Stephens' grandchildren, over which Mr. Stephens
has the sole
4
<PAGE>
voting and investment power; 1,343 shares in the H.O. Stephens Trust for the
benefit of Mr. Stephens' mother, over which Mr. Stephens, as trustee, has the
sole voting and investment power ; and 20,825 shares owned by the Gerald D. and
Helen M. Stephens Foundation, over which Mr. Stephens, as President, has sole
voting and investment power.
(7) Includes shares allocated to the executive officers under the ESOP with
respect to which such officers have sole voting power and no investment power,
except during the period in which any such executive officer may diversify a
percentage, not to exceed 50%, of such officer's ESOP benefit. During 1997, one
of the executive officers was eligible to elect to diversify shares owned by the
ESOP. As of December 31, 1997, the following shares were allocated under the
ESOP: Mr. Dondanville 14,458 shares; Mr. Michael 26,159 shares; Mr. Stephens
202,429 shares; Mr. Stone 690 shares; and Mr. Younghanz 8,815 shares.
(8) Includes shares held by a bank trustee under an irrevocable trust
established by the Company pursuant to the RLI Corp. Director Deferred
Compensation Plan ("Director Deferred Plan") for the benefit of the
following: Mr. Haayen 5,045 shares; Mr. Keane 39,493 shares; Mr. Lenrow 7,744
shares; Dr. Overman 20,862 shares; Mr. Sutkowski 22,201 shares; and, Mr.
Viets 5,769 shares. Each participating director has no voting or investment
power with respect to such shares and disclaims beneficial ownership of such
shares for purposes of Section 13(d) of the Securities Exchange Act of 1934.
(9) Includes 1,200 shares which may be acquired within sixty days of December
31, 1997, pursuant to options under the Directors' Stock Option Plan for Outside
Directors.
(10) Includes shares which may be acquired within sixty days of December 31,
1997, under the Incentive Stock Option Plan upon the exercise of outstanding
stock options as follows: Mr. Stephens 15,290 shares; Mr. Michael 2,730 shares;
Mr. Dondanville 1,260 shares; Mr. Stone 1,400 shares; Mr. Younghanz 2,050
shares; and all executive officers as a group 25,580 shares.
The information with respect to beneficial ownership of Common Stock of the
Company is based on information furnished to the Company by each individual
included in the table.
PROPOSAL ONE:
ELECTION OF DIRECTORS
NOMINEES. At the Annual Meeting, three (3) directors are to be elected, each to
hold office for a three-year term or until a successor is elected and qualified.
Messrs. Gerald D. Stephens and Robert O. Viets are Class II directors who were
elected by the shareholders in 1995 for three-year terms expiring in 1998. Mr.
Haayen is currently a member of the Board as a Class I director. In order to
comply with provisions of the Company's By-Laws requiring director classes to be
as nearly equal in number as possible, Mr. Haayen intends to resign as a Class I
director and is
5
<PAGE>
being nominated as a Class II director. As a Class I director, Mr. Haayen's
term would have expired in 2000. If elected as a Class II director, Mr.
Haayen's term will expire in 2001.
VOTING OF PROXIES. Unless otherwise instructed, the shares represented by the
enclosed Proxy will be voted for the election of the three nominees named above.
The affirmative vote of a plurality of the shares present in person or
represented by Proxy at the Annual Meeting and entitled to vote is required for
the election of directors. Votes will be tabulated by an Inspector of Election
appointed at the Annual Meeting. Abstentions and broker non-votes have no
effect on determinations of plurality except to the extent that they affect the
total votes received by any particular candidate. There is no cumulative voting
for the directors under the Company's Articles of Incorporation.
SUBSTITUTE NOMINEES. The Board of Directors has no reason to believe that any
nominee will be unable to serve if elected. In the event that any nominee shall
become unavailable for election, the shares represented by the enclosed Proxy
will be voted for the election of a substitute nominee selected by the persons
named in the enclosed Proxy unless the Board of Directors should determine to
reduce the number of directors pursuant to the Company's By-Laws.
DIRECTOR AND NOMINEE INFORMATION. The following includes certain information
with respect to the current directors and nominees to the Board of Directors
furnished to the Company by such individuals:
<TABLE>
<CAPTION>
DIRECTOR PRINCIPAL
NAME AGE SINCE OCCUPATION
<S> <C> <C> <C>
Richard J. Haayen 73 1993 Chairman and CEO of Allstate
Insurance Company in Northbrook,
(to be elected for a term of IL, until his retirement in 1989.
three years expiring in 2001) Currently Executive-In-Residence
at Southern Methodist University
PICTURE in Dallas, TX.
Gerald D. Stephens 65 1965 Mr. Stephens founded the Company
in 1965 and has been President
(to be elected for a term of since 1972.
three years expiring in 2001)
PICTURE
Robert O. Viets (1) 54 1993 President and CEO since 1988 of
Cilcorp Inc., a holding company
(to be elected for a term of in Peoria, IL, whose principal
</TABLE>
6
<PAGE>
three years expiring in 2001) business subsidiary is Central
Illinois Light Company ("CILCO").
Mr. Viets joined CILCO in 1973
and held various managerial and
officer positions until his
PICTURE promotion to President and CEO.
Certain information concerning the remaining directors, whose terms expire
either in 1999 or 2000, is set forth as follows based upon information furnished
to the Company by such individuals:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Bernard J. Daenzer 82 1972 Owner of Daenzer Associates, Key
Largo, FL, an insurance
(term expiring in 2000) consulting services firm since
1980. Formerly President and
Chairman of Wolhreich and
Anderson Insurance Companies
and the Howden Swan
Insurance Agencies until
his retirement in 1980.
PICTURE
William R. Keane 81 1966 Former Vice President, Contacts,
Inc. (contact lens laboratory)
(term expiring in 1999) in Chicago, IL, until retirement
in 1983.
PICTURE
Gerald I. Lenrow 70 1993 Consultant to General
(term expiring in 1999) Reinsurance Corporation since
1996. Former partner in the
international accounting firm of Coopers
& Lybrand LLP until 1990, following
which he served as their consultant
until joining General Reinsurance
Corporation.
PICTURE
Jonathan E. Michael 44 1997 Executive Vice President of the
Company; President, Chief
(term expiring in 2000) Operating Officer of RLI
Insurance Company and Mt. Hawley
Insurance Company, the Company's
wholly-owned subsidiaries. Mr.
Michael commenced employment with
the Company as Chief Accountant
PICTURE in 1982.
Edwin S. Overman 75 1987 President Emeritus of the
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(term expiring in 1999) Insurance Institute of America,
a national educational organization in
Malvern, PA, since his retirement as
President of the Institute in 1987.
PICTURE
Edward F. Sutkowski (2) 59 1975 President of the law firm of
Sutkowski & Washkuhn Ltd. in
(term expiring in 2000) Peoria, IL, since 1965.
</TABLE>
PICTURE
(1) Mr. Viets is a director of Cilcorp Inc. in Peoria, Illinois, and Consumers
Water Company in Portland, Maine, whose securities are registered pursuant to
Section 12 or subject to the requirements of Section 15(d) of the Securities and
Exchange Act of 1934.
(2) Mr. Sutkowski is associated with the law firm of Sutkowski & Washkuhn Ltd.,
which has provided legal services to the Company prior to and during 1997. It
is expected that the Company's relationship with Sutkowski & Washkuhn Ltd. will
continue in the future.
BOARD COMMITTEES
AUDIT COMMITTEE. The Company's Audit Committee, comprised of outside directors
Messrs. Haayen, Keane, Lenrow and Viets, met two times in 1997 to consider an
outside audit firm and to discuss the planning of the Company's annual outside
audit and its results. The Audit Committee also monitored the Company's
management of its exposures to risk of financial loss, assessed the auditors'
performance, reviewed the adequacy of the Company's internal controls, and the
extent and scope of audit coverage, monitored selected financial reports, and
made audit and auditor engagement recommendations to the Board of Directors.
EXECUTIVE RESOURCES COMMITTEE. The Company's Executive Resources Committee,
comprised of outside directors Messrs. Daenzer, Haayen, Lenrow and Overman, met
one time in 1997 to review and recommend the compensation of the executive
officers and other officers of the Company. The Committee also evaluated
executive performance, executive back-up plans, examined the officer development
program, and was responsible for searching, enlisting and maintaining a file of
prospective new Board members and potential executive officers. The Committee
administers the Company's Stock Option Plans through a committee comprised of
outside directors Messrs. Haayen, Daenzer, Keane, Overman and Viets.
8
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Mr. Sutkowski,
a member of the Executive Resources Committee during a portion of 1997, is
associated with the law firm of Sutkowski & Washkuhn Ltd. During 1997, the
Company and certain of its subsidiaries retained the legal services of that
firm. Mr. Sutkowski resigned from the Executive Resources Committee
effective March 6, 1997.
NOMINATING COMMITTEE. The Company does not have a standing nominating
committee.
BOARD MEETINGS AND COMPENSATION
MEETINGS. During the year 1997, seven meetings of the Board of Directors were
held. No director attended fewer than 75% of the aggregate number of meetings
of the Board of Directors and Board of Directors' committees on which he served.
DIRECTOR COMPENSATION. During 1997, all directors of the Company (other than
officers of the Company) were compensated at the rate of $15,000 per year and
paid $1,100 for each Board of Directors' meeting attended, $1,100 for each
Committee meeting of the Board of Directors attended, and $1,100 for each
Committee meeting of the Board of Directors chaired. Directors are also
reimbursed for actual travel and related expenses incurred, and are provided a
travel accident policy funded by the Company.
STOCK OPTION PLAN FOR OUTSIDE DIRECTORS. The Stock Option Plan for Outside
Directors ("Director Plan") provides for the grant of an option to purchase
3,000 shares of the Company's Common Stock to each newly elected or appointed
outside director. In addition, if the Company earns more than its cost of
capital and the ESOP contribution as provided under its Market Value Potential
Performance Incentive Plan in respect of a year, each outside director shall be
granted an option to purchase 600 additional shares of the Company's Common
Stock under the Director Plan effective the first business day in February of
the succeeding year.
DIRECTOR DEFERRED COMPENSATION PLAN. Prior to the beginning of each year, an
outside director may elect to defer the compensation otherwise payable to the
director during the succeeding year pursuant to the Director Deferred
Compensation Plan ("Director Deferred Plan"). Under the Deferred Plan, the
Company must transfer to a bank trustee under an irrevocable trust established
by the Company, such number of shares as are equal to the compensation deferred
at the close of the referent year. Dividends on these shares are reinvested
quarterly under the Company's Dividend Reinvestment Plan. In general, Deferred
Plan benefits are distributable beginning when the director's status terminates.
EXECUTIVE RESOURCES COMMITTEE REPORT
9
<PAGE>
The following report by the Executive Resources Committee is required by
the rules of the Securities and Exchange Commission to be included in this Proxy
Statement and shall not be considered incorporated by reference in other filings
by the Company with the Securities and Exchange Commission.
GENERAL. The Executive Resources Committee is responsible for determining
specific compensation levels of its executive officers. The Company aims to
offer total compensation packages that attract, retain and motivate high quality
executives and that reward executives for Company profitability and the
enhancement of shareholder value. The following components of executive
compensation have been designed to meet these objectives.
BASE SALARY. The Executive Resources Committee sets base salary ranges for each
executive officer position based on executive compensation data from nationally
recognized surveys from a group of comparable insurance companies prepared by
Watson Wyatt, an independent actuarial firm. Actual salaries, which consider
individual performance and job content in the context of these ranges, are
targeted to fall at or near the 75th percentile of salaries offered in the
Company's competitive market.
MVP BONUS. Prior to 1996, the Company paid annual cash bonuses to its executive
officers based upon achievement of the Company's annual business plan. Since
the adoption of the Market Value Potential Plan ("MVP Plan") in 1996, the
Company has paid bonuses pursuant to the MVP Plan, which rewards executive
officers for earnings in excess of the Company's cost of capital. The MVP Plan
thus encourages executive officers to manage and allocate Company capital to
products that produce income in excess of the cost of capital, thereby enhancing
the potential for appreciation of the Company's stock.
Under the MVP Plan, the total annual bonus pool for the Company, if any, is
based upon a Committee-specified percentage of the Company's return on capital
in excess of its cost of capital. The Executive Resources Committee awards
individual bonuses out of the pool taking into account Watson Wyatt studies of
bonus compensation in the Company's competitive market and the executive
officer's job content. A memo account is established for each participant in
the MVP Plan and the participant's allocated percentage of the MVP Bonus Pool
for each year (whether a positive or negative amount) is annually credited to
participants' accounts without limitation. Once a year, an interest factor is
credited to positive balances and sixty percent of each participant's positive
account balance is paid out. The remaining positive balance or any negative
balance is rolled into the next year and is subject to subsequent MVP Plan
results.
INCENTIVE STOCK OPTIONS. Stock options awarded pursuant to the Incentive Stock
Option Plan are another important element of the Company's compensation
philosophy. The Company believes options
10
<PAGE>
serve as incentives to executives to maximize the long-term growth and
profitability of the Company, which will be reflected in the Company's stock
price. Under the Incentive Stock Option Plan, options may not be granted for
less than fair market value of the Company's common stock on the date of grant,
so that recipients will recognize value from the grants only if the common stock
price increases in the future. Furthermore, all options granted in 1997 provide
for twenty percent annual vesting over a period of five years.
ESOP. The Company's ESOP also offers a valuable way of aligning the interests
of its employees, including its executive officers, with those of its
stockholders on a long-term basis. Pursuant to the ESOP, the Company makes
annual cash contributions, based on the Company achieving positive MVP, that are
used to purchase Company common stock on behalf of the Company's employees,
including its executive officers. All employees, including executive officers
may have an annual contribution of fifteen percent of wages (limited to
$24,000). The ESOP vests twenty percent per year to 100% at the end of five
years.
CHIEF EXECUTIVE OFFICER. Policies with respect to the Chief Executive Officer
are the same as those discussed for executive officers generally, except that,
in addition to the ESOP, Mr. Stephens is eligible to participate in an
individualized Key Employee Excess Benefit Plan ("Key Plan"). Under the Key
Plan, the Company makes annual cash contributions which are used to purchase
stock held in a trust it maintains for Mr. Stephens' benefit in an amount equal
in value to the excess of the contribution allowable to him under the ESOP
(determined without regard to any limitations on compensation imposed by the
Internal Revenue Code), over the contribution actually made for him under the
ESOP (determined with regard to such limitations).
INTERNAL REVENUE CODE SECTION 162(m). The Company intends that bonuses awarded
pursuant to the MVP Plan will satisfy the conditions necessary for deductibility
by the Company under Section 162(m) of the Internal Revenue Code, which limits
the ability of the Company to deduct any compensation in excess of $1,000,000
per year for federal income tax purposes unless such conditions are met.
MEMBERS OF THE EXECUTIVE RESOURCES COMMITTEE
Edwin S. Overman, Chairman
Bernard J. Daenzer
Richard J. Haayen
Gerald I. Lenrow
EXECUTIVE MANAGEMENT COMPENSATION
EXECUTIVE OFFICERS. The following information is provided as to each current
executive officer of the Company:
11
<PAGE>
<TABLE>
<CAPTION>
Executive
Position Officer
Name and Age with Company Since
- ------------ ------------ ---------
<S> <C> <C>
Gerald D. Stephens President 1965
Age 65 and Director
Jonathan E. Michael Executive Vice 1985
Age 44 President; President,
Chief Operating Officer
of RLI Insurance
Company and Mt. Hawley
Insurance Company, the
Company's wholly-owned
insurance subsidiaries
Joseph E. Dondanville Vice President, 1992
Age 41 Chief Financial
Officer
Mary Beth Nebel Vice President 1994
Age 41 (1) and General
Counsel
Camille J. Hensey Vice President and 1987
Age 56 Corporate Secretary
Gregory J. Tiemeier Assistant Secretary; 1992
Age 40 (2) Senior Vice President,
Operations and Technology
and Assistant Secretary
of RLI Insurance Company
and Mt. Hawley Insurance
Company, the Company's
wholly-owned insurance
subsidiaries
Terry L. Younghanz Senior Vice President 1996
Age 51 (2) of Underwriting of RLI
Insurance Company and
Mt. Hawley Insurance
Company, the Company's
wholly-owned insurance
subsidiaries
Michael J. Stone Vice President of Claims 1997
Age 49 (3) of RLI Insurance Company
and Mt. Hawley Insurance
Company, the Company's
wholly-owned insurance
subsidiaries
</TABLE>
12
<PAGE>
(1) Ms. Nebel was promoted to Vice President and General Counsel in 1994,
having served as Assistant General Counsel since she joined the Company in 1988.
(2) Mr. Younghanz was promoted to Senior Vice President, Underwriting in 1996.
He joined the Company in 1987 as Regional Vice President of the Company's
Heartland Branch Office in Overland Park, Kansas.
(3) Mr. Stone joined the Company in his current position in May of 1996 after
having served in various positions for Travelers Insurance Group of Hartford,
Connecticut since 1977, including Vice President of Claims. As Mr. Stone
assumed significant policy-making functions during his first year as an officer
of the Company's wholly-owned insurance subsidiaries, the Board of Directors
classified him as an executive officer of the Company effective August 7, 1997.
SUMMARY COMPENSATION TABLE. The aggregate compensation earned from the
Company and its subsidiaries during the 1997 fiscal year is expressed below for
the Company's President and four other most highly-compensated executive
officers:
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------ ------------
OTHER SECURITIES
NAME and PRINCIPAL ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY ($) BONUS ($)(1) COMPENSATION OPTIONS (#) COMPENSATION ($)(2)
- ----------------- ----- ---------- ------------ ------------ ----------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Gerald D. Stephens 1997 458,296 1,020,291 (3) 33,200 158,862
President 1996 438,208 477,178 21,700 69,743
1995 405,744 0 27,375(5) 67,334
Jonathan E. Michael 1997 261,680 714,204 (3) 8,400 99,517
Executive Vice President 1996 257,056 334,025 2,900 40,064
1995 239,719 0 5,375(5) 39,780
Terry L. Younghanz 1997 182,400 566,838 69,706(4) 4,200 25,798
Senior Vice President, 1996 165,588 258,193 58,789(4) 4,000 23,275
Underwriting, RLI 1995 133,646 211,827 3,125(5) 24,130
Insurance Company
and Mt. Hawley
Insurance Company
Joseph E. Dondanville 1997 144,166 377,342 (3) 4,300 25,798
Vice President, Chief 1996 132,760 214,730 1,800 20,600
Financial Officer 1995 124,271 0 2,250(5) 19,991
Michael J. Stone (6) 1997 183,600 327,585 (3) 4,200 25,798
Vice President, Claims, 1996 - - - -
RLI Insurance Company and 1995 - - - -
Mt. Hawley Insurance Company
</TABLE>
13
<PAGE>
(1) 1997 amounts represent compensation accrued during fiscal year 1997 and
paid in 1998 pursuant to the Company's MVP Plan, exclusive of the following
additional amounts which may be payable to such individuals in future years
under the MVP Plan: Gerald D. Stephens $680,194; Jonathan E. Michael
$476,136; Terry L. Younghanz $218,390; Joseph E. Dondanville $251,561; and
Michael J. Stone $218,390. In the case of Mr. Younghanz, the 1995
amount, $160,769 of the 1996 amount and $239,253 of the 1997 amount
represent underwriting bonuses earned in such year, based upon a percentage
of earned premiums, less developed losses and expenses, for his area of
responsibility for the seven years preceding the year in which the bonus
was earned. The remainder of the bonus for 1996 and 1997 was paid to Mr.
Younghanz pursuant to the MVP Plan.
(2) Represents the value of Company contributions to the ESOP on behalf of the
named executive officers. In the case of Messrs. Stephens and Michael, the
amounts include shares allocated to them under their respective Key
Employee Excess Benefit Plans ("Key Plan") as follows: Mr. Stephens 2,056
shares in respect of 1997; 2,180 shares in respect of 1996; and 600 shares
in respect of 1995; Mr. Michael 506 shares in respect of 1997; and 665
shares in respect of 1996, the year in which Mr. Michael became a
participant in the Key Plan. In general, benefits are distributable to
Messrs. Stephens and Michael when their employment terminates. Under the
Key Plan, the Company must transfer to the trustee under an irrevocable
trust maintained by the Company for the benefit of Messrs. Stephens and
Michael such number of shares as are equal in value to the excess of (a)
the contribution allocable to them under the ESOP determined without regard
to any limitation on compensation imposed by the Internal Revenue Code,
over (b) the contribution actually allocable to them under the ESOP
determined with regard to any limitation on compensation imposed by the
Internal Revenue Code. The value of each share transferred is equal to the
per share closing price as of the close of the last business day of the
referent year. The total value of their Key Plan benefits as of December
31, 1997 was: Mr. Stephens $1,470,317 and Mr. Michael $132,042.
(3) The amount of perquisites and other personal benefits did not exceed the
lesser of $50,000 or 10% of the total of the named executive officer's
annual salary and bonus.
(4) Includes $50,839 in 1996 and $43,664 in 1997 paid for the relocation of Mr.
Younghanz from Shawnee, Kansas to the Company's Home Office in Peoria,
Illinois. Also includes $24,718 in 1997 for spousal travel required for
business related Company activities and certain personal travel. These
amounts include reimbursement for federal, state and FICA tax liability
resulting from the income imputed to Mr. Younghanz.
(5) Twenty percent of each option grant becomes exercisable one year after the
date of the grant and each year thereafter in 20% increments. Such options
lapse at the end of the ten-year period beginning on the grant date.
Amounts shown have been adjusted to reflect the 5-for-4 stock split which
was paid in the form of a stock dividend in June, 1995.
(6) Mr. Stone joined the Company in 1996 and became an executive officer in
1997.
OPTION GRANTS IN LAST FISCAL YEAR. The following table shows information
regarding grants of stock options made to the named executive officers under the
Company's Incentive Stock Option Plan during the fiscal year ended December 31,
1997. The amounts shown for each of the named executive officers as potential
realizable values are based on arbitrarily assumed annualized rates of stock
price appreciation of five percent and ten percent over the full ten-year term
of the options, which would result in stock prices of approximately $52.94 and
$84.30, respectively. The amounts shown as potential realizable values for all
shareholders represent the corresponding increases in the market value of
8,634,254 outstanding shares of the Company's Common Stock held by all
shareholders as of December 31, 1997, which would total approximately
$457,089,423 and $727,838,514, respectively. No gain to the optionees is
possible without an increase in stock price which will benefit all shareholders
proportionately. These potential realizable values are based solely on
arbitrarily assumed rates
14
<PAGE>
of appreciation required by applicable Securities and Exchange Commission
regulations. Actual gains, if any, on option exercises and common stockholdings
are dependent on the future performance of the Company's Common Stock. There
can be no assurance that the potential realizable values shown in this table
will be achieved.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
INDIVIDUAL GRANTS PRICE APPRECIATION FOR OPTION TERM
----------------------------------------------------------------- ----------------------------------
IF STOCK AT IF STOCK AT
$52.94 $84.30
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES OR BASE
GRANTED IN FISCAL PRICE EXPIRATION
NAME (#)(1) YEAR ($/Sh) DATE 5%(2) 10%(2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ALL SHAREHOLDERS' $457,089,423 $727,838,514
STOCK APPRECIATION
Gerald D. Stephens 33,200 42.13% $32.50 05/01/07 $ 678,572 $ 1,719,644
Jonathan E. Michael 8,400 10.66% $32.50 05/01/07 $ 171,687 $ 435,091
Terry L. Younghanz 4,200 5.33% $32.50 05/01/07 $ 85,843 $ 217,545
Joseph E. Dondanville 4,300 5.46% $32.50 05/01/07 $ 87,887 $ 222,725
Michael J. Stone 4,200 5.33% $32.50 05/01/07 $ 85,843 $ 217,545
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Each option grant becomes exercisable in 20% increments on the first five
anniversaries of the grant date. Such options lapse on the tenth
anniversary of the grant date.
(2) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates dictated by the Securities and Exchange Commission
when the "Potential Realizable Value" alternative is used. These are not
intended to be a forecast of the Company's stock price.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES(1). The following table sets forth information with respect to the
named executive officers concerning the exercise of options during the last
fiscal year and unexercised options held December 31, 1997. Value realized
upon exercise is the excess of the fair market value of the underlying stock
on the exercise date over the exercise price under the option. Value of
unexercised,
15
<PAGE>
in-the-money options at fiscal year-end is the difference between its
exercise price and the fair market value of the underlying stock on December
31, 1997, which was $49.813 per share. These values, unlike the amounts set
forth in the column headed "Value Realized," have not been, and may never be,
realized. The underlying options have not been, and may never be, exercised;
actual gains on exercise, if any, will depend on the value of the Company's
Common Stock on the date of exercise. There can be no assurance that these
values will be realized.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED OPTIONS VALUE OF IN-THE-MONEY OPTIONS
--------------------------------------------------------------------- -----------------------------
SHARES
ACQUIRED
ON VALUE
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gerald D. Stephens 0 $0.00 15,290 66,985 $441,562 $1,543,156
Jonathan E. Michael 0 $0.00 2,730 13,945 $ 79,283 $ 306,488
Terry L. Younghanz 0 $0.00 2,050 9,275 $ 58,593 $ 216,134
Joseph E. Dondanville 0 $0.00 1,260 7,090 $ 36,382 $ 154,885
Michael J. Stone 0 $0.00 1,400 9,800 $ 37,275 $ 223,125
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The share numbers and market and exercise prices have been adjusted,
as necessary, for the 5-for-4 stock split that occurred on June 21,
1995.
LONG-TERM INCENTIVE PLAN. No long-term incentive plan awards were made during
1997.
PENSION PLAN. The following table illustrates the estimated annual benefits
(based on a straight-life annuity payable beginning at age 65, but in no
event less than 120 monthly payments) under the Company's pension plan for
specified compensation and service levels assuming a participant retired on
July 1, 1998 at age 65 after selected years of service:
<TABLE>
<CAPTION>
AVERAGE ANNUAL ESTIMATED ANNUAL PENSION BENEFIT UPON RETIREMENT AT
COMPENSATION JULY 1, 1998 WITH YEARS OF SERVICE INDICATED
- ------------ --------------------------------------------
15 YRS. 20 YRS. 25 YRS. 30 YRS. 35 YRS.
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$100,000 $ 20,035 $ 26,714 $ 33,392 $ 40,070 $ 46,749
125,000 25,698 34,264 42,830 51,395 59,961
150,000 31,360 41,814 52,267 62,720 73,174
160,000* 33,625 44,834 56,042 67,250 78,459
</TABLE>
*Generally, a participant's annual benefit payable beginning at his social
security retirement age (determined on the basis of his year of birth) must
not exceed the lesser of $90,000 (as adjusted for cost-of-living
increases--$125,000 for 1997) or 100% of his average compensation for his
high three years. In addition, effective beginning in 1994, the Internal
Revenue Code reduced the level of a participant's compensation which may be
considered in determining benefits under all types of tax-qualified plans
from the 1993 level of $235,840 to $150,000 (as adjusted for cost-of-living
increases - $160,000). In applying the $150,000 limit, the pension plan
16
<PAGE>
must freeze benefits for any participant whose benefit is based on
compensation in excess of $150,000 as of December 31, 1993. The frozen
benefit may be adjusted for increases in compensation after 1993, but
adjustments are not permitted unless the participant's updated compensation
exceeds the compensation that determined the participant's frozen benefit.
Based upon the foregoing, a participant's annual benefit is limited to
$74,453 unless such participant's earned benefit was greater than $74,453
as of December 31, 1993.
Mr. Stephens' current compensation covered by the pension plan is
$160,000 with 31 years of plan participation; Mr. Michael's current covered
compensation is $160,000 with 14 years of plan participation; Mr.
Younghanz's current covered compensation is $160,000 with 10 years of plan
participation; Mr. Dondanville's current covered compensation is $160,000
with 13 years of plan participation; and Mr. Stone's current covered
compensation is $160,000 with 1 year of plan participation.
COMMON STOCK PERFORMANCE CHART
A line graph comparing the percentage change in the cumulative total
shareholder return, including the reinvestment of dividends, on the Company's
Common Stock with a cumulative total return of the S & P Composite 500 Stock
Index and the S & P Property and Casualty Index for the period beginning
December 31, 1992 through December 31, 1997 has been omitted from this
electronic filing. The table below contains the data used to create the
omitted line graph:
TOTAL RETURN
COMPARISON OF FIVE YEAR CUMULATIVE
RLI, S&P 500, S&P P/C INS INDEX
Compounded Total Return
RLI - 22.9%
S&P 500 - 19.4%
S&P P/C Ins - 17.2%
Assumes $100 invested on December 31, 1992
RLI, S&P 500 Index, and S&P P/C Ins Index
Total Return assumes reinvestment of dividends
<TABLE>
<CAPTION>
Measurement Period S&P 500 S&P P/C Ins
(Fiscal Year Covered) RLI Corp. Index Index
- --------------------- --------- ------- ------------
<S> <C> <C> <C>
Measurement Pt - 12/31/92 $100 $100 $100
FYE 12/31/93 109 110 95
FYE 12/31/94 87 112 98
FYE 12/31/95 135 153 130
FYE 12/31/96 185 189 156
FYE 12/31/97 280 242 221
</TABLE>
There can be no assurance that the Company's stock performance will
continue into the future with the same or similar trends. The Company will
neither make nor endorse any predictions as to future stock performance.
17
<PAGE>
The foregoing line graph shall not be deemed incorporated by reference
by any general statement incorporating by reference this proxy statement into
any filing under the Securities Act of 1933 or the Securities Exchange Act of
1934, except to the extent that the Company specifically incorporates this
information by reference, and shall not otherwise be deemed filed under such
Acts.
PROPOSAL TWO:
CONSIDER AND ACT UPON A PROPOSAL TO APPROVE AN ARRANGEMENT WITH CENTRE
REINSURANCE (U.S.) LIMITED UNDER WHICH THE COMPANY WOULD ISSUE CONVERTIBLE
PREFERRED STOCK IN THE EVENT OF A QUALIFYING CATASTROPHIC EVENT
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSAL:
The Company has entered into an alternative reinsurance agreement (the
"Agreement") with Centre Reinsurance (U.S.) Limited, a Bermuda corporation
("Centre Re"), under which the Company has the right to issue certain equity
securities to Centre Re for a fixed price upon the occurrence of a
catastrophic loss event affecting the Company's California
Difference-in-Condition ("DIC") policy coverage.
The Board of Directors believes that the Agreement provides the Company
with the ability to supplement its conventional reinsurance for the
California DIC business on a cost effective basis. Conventional reinsurance
provides the Company with coverage in the event that a catastrophic event
occurs which causes the Company to make policy-related payouts in excess of
certain predefined levels. Such arrangements enable the Company to better
manage its loss exposure on particular types of policies within its
portfolio, such as the California DIC business, because the Company
determines the extent to which it will wholly assume or partially diversify
the risk of loss associated with such coverage. The Agreement is similar to
reinsurance in the respect that it provides the Company with the ability to
obtain capital to absorb incurred losses in excess of certain levels on the
California DIC coverage; however, because the Company is issuing preferred
stock in exchange for the capital it receives pursuant to the Agreement, its
effective cost of diversifying the coverage-related risk is reduced.
The Board of Directors has sought the approval of shareholders because
(i) the Agreement provides for the issuance of nonvoting preferred securities
which are convertible (after a certain period of time or in other limited
circumstances) into shares of common stock, and (ii) the rules of The New
York Stock Exchange require that, before issuing new shares of common stock
or convertible securities representing greater than 20% of the total
outstanding voting power or number of shares the issuance of such common
stock or convertible securities must be approved by the affirmative vote of a
majority of shareholders voting on such proposal. Although shareholder
approval would only be required if a catastrophic event occurred and the
Company chose to exercise the securities issuance option, and then only if
the amount of common stock underlying the preferred stock to be issued
exceeded the 20% threshold, the Board of Directors believes that obtaining
stockholder approval of such issuance on an advance basis will provide the
Company with the
18
<PAGE>
flexibility necessary to react to the adverse conditions under which the
securities issuance option would become operative.
The Agreement relates to catastrophic events of a certain magnitude (a
"qualifying catastrophic event") occurring between October 1, 1997 and
October 1, 1999 (the "term"). In the event that a qualifying catastrophic
event occurs during such time, the Company is entitled to issue up to a total
of $50 million of Series A and B Cumulative Convertible Preferred Stock to
Centre Re. In addition, the Company's right to exercise the securities
issuance option under the Agreement is subject to certain conditions,
including maintenance of the Company's risk exposure level (through policy
management, reinsurance and otherwise) on the California DIC business within
certain statistical parameters, compliance with certain representations and
warranties set forth in the Agreement and satisfaction of a minimum GAAP net
worth test at the time of exercise.
Upon exercise of the securities issuance option, the nonvoting preferred
securities would be issued in two series (the "Series A" and "Series B"
shares). Series A shares are redeemable by the Company three years after the
date of issuance, and in certain other circumstances, including following
certain changes of control of the Company. Series A shares also become
convertible by holders three years after the date of issuance, and in certain
other circumstances, including the Company's failure to maintain its risk
exposure at or below certain levels, and following a significant business
unit acquisition or disposal or change of control not approved by a majority
of the holders of such shares. The conversion rate for Series A shares is
based on the aggregate principal amount of such shares, plus accrued and
unpaid dividends, divided by the average trading price of the Company's
common stock over the 30 trading days immediately preceding the conversion,
subject to a floor equal to 80% of the book value per share.
Series B shares are identical to Series A shares except that the
Company's redemption rights and holder's conversion rights become exercisable
after four years, rather than three. The Series A shares and Series B shares
are "paired" such that they must be issued in equal increments under the
Agreement, but may be transferred separately to subsequent holders after such
date. Both series of shares accrue dividends at the London Interbank Offered
Rate ("LIBOR") plus a spread based upon ratings assigned by Standard & Poors.
Holders of the Series A and Series B shares have registration rights,
subject to certain terms and conditions, relating to the common stock
underlying such shares.
At present, a number of uncertainties make it difficult for the Company
to predict the potential effect of the conversion of preferred shares issued
under the Agreement. Specifically, these factors include: (i) when, if ever,
and to what extent the securities issuance option under the Agreement would
be exercised, (ii) if issued, whether the preferred shares would become
convertible, (iii) assuming the preferred shares were issued and become
convertible, the approximate trading price of the Company's common stock
immediately preceding the conversion time, and (iv) the number of shares of
common stock that would be outstanding at the time of conversion. The terms
of the Agreement provide that
19
<PAGE>
the total number Series A and Series B shares issued thereunder is limited to
an amount which, assuming immediate conversion of all such shares at the time
of original issuance, would not exceed 50% of the total number of common
shares outstanding after such conversion. However, the Board of Directors
believes it to be unlikely that the preferred shares would ever be
convertible into common stock at levels approaching 50%. For example, at a
conversion price of $52.125 per share (the closing price of the common stock
on March 1, 1998) $50 million of the preferred would convert into less than
12% of the common and, at a conversion price of $31.275 per share (a 40%
reduction in the closing price of the common stock on March 1, 1998), $50
million of the preferred would convert into less than 20% of the common
(based on current capitalization). Moreover, the Company has the ability to
negate the conversion rights of holders of preferred shares through exercise
of redemption rights, and expects to exercise such rights where practicable.
The Board of Directors believes that the Agreement will provide value to
shareholders by enabling the Company to increase the diversification of
certain risks associated with its California DIC business in a more cost
effective manner than conventional reinsurance. In addition, the Agreement
provides the Company with the opportunity to obtain capital at a known rate
following a catastrophic event under conditions where obtaining financing
through secured or unsecured borrowings or market driven equity offerings
could be cost prohibitive or otherwise impracticable. The Company expects
that access to such capital would not only help to absorb losses incurred as
a result of the catastrophic event, but would also provide the Company with a
capital base on which to write new coverage and expand its portfolio in a
post-catastrophe environment. Therefore, the Board seeks the approval of the
issuance of the maximum number of shares of Series A and Series B Cumulative
Convertible Preferred Stock permitted under the Agreement (i.e., a number of
shares which, on a converted basis calculated at the time of issuance, would
not collectively exceed 50% of the shares of common stock then outstanding).
SHAREHOLDER VOTE. The affirmative vote of the holders of at least a majority
of the shares of Common Stock of the Company present and entitled to vote at
the Annual Meeting is required for adoption of this proposal.
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors, upon the recommendation of the Audit Committee,
selected KPMG Peat Marwick LLP ("KPMG") as the Company's independent public
accountants for the year ended December 31, 1997. Representatives of KPMG
are expected to be present at the Annual Meeting with the opportunity to make
a statement, if they desire, and will be available to respond to appropriate
questions from the shareholders. As of March ____, 1998, the Board of
Directors has not selected independent public accountants for the current
fiscal year.
OTHER BUSINESS
The Board of Directors knows of no other business to be presented at the
Annual Meeting; however, if any other matters do
20
<PAGE>
come before the meeting, it is intended that the persons named in the proxy
will vote in accordance with their best judgment.
It is important that proxies be returned promptly so that the presence
of a quorum may be assured well in advance of the Annual Meeting, thus
avoiding the expense of follow-up solicitations. Accordingly, even if you
expect to attend the Annual Meeting, you are requested to date, execute and
return the enclosed proxy in the stamped, self-addressed envelope provided.
If you attend the meeting in person, your proxy will be returned to you
on request.
By Order of the Board of Directors
Camille J. Hensey
Corporate Secretary
Peoria, Illinois
March , 1998
21
<PAGE>
Page 1 of 2
(LOGO) PROXY
RLI CORP.
9025 North Lindbergh Drive
Peoria, Illinois 61615
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Richard J. Haayen, William R. Keane and
Gerald D. Stephens, as Proxies, each with the power to appoint his
substitute, and hereby authorizes them, or any one or more of them, to
represent and to vote, as designated below, the shares of Common Stock of RLI
Corp. held of record by the undersigned on March 9, 1998, at the Annual
Meeting of Shareholders to be held on May 7, 1998 or any adjournments thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSALS:
1. ELECTION OF CLASS II DIRECTORS
(mark one):
FOR ALL NOMINEES LISTED BELOW
(except as marked to the contrary below) / /
WITHHOLD AUTHORITY
to vote for all nominees listed below / /
(INSTRUCTION: To withhold authority to vote for any individual nominee,
write that nominee's name on the space provided below):
- --------------------------------------------------------------------------------
NOMINEES: RICHARD J. HAAYEN, GERALD D. STEPHENS AND ROBERT O. VIETS
2. APPROVE AN ARRANGEMENT WITH CENTRE REINSURANCE (U.S.) LIMITED UNDER WHICH
RLI CORP. WOULD ISSUE CONVERTIBLE PREFERRED STOCK IN THE EVENT OF A
QUALIFYING CATASTROPHIC EVENT:
/ / FOR / / AGAINST / / ABSTAIN
(PLEASE DO NOT FOLD - DATE AND SIGN REVERSE SIDE)
Page 2
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
22
<PAGE>
This Proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder.
IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR EACH OF THE NOMINEES
LISTED ABOVE AND FOR PROPOSAL 2.
DATED: , 1998
---------------------------------------
- ----------------------------------------
Signature
- ----------------------------------------
Signature if held jointly
Please sign exactly as your name
appears hereon. Joint owners
should each sign personally.
Corporate officers, executors,
administrators, trustees, etc.,
should so indicate when signing.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
23
