<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:
/ / 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-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 under which the Company would issue Convertible
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 27, 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 27, 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. CDT.
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 of 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% 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>
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 (a "broker non-vote"), 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 Proposal One. With
respect to Proposal Two, broker non-votes will not be considered present at
the Annual Meeting.
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 27, 1998.
SHAREHOLDER PROPOSALS. To be included in the Board of Directors' Proxy
Statement for the 1999 Annual Meeting of Shareholders, a
<PAGE>
shareholder proposal must be received by the Company on or before November
25, 1998. Proposals should be directed to the attention 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 8,492,758 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
<PAGE>
sole dispositive power with respect to 590,960 shares. Messrs. Johnson and
Johnson are the principal shareholders of Franklin.
(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 ("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 *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Gerald I. Lenrow (4) (8) (9) 9,269 *
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 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 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
<PAGE>
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 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 60 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 60 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 being nominated as a
Class II director. As a Class I director, Mr.
<PAGE>
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. Shares may be voted
for, or withheld from, each nominee. Shares that are withheld 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 nominee.
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 Ill., until his retirement in 1989.
of three years expiring Currently Executive-In-Residence at
in 2001) Southern Methodist University in Dallas,
Texas.
PICTURE
Gerald D. Stephens 65 1965 Mr. Stephens founded the Company
in 1965 and has been President
(to be elected for a term since 1972.
of three years expiring
in 2001)
PICTURE
Robert O. Viets (1) 54 1993 President and CEO since 1988 of
Cilcorp Inc., a holding company
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(to be elected for a term of three in Peoria, Ill., whose principal
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 promotion to
President and CEO.
PICTURE
</TABLE>
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, Fla., an insurance
consulting services firm since
1980. Formerly President and
(term expiring in 2000) 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, Ill., 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 its
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>
<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, Ill., since 1965.
PICTURE
</TABLE>
(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. Daenzer,
Haayen, Keane, Overman and Viets.
<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 and Board 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 meeting attended, $1,100 for each
Committee meeting of the Board attended, and $1,100 for each Committee
meeting of the Board chaired. Effective May 1, 1998, retroactive to
January 1, 1998, all directors (other than officers of the Company) will be
compensated at the rate of $20,000 per year. Compensation for attendance
at each Board meeting, Committee meeting and Committee meeting chaired will
remain the same. 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, during 1996 and 1997, if the
Company earned more than its cost of capital and the ESOP contribution as
provided under its Market Value Potential Plan in each respective year,
each outside director was 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. Effective
May 1, 1998, retroactive to January 1, 1998, the amount of options to be
granted to the outside directors under the Director Plan was increased
from 600 to 1,200 additional shares of the Company's Common Stock.
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 ("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
<PAGE>
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
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.
<PAGE>
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 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 shareholders 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
<PAGE>
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:
<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 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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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>
(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>
ANNUAL COMPENSATION LONG-TERM 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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
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 1995 - - - -
and Mt. Hawley Insurance
Company
</TABLE>
(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 Plans
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
<PAGE>
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 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.
<PAGE>
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, 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 $49.813 per share. These values,
unlike the amounts set forth in the column headed "Value Realized," have
not been, and may never be, realized. The underlying options have not
been, and may never be, exercised; actual gains on exercise, if any, will
depend on the value of the Company's Common Stock on the date of exercise.
There can be no assurance that these values will be realized.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING
UNEXERCISED OPTIONS AT
FISCAL YEAR-END (#) VALUE OF IN-THE-MONEY OPTIONS
SHARES ------------------- -----------------------------
ACQUIRED
ON VALUE
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($)
- ----------------------------------------------------------------------------------------------------------------
<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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
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
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' 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 one 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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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.
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 catastrophe financing
agreement ("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 property insurance
policies written by the Company.
The Board of Directors believes that the Agreement provides the
Company with the ability to supplement its conventional reinsurance for the
property insurance business on a cost-effective basis. Conventional
property reinsurance provides the Company with coverage in the event that a
catastrophic event occurs which causes the Company to pay claims in excess
of certain predefined levels. Such arrangements enable the Company to
better manage its loss exposure on property policies within its portfolio
because the Company determines the extent to which it will retain 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 property coverage; however, because the
Company is issuing Preferred Stock in exchange for the capital it receives
pursuant to the Agreement, it secures access to capital, rather than
transferring insurance risk, which the Board of Directors believes to be a
more cost-effective means of managing the Company's capital.
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
<PAGE>
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
shareholder approval of such issuance on an advance basis will provide the
Company with the 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
("qualifying catastrophic event") occurring between October 1, 1997, and
October 1, 1999. 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 its California Difference in
Conditions 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 ("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 & Poor's. 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
<PAGE>
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 the total
number Series A and Series B shares issued thereunder is limited to an
amount which, assuming immediate conversion of all such shares held by
Centre Re at the time of issuance, would not exceed 50% of the total number
of Common Stock 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 Shares would convert
into less than 12% of the Common Stock 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 Shares would convert into
less than 20% of the Common Stock (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 property insurance 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, together with all
other shares held by Centre Re 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,
<PAGE>
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 27, 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 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 27, 1998
<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.
<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.
