<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[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 Rule 14a-11(c) or Rule 14a-12
Executive Risk Inc.
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) 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.
[ ] 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:
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[LETTERHEAD OF EXECUTIVE RISK INC.]
March 31, 1997
To the Stockholders of Executive Risk Inc.:
You are cordially invited to attend the Annual Meeting of Stockholders of
Executive Risk Inc. ("Executive Risk" or the "Company") to be held at 10:00 a.m.
on Friday, May 9, 1997, at the Avon Old Farms Inn at the intersection of Route
44 and Nod Road, Avon, Connecticut. Stockholders will be asked to consider and
vote upon the election of directors and the appointment of auditors for 1997, as
well as on the amendment and restatement of the Certificate of Incorporation
primarily to remove the authorization of certain unneeded classes of capital
stock, no longer outstanding, and the approval of the Company's Performance
Share Plan, Nonqualified Stock Option Plan and Incentive Compensation Plan (Pool
A), in each case as amended and restated to provide for the tax deductibility of
all compensation paid under those Plans. A report on the current affairs of
Executive Risk also will be presented at the meeting, and you will have an
opportunity for questions and comments.
We look forward to welcoming you to this year's stockholders' meeting.
WHETHER OR NOT YOU PLAN TO ATTEND, WE ASK THAT YOU PARTICIPATE IN THE MEETING BY
COMPLETING, SIGNING AND RETURNING THE ENCLOSED PROXY AS SOON AS POSSIBLE. This
will not limit your right to attend the meeting, and if you are able to join us,
your signed Proxy will not limit your right to vote in person at the meeting.
For your benefit, enclosed is a copy of Executive Risk's Annual Report for
1996, which includes the financial statements. We hope this material is of value
to you, and we thank you for your interest in Executive Risk.
Sincerely,
/s/ LeRoy A. Vander Patten
-----------------------------------
LeRoy A. Vander Putten
Chairman and Chief Executive Officer
<TABLE>
<S> <C>
ROY VANDER PUTTEN 82 HOPMEADOW STREET
CHAIRMAN AND POST OFFICE BOX 2002
CHIEF EXECUTIVE OFFICER SIMSBURY, CONNECTICUT 06070-7683
EXECUTIVE RISK INC. 860-408-2000
</TABLE>
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[EXECUTIVE RISK INC. LOGO]
EXECUTIVE RISK INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 9, 1997
March 31, 1997
To the Stockholders of Executive Risk Inc.:
Notice is hereby given that the Annual Meeting of Stockholders (the "Annual
Meeting") of Executive Risk Inc., a Delaware corporation (the "Company"), will
be held at the Avon Old Farms Inn, Route 44 and Nod Road, Avon, Connecticut, on
Friday, May 9, 1997 at 10:00 a.m. for the following purposes:
Item 1. To elect one (1) director to hold office until the 1998 Annual
Meeting of Stockholders and four (4) directors to hold office until
the 2000 Annual Meeting of Stockholders and until their respective
successors have been duly elected and qualified;
Item 2. To approve the Company's Amended and Restated Certificate of
Incorporation, as amended and restated to (a) provide for a Board
of Directors of at least seven and no more than eleven directors,
as determined by the Board from time to time, and (b) to remove the
provisions relating to the Class A 7 1/2% Cumulative Convertible
Preferred Stock and the Class B Common Stock;
Item 3. To approve the Company's Performance Share Plan, as amended and
restated effective as of January 1, 1997, so as to qualify all
compensation under such Plan for deduction under Section 162(m) of
the Internal Revenue Code;
Item 4. To approve the Company's Incentive Compensation Plan (Pool A), as
amended and restated effective as of January 1, 1997, so as to
qualify all compensation under such Plan for deduction under
Section 162(m) of the Internal Revenue Code;
Item 5. To approve the Company's Nonqualified Stock Option Plan, as amended
and restated, so as to qualify all compensation under such Plan for
deduction under Section 162(m) of the Internal Revenue Code;
Item 6. To ratify the appointment of Ernst & Young LLP, independent public
accountants, as the Company's auditors for the year 1997; and
to transact such other business as may properly be brought before the meeting or
any adjournment thereof. The Board of Directors has fixed the close of business
on March 19, 1997, as the record date for the determination of stockholders
entitled to notice of, and to vote at, the Annual Meeting. Enclosed are a Proxy
Statement, a form of Proxy and an addressed return envelope. ALL STOCKHOLDERS,
WHETHER OR NOT THEY EXPECT TO BE PRESENT AT THE MEETING, ARE REQUESTED TO DATE
AND SIGN THE PROXY AND TO RETURN IT AS SOON AS POSSIBLE IN THE ADDRESSED
ENVELOPE PROVIDED. STOCKHOLDERS WHO ATTEND THE MEETING MAY REVOKE THEIR PROXIES
AND VOTE IN PERSON.
By Order of the Board of Directors
/s/ James A. FitzPatrick, Jr.
-----------------------------------
James A. FitzPatrick, Jr.
Secretary
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EXECUTIVE RISK INC.
82 HOPMEADOW STREET
SIMSBURY, CONNECTICUT 06070
(860) 408-2000
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
The enclosed Proxy is solicited on behalf of the Board of Directors of
Executive Risk Inc., a Delaware corporation, for use at the 1997 Annual Meeting
of Stockholders (the "Annual Meeting") to be held at 10:00 a.m. on Friday, May
9, 1997, at the Avon Old Farms Inn, Route 44 at the intersection of Nod Road,
Avon, Connecticut. Executive Risk Inc. is the parent corporation of Executive Re
Inc., which it acquired on January 1, 1994; unless otherwise indicated,
references to the "Company" in this Proxy Statement shall mean Executive Re Inc.
with respect to any period prior to January 1, 1994 and Executive Risk Inc. with
respect to any period on and after such date. The Company's principal executive
offices are located at 82 Hopmeadow Street, Simsbury, Connecticut 06070. The
approximate date on which the Proxy Statement and the accompanying Proxy are
first being sent to Stockholders is March 31, 1997.
Proxies are being solicited from holders of the Company's common stock, par
value $0.01 per share (the "Common Stock"). If the Proxy is properly executed
and returned, the shares represented thereby will be voted and, where
specification is made by the stockholder as provided therein, will be voted in
accordance with such specification. The Proxy may be revoked by delivering to
the Secretary of the Company an instrument of revocation at any time prior to
the voting thereof or by presentation at the Annual Meeting of a duly executed
proxy bearing a later date. In addition, stockholders of record who attend the
Annual Meeting may vote in person even though they have submitted a Proxy, in
which event the Proxy will be deemed to have been revoked.
The Board of Directors has fixed the record date for the determination of
stockholders entitled to notice of, and to vote at, the Annual Meeting as March
19, 1997. As of the record date, the Company had 9,329,307 of Common Stock
outstanding and eligible to vote.
The Company will bear the entire cost of preparing, assembling, printing
and mailing this Proxy Statement, the accompanying Proxy and any additional
material which may be furnished to stockholders. Copies of solicitation
materials will be furnished to brokerage houses, fiduciaries and custodians to
forward to beneficial owners of stock held in their names. The solicitation of
Proxies will be made by the use of the mails and through direct communication
with certain stockholders or their representatives by officers, directors and
employees of the Company, who will receive no additional compensation therefor.
The Company has engaged Corporate Investor Communications, Inc. to distribute
materials to brokerage houses, fiduciaries, custodians and other nominee
holders. The Company will pay less than $3,500, plus out-of-pocket expenses, for
their services.
VOTING RIGHTS
Holders of Common Stock are entitled to one vote per share of stock held on
each matter that is voted on at the Annual Meeting. There is no cumulative
voting. The presence at the Annual Meeting, in person or by Proxy, of the
holders of a majority of the shares of Common Stock outstanding and entitled to
vote shall constitute a quorum. The votes required with respect to each of the
items to be considered by stockholders are set forth in the discussion of each
item herein.
Unless contrary instructions are indicated on the proxy card, all shares of
Common Stock represented by valid Proxies will be voted as follows: (a) FOR the
election of the nominees to the Board of Directors, (b) FOR the approval of the
Amended and Restated Certificate of Incorporation, as amended to provide for a
Board of Directors of not less than seven and not more than eleven members and
to remove a series of preferred stock and a class of common stock no longer
outstanding, (c) FOR approval of the Company's Performance Share Plan, as
amended and restated, (d) FOR approval of the Company's Incentive
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Compensation Plan (Pool A), as amended and restated, (e) FOR the approval of the
Company's Nonqualified Stock Option Plan, as amended and restated, (f) FOR the
ratification of the appointment of the Company's independent auditors for 1997,
all as set forth on the Proxy and described below, and (g) voted in the
discretion of the person or persons holding the Proxies in respect of such other
business, if any, as may properly be brought before the Annual Meeting. As of
the date hereof, the Board of Directors knows of no business that will be
presented for consideration at the Annual Meeting other than those matters
referred to herein. If you give specific instruction by marking the boxes on the
Proxy, your shares will be voted in accordance with such instructions.
ITEM 1: ELECTION OF ONE DIRECTOR IN CLASS II TO A TERM EXPIRING AT THE 1998
ANNUAL MEETING AND FOUR DIRECTORS IN CLASS I TO TERMS EXPIRING AT THE
2000 ANNUAL MEETING
The Certificate of Incorporation as currently in effect provides for a
Board of Directors consisting of thirteen persons. (See "Item 2: Amendment and
Restatement of Certificate of Incorporation.") Effective as of the date of this
Proxy Statement, the following ten persons currently serve as directors of the
Company: Gary G. Benanav, Barbara G. Cohen, John G. Crosby, Patrick A. Gerschel,
Peter Goldberg, Robert H. Kullas, Michael D. Rice, Joseph D. Sargent, Stephen J.
Sills and LeRoy A. Vander Putten, and there are three vacancies. The Board of
Directors is divided into three classes, each of which serves a term of three
years. The Class I directors consist of Messrs. Crosby, Gerschel, Goldberg and
Kullas, each of whose terms expires at the Annual Meeting and each of whom has
been nominated for reelection to a term ending at the 2000 Annual Meeting. The
Class II directors currently consist of Messrs. Benanav, Rice and Vander Putten,
and the term of the Class II directors expires at the 1998 Annual Meeting. Mr.
Vander Putten has announced his retirement from the Board, effective as of May
30, 1997. Robert V. Deutsch, the Company's Executive Vice President, Chief
Financial Officer, Chief Actuary and Treasurer, has been nominated for election
at the Annual Meeting as a Class II director. The Class III directors consist of
Ms. Cohen and Messrs. Sargent and Sills, and their term of office expires at the
1999 Annual Meeting. Vacancies within any Class may be filled by a majority vote
of the Board of Directors.
DIRECTOR BIOGRAPHIES
Biographical summaries of those persons who are members of the Board of
Directors, or who are nominees for election at the Annual Meeting, follow below.
Data with respect to shares of the Company's Common Stock beneficially owned by
each of them, directly or indirectly, as of March 1, 1997 appears later in this
Proxy Statement.
LeRoy A. Vander Putten (62). Mr. Vander Putten has been a director of the
Company and its Chief Executive Officer since January 1988. He also served as
the Company's Chairman from January 1988 through December 1993, and he resumed
the office of Chairman in August 1994. He was the Company's President from
January 1988 until August 1994. Mr. Vander Putten served as Chairman, President
and Chief Executive Officer of Executive Risk Indemnity Inc. ("ERII") beginning
in January 1988 and of Executive Risk Specialty Insurance Company ("ERSIC")
beginning in November 1991. In January 1994, his title with ERII and ERSIC
became President and Chief Executive Officer, and in August 1994, his title
became Chairman and Chief Executive Officer for both ERII and ERSIC. He has
served as a member of the Partnership Committee of Executive Risk Management
Associates ("ERMA") since 1988. Mr. Vander Putten has announced his retirement
as a director and officer of the Company and its subsidiaries, effective as of
May 30, 1997.
Robert H. Kullas (52). Mr. Kullas has served as a director of the Company,
ERII and ERSIC, and Chairman of the Partnership Committee of ERMA, since January
1994. Since April 1996 he has been the Vice Chairman and Chief Operating Officer
of the Company, ERII and ERSIC. From January 1994 until August 1994, his title
was Chairman of the Board of each of the Company, ERII and ERSIC, and from
August 1994 through April 1996 he was President and Chief Operating Officer for
each of the Company, ERII and ERSIC. Prior to 1993, Mr. Kullas held various
financial and planning positions in the Life, Financial and Commercial Insurance
Divisions at Aetna Life & Casualty Company ("AL&C"), including his last
position, from 1991 through 1993, as Vice President-Finance and Treasurer. Mr.
Kullas will become
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Chairman of the Company and Co-Chairman of ERII and ERSIC, effective upon Mr.
Vander Putten's retirement on May 30, 1997.
Stephen J. Sills (48). Mr. Sills has served as a director of the Company
since December 1986. He has been the President and Chief Underwriting Officer of
the Company, ERII and ERSIC since April 1996, and served as Executive Vice
President and Chief Underwriting Officer from November 1990 until April 1996.
Prior to serving as Executive Vice President, Mr. Sills served as Senior Vice
President of the Company and of ERII from December 1986 and April 1987,
respectively. Mr. Sills has served as a director of ERII and ERSIC since
February 1987 and December 1991, respectively. Mr. Sills also has served as
President, and a member of the Partnership Committee, of ERMA since January
1988. Effective May 30, 1997, Mr. Sills will become Chief Executive Officer of
the Company and Co-Chairman of ERII and ERSIC.
Robert V. Deutsch (37). Mr. Deutsch has been nominated for election to a
Class II directorship for a term expiring at the 1998 Annual Meeting. He has
served as Executive Vice President, Chief Financial Officer, Chief Actuary and
Treasurer of the Company, ERII and ERSIC since April 1996, prior to which he had
served as Senior Vice President, Chief Financial Officer, Chief Actuary and
Treasurer since November 1990. Mr. Deutsch will become President of ERII and
ERSIC and Executive Vice President of ERMA on May 30, 1997.
Gary G. Benanav (51). Mr. Benanav has served as a director of the Company
and of ERII since April 1988 and a director of ERSIC since December 1991, and
has been a member of the Partnership Committee of ERMA since January 1994. Since
October 1996 he has been Chief Operating Officer of ProHealth Physicians MSO,
Inc., a Farmington, CT medical management services organization, and since
January 1, 1997, he has been Chief Executive Officer of Aeris Ventures, LLC,
West Hartford, CT, a venture capital firm. Prior to October 1996 he served as
Executive Vice President of AL&C and head of AL&C's property/casualty lines,
positions held since December 1993. From April 1992 through December 1993, he
served as Group Executive responsible for Aetna Life Insurance and Annuity
Company and Aetna International. He also serves as a director of Barnes Group,
Inc., Bristol, CT.
Barbara G. Cohen (44). Ms. Cohen has served as a director of the Company,
ERII and ERSIC since May 1996. Since 1993 Ms. Cohen has been President of Kannon
Consulting, a Chicago-based marketing consulting firm. From 1991 to 1993 she was
a senior partner at Cambridge Group, Inc. and, prior to that, a partner in the
Marketing and Strategy practice of Booz, Allen & Hamilton, Inc.
John G. Crosby (53). Mr. Crosby has served as a director of the Company
since 1987 and as a director of ERII and ERSIC, and a member of the Partnership
Committee of ERMA, since January 1994. Mr. Crosby is currently President and
Managing Director of the investment banking firm, Madison Partners, Inc., a
position he has held since September 1995. He served as Managing Director of LSG
Advisors ("LSG"), an investment banking firm and a division of Societe General
Securities Corp., from May 1993 through August 1995. From 1990 through May 1993,
Mr. Crosby served as Managing Director of The Lodestar Group ("Lodestar"),
predecessor to LSG.
Patrick A. Gerschel (50). Mr. Gerschel has served as a director of the
Company and of ERII since July 1990, as a director of ERSIC since December 1991
and as a member of the Partnership Committee of ERMA since January 1994. Mr.
Gerschel has served as Chairman of Gerschel & Co., a merchant banking firm,
since 1980 and as Chairman of Residential Company of America since 1996.
Peter Goldberg (60). Mr. Goldberg has served as a director of the Company,
ERII and ERSIC, and a member of the Partnership Committee of ERMA, since May
1994. Mr. Goldberg has served as Chairman and a director of Calco Insurance
Brokers & Agents, Inc. since 1993. Since 1993, Mr. Goldberg also has served as
President and a director of California Casualty Management Company ("CCMC") and
from 1980 to 1993 was Executive Vice President and a director of CCMC.
Michael D. Rice (54). Mr. Rice has served as a director of the Company
since 1986. He has also served as a director of ERII and ERSIC, and a member of
the Partnership Committee of ERMA, since January 1994. Mr. Rice has served as
President of Aon Specialty Group, an insurance brokerage firm, since 1989.
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<PAGE> 7
Joseph D. Sargent (67). Mr. Sargent has served as a director of the
Company, ERII and ERSIC since December 1986, February 1987 and December 1991,
respectively. He has also served as a member of the Partnership Committee of
ERMA since January 1994. Mr. Sargent currently serves as Chairman of Connecticut
Surety Corporation, a position he has held since December 1992. Mr. Sargent
served as Chairman, and later as Vice Chairman, of Conning & Company, an
investment banking firm, from 1991 to 1995 and as its Chairman and Chief
Executive Officer from 1988 to 1991. Mr. Sargent is a director of Trenwick Group
Inc., E.W. Blanch Holdings, Policy Management Systems Corporation, Mutual Risk
Management Ltd. and MMI Companies, Inc.
MEETINGS OF THE BOARD OF DIRECTORS
The Board of Directors had six meetings during fiscal 1996. In addition,
various Committees of the Board met an aggregate of thirty-one times during
1996. Each incumbent director of the Company attended at least 75% of the
aggregate meetings of the Board of Directors and of the Committees thereof of
which he or she was a member during 1996.
COMMITTEES OF THE BOARD OF DIRECTORS
The standing committees of the Board of Directors are the Executive
Committee, the Audit Committee, the Committee on Directors and Compensation (the
"Compensation Committee") and the Finance Committee. The Executive Committee has
responsibility for the management of the business and affairs of the Company
between regular meetings of the Board and does not have a regular meeting
schedule. The members of the Executive Committee are Messrs. Vander Putten
(Chairman), Kullas, Rice and Sargent. The Company's Executive Committee held two
meetings in fiscal 1996.
The Audit Committee has responsibility for reporting to the Board
concerning such Committee's review of the Company's financial condition. The
members of the Audit Committee are Messrs. Gerschel, Goldberg and Sargent
(Chairman). The Company's Audit Committee held four meetings in fiscal 1996.
The Compensation Committee has responsibility for identifying and
recommending to the Company's stockholders nominees to its Board of Directors,
and for administering the Company's employee benefits plans and determining
compensation for its officers. It met five times in fiscal 1996. The members of
the Compensation Committee are Messrs. Crosby (Chairman), Gerschel and Sargent.
The Committee will consider candidates for the Board recommended by
stockholders. Recommendations should be submitted in writing to the Secretary of
the Company and should identify the nominee by name and provide pertinent
biographical information. A stockholder recommendation must be received at least
90 days prior to the date of the Annual Meeting of Stockholders. The
Compensation Committee held six meetings in 1996.
The Finance Committee has responsibility for the investing and reinvesting
of funds of the Company, including purchasing, selling, transferring, voting
proxies for and converting stocks, bonds, notes and other securities. The
members of the Finance Committee are Messrs. Benanav (Chairman), Crosby and
Vander Putten. The Committee met six times during fiscal 1996.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company maintained during 1996, and continues to maintain as of the
date hereof, certain relationships with The Aetna Casualty and Surety Company
("AC&S"). See "Compensation Committee Interlocks and Insider Participation"
below.
In connection with the exercise of expiring stock options, the Committee on
Directors and Compensation of the Board of Directors approved in December 1995
Company loans in the principal amounts of $1,100,000, $400,000 and $500,000,
respectively, for Messrs. Vander Putten, Sills and Deutsch. Each such Company
loan, evidenced by a Promissory Note of the named officer, called for the
accrual of interest at the rate of 7.25% per annum. Originally scheduled to
mature on September 3, 1996, the due date for each Note was extended to March
17, 1997 because the original maturity fell within the "lock-up" period agreed
to in connection with the June 1996 secondary offering of Common Stock. While
outstanding, each Promissory Note was secured by a
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Pledge Agreement, pursuant to which all shares acquired through the exercise of
the options were pledged as collateral for the full repayment of the loans. The
Promissory Notes were paid in full in March, 1997, in conformity with their
terms.
LEGAL COUNSEL
James A. FitzPatrick, Jr., Secretary of the Company, is a partner in the
law firm of Dewey Ballantine, which provides legal services to the Company.
RECOMMENDATION
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT STOCKHOLDERS VOTE
"FOR" THE ELECTION OF ROBERT V. DEUTSCH AS A CLASS II DIRECTOR, TO HOLD OFFICE
UNTIL THE 1998 ANNUAL MEETING, AND JOHN G. CROSBY, PATRICK A. GERSCHEL, PETER
GOLDBERG AND ROBERT H. KULLAS AS CLASS I DIRECTORS, TO HOLD OFFICE UNTIL THE
2000 ANNUAL MEETING, AND UNTIL THEIR RESPECTIVE SUCCESSORS ARE ELECTED AND
QUALIFIED. Assuming the presence of a quorum, the directors shall be elected by
a plurality of the votes cast by the holders of shares of Common Stock present
and entitled to vote on this item at the Annual Meeting. Instructions on the
accompanying proxy card to withhold authority to vote for one or more of the
nominees will result in the respective nominees receiving fewer votes. Under
applicable Delaware law, in tabulating the vote, broker nonvotes will have no
effect on the vote.
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BENEFICIAL OWNERSHIP OF STOCK
The following table sets forth, as of March 1, 1997, certain information
regarding the beneficial ownership of the Common Stock by (i) each of the
Company's directors and executive officers and all directors and executive
officers of the Company as a group, and (ii) each person, other than a director,
known by the Company to own beneficially more than 5% of the outstanding shares
of Common Stock. "Beneficial ownership" for these purposes includes stock which
any person listed below has the right to acquire within 60 days, but does not
include any fee options to be granted under the Directors Stock Option Plan.
(See "Executive Compensation -- Director Compensation.") Unless otherwise
indicated, each person or entity named below has sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned by
such person or entity, subject to community property laws where applicable and
the information set forth in the footnotes to the table below.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF SHARES COMMON
NAME OF COMMON STOCK STOCK(1)
- ------------------------------------------------------------ ------------------- ---------------
<S> <C> <C>
DIRECTORS AND OFFICERS
Gary G. Benanav(2).......................................... 11,611 *
Barbara G. Cohen(3)......................................... 114 *
John G. Crosby(4)........................................... 13,991 *
Robert V. Deutsch(5)........................................ 324,426 3.4
Patrick A. Gerschel(6)...................................... 731,823 7.8
Peter Goldberg(7)........................................... 4,761 *
Robert H. Kullas(8)......................................... 119,130 1.3
Michael D. Rice(9).......................................... 7,939 *
Joseph D. Sargent(10)....................................... 38,522 *
Stephen J. Sills(11)........................................ 370,900 3.8
LeRoy A. Vander Putten(12).................................. 420,683 4.3
All officers and directors as a group(11 persons)(13)....... 2,043,900 19.6
</TABLE>
- ---------------
* Less than one percent.
PERSON(S) OWNING MORE THAN 5% OF THE OUTSTANDING
COMMON STOCK, OTHER THAN DIRECTORS OR OFFICERS
<TABLE>
<S> <C> <C>
Denver Investment Advisors LLC(14).......................... 595,410 6.4
Fiduciary Trust Company International(15)................... 542,450 5.8
First Chicago NBD Corporation(16)........................... 466,500 5.0
Mellon Bank Corporation(17)................................. 810,000 8.7
</TABLE>
- ---------------
(1) Percentages based upon 9,329,307 shares of Common Stock outstanding
(10,443,728 issued, net of 1,114,421 shares owned by the Company in
treasury) and adjusted in each case by the number of shares each owner has
the right to acquire within the 60 day period ending April 30, 1997.
(2) Includes 9,606 shares of Common Stock issuable upon exercise of options
currently exercisable or becoming exercisable within the 60 day period
ending April 30, 1997.
(3) Includes 114 shares of Common Stock issuable upon exercise of options
currently exercisable or becoming exercisable within the 60 day period
ending April 30, 1997.
(4) Includes 9,386 shares of Common Stock issuable upon exercise of options
currently exercisable or becoming exercisable within the 60 day period
ending April 30, 1997.
(5) Includes 296,271 shares of Common Stock issuable upon exercise of options
currently exercisable or becoming exercisable within the 60 day period
ending April 30, 1997.
(6) The address for Mr. Gerschel, who is a 5% stockholder as well as a
director, is: c/o Gerschel & Company,720 Fifth Avenue, New York, NY 10019.
Share total includes 17,000 shares of Common
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Stock owned by an affiliated entities. Also includes 10,953 shares of
Common Stock issuable upon exercise of options currently exercisable or
becoming exercisable within the 60 day period ending April 30, 1997.
(7) Includes 3,756 shares of Common Stock issuable upon exercise of options
currently exercisable or becoming exercisable within the 60 day period
ending April 30, 1997. Excludes 25,000 shares of Common Stock beneficially
owned by California Casualty Indemnity Exchange, with which Mr. Goldberg is
affiliated.
(8) Includes 116,125 shares of Common Stock issuable upon exercise of options
currently exercisable or becoming exercisable within the 60 day period
ending April 30, 1997.
(9) Includes 7,971 shares of Common Stock issuable upon exercise of options
currently exercisable or becoming exercisable within the 60 day period
ending April 30, 1997.
(10) Includes 7,517 shares of Common Stock issuable upon exercise of options
currently exercisable or becoming exercisable within the 60 day period
ending April 30, 1997. Includes 3,500 shares owned by Mr. Sargent's wife
and 5,400 shares owned by an affiliated trust, as to which Mr. Sargent
disclaims beneficial ownership.
(11) Includes 316,720 shares of Common Stock issuable upon exercise of options
currently exercisable or becoming exercisable within the 60 day period
ending April 30, 1997.
(12) Includes 323,744 shares of Common Stock issuable upon exercise of options
currently exercisable or becoming exercisable within the 60 day period
ending April 30, 1997.
(13) Includes 1,102,163 shares of Common Stock issuable upon exercise of options
currently exercisable or becoming exercisable within the 60 day period
ending April 30, 1997.
(14) Based upon filing on SEC Schedule 13G, dated January 28, 1997. The address
of this stockholder is as follows: Denver Investment Advisors LLC 1225 17th
Street, 26th Floor Denver, CO 80202
(15) Based upon filing on SEC Schedule 13G, dated January 28, 1997. The address
of this stockholder is as follows: Fiduciary Trust Company International
Two World Trade Center New York, NY 10048
(16) Based upon filing on SEC Schedule 13G, dated February 4, 1997. The address
of this stockholder is as follows: First Chicago NBD Corporation One First
National Plaza Chicago, IL 60670
(17) Based upon filing on SEC Schedule 13G, dated January 29, 1997. The address
of this stockholder is as follows: Mellon Bank Corporation
One Mellon Bank Center
Pittsburgh, PA 15258
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's executive officers and directors, and
persons who own 10% or more of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the SEC
and the New York Stock Exchange. Such persons are required by SEC regulations to
furnish the Company with copies of all Section 16(a) reports they file. Based
solely upon a review of Forms 3 and 4 furnished to the Company pursuant to Rule
16a-3 of the SEC prior to the date of this Proxy Statement, and Forms 5
furnished with respect to the 1996 fiscal year, Peter Goldberg is the only
reporting person to have made a late filing under Section 16(a). Mr. Goldberg
filed one Form 4 for October 1995 and one Form 4 for November 1995 reporting
sale transactions by his affiliated company, California Casualty, which were
reported late due to inadvertance.
7
<PAGE> 11
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes the compensation for services rendered in
all capacities to the Company and its subsidiaries during the past three
completed fiscal years by the Company's Chief Executive Officer and all other
executive officers of the Company (the "executive officers").
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
-------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) OPTIONS(#) COMPENSATION($)(2)
- ------------------------------------ ---- --------- ----------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
LeRoy A. Vander Putten.............. 1996 342,321 365,500 40,309 105,710
Chairman and Chief 1995 320,417 166,800 23,810 400,633
Executive Officer 1994 310,106 166,200 0 22,900
Robert H. Kullas.................... 1996 329,321 221,600 16,500 66,744
Vice Chairman and Chief 1995 307,417 131,100 0 66,192
Operating Officer 1994 297,000 130,400 112,000 44,244
Stephen J. Sills.................... 1996 329,321 301,900 35,547 109,158
President and Chief 1995 307,417 131,100 19,048 98,951
Underwriting Officer 1994 297,096 130,400 0 102,813
Robert V. Deutsch................... 1996 292,321 267,800 30,785 83,439
Executive Vice President, 1995 270,417 116,100 14,286 81,023
Treasurer, Chief Financial Officer 1994 260,219 114,000 0 81,851
and Chief Actuary
</TABLE>
- ---------------
(1) The 1996 bonuses include payments received in February 1997, related to
incentives which were awarded in 1993, subject to the Company's loss ratio
performance for the 1993 loss year determined as of December 31, 1996. Such
payments were $102,500, $80,300 and $70,400 for, respectively, Messrs.
Vander Putten, Sills and Deutsch. In addition to the bonus amounts disclosed
above, each executive officer may be entitled to bonus payments related to
loss ratio performance with respect to report years 1994, 1995 and 1996, to
be determined as of December 31, 1997, 1998 and 1999, respectively, and paid
in February of the following year. Each such payment amount, if any, will be
disclosed in the Company's annual proxy statement for the year in which it
becomes finally determinable.
(2) All amounts under this column for 1996 represent retirement and
matching contributions made by the Company under its tax-qualified and
supplemental defined contribution pension plans, except that for Mr.
Vander Putten, the amount includes $18,401 paid by the Company as the
annual premium for a split-dollar life insurance policy issued and
maintained on his behalf.
8
<PAGE> 12
STOCK OPTION GRANTS IN FISCAL 1996
The following table sets forth information relating to the grant of stock
options by the Company during 1996 to the executive officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------
% OF TOTAL
NUMBER OF OPTIONS MARKET PRICE
SECURITIES GRANTED TO PER SHARE
UNDERLYING EMPLOYEES EXERCISE ON DATE OF GRANT DATE
OPTIONS IN FISCAL PRICE(1) GRANT EXPIRATION PRESENT VALUE
NAME GRANTED YEAR ($/SHARE) ($/SHARE) DATE ($)(1)
- --------------------------------- ---------- ---------- --------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
LeRoy A. Vander Putten........... 16,500 7.53 26.00 29.75 3/13/06(3) 274,395
23,809 10.86 8.97(2) 30.75 3/22/06 598,320
Robert H. Kullas................. 16,500 7.53 26.00 29.75 3/13/06(3) 274,395
Stephen J. Sills................. 16,500 7.53 26.00 29.75 3/13/06(3) 274,395
19,047 8.69 8.97(2) 30.75 3/22/06 478,651
Robert V. Deutsch................ 16,500 7.53 26.00 29.75 3/13/06(3) 274,395
14,285 6.52 8.97(2) 30.75 3/22/06 358,982
</TABLE>
- ---------------
(1) Based on the Black-Scholes option pricing model adapted for use in valuing
employee stock options. The actual value, if any, an executive officer
realizes will depend on the excess of the stock price over the exercise
price on the date the options are exercised, so there is no assurance the
value realized by an executive will be at or near the value estimated by the
Black-Scholes model. The estimated present values disclosed in this column
based on the Black-Scholes model assume a stock price volatility of .265, a
risk-free rate of return of 6.36%, an estimated future dividend yield of
0.26%, and a date of exercise on the tenth anniversary of the date of grant
of the options. These assumptions were developed only for purposes of this
disclosure, and do not constitute projections or representations by the
Company as to the actual performance of the Common Stock.
(2) The exercise price for these options is equal to 30% of the average closing
price of the Common Stock for the 30-day period immediately preceding the
grant date, as provided for in the Company's 1991 IPO Stock Compensation
Plan under which these options were granted. These options were immediately
exercisable upon grant. See "Compensation Committee Report -- Stock Options
and Performance Shares."
(3) These options vest and become exercisable in equal annual instalments of
4,125 shares on March 13th of the years 1997, 1998, 1999 and 2000.
AGGREGATED STOCK OPTION EXERCISES IN FISCAL 1996 AND FISCAL YEAR-END OPTION
VALUES
There were no exercises of stock options by any of the executive officers
during 1996. The following table shows the number and values of options held by
the named executive officers as of December 31, 1996. The values of unexercised
in-the-money stock options are included pursuant to SEC rules; there is no
assurance that such values will in fact be realized.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
VALUE NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
REALIZED OPTIONS AT 12/31/96 12/31/96(1)
UPON ---------------------------- ----------------------------
NAME EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- SHARES -------- ----------- ------------- ----------- -------------
ACQUIRED ($) (#) (#) ($) ($)
UPON
EXERCISE(1)
-----------
(#)
<S> <C> <C> <C> <C> <C> <C>
LeRoy A. Vander Putten... -- -- 266,619 69,500 6,596,352 1,402,903
Robert H. Kullas......... -- -- 84,000 44,500 2,100,000 881,500
Stephen J. Sills......... -- -- 259,595 69,500 6,259,918 1,402,903
Robert V. Deutsch........ -- -- 239,146 69,500 5,876,639 1,402,903
</TABLE>
- ---------------
(1) Stock options are classified as in-the-money if the fair market value of the
underlying common stock exceeds the exercise price of the option. The value
of such in-the-money options shown above is the
9
<PAGE> 13
difference between the exercise or base price and the fair market value of
the underlying common stock as of December 31, 1996. The fair market value
of the Common Stock on December 31, 1996, based on the December 31, 1996
closing price on the New York Stock Exchange, was $37.00 per share.
LONG-TERM INCENTIVE PLANS -- AWARDS DURING FISCAL 1996
The Company's Performance Share Plan (the "PSP") for key employees was
approved by stockholders at the 1996 Annual Meeting. The benefits available
under the PSP are "Performance Share Units," which are expressed by reference to
the Company's Common Stock (each Performance Share Unit being equal to one share
of Common Stock). Performance Share Units entitle the recipient to a
distribution of shares of Common Stock and/or a distribution of cash, as
determined by the Compensation Committee based upon the achievement of
pre-established Company financial objectives ("Performance Measures") for the
performance period (the "Performance Period") established by the Committee. The
following table summarizes grants made to the executive officers during the 1996
fiscal year under the PSP, which was approved by stockholders during 1996.
<TABLE>
<CAPTION>
PERFORMANCE ESTIMATED FUTURE PAYMENTS UNDER
PERIOD NON-STOCK PRICE PLAN(1)
UNTIL ----------------------------------
NUMBER OF MATURATION MAXIMUM
SHARES, UNITS OR OR THRESHOLD TARGET #
NAME OTHER RIGHTS(1) PAYOUT(2) # SHARES # SHARES SHARES
- --------------------------------- ---------------- ----------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
LeRoy A. Vander Putten........... 5,500 1995-1997 2,750 5,500 8,250
6,300 1996-1998 3,150 6,300 9,450
Robert H. Kullas................. 5,500 1995-1997 2,750 5,500 8,250
6,300 1996-1998 3,150 6,300 9,450
Stephen J. Sills................. 5,500 1995-1997 2,750 5,500 8,250
6,300 1996-1998 3,150 6,300 9,450
Robert V. Deutsch................ 5,500 1995-1997 2,750 5,500 8,250
6,300 1996-1998 3,150 6,300 9,450
</TABLE>
- ---------------
(1) The Performance Measures established by the Compensation Committee with
respect to the awards listed in the table above are: return on equity
("ROE"), total shareholder return ("TSR") compared to a risk free return,
TSR compared to that of a peer group determined by the Compensation
Committee and growth in earnings per share compared against that of such
peer group. The Compensation Committee has determined performance levels,
and the relative weightings, applicable to each such Performance Measure in
order to determine the number of Performance Share Units earned at the
threshold, target and maximum performance levels. The number of Performance
Share Units to be earned if the threshold, target and maximum performance
levels are met for each Performance Measure are indicated in the table above
(i.e., 50% earned at the threshold level, 100% at the target level and 150%
at the maximum level, with interpolation used for actual performance between
these levels). Failure to achieve a threshold level with respect ot any
Performance Measure will result in no award for that Performance Measure.
Also, no Performance Share Units will be earned if, at the end of the
relevant Performance Period, the Company has not achieved an ROE threshold
established by the Compensation Committee at the beginning of the
Performance Period. The ROE threshold in effect for the Performance Periods
referred to in the table above is 10%. After the conclusion of each
Performance Period, the Compensation Committee will determine the number of
Performance Share Units earned, if any, and whether the award will be paid
in cash or stock or a combination of both. Any part of an award paid in cash
will be based upon the fair market value of the Common Stock on the day
prior to the distribution.
(2) The awards granted on March 13, 1996 are for the Performance Period which
runs from January 1, 1995 through December 31, 1997. Those granted on April
26, 1996 are for the Performance Period which runs from January 1, 1996
through December 31, 1998. In each case, awards were granted subject to
stockholder approval of the Performance Share Plan, which was obtained at
the Annual Meeting held May 10, 1996.
10
<PAGE> 14
EMPLOYMENT AGREEMENTS
Each of Messrs. Vander Putten, Kullas, Sills and Deutsch currently has an
employment agreement with the Company (the "Employment Agreements") effective
through April 30, 1997. The Employment Agreements provide that each of the
executive officers will serve the Company at annual salary rates which are
currently $352,000, $339,000, $339,000 and $302,000 for Messrs. Vander Putten,
Kullas, Sills and Deutsch, respectively. The salaries have been subject to
review for possible increase or decrease (within specified parameters) prior to
August 31st of each year by the Compensation Committee. The Employment
Agreements also provide that each executive officer will have the opportunity to
earn additional annual compensation at the discretion of the Board of Directors,
pursuant to the "variable merit pool" established by the Company from time to
time and an annual cash bonus under an incentive compensation plan of the
Company.
The Employment Agreements include certain provisions that are effective in
the event the employment of the executive officer is terminated by the Company
other than for "cause" or by the executive officer for "good cause" (each as
defined in the Employment Agreements). In such cases, the executive officer is
entitled to (i) full vesting of all outstanding stock options and cash incentive
compensation awards; (ii) a cash payment equal to his salary and variable merit
pool amount for the remainder of his contract term or, if greater, two times his
average annual base salary, variable merit pool amount and cash bonus for the
preceding 24 months; and (iii) continuation of medical, pension and other
benefits for the remainder of the contract term or, if greater, for 24 months.
The Employment Agreements include special provisions which take effect upon
a "change of control" of the Company (as defined in the Agreements). Upon a
change of control, all stock options become fully vested and exercisable, with
the proviso that, for those options granted to Messrs. Deutsch, Sills and Vander
Putten in 1993 and to Mr. Kullas in 1994, such options become fully vested but
each of the executive officers would be paid a lump sum cash amount in lieu of
the right to exercise such stock options. The payment to be made to each
executive officer is determined by the Board of Directors of the Company, but in
no event is the payment to each executive officer to be less than a specified
percentage of a "bonus pool" established under the Agreements. The specified
minimum percentages are 20% for Messrs. Vander Putten, Sills and Deutsch and 10%
for Mr. Kullas. The aggregate amount of the bonus pool is equal to 20% of the
difference between the "purchase price" (as defined in the Employment
Agreements) in the transaction resulting in the change of control and the book
value of the Company as of March 31, 1993; such book value was approximately
$95.5 million.
The Company will pay each executive officer an amount necessary to
reimburse him, on an after-tax basis, for any excise tax due under Section 4999
of the Internal Revenue Code as a result of any payment under the Agreements
being treated as an "excess parachute payment" under Section 280G of the
Internal Revenue Code.
The Employment Agreements contain provisions, effective during the period
of employment and for 24 months thereafter under certain circumstances, relating
to noncompetition with the Company's business, nondisclosure of confidential
information and nonsolicitation of the Company's or its subsidiaries' employees
or officers by the executive officers. The Employment Agreements are not
assignable by either party, but are binding upon successors of the Company.
It is not anticipated that new employment agreements will be entered into
upon the expiration of the Employment Agreements on April 30, 1997.
DIRECTOR COMPENSATION
The Company maintains a compensation program for members of the Board of
Directors who are not officers or employees of the Company ("Nonemployee
Directors"). Under the program, each Nonemployee Director is entitled to an
annual fee of $13,000, as well as fees of $2,000 for each meeting of the Board
of Directors attended and $1,000 for each committee meeting attended. Any
Nonemployee Director who serves as chairman of one of the standing committees of
the Board of Directors is also entitled to a $3,000 annual fee.
11
<PAGE> 15
Under the Company's Nonemployee Directors Stock Option Plan, which became
effective March 22, 1994, each Nonemployee Director receives a portion of these
fees in the form of stock options ("Fee Options"). The portion of each
Nonemployee Director's compensation that is receivable in the form of Fee
Options varies from 25% of such compensation (for Nonemployee Directors who are
60 and older) up to 75% (for those younger than 50). Such options are
exercisable at a 70% discount to the grant date market value of the Company's
Common Stock, with the total discount on all options granted equaling the
portion of compensation allocated to Fee Options. During 1996, options for a
total of 3,465 shares of Common Stock were granted as Fee Options under this
Plan, with an average option price versus market price differential of
approximately $22.50 per option.
In addition to Fee Options, all Nonemployee Directors are eligible for
options to purchase Common Stock ("Performance Options"), depending on the
financial performance of the Company. Performance Options may be granted once
each year, on the date of the Annual Meeting of stockholders, and are
exercisable at the fair market value on the grant date. On May 10, 1996, the
1996 Annual Meeting date, 7,777 Performance Options were granted in the
aggregate under the Plan, with an exercise price of $30.75, the grant date
market value.
Officers or employees of the Company who serve on the Board of Directors
receive no additional compensation for their services in that capacity.
PERFORMANCE GRAPH
The following graph compares the change in the Company's cumulative total
stockholder return on its Common Stock to the return for the S&P's 500 Composite
Stock Price Index and the S&P Property/Casualty Industry Group Stock Price Index
since the Company's initial public offering on March 15, 1994.
CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
MEASUREMENT PERIOD EXECUTIVE S&P PROP-
(FISCAL YEAR COVERED) RISK INC. S&P 500 CASUALTY
<S> <C> <C> <C>
3/15/94 100 100 100
6/30/94 108 96 100
12/31/94 119 101 109
6/30/95 159 121 121
12/31/95 244 138 147
6/30/96 322 152 154
12/31/96 312 170 179
</TABLE>
COMPENSATION COMMITTEE REPORT
The compensation of the Company's executive officers earned during 1996 was
determined by the Compensation Committee, which is responsible for reviewing and
making recommendations to the Board of Directors with respect to the Company's
executive compensation and overall compensation policy, as well as for oversight
and administration of the Company's stock option, incentive compensation,
retirement and other
12
<PAGE> 16
benefit plans. This report discusses the executive compensation determinations
made by the Compensation Committee with respect to the 1996 compensation of the
Company's Chief Executive Officer, LeRoy A. Vander Putten, and its three other
executive officers during 1996, Robert H. Kullas, Stephen J. Sills and Robert V.
Deutsch.
I. Executive Compensation Philosophy. In general, the Company's executive
compensation philosophy is that the interests of the Company's stockholders and
the Company's executive officers should be aligned through the use of
compensation programs that motivate and reward superior individual performance,
within the context of overall corporate achievement. The goals of the Company's
executive compensation program are to attract and ensure retention of executives
whose abilities are critical to the success of the Company, to sustain a high
level of corporate performance by establishing a relationship between executive
compensation and the attainment of strategic objectives, and to align the
interests of the executive officers with those of the Company's stockholders by
basing an important part of total compensation on the long-term performance of
the Company's Common Stock.
II. Components of Executive Compensation. The components of the 1996
compensation program for executive officers of the Company, including the Chief
Executive Officer, consisted of salary, "variable merit pool" compensation,
annual incentive bonuses, awards of stock-based compensation, including
performance share units and options, and retirement plan benefits. The
Performance Share Plan for the Company's senior management, including executive
officers, was approved by stockholders in 1996.
A. Annual Salary. Salaries for the Company's executive officers are
initially set at levels which the Company believes will enhance its ability to
attract and retain highly qualified key executives in a competitive environment.
In setting annual salary levels, the Company considers an individual's level of
responsibility as well as his individual talent and skills. It also takes into
consideration recommendations of outside benefits consultants as well as
executive officer salary surveys, including general surveys and surveys specific
to the insurance industry, to determine appropriate base salary levels within
the context of the Company's internal salary range structure. The Company does
not have any specific target or formula for setting compensation levels on any
competitive basis with other companies. The salaries of the Company's executive
officers for 1996 are set forth under the caption "Summary Compensation Table"
above.
The Compensation Committee continued in 1996 the variable compensation
strategy previously instituted. Beginning in 1993, the Compensation Committee
implemented a "variable merit pool" increase salary program for senior
management, including the executive officers, in which all or a portion of
annual salary increases are in the form of a one-time payment, which is made in
August. These payments are funded from a variable merit pool which is determined
by ranking the Company's annual financial performance relative to that of a peer
group of companies. The funded variable merit pool is split into two components:
(1) an adjustment of base salary (fixed increase) and (2) a one-time award that
must be re-earned each year (variable increase). The size of the pool is
determined by the Compensation Committee based on the Company's percentile
ranking in the peer group. The mix of fixed and variable increase awards for
each individual is based on analysis of individual performance and independent
salary survey information for the individual's equivalent position in peer
companies. Under the variable merit pool program, executive officer salaries
increased during 1996 by 9.7% over the previous year's salary. The Chief
Executive Officer received an adjustment during 1996 equal to 9.1% of his
previous year's salary, split equally between fixed and variable increase.
B. Annual Incentive Compensation. Annual bonuses paid to executive
officers under an Incentive Compensation Plan are a significant element of the
Company's executive compensation program. This Incentive Compensation Plan is
designed to reward senior management for the achievement of corporate goals, as
well as to compensate senior management on the basis of the Company's financial
results. Annual bonuses under this Incentive Compensation Plan are initially
based on actual performance measured against four "key performance variables."
These variables are (i) the Company's "loss ratio," which is the loss and loss
adjustment expenses of the Company as a percentage of earned premiums for the
applicable report year, (ii) the Company's "return on equity," which is the
Company's net income excluding realized capital gains (losses), net of tax,
divided by average consolidated stockholders' equity, prior to adjustment under
Statement
13
<PAGE> 17
of Financial Accounting Standards No. 115, (iii) gross premiums underwritten,
primarily by ERMA and through the Company's UAP Executive Partners joint venture
with Union des Assurance de Paris -- Incendie-Accidents, and (iv) gross premiums
written by the Company's insurance subsidiaries, other than premiums assumed
from AC&S. The latter two variables are "discretionary performance variables,"
under the Incentive Compensation Plan. The Compensation Committee has the
discretion to select the discretionary performance variables from year to year
as it deems appropriate.
The Compensation Committee assigns a relative weight to each of the key
performance variables to determine the portion of the annual bonuses to be
represented by each variable. In addition, "threshold," "target" and "maximum"
objectives are set for each of the variables, and bonus payments, as a
percentage of base salary, are established for each objective level.
Bonuses under this Incentive Compensation Plan are reviewed by the
Compensation Committee and recommended for the Board of Directors approval. When
approved, payment is made during the year subsequent to the year in which the
bonus is earned, except that portion of the bonus payment based on the Company's
loss ratio performance for the applicable report year, which is paid in the
fourth year following the bonus year in order to reflect the actual report year
loss ratio using a look-back adjustment. Awards made in 1997 for the 1996 bonus
year were based on corporate performance at the "maximum" level for the two key
performance variables relating to gross premiums, at substantially above the
"target" level for the return on equity variable and at the "target" level for
the loss ratio variable. For 1996, the Chief Executive Officer received a bonus
under the Incentive Compensation Plan of $263,000, and was awarded a deferred
bonus payable in 2000 (to be adjusted upward or downward based on future loss
ratio performance for the 1996 report year) in a target amount of $98,600,
exclusive of interest payable under the Plan (at the average three-year Treasury
bill rate as published in The Wall Street Journal during the week preceding the
Committee meeting at which the award recommendation is approved) through the
date of payment. The aggregate of such bonus payments would represent
approximately 103% of the Chief Executive Officer's 1996 salary, assuming the
loss ratio portion of the bonus is paid at the target level in 2000.
C. Stock Options and Performance Shares. Stock options and awards of
performance share units for the Company's executive officers are a important
element of the Company's executive compensation program, intended to reinforce
management's long-term perspective on corporate performance. Compensation
derived from stock options and performance share units is intrinsically related
to long-term corporate performance and stockholder value, because the value of
such compensation is determined by changes in the price of the Company's Common
Stock and, with respect to performance share units, by Company financial
performance as against certain pre-established performance measures. Stock
option and performance share unit awards to executives, as well as awards of
restricted shares of Common Stock to most of the Company's non-executive
personnel, are made at the discretion of the Compensation Committee based on a
variety of factors, including the level of responsibility with the Company and
ability to affect stockholder value, as well as demonstrated past and expected
future performances. The Compensation Committee also takes into consideration
prior awards to the executive officer and the individual's overall equity
position in the Company.
The Committee specifically endorses the principle that stock options and
stock ownership by the Company's executive officers, as well as other members of
the Company's senior management, other key employees and nonmanagement
directors, are an essential element in aligning the interests of these
individuals with those of the stockholders and thereby enhancing stockholder
value. In this regard, the Company has continued its Nonqualified Stock Option
Plan and Nonemployee Directors Stock Option Plan. Further, in connection with
the adoption of the Performance Share Plan in 1996, long-term guidelines for
executive ownership of Company stock were established, ranging from the
equivalent of one to three times annual salary in Company stock ownership.
In 1996, certain members of management, including the executive officers,
were granted awards under the Company's Performance Share Plan. Their awards
were made at the discretion of the Committee, taking into account, among other
things, the expected contributions of each such individual to the Company's
success. (See "Long-Term Incentive Plans -- Awards During Fiscal 1996.")
Additionally, on March 22, 1996, Messrs. Vander Putten, Sills and Deutsch
received, respectively, options to purchase 23,809 shares,
14
<PAGE> 18
19,047 shares and 14,285 shares of Company Common Stock at $8.97 per share, or
30% of its grant date fair market value (see "Stock Option Grants in Fiscal
1996").
D. Pension Plans. The Committee believes that the Company's retirement
benefits program provides employees and senior management with retirement
compensation that promotes the long-term employment of these individuals by
means of a defined contribution plan through which a retirement fund is created
for the employee. Under the Company's funded tax-qualified Retirement Plan,
participants are entitled to defer a portion of their compensation on a pre-tax
and an after-tax basis, and are entitled to a matching contribution from the
Company, a portion of which is fixed and a portion of which will vary depending
upon the Company's return on equity. Such matching contribution will be
determined with respect to participant contributions up to 10 percent of the
participant's compensation. In addition, participants are entitled to Company
retirement contributions as a percentage of their annual base salary. Company
contributions that would otherwise be made under the benefit formula for the
Retirement Plan, but are in excess of certain limitations on tax-qualified
retirement plans under the Internal Revenue Code, are provided to certain
highly-compensated plan participants, including the executive officers, on an
unfunded basis under the Company's nonqualified Benefit Equalization Plan.
Company contributions and allocations for 1996 under the Retirement Plan
and the Benefit Equalization Plan on behalf of the executive officers, including
the Chief Executive Officer, are shown under the caption "Summary Compensation
Table" above. The Company's Chief Executive Officer is also entitled to
additional pension benefits under an arrangement relating to his prior
participation in AL&C's pension plan. The Company's obligations with respect to
these benefits were satisfied fully in 1995.
III. Compensation Deduction Limitation. Federal tax law generally disallows the
corporate tax deduction for certain compensation paid in excess of $1,000,000
annually to each of the chief executive officer and the four other most highly
paid executive officers of publicly held companies. One of the exceptions to the
deduction limit is for "performance-based" compensation. The Company believes
that its Nonqualified Stock Option Plan has satisfied the requirements for stock
options to be exempt from the compensation deduction limit under Federal tax law
and, therefore, expects that any stock option compensation realized upon the
exercise of stock options that were granted under this plan will not be counted
against the compensation deduction limit. However, in order for compensation
under the Nonqualified Stock Option Plan to continue to be exempt from the
compensation deduction limit, it must be approved by stockholders at the Annual
Meeting (see "Item 5 -- Approval of Nonqualified Stock Option Plan").
The Company is also requesting stockholders to approve, at the Annual
Meeting, an amended Performance Share Plan and an amended Incentive Compensation
Plan. Each such amended Plan, the Committee believes, will satisfy the
requirements for qualifying future awards thereunder to be exempt under Federal
tax law from the $1,000,000 compensation deduction limit. (See "Item 3: Approval
of Amended and Restated Performance Share Plan" and "Item 4: Approval of Amended
and Restated Incentive Compensation Plan.") For these reasons, and because the
Company's annual cash compensation to its executive officers is currently below
the $1,000,000 limit, the Company does not at this time anticipate any loss of
deductibility under the Federal tax law for compensation paid to its executive
officers. The Company was not denied a deduction under this law for any
compensation paid to its executive officers during 1996.
COMMITTEE ON DIRECTORS AND
COMPENSATION OF EXECUTIVE RISK INC.
- -------------------------------------
John G. Crosby, Chairman
Patrick A. Gerschel
Joseph D. Sargent
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the first quarter of 1996, Alfred L. Austin served as a Company
director and member of the Compensation Committee and contemporaneously served
as an officer and employee of AC&S. Until March 26, 1996, AC&S owned
approximately 40% of the Company's outstanding capital stock. On that date,
15
<PAGE> 19
the Company purchased 2,511,300 shares of Company Common Stock and Class B
Common Stock from AC&S at a price of $29.875 per share, or approximately $75
million, under the terms of the Amended and Restated Stock Repurchase Agreement.
Pursuant to covenants in that Agreement, in June 1996, the remaining 2,000,000
shares of Company Common Stock then owned by AC&S were sold in an underwritten
public offering in which the Company also issued and sold 300,000 shares of
Common Stock. As a result, from and after June 1996, AC&S has maintained no
ownership interest in the Company.
Additionally, the Company maintained during 1996, and continues to
maintain, certain other contractual relationships with AC&S. Under the
partnership agreement which governed this relationship until January 1, 1994,
AC&S is entitled to certain profit sharing distributions from the Company, which
are essentially a portion of each year's profits, paid out in subsequent years.
In 1996, AC&S received $394,000, representing a profit sharing distribution with
respect to 1992.
The terms of the Company's relationship with AC&S have been provided for in
certain agency, reinsurance and collateral agreements with AC&S. Certain
provisions of these agreements are provided below.
Agency Agreement. Until February 13, 1997, the Company's agency
relationship with AC&S was governed by the Agency Agreement dated as of January
1, 1994 (the "Pre-restructuring Agency Agreement"), which was terminated and
superseded by the Restructured Agency Agreement, effective as of January 1,
1997. Under the Pre-restructuring Agency Agreement, AC&S had authorized ERMA to
issue AC&S D&O insurance policies with liability limits of up to $20 million
(with up to $30 million available on a case-by-case basis with AC&S's approval)
as well as certain other types of policies. The Pre-restructuring Agency
Agreement provided that, with minor exceptions, all of AC&S's D&O insurance in
the United States would be written through ERMA. There were provisions for
override commissions to AC&S under certain circumstances, which ceased to exist
during 1996, and ERMA was entitled to a commission of 24% of gross written
premiums on all AC&S policies of D&O insurance and certain other specialty lines
of insurance issued through ERMA, subject to certain adjustments.
The Company had guaranteed the obligations of ERMA to AC&S under the
Pre-restructuring Agency Agreement.
Reinsurance Agreements. Until February 13, 1997, the Company's reinsurance
relationship with AC&S existed under the terms of a Quota Share Agreement dated
as of January 1, 1994 (the "Pre-restructuring Quota Share Agreement"). The
Pre-restructuring Quota Share Agreement required AC&S to cede to ERII 50% of its
gross liability on all of AC&S's D&O insurance policies issued through ERMA,
6.25% of its gross liability on financial institution trust department errors
and omissions policies issued through ERMA and generally 50% of its gross
liability on other specified lines of policies issued through ERMA. It required
that ERII pay AC&S a ceding commission equal to 3% of premiums reinsured for
premium taxes plus ERII's share of certain costs of ERMA related to this
business.
AC&S also had entered into a reinsurance agreement with each of the
Company's insurance subsidiaries, ERII and ERSIC, under which such subsidiaries
ceded to AC&S 12.5% and 6.25%, respectively, of their gross liability on
policies of D&O insurance and financial institution trust department bonds and
generally 50% on other specified lines of insurance issued by ERII and ERSIC
which meet specific guidelines.
In connection with the Restructuring Agreement dated February 13, 1997, the
agency and reinsurance relationships between the Company, its subsidiaries and
AC&S have been substantially modified. ERMA continues to be an underwriting
agency for AC&S policies of D&O insurance, but is no longer the exclusive agency
for such policies. The Company's insurance subsidiaries are no longer obligated
to cede any insurance to AC&S, and they reinsure 100% of the AC&S D&O insurance
issued through ERMA.
ITEM 2: APPROVAL OF THE COMPANY'S CERTIFICATE OF INCORPORATION, AS AMENDED
AND RESTATED (A) TO PROVIDE FOR A BOARD OF DIRECTORS OF AT LEAST
SEVEN AND NO MORE THAN ELEVEN DIRECTORS, AS APPROVED BY THE BOARD
FROM TIME TO TIME, AND (B) TO REMOVE THE PROVISIONS RELATING TO THE
CLASS A 7 1/2% CUMULATIVE CONVERTIBLE PREFERRED STOCK AND THE CLASS
B COMMON STOCK.
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The Company's original certificate of incorporation was initially amended
and restated as of December 31, 1993 (the "1993 Restated Certificate"). As so
amended, the 1993 Restated Certificate currently provides for a thirteen-person
Board of Directors and includes authorization for two types of capital shares,
of which there are no shares outstanding. These types of capital shares are: (a)
a series of preferred stock, consisting of 611,077 shares of Class A 7 1/2%
Cumulative Convertible Preferred Stock (the "Class A Preferred Stock"), and (b)
a class of common stock, being the 2,500,000 shares of Class B Common Stock, par
value $.01 per share (the "Class B Common Stock"). All shares of the Class A
Preferred Stock were converted upon the closing of the Company's initial public
offering in March 1994 into shares of Common Stock, at the rate of ten Common
Stock shares for each Class A Preferred Stock share. All 1,225,000 issued and
outstanding shares of the Class B Common Stock were owned by AC&S until March
26, 1996, on which date the Company repurchased all of the Class B Common Stock.
The Company's Board of Directors currently consists of ten persons. Upon
the election of Mr. Deutsch at the Annual Meeting, the Board of Directors will
consist of eleven persons until May 30, 1997, when Mr. Vander Putten's
retirement will become effective. There are no current plans to appoint an
additional director. The Board of Directors, after considering the alternatives,
has determined that a provision which authorizes a board of at least seven and
up to eleven directors (with the actual number to be established by the Board of
Directors from time to time) will best suit the Company's needs for the
foreseeable future.
The Class A Preferred Stock and the Class B Common Stock provisions in the
1993 Restated Certificate contain extensive terms and conditions governing the
rights and remedies of holders under specified circumstances, which are no
longer relevant. The Company has no intention of issuing any Class A Preferred
Stock or Class B Common Stock at any time in the future. Therefore, on February
18, 1997, the Board of Directors voted, subject to approval by stockholders at
the Annual Meeting, to amend and restate the 1993 Restated Certificate as set
forth in Exhibit A to this Proxy Statement (the "1997 Restated Certificate").
The effect of such amendment and restatement is to (a) remove the Article FOURTH
authorization for and references to the Class A Preferred Stock and the Class B
Common Stock, and (b) replace the Article FIFTH requirement of a thirteen person
Board of Directors with an authorization of a Board of Directors of no less than
seven and no more than eleven directors, as determined by the Directors from
time to time. The amendment and restatement does not affect the provisions which
authorize the Board of Directors to approve a future series of preferred stock
and specify the preferences and rights of holders of such stock. Pursuant to
Delaware law, such amendment and restatement requires the affirmative vote of
the holders of a majority of the shares of Common Stock outstanding. Abstentions
and broker nonvotes will be counted as negative votes.
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE APPROVAL
OF THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AS SET FORTH IN EXHIBIT
A.
ITEM 3: AMENDMENT AND RESTATEMENT OF THE COMPANY'S PERFORMANCE SHARE PLAN
AS AMENDED AND RESTATED
In 1996, the Board adopted, and the stockholders of the Company approved,
the Company's Performance Share Plan ("PSP") to provide long-term, stock-based
incentive compensation to the Company's key employees. In March 1997, the Board
approved an amendment and restatement of the PSP, effective January 1, 1997,
subject to the approval of the stockholders at the Annual Meeting. The purpose
of amending and restating the PSP is to allow awards made under the PSP in 1997
and future years to the Company's executive officers to qualify as
"performance-based" compensation under Section 162(m) of the Internal Revenue
Code, discussed above. (See "Compensation Committee Report -- Compensation
Deduction Limitation"). This will allow the Company to preserve the
tax-deductibility of future awards under the PSP without regard to the
limitations of Section 162(m) of the Internal Revenue Code.
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SUMMARY OF THE PSP
The following summary of the PSP is qualified in its entirety by reference
to the complete text of the PSP, attached as Exhibit B to this Proxy Statement.
Administration. The PSP shall be administered by a committee (the
"Committee") of at least two directors, each of whom qualify as "nonemployee
directors" under Rule 16b-3 under the Securities Exchange Act of 1934 and as
"outside directors" under Section 162(m) of the Internal Revenue Code.
Currently, the Compensation Committee administers the PSP. Subject to the
express provisions of the PSP, the Committee has the power and authority to make
all determinations with respect to awards and payments under the PSP. The
Committee also has the authority to interpret the provisions of the PSP.
Eligibility. The employees eligible to receive awards under the PSP
("Participants") consist of key employees of the Company and its subsidiaries
who, in the opinion of the Committee, have the capacity for contributing in a
substantial measure to the successful performance of the Company. The Committee
shall select those key employees, if any, who will participate in the PSP with
respect to any performance period established by the Committee ("Performance
Period").
Performance Share Units. The benefits available to Participants under the
PSP are "Performance Share Units," which are expressed by reference to the
Company's Common Stock (each Performance Share Unit being equal to one share of
Common Stock) and which entitle the recipient to a distribution of shares of the
Company's Common Stock and/or a distribution of cash, as determined by the
Committee. The extent to which distributions are made with respect to
Performance Share Units awarded for a Performance Period is based upon the
achievement of pre-established Company financial objectives ("Performance
Measures") for the Performance Period. The duration of each Performance Period
is established by the Committee, subject to the requirement that all Performance
Periods shall be at least three years in duration. Performance Share Units are
granted to Participants at levels determined in the discretion of the Committee.
Performance Share Units are granted on an annual basis within the first six
months of the year in which a Performance Period commences, with a target award
relating to a number of Performance Share Units, as determined by the Committee
in its discretion. The maximum number of Performance Share Units that may be
earned by a Participant with respect to all Performance Periods ending during
any one calendar year is 25,000, subject to adjustment for certain corporate
reorganization and other events affecting the capitalization of the Company. The
number of Performance Share Units earned by a Participant shall be determined by
the Company's degree of achievement under the applicable Performance Measure or
Measures.
Performance Measures. The Performance Measures from which the Committee
may choose for any given Performance Period are Return on Equity, Total
Shareholder Return and Earnings Per Share (as each term is defined in the PSP).
The Committee may designate any one or more of these Performance Measures for
use with respect to Performance Share Units awarded for a Performance Period.
The Performance Measures shall be established, and the Company's performance
with respect thereto shall be evaluated, by the Committee on the basis of
generally accepted accounting principles. The Performance Measures may be
established, and the Company's performance may be evaluated, on an absolute
basis or on a relative basis by comparison to the Company's Peer Group or to the
Risk Free Rate (as each term is defined in the PSP). The Committee shall
determine the threshold, target and maximum performance levels applicable to a
Performance Measure ("Performance Levels"), and the relative performance
weighting used for each Performance Measure in determining the number of
Performance Share Units earned under an award at the threshold, target and
maximum Performance Levels. Failure to achieve at least the threshold level will
result in no Performance Share Units being earned for that Performance Measure
for the Performance Period. Also, there will be no Performance Share Units
earned by any Participant if, at the end of the relevant Performance Period, the
Company has not achieved a separate Return on Equity threshold established by
the Committee for the Performance Period. The Committee may in its sole
discretion reduce the number of Performance Share Units that would otherwise be
earned by a Participant if the Committee determines that the Participant's
individual performance during the Performance Period was materially below the
expected level of performance.
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Termination of Employment. In the event of a Participant's termination of
employment with the Company or a subsidiary prior to the end of a Performance
Period, other than by reason of such Participant's death, permanent disability
or retirement, the Participant will forfeit all rights under any outstanding PSP
award. In the event of death, permanent disability or retirement, the PSP
contains provisions for proration of outstanding awards.
Adjustments; Change in Control. As and to the extent permitted by Section
162(m) of the Internal Revenue Code, in the event of a change in corporate
capitalization, a corporate transaction or liquidation, an extraordinary gain or
loss or other extraordinary item for accounting purposes, or a material change
in accounting principles affecting on the Performance Measures, then the
Committee shall make adjustments to the Performance Measures and/or the
Performance Levels, based solely on objective criteria, so as to neutralize the
effect of such event or occurrence on all affected awards. In the event of a
Change in Control (as defined in the PSP), Participants shall be eligible to
earn all of the Performance Share Units subject to then-outstanding awards for
Performance Periods not then completed, without proration to account for the
partial period of employment service during such Performance Period, taking into
account the degree of achievement of the applicable Performance Measures for the
period prior to the Change in Control.
Termination and Amendment. The Board may terminate or amend the PSP any
time in any manner, except that no such termination or amendment will affect
outstanding awards under the PSP with the affected Participant's written
consent.
New Plan Benefits. The benefits that will be received by Participants
under the PSP as amended and restated are not determinable at this time. Awards
to the Company's executive officers under the PSP (prior to its amendment and
restatement) during 1996 are summarized above. (See "Executive Compensation --
Long-Term Incentive Plans -- Awards During 1996"). Awards to all other employees
as a group (18 employees) during 1996 were for an aggregate of 36,850
Performance Share Units at the target Performance Level. It is anticipated that
the Committee will make an award of Performance Share Units to the executive
officers and certain other employees for a new Performance Period covering
1997-99, subject to the approval by the stockholders of the PSP as amended and
restated. The number of Performance Share Units to be awarded is not
determinable as of the date of this Proxy Statement.
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF
THE AMENDED AND RESTATED PERFORMANCE SHARE PLAN AS SET FORTH IN EXHIBIT B.
Assuming the presence of a quorum, the affirmative vote of a majority of the
votes cast by the holders of shares of Common Stock present and entitled to vote
on this item at the Annual Meeting is required to approve the Performance Share
Plan amendments. Under applicable Delaware law, in tabulating the vote, broker
nonvotes will have no effect on the vote. Abstentions will be counted as
negative votes.
ITEM 4: APPROVAL OF THE INCENTIVE COMPENSATION PLAN (POOL A) AS AMENDED AND
RESTATED
In 1994, the Company adopted the Company's Incentive Compensation Plan
(Pool A) ("ICP") to provide a vehicle through which the Company can base
incentive compensation on the Company's performance. In March 1997, the Board
approved an amendment and restatement of the ICP, effective January 1, 1997,
subject to approval of the stockholders at the Annual Meeting. The purpose of
amending and restating the ICP is to allow awards made under the ICP in 1997 and
future years to the Company's executive officers to qualify as
"performance-based" compensation under Section 162(m) of the Internal Revenue
Code, discussed above. (See "Compensation Committee Report -- Compensation
Deduction Limitation"). This will allow the Company to preserve the tax
deductibility of future awards under the ICP without regard to the limitations
of Section 162(m) of the Internal Revenue Code. The following summary of the ICP
is qualified in its entirety by reference to the complete text of the ICP,
attached as Exhibit C to this Proxy Statement.
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Administration. The ICP is administered by the Compensation Committee.
Each member of the Compensation Committee will qualify as an "outside director"
under Section 162(m) of the Internal Revenue Code. The Compensation Committee
has the power and authority to make all determinations with respect to awards
and payments under the ICP. The Compensation Committee also has the authority to
interpret the provisions of the ICP.
Eligibility. The employees eligible to receive awards under the ICP
("Participants") consist of the key management employees of the Company who are
recommended to the Compensation Committee by the Chief Executive Officer and
Chairman of the Company. For each year, the Compensation Committee shall select
those eligible employees, if any, who will participate in the ICP with respect
to such year. Unless the Compensation Committee determines otherwise, the
Company's Chief Executive Officer, Chairman and Chief Financial Officer will be
Participants under the ICP.
Bonus Amounts. The benefits available to Participants under the ICP are
annual cash bonuses. The extent to which a participant receives a bonus payment
for any year is based upon the achievement of pre-established Company financial
objectives ("Key Performance Variables") for the year. The specific Key
Performance Variables and threshold, target and maximum objectives with respect
to the bonus payment for any year are established by the Compensation Committee
within the first 90 days of such year. The dollar amount of the annual bonus
payable to a Participant equals the sum of the allocations for each of the Key
Performance Variables, which allocations equal the Participant's salary times
the weighting percentage for each Key Performance Variable times the applicable
percentage of salary for the performance level achieved. The maximum annual
bonus for any Participant with respect to any year is $1,000,000.
Key Performance Variables. The Key Performance Variables which the
Compensation Committee may choose for any year are Report Year Loss Ratio,
Return on Equity, Gross Premiums Written -- Facility, Gross Premiums
Written -- Insurance Companies, Pre-tax Operating Earnings, Earnings Per Share,
Book Value Per Share, Total Cash and Invested Assets, Expense Ratio and Stock
Price (as each term is defined in the ICP). The Compensation Committee may
designate any of the Key Performance Variables for any year, but the Key
Performance Variables selected for any year must include Report Year Loss Ratio
and Return on Equity. Except as otherwise provided in the ICP or the context
otherwise requires, the Key Performance Variables are established, and the
Company's performance with respect thereto is evaluated, by the Compensation
Committee on the basis of generally accepted accounting principles. The Key
Performance Variables may be established, and the Company's performance may be
evaluated, on an absolute basis or on a relative basis by comparison to the
Company's Peer Group (as such term is defined in the ICP). The Compensation
Committee shall determine the threshold, target and maximum performance levels
applicable to a Key Performance Variable, and the relative performance weighting
used for each Key Performance Variable. Failure to achieve at least the
threshold level for any year will result in no annual bonus being paid for that
Key Performance Variable for that year. The Compensation Committee may, in its
sole discretion, reduce the bonus amount payable to a Participant with respect
to any year for any reason whatsoever.
Payment of Awards. At the completion of each year, the Compensation
Committee shall assess the performance of the Company and determine the annual
bonus payable to each Participant. The portion of the annual bonus payable for a
year allocable to Key Performance Variables other than Return on Equity and
Report Year Loss Ratio will generally be paid in the month of February of the
next following year. The portion of the annual bonus payable for a year
allocable to Return of Equity will generally be paid in the second calendar
quarter of the next following year. The portion of the award allocable to Report
Year Loss Ratio will be paid, with interest, in the fourth year following the
year to which it relates, and will be adjusted upward or downward using a
look-back adjustment based upon an estimate of the expected consolidated losses
and loss adjustment expenses of the Company's insurance company subsidiaries,
prepared by a firm of independent actuaries for the applicable report year. The
ICP contains provisions relating to the deferral of an otherwise payable bonus
amount, at the option of the Participant, including provisions relating to the
payment of interest on such deferred amount.
Termination of Employment. In the event of a Participant's termination of
employment with the Company prior to the date of payment of any portion of a
bonus under the ICP, other than by reason of such Participant's death,
disability, leave of absence or retirement, the Participant will not receive
such payment. In the event of a Participant's termination of employment with the
Company by reason of death, disability,
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retirement or leave of absence, (i) bonus amounts previously earned will be paid
to the Participant (or his beneficiary) and (ii) a pro rata portion of the bonus
with respect to the year of such termination of employment will also be payable.
Adjustments. As and to the extent permitted by Section 162(m) of the
Internal Revenue Code, in the event of a change in corporate capitalization, a
corporate transaction or liquidation, an extraordinary gain or loss or other
extraordinary item for accounting purposes, or a material change in accounting
and actuarial policies or practices affecting the Key Performance Variables,
then the Compensation Committee shall make adjustments to the Key Performance
Variables and such objectives, so as to neutralize the effect of such event or
occurrence on all affected bonus amounts.
Termination and Amendment. The Board may terminate the ICP and the
Committee may amend the ICP at any time and in any manner, except that no such
termination or amendment will affect outstanding awards under the ICP without
the affected Participant's consent.
New Plan Benefits. The benefits that will be received by Participants
under the ICP, as amended and restated, are not determinable at this time. Bonus
payments to the Company's executive officers under the ICP (prior to its
amendment and restatement) with respect to 1996 are summarized above. (See
"Executive Compensation -- Summary Compensation Table -- Bonus.") Bonus payments
to all other employees as a group (two employees) under the ICP with respect to
1996 aggregated $219,800. The Compensation Committee has determined that three
of the executive officers and one other employee will be Participants under the
ICP for the 1997 year, subject to the approval by stockholders of the ICP, as
amended and restated. The Key Performance Variables designated by the
Compensation Committee for 1997 are: Gross Premiums Written -- Facility, Report
Year Loss Ratio, Return on Equity and Earnings Per Share. Bonus awards for three
of the executive officers and one other employee of the Company for 1997 would,
assuming performance with respect to all Key Performance Variables was exactly
at the threshold level, range from 20% to 40% of such respective individuals'
salaries, at the target level, range from 40% to 80% of such respective
individuals' salaries and, at the maximum level, range from 60% to 120% of such
respective individuals' salaries.
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF
THE AMENDED INCENTIVE COMPENSATION PLAN (POOL A), IN THE FORM ATTACHED AS
EXHIBIT C. Assuming the presence of a quorum, the affirmative vote of a majority
of the votes cast by the holders of shares of Common Stock present and entitled
to vote on this item at the Annual Meeting is required to approve the amended
Incentive Compensation Plan Pool A. Under applicable Delaware law, in tabulating
the vote, broker nonvotes will have no effect on the vote. Abstentions will be
counted as negative votes.
ITEM 5: APPROVAL OF THE COMPANY'S NONQUALIFIED STOCK OPTION PLAN
In 1993, the Board adopted, and the Company's sole stockholder (prior to
the Company's public offering) approved, the Company's Nonqualified Stock Option
Plan (the "Nonqualified Plan") to provide selected officers and employees with
stock-based compensation and the opportunity to increase their equity ownership
in the Company. In March 1997, the Board approved an amendment and restatement
of the Nonqualified Plan, and directed that the Nonqualified Plan, as amended
and restated, be submitted to the stockholders for approval. The purpose of
submitting the Nonqualified Plan, as amended and restated, to the stockholders
at the Annual Meeting is to allow stock options granted under the Nonqualified
Plan in the future to the Company's executive officers to qualify as
"performance-based" compensation under Section 162(m) of the Internal Revenue
Code, discussed above. (See "Compensation Committee Report -- Compensation
Deduction Limitation.") This will allow the Company to preserve the
tax-deductibility of such stock options without regard to the limitations of
Section 162(m) of the Code. the following summary of the Nonqualified Plan is
qualified by reference in its entirety by reference to the complete text of the
Nonqualified Plan, attached as Exhibit D to this Proxy Statement.
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Administration. The Nonqualified Plan shall be administered by a committee
(the "Committee") of no fewer than two members of the Board. Currently, the
Compensation Committee administers the Nonqualified Plan. The Committee has the
power, subject to the provisions of the Nonqualified Plan, to determine who will
be granted options under the Plan, how many shares will be subject to each
option, the terms of each option grant, the price of the shares subject to each
option and the conditions to which each option is subject. The Committee also
has the authority to interpret the provisions of the Plan.
Stock Options. Stock options granted under the Nonqualified Plan are not
intended to qualify as "incentive stock options" under the Internal Revenue
Code. Stock options may be granted to any officer or employee of the Company or
any subsidiary ("Participants"). The number of shares of Common Stock subject to
an option shall be determined by the Committee. However, no Participant may be
granted options to purchase more than an aggregate of 750,000 shares of Common
Stock during the term of the Nonqualified Plan, which is the 10-year period
commencing on November 13, 1993 and expiring on November 13, 2003. This
limitation is subject to adjustment for certain corporate reorganization and
other events affecting the capitalization of the Company. The exercise price of
stock options may be set at the price determined by the Committee in its
discretion. Stock options that are intended to satisfy the requirements for
"performance-based" compensation under Section 162(m) of the Internal Revenue
Code must be granted at or above the fair market value of the Common Stock on
the date of grant. The Committee may in its discretion prescribe installment or
other vesting provisions for stock options under the Nonqualified Plan that
determine the time or times at which options shall become exercisable. The
maximum term of exercise for stock options is 121 months from the date of grant.
The exercise price of stock options may be paid by the Participant either in
cash or in shares of Common Stock owned by the Participant, as determined by the
Committee. Stock options granted under the Nonqualified Plan are nontransferable
except by will or the laws of descent and distribution or, as may be approved by
the Committee, to a "Permitted Transferee" of the Participant, which is defined
under the Nonqualified Plan to include immediate family members, charitable
institutions and certain related trusts and other organizations.
Termination of Employment. In the event of a Participant's termination of
employment by reason of death, permanent and total disability or retirement, the
right to exercise an option under the Nonqualified Plan shall terminate upon the
earlier of the option's expiration date or the third anniversary of the death,
disability or retirement. In the event of a Participant's termination of
employment for any other reason, the Participant's right to exercise an option
shall terminate no later than three months after such termination of employment.
The Committee may in its discretion provide for any shorter or longer exercise
period following termination of employment or may extend the exercise period in
such an event.
Amendment and Termination. The Board may at any time terminate or amend
the Nonqualified Plan in any respect, except that no such termination or
amendment will affect outstanding options under the Nonqualified Plan without
the Participant's consent.
New Plan Benefits. Stock options granted to the Company's executive
officers under the Nonqualified Plan during 1996 are summarized above. (See
"Executive Compensation Stock Option Grants in 1996".) Stock options granted to
all other employees of the Company during 1996 (17 persons) covered a total of
72,250 shares of Common Stock at a weighted average exercise price of $28.52 per
share. Any future option grants under the Nonqualified Plan, which would be
contingent upon the stockholders' approval of the Nonqualified Plan at the
Annual Meeting, are not determinable at this time. A total of 3,000,000 shares
were originally reserved for issuance under the Nonqualified Plan, of which a
total of 1,512,563 shares remain available for grant as of the date of this
Proxy Statement. The closing price of the Common Stock on the New York Stock
Exchange on March 13, 1996 was $47.63 per share.
Federal Income Tax Consequences. All stock options granted under the
Nonqualified Plan are treated as nonqualified stock options for federal income
tax purposes. A Participant generally will not recognize any taxable income upon
the grant of a nonqualified option because, under current Treasury regulations
pursuant to Section 83 of the Internal Revenue Code, the fair market value of an
option at the time it is granted is ordinarily not considered to be "readily
ascertainable." However, upon exercise of a nonqualified stock option, a
Participant must recognize ordinary income in an amount equal to the excess of
the fair market value of the
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Common Stock at the time of exercise over the exercise price. Upon the
subsequent disposition of the Common Stock, the Participant may realize a
capital gain or loss, depending on whether the selling price exceeds the fair
market value of the Common Stock on the date of exercise. The Participant's
holding period for the Common Stock, for capital gains and losses purposes,
begins on the date of exercise. The Participant's tax basis in the shares
received on exercise of a nonqualified option will be equal to the amount of
consideration paid by the Participant on exercise, plus the amount of ordinary
income recognized as a result of the receipt of such shares. The Company will
generally be entitled to a deduction for federal income tax purposes at the same
time and in the same amount as the Participant recognizes taxable income.
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF
THE NONQUALIFIED STOCK OPTION PLAN, AS AMENDED AND RESTATED, AS SET FORTH IN
EXHIBIT D. Assuming the presence of a quorum, the affirmative vote of a majority
of the votes cast by the holders of shares of Common Stock present and entitled
to vote on this item at the Annual Meeting is required to approve the
Nonqualified Stock Option Plan. Under applicable Delaware law, in tabulating the
vote, broker nonvotes will have no effect on the vote. Abstentions will be
counted as negative votes.
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF
THE NONQUALIFIED STOCK OPTION PLAN AS SET FORTH IN EXHIBIT D. Assuming the
presence of a quorum, the affirmative vote of a majority of the votes cast by
the holders of shares of Common Stock present and entitled to vote on this item
at the Annual Meeting is required to approve the Nonqualified Stock Option Plan.
Under applicable Delaware law, in tabulating the vote, broker nonvotes will have
no effect on the vote. Abstentions will be counted as negative votes.
ITEM 6: RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors has appointed Ernst & Young LLP as the independent
auditors of the Company for 1997. Ernst & Young LLP has served as the
independent auditors of the Company and its subsidiaries since 1987.
Arrangements have been made for a representative of Ernst & Young LLP to attend
the Annual Meeting. The representative will have the opportunity to make a
statement if he so wishes and will be available to respond to appropriate
stockholder questions.
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" RATIFICATION
OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT AUDITORS
FOR 1997. Assuming the presence of a quorum, the affirmative vote of a majority
of the votes cast by the holders of shares of Common Stock present and entitled
to vote on this item at the Annual Meeting is required to ratify the appointment
of the Company's auditors. Under applicable Delaware law, in tabulating the
vote, broker nonvotes will have no effect on the vote. Abstentions will be
counted as negative votes.
STOCKHOLDER'S PROPOSALS
Under the rules of the Securities and Exchange Commission, any proposal
which a Stockholder intends to present at the 1998 Annual Meeting of the Company
and have included in the Proxy Statement and proxy for that Meeting must be
received by December 1, 1997, at the Company's principal executive offices, 82
Hopmeadow Street, Simsbury, Connecticut 06070. Any such proposal must be
accompanied by the notice required by the rules of the Securities and Exchange
Commission, must otherwise comply with those rules and should be addressed to
the attention of the Secretary of the Company.
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COPIES OF ANNUAL REPORT AND FORM 10-K
Copies of the Company's 1996 Annual Report to Stockholders are being mailed
to stockholders simultaneously with this Proxy Statement. THE COMPANY WILL
PROVIDE TO ANY STOCKHOLDER UPON REQUEST A COPY OF ITS ANNUAL REPORT TO THE
SECURITIES AND EXCHANGE COMMISSION ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1996 (WITHOUT EXHIBITS, UNLESS OTHERWISE REQUESTED). SUCH COPY WILL BE FURNISHED
WITHOUT CHARGE, OTHER THAN REASONABLE CHARGES FOR ANY EXHIBIT REQUESTED.
REQUESTS MUST BE IN WRITING AND MAILED TO:
EXECUTIVE RISK INC.
82 HOPMEADOW STREET
SIMSBURY, CT 06070-7683
ATTENTION: ROBERT V. DEUTSCH, EXECUTIVE VICE PRESIDENT
By Order of the Board of Directors,
James A. FitzPatrick, Jr.
Secretary
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EXHIBIT A
1997 AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
EXECUTIVE RISK INC.
Executive Risk Inc., a corporation organized and existing under the laws of
the State of Delaware, hereby certifies as follows:
1. The name of the Corporation is Executive Risk Inc. The Corporation
originally incorporated under the same name, and the original Certificate of
Incorporation was filed with the Secretary of State of the State of Delaware on
August 17, 1993. The first Amended and Restated Certificate of Incorporation was
filed with the Secretary of the State of Delaware on December 31, 1993.
2. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, this Second Amended and Restated Certificate of Incorporation
restates and integrates and further amends the provisions of the Amended and
Restated Certificate of Incorporation of the Corporation.
3. The text of the Amended and Restated Certificate of Incorporation of the
Corporation is hereby restated and amended pursuant to this Second Amended and
Restated Certificate of Incorporation to read in its entirety as follows:
FIRST: The name of the corporation is EXECUTIVE RISK INC.
(hereinafter called the "Corporation").
SECOND: The address of the registered office and registered agent in
this state is 1013 Centre Road, Wilmington, DE 19805, and the name of the
registered agent at said address is Prentice-Hall Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: The authorized capital stock of the Corporation shall consist
of 4,000,000 shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock"), and 50,000,000 shares of Common Stock, $.01 par value
per share (the "Common Stock"). The Preferred Stock shall consist of one or
more series of Preferred Stock which shall have the powers, terms,
conditions, designations, preferences and privileges, the relative,
participating, optional and other special rights, and the qualifications,
limitations and restrictions, if any, as provided herein.
A. Preferred Stock
The Board of Directors is hereby expressly authorized to provide for,
designate and issue, out of the authorized but unissued shares of Preferred
Stock, one or more series of Preferred Stock. Before any shares of any such
series are issued, the Board of Directors shall fix, and hereby is expressly
empowered to fix, as to the shares of any such series:
(a) the designation of such series, the number of shares to constitute
such series and the stated value thereof, if different from the par value
thereof;
(b) whether the shares of such series shall have voting rights or
powers, in addition to any voting rights required by law and, if so, the
terms of such voting rights or powers, which may be full or limited;
(c) the dividends, if any, payable on such series, whether any such
dividends shall be cumulative and, if so, from what dates, the conditions
and dates upon which such dividends shall be payable, the
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preferences or relation which such dividends shall bear to the dividends
payable on any shares of stock of any other class or any other series of
this class;
(d) whether the shares of such series shall be subject to redemption
by the Corporation and, if so, the times, prices and other conditions of
such redemption;
(e) the amount or amounts payable upon shares of such series upon, and
the rights of the holders of such series in, the voluntary or involuntary
liquidation, dissolution or winding up, or upon any distribution of the
assets, of the Corporation;
(f) whether the shares of such series shall be subject to the
operation of a retirement or sinking fund and, if so, the extent to which
and manner in which any such retirement or sinking fund shall be applied to
the purchase or redemption of the shares of such series for retirement or
other corporate purposes and the terms and provisions relative to the
operation thereof;
(g) whether the shares of such series shall be convertible into or
exchangeable for shares of stock of any other class or any other series of
this class or any other securities and, if so, the price or prices or the
rate or rates of conversion or exchange and the method, if any, of
adjusting the same, and any other terms and conditions of conversion or
exchange;
(h) the limitations and restrictions, if any, to be effective while
any shares of such series are outstanding upon the payment of dividends or
the making of other distributions on, and upon the purchase, redemption or
other acquisition by the Corporation of, the Common Stock or shares of
stock of any other class or any other series of this class;
(i) the conditions or restrictions, if any, to be effective while any
shares of such series are outstanding upon the creation of indebtedness of
the Corporation or upon the issue of any additional stock, including
additional shares of such series or of any other series of this class or of
any other class; and
(j) any other powers, designations, preferences and relative,
participating, optional or other special rights, and any qualifications,
limitations, or restrictions thereof.
The powers, designations, preferences and relative, participating,
optional or other special rights of each series of Preferred Stock, and the
qualifications, limitations or restrictions thereof, if any, may differ
from those of any and all other series at any time outstanding. The Board
of Directors is hereby expressly authorized from time to time to increase
(but not above the total number of authorized shares of Preferred Stock) or
decrease (but not below the number of shares thereof then outstanding) the
number of shares of stock of any series of Preferred Stock designated to
any one or more series of Preferred Stock pursuant to this Section A of
this Paragraph Fourth.
B. Common Stock
All shares of Common Stock will be identical and will entitle the holders
thereof to the same rights and privileges.
Dividends
When, as and if dividends are declared thereon, whether payable in
cash, property or securities of the Corporation, the holders of Common
Stock will be entitled to share equally in and receive, in accordance with
the number of shares of Common Stock held by each such holder, such
dividends. Dividends payable under this Paragraph Fourth shall be paid to
the holders of record of the outstanding Common Stock as their names shall
appear on the stock register of the Corporation on the record date fixed by
the Board of Directors in advance of declaration and payment of each
dividend. Any Common Stock issued as a dividend pursuant to this Paragraph
Fourth shall, when so issued, be duly authorized, validly issued, fully
paid and non-assessable, and free of all liens and charges.
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Notwithstanding anything contained herein to the contrary, no
dividends on Common Stock shall be declared by the Corporation's Board of
Directors or paid or set apart for payment by the Corporation at any time
that such declaration, payment, or setting apart is prohibited by
applicable law.
Voting Rights
Each holder of the Common Stock shall be entitled to one vote for each
share of Common Stock held on all matters submitted to a vote of the
stockholders.
Other Rights
Except for and subject to those rights expressly granted to the
holders of Preferred Stock or as otherwise provided herein, and except as
may be provided by the laws of the State of Delaware, the holders of Common
Stock shall have exclusively all other rights of stockholders, including,
without limitation, (a) the right to receive dividends, when, as and if
declared by the Board of Directors, out of assets lawfully available
therefor, and (b) in the event of any distribution of assets upon a
liquidation, dissolution or winding-up of the affairs of the Corporation
(each a "Liquidation") or otherwise, the right to receive ratably and
equally with all other holders of Common Stock in all the assets and funds
of the Corporation remaining after the payment to the holders of the
Preferred Stock of the specific amounts which they are entitled to receive
upon such Liquidation. For the purposes of this Paragraph Fourth, neither
the consolidation or merger of the Corporation with or into any other
corporation or corporations in which the stockholders of the Corporation
receive capital stock and/or other securities (including debt securities)
of the acquiring corporation (or of the direct or indirect parent
corporation of the acquiring corporation), nor the sale, lease, or transfer
by the Corporation of all or any part of its assets, nor the reduction of
the capital stock of the Corporation, shall be deemed to be a voluntary or
involuntary liquidation, dissolution, or winding up of the Corporation as
those terms are used in this Paragraph Fourth.
FIFTH: The number which shall constitute the Board of Directors of the
Corporation shall be no less than seven and no more than eleven, as
determined by the Board of Directors from time to time. The Board of
Directors shall be classified, with respect to the time for which they
severally hold office, into three classes, as nearly equal in number as
possible, as shall be provided in the manner specified in the By-Laws, one
class to hold office initially for a term expiring at the annual meeting of
stockholders to be held in 1998, another class to hold office initially for
a term expiring at the annual meeting of stockholders to be held in 1999
and another class to hold office initially for a term expiring at the
annual meeting of stockholders to be held in 2000, with the members of each
class to hold office until their successors are duly elected and qualified.
At each annual meeting of the stockholders of the Corporation, the
successors to the class of directors whose term expires at that meeting
shall be elected to hold office for a term expiring at the annual meeting
of stockholders held in the third year following the year of their
election. The election of directors need not be by ballot unless the
By-Laws so provide.
In any election of directors, no holder of Common Stock shall be
entitled to cumulate the number of votes that such holder is entitled to
cast for the election of directors with respect to such holder's Common
Stock.
SIXTH: The following provisions are inserted for the management of the
business and for the conduct of the affairs of the Corporation, and in
furtherance and, except as specifically set forth in this Paragraph, not in
limitation of the powers of the Corporation and of its directors and
stockholders conferred by statute:
The Board of Directors shall have power without (except as provided by
applicable law) the assent or vote of the stockholders to make, alter,
amend, change, add to or repeal the By-Laws of the Corporation; to
authorize and cause to be executed mortgages and liens upon all or any part
of the property of the Corporation; to determine the use and disposition of
any surplus or net profits; to fix the times for the declaration and
payment of dividends; and to set apart out of any of the funds of the
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Corporation available for dividends a reserve or reserves for any proper
purpose and to abolish any such reserve.
In addition to the powers and authorities hereinbefore or by statute
expressly conferred upon them, the Board of Directors is hereby empowered
to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation; subject, nevertheless, to the
provisions of the statutes of Delaware, this Certificate of Incorporation
and the Corporation's By-Laws, as in effect from time to time.
SEVENTH: No director shall be liable to the Corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a
director, provided that the foregoing shall not eliminate or limit any
liability that may exist with respect to (1) a breach of the director's
duty of loyalty to the Corporation or its stockholders, (2) acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) liability under Section 174 of the Delaware
General Corporation Law or (4) a transaction from which the director
derived an improper personal benefit, it being the intention of the
foregoing provision to eliminate the liability of the Corporation's
directors to the Corporation or its stockholders to the fullest extent
permitted by Section 102(b)(7) of the Delaware General Corporation Law, as
in effect on the date hereof and as such Section may be amended after the
date hereof to the extent such amendment permits such liability to be
further eliminated or limited. The Corporation shall indemnify to the
fullest extent permitted by Section 145 of the Delaware General Corporation
Law (as in effect on the date hereof and as such Section may be amended
after the date hereof) each person that such Section grants the Corporation
the power to indemnify.
EIGHTH: Except as fixed pursuant to the provisions of Section A of
Paragraph Fourth of this Certificate of Incorporation relating to the
rights of the holders of Preferred Stock, no action required to be taken or
that may be taken at any annual or special meeting of stockholders of the
Corporation may be taken without a meeting and the power of the
stockholders of the Corporation to consent in writing, without a meeting,
to the taking of any action is specifically denied.
NINTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation in the
manner now or hereafter prescribed by law and in this Certificate of
Incorporation and all rights and powers conferred herein on stockholders,
directors and officers are subject to this reserved power. Any amendment to
the provisions of Paragraph Fifth, Paragraph Seventh, Paragraph Eighth or
this Paragraph Ninth, and any amendment by the stockholders to the By-Laws
of the Corporation, shall require, in addition to the approval required by
applicable law and the other paragraphs of this Certificate of
Incorporation, the affirmative vote of the holders of at least seventy-five
percent of the then-outstanding shares of Common Stock.
IN WITNESS WHEREOF, we have signed this Second Amended and Restated
Certificate of Incorporation and caused the corporate seal of the Corporation to
be hereunto affixed this day of May, 1997.
--------------------------------------
Chairman and Chief Executive Officer
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EXHIBIT B
EXECUTIVE RISK INC.
PERFORMANCE SHARE PLAN
(AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1997)
ARTICLE I
ESTABLISHMENT
The Board of Directors of Executive Risk Inc., upon recommendation of the
Committee on Directors and Compensation of the Board, has approved this amended
and restated Executive Risk Inc. Performance Share Plan (as so amended and
restated, the "Plan"). The Plan shall be submitted to the stockholders of the
Company for approval at the 1997 Annual Meeting of Stockholders. The Plan shall
be effective as of January 1, 1997, subject to its approval by the stockholders
of the Company. Awards may be made under the Plan subject to such stockholder
approval, but no benefits shall be distributed under an Award unless and until
the Plan has been approved by the stockholders of the Company.
ARTICLE II
PURPOSE
The purpose of the Plan is to advance the interests of the Company and its
stockholders by attracting and retaining key employees, and by stimulating the
efforts of such employees to contribute to the continued success and growth of
the business of the Company. The Plan is intended to provide competitive,
longer-term, performance-driven, incentive compensation opportunities to
Participants, which are directly related to and dependent upon the
competitiveness of the longer-term returns realized by the Company's
stockholders. The Plan also is intended to provide such employees with an
opportunity to increase their ownership of the Company's common stock and,
thereby, increase their personal interest in the long-term success of the
Company's business in a manner designed to increase stockholder value.
ARTICLE III
DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings set
forth below:
(a) "Award" means the grant to a Participant, under Section 7.1 hereof, of
a right to earn a number of Performance Share Units for a stipulated Performance
Period, with the number of such Performance Share Units to be distributed being
dependent upon the financial performance of the Company, measured with reference
to the threshold, target and maximum Performance Levels.
(b) "Award Certificate" means a certificate or letter setting forth the
terms and conditions applicable to each Award, which shall include, but shall
not be limited to, the Performance Share Units which may be earned by the
Participant, the Performance Measures (and the related Performance Levels and
Performance Weighting) applicable to the Award and the length of the Performance
Period applicable to the Award.
(c) "Board" means the Board of Directors of the Company.
(d) "Committee" means the committee described in Section 4.1 hereof.
(e) "Common Stock" means the common stock of the Company, par value $.01
per share.
(f) "Company" means Executive Risk Inc., a Delaware corporation.
(g) "EPS" means the consolidated operating earnings per common share of the
Company (or Peer Group company, as applicable) on a fully diluted basis,
determined by dividing (a) operating earnings of the Company (or Peer Group
company, as applicable) by (b) the weighted average number of outstanding common
shares and common share equivalents of the Company (or Peer Group company).
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(h) "Fair Market Value" means the closing price of the Common Stock on the
New York Stock Exchange (or any other stock exchange on which the Common Stock
is listed) on the date as of which Fair Market Value is to be determined or, in
the absence of any reported sales of Common Stock on such date, on the first
preceding date on which such sale shall have been reported. If the Common Stock
is not listed on any stock exchange on the date as of which Fair Market Value is
to be determined, the Committee shall determine in good faith the Fair Market
Value in whatever manner it considers appropriate.
(i) "Participant" means an employee of the Company or a Subsidiary who has
been selected by the Committee to participate in the Plan under Article VI
hereof for a stipulated Performance Period.
(j) "Peer Group" means the insurance companies that are designated by the
Committee from time to time for purposes of measuring the relative performance
of the Company under a Performance Measure, with such designation to be made
with respect to a stipulated Performance Period within the time periods
specified in Section 7.2 hereof.
(k) "Performance Levels" means the threshold, target and maximum levels of
the Company's performance under the Performance Measures established by the
Committee, pursuant to Section 7.2 hereof, for a stipulated Performance Period
for purposes of determining the number of Performance Share Units that may be
earned by a Participant with respect to an Award.
(l) "Performance Measure" means a financial objective determined by the
Committee, under Section 7.2 hereof, to be applied to an Award granted to a
Participant for a stipulated Performance Period, based on any or all of ROE, TSR
and EPS. Except as otherwise expressly provided or the context otherwise
requires, financial and accounting terms used in the Plan, including terms
defined herein as Performance Measures, are used as defined for purposes of, and
shall be determined in accordance with, generally accepted accounting principles
and as derived from (i) in the case of the Company, the audited consolidated
financial statements of the Company prepared in the ordinary course of business
and (ii) as to Peer Group companies, the audited financial statements of such
companies and/or information with respect to such companies published by one or
more investment or financial institutions not controlling, controlled by, or
under common control with the Company, such as Conning & Company or Fox-Pitt,
Kelton, Inc.
(m) "Performance Period" means the period established by the Committee,
under Section 7.4 hereof, during which the number of Performance Share Units
that may be earned by a Participant with respect to an Award shall be
determined.
(n) "Performance Share Unit" means a measure of participation under the
Plan, expressed by reference to a share of Common Stock.
(o) "Performance Weighting" means the percentage weight (out of 100%)
allocated by the Committee, under Section 7.2 hereof, to each of the Performance
Measures for purposes of determining the number of Performance Share Units that
may be earned by a Participant with respect to an Award.
(p) "Permanent and Total Disability" means the inability of a Participant
to perform his duties as an employee of the Company or a Subsidiary by reason of
any medically determinable physical or mental impairment which can be expected
to result in death or which has lasted or can be expected to last for a
continuous period of not less than 12 months.
(q) "Retirement" means termination of employment with the Company (i) at
age 65 or greater or (ii) at age 50 or greater so long as the Participant's age
plus his full years of employment (measured based on 12 full calendar months of
service) by the Company or any Subsidiary equals or exceeds 60.
(r) "Risk Free Rate" means the stated rate of return, as of the beginning
of a Performance Period, of a United States Treasury security having a term of
maturity equal to the duration of the Performance Period.
(s) "ROE" means consolidated return on equity of the Company (or Peer Group
company, as applicable), determined by dividing the consolidated net income of
the Company (or Peer Group company), excluding realized capital gains and losses
and excluding the effects of FAS 115, by the average consolidated shareholders'
equity of the Company (or Peer Group company).
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(t) "Rule 16b-3" means Rule 16b-3 promulgated under the Securities Exchange
Act of 1934, as amended (or any successor provision at the time in effect).
(u) "Salary" means the aggregate of Participant's current annual base
salary rate and current annual variable compensation rate, as in effect from
time to time.
(v) "Section 162(m)" means Section 162(m) of the Internal Revenue Code of
1986, as amended, and applicable interpretive authority thereunder.
(w) "Stock Ownership Guidelines" means the stock ownership guidelines that
have been established by the Board for a Participant.
(x) "Subsidiary" means any corporation in which 50% or more of the voting
stock is owned, directly or indirectly, by the Company and any unincorporated
entity in which the Company has a 50% or more capital interest or with respect
to which the Company has the power, directly or indirectly, to designate 50% or
more of the individuals exercising functions similar to a board of directors.
(y) "Target Award" means the aggregate number of Performance Share Units
which would be earned by a Participant with respect to an Award assuming that
the target Performance Level is exactly achieved by the Company with respect to
all Performance Measures.
(z) "TSR" means the consolidated total shareholder return of the Company
(or Peer Group company, as applicable) and is calculated by dividing: (1) the
sum of: (i) Common Stock (or Peer Group company common stock) dividends paid
during the Performance Period, assuming dividend reinvestment, and (ii) the
difference between the Fair Market Value of the Common Stock (or Peer Group
company common stock) at the end and the beginning of the Performance Period, by
(2) the Fair Market Value of the Common Stock (or Peer Group company common
stock) at the beginning of the Performance Period. For purposes of TSR, "Fair
Market Value" shall be determined based on the average of the reported closing
prices of the applicable stock for the 30 days immediately preceding the date as
of which Fair Market Value is to be determined.
ARTICLE IV
ADMINISTRATION
4.1 The Committee.
The Plan shall be administered by the Committee, which shall consist of not
less than two members of the Board. Until such time as another committee of the
Board shall be appointed by the Board to serve as the Committee hereunder, the
Committee shall be the Committee on Directors and Compensation of the Board.
Each Committee member shall, at all times while serving, satisfy the
requirements of (i) a "nonemployee director" within the meaning of Rule 16b-3
and (ii) an "outside director" within the meaning of Section 162(m).
4.2 Authority of the Committee.
Subject to the express provisions of the Plan, the Committee shall have
full power and authority for the following:
(a) Selecting Participants to whom Awards are granted.
(b) Determining the size and frequency of Awards for each Participant.
(c) Determining the Performance Measures, Performance Levels,
Performance Weighting, Performance Period and Peer Group members (if
applicable) for each Award under the Plan.
(d) Determining all other terms and conditions of the Award
Certificates.
(e) Determining the number of Performance Share Units earned with
respect to an Award.
(f) Determining the form of distribution with respect to Performance
Share Units earned.
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(g) Construing and interpreting the Plan, the Award Certificates and
any other agreement or instrument entered into under the Plan.
(h) Establishing, amending, rescinding or waiving rules and
regulations for the Plan's administration.
Further, the Committee shall have the full power to make all other
determinations which may be necessary or advisable for the administration of the
Plan, to the extent consistent with the provisions of the Plan.
As permitted by law, the Committee may delegate its authority as identified
hereunder; provided, however, that the Committee may not delegate certain of its
responsibilities hereunder if such delegation would jeopardize compliance with
the requirements of Section 162(m) and Rule 16b-3 referred to in Section 4.1
hereof.
4.3 Decisions Binding.
All determinations and decisions made by the Committee pursuant to the
provisions of the Plan shall be final, conclusive, and binding on all persons,
including the Company, its Subsidiaries and stockholders, Participants and their
estates and beneficiaries.
ARTICLE V
AUTHORIZED SHARES AND ADJUSTMENTS
5.1 Authorized Shares.
Subject to adjustment pursuant to the provisions of Section 5.2 hereof, the
maximum aggregate number of shares of Common Stock that will be available for
delivery upon distributions in shares of Common Stock with respect to
Performance Share Units under all Awards shall be 1,000,000 shares. Shares of
Common Stock delivered under the Plan may be either authorized but unissued
shares or shares held in the Company's treasury. Shares of Common Stock that
shall have been delivered with respect to Performance Share Units under an Award
shall not again be available for delivery under the Plan. If any number of
shares of Common Stock covered by Performance Share Units under an Award shall
not for any reason be delivered to a Participant, such number of shares shall
remain available for delivery hereunder.
5.2 Antidilution.
Subject to Article X hereof, in the event of a reorganization,
recapitalization, stock split, stock dividend, combination of shares, merger or
consolidation, or the sale, conveyance, lease or other transfer by the Company
of all or substantially all of its property, or any other change in the
corporate structure or shares of the Company, pursuant to any of which events
the then outstanding shares of Common Stock are split up or combined, or are
changed into, become exchangeable at the holder's election for, or entitle the
holder thereof to, other shares of stock, or in the case of any other
transaction described in Section 424(a) of the Code, the Committee may
proportionately change the number and kind of shares (including by substitution
of shares of another corporation) that are or may be subject to Performance
Share Units in the manner that it shall deem to be equitable and appropriate
consistent with such transaction. The determination of the Committee with
respect to any such adjustment shall be final, binding and conclusive. The grant
of an Award pursuant to the Plan shall not affect in any way the right or power
of the Company to make adjustments, reclassifications, reorganizations or
changes of its capital or business structure or to merge or consolidate or to
dissolve, liquidate, sell or transfer all or any part of its business or assets.
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ARTICLE VI
ELIGIBILITY AND PARTICIPATION
6.1 Eligibility.
Eligibility for participation in the Plan shall be limited to key employees
of the Company and its Subsidiaries. Awards under the Plan shall be made to such
key employees who, in the opinion of the Committee, have the capacity for
contributing in a substantial measure to the successful performance of the
Company.
6.2 Participation.
Participation in the Plan shall be effective on the first day of each
Performance Period. On or prior to the date of the first regularly scheduled
meeting of the Committee in the second calendar quarter of each year, the
Committee shall identify which, if any, key employees shall receive an Award for
the Performance Period commencing on January 1 of such year. As soon as
practicable following selection, a Participant shall receive an Award
Certificate.
ARTICLE VII
PERFORMANCE SHARE UNITS
7.1 Timing and Number of Units.
Awards may be granted to Participants as of the first day of each
Performance Period on an annual basis. The Committee shall determine, in its
sole discretion, the number of Performance Share Units that would be earned with
respect to an Award upon the attainment of the threshold, target and maximum
Performance Levels. In making such determination, the Committee may take into
account, among other factors, the expected contribution of each Participant to
the Company's success, the percentage of the Participant's Salary that the
Committee may deem appropriate to target for distribution on Performance Share
Units, and the extent to which the Participant has taken actions toward
satisfying the Stock Ownership Guidelines. Notwithstanding the foregoing, the
maximum number of Performance Share Units that may be earned by any Participant
under Section 8.1 hereof with respect to all Performance Periods ending during
any one calendar year shall not exceed 25,000 units, subject to adjustment on
the same basis as provided in Section 5.2 hereof.
7.2 Performance Measures, Levels and Weighting.
The number of Performance Share Units, if any, earned by a Participant
under an Award shall be determined by the Company's degree of achievement under
the applicable Performance Measure or Measures. The Performance Measures may be
established (i) on an absolute basis or (ii) on a relative basis by comparison
to the Company's Peer Group or to the Risk Free Rate. The Committee, in its sole
discretion, shall determine the Performance Levels applicable to a Performance
Measure, and the relative Performance Weighting used for each Performance
Measure in determining the number of Performance Share Units earned under an
Award at the threshold, target and maximum Performance Levels. All such
determinations shall be made not later than the date of the first regularly
scheduled meeting of the Committee in the second calendar quarter of the year in
which the applicable Performance Period commences and while the performance
relating to the Performance Measures and Performance Levels remains
substantially uncertain. Notwithstanding anything elsewhere in the Plan to the
contrary, as and to the extent required by Section 162(m), the grant of an Award
to a Participant must state, in terms of an objective formula or standard, the
method of computing the amount of compensation payable to the Participant if the
Performance Levels are attained, and must preclude discretion to increase the
amount of compensation payable that would otherwise be due upon attainment of
such goals.
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7.3 Adjustments for Material Changes.
As and to the extent permitted by Section 162(m), in the event of (i) a
change in corporate capitalization, a corporate transaction or a complete or
partial corporate liquidation, or (ii) any extraordinary gain or loss or other
event that is treated for accounting purposes as an extraordinary item under
generally accepted accounting principles or (iii) any material change in
accounting policies or practices affecting the Performance Measures, then the
Committee shall make adjustments to the Performance Measures and Performance
Levels, based solely on objective criteria, so as to neutralize the effect of
the event on all affected Awards.
7.4 Performance Periods.
The Committee shall establish the duration of the Performance Periods in
its discretion, provided that Performance Periods shall be at least three (3)
years in length. Each Performance Period shall begin on January 1 of the
calendar year.
ARTICLE VIII
DETERMINATION AND DISTRIBUTION OF UNITS
8.1 Determination of Earned Performance Share Units.
The number of Performance Share Units earned by a Participant with respect
to an Award shall be determined as follows:
(i) as to each of the Performance Measures, (a) the Target Award shall
be multiplied by the percentage assigned by the Committee to the
Performance Level actually achieved (e.g., 50% earned at threshold level,
100% earned at target level and 150% earned at maximum level, with
interpolation of percentages for actual performance between the stated
Performance Levels) and (b) the resulting amount shall be multiplied by the
Performance Weighting assigned to such Performance Measure; and
(ii) the sum of the amounts obtained under clause (i) above shall be
the aggregate number of Performance Share Units earned.
Notwithstanding the foregoing, the Performance Share Units earned by a
Participant shall be subject to the following rules:
(a) no Performance Share Units shall be earned by any Participant if,
at the end of the Performance Period, the Company has not achieved an ROE
threshold established by the Committee at the time the Performance Measures
are established for such Performance Period;
(b) the Committee may, in its sole discretion, reduce the number of
Performance Share Units that would otherwise be earned by a Participant
with respect to an Award if the Committee shall have determined that the
Participant's individual performance during the Performance Period was
materially below the expected performance level; provided that the
Committee shall not be permitted to exercise such discretion following a
"Change in Control" of the Company (as defined in Article X hereof);
(c) subject to Articles IX and X below, a Participant must be
continuously employed by the Company throughout the applicable Performance
Period to earn Performance Share Units with respect to an Award; and
(d) before any distribution on Performance Share Units is made to a
Participant with respect to an Award, the Committee must certify in writing
(by resolution or otherwise) that the applicable Performance Levels under
the Performance Measures, and any other material terms of the Award
Certificate, were satisfied.
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8.2 Distributions on Performance Share Units.
Distributions to Participants on Performance Share Units with respect to
Awards shall be made not later than 30 days following the date of the first
regularly scheduled meeting of the Committee in the second calendar quarter of
the year that follows the end of the applicable Performance Period.
Distributions shall be made in a single lump-sum, in cash or in shares of Common
Stock, or in any combination of cash and Common Stock, as determined by the
Committee in its sole discretion. To the extent that a distribution is made to a
Participant in Common Stock, it shall be made on the basis of one share of
Common Stock for each Performance Share Unit earned. To the extent that a
distribution is made to a Participant in cash, it shall equal the product of (i)
the Fair Market Value of a share of the Common Stock on the day prior to the
distribution and (ii) the difference between the number of Performance Share
Units earned by such Participant and the number of shares of Common Stock
included in such distribution. In determining the form of distribution to a
Participant, the Committee may consider, in addition to any other factors it may
deem appropriate, the withholding tax liability of the Participant in connection
with the distribution and the extent to which the Participant has taken actions
toward satisfying the Stock Ownership Guidelines. Distributions to Participants
in shares of Common Stock shall be subject to such restrictions as the Committee
may in its discretion impose in order to comply with the requirements for
exemption under Rule 16b-3, including, without limitation, the imposition of a
6-month holding period on the shares of Common Stock so distributed. Following
completion of a distribution on Performance Share Units, such Performance Share
Units shall be deemed cancelled and of no further effect.
ARTICLE IX
TERMINATION OF EMPLOYMENT
9.1 Termination Upon Death or Disability.
In the event of a Participant's termination of employment with the Company
or a Subsidiary prior to the end of a Performance Period with respect to an
Award by reason of the Participant's death or Permanent and Total Disability,
the Participant will be eligible to earn prorated Performance Share Units with
respect to an Award for each such Performance Period which has not yet ended,
determined with respect to the number of full months of participation during
such Performance Period. In such a case, the Committee shall determine the
number of Performance Share Units earned with respect to an Award based on the
Company's degree of achievement under the applicable Performance Measures in the
same manner as provided in Section 7.2 hereof, but based on Performance Levels
prorated for the period through the full calendar year ending on or immediately
prior to the date of termination of employment, and actual performance under
such prorated Performance Levels for the same such period. Notwithstanding the
foregoing, in the event of termination of employment by reason of death or
Permanent and Total Disability during the first calendar year of a Performance
Period, the number of Performance Share Units earned with respect to an Award
shall be prorated as described above with respect to the Participants' number of
full months of participation during the Performance Period, but shall be based
on the applicable Target Award, rather than prorated actual performance as
described above.
9.2 Termination Upon Retirement.
In the event of a Participant's termination of employment with the Company
or a Subsidiary prior to the end of a Performance Period with respect to an
Award by reason of the Participant's Retirement, the Participant will be
eligible to earn prorated Performance Share Units with respect to an Award for
each such Performance Period which has not yet ended, determined with respect to
the number of full months of participation during such Performance Period. In
such a case, the Committee shall determine the number of Performance Share Units
earned with respect to an Award based on the Company's degree of achievement
under the applicable Performance Measures in the same manner as provided in
Section 7.2 hereof, but based on Performance Levels prorated through the full
calendar year in which the date of termination of employment occurs, and actual
performance under such prorated Performance Levels for the same such period.
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9.3 Termination for Other Reasons.
In the event a Participant's employment with the Company or a Subsidiary is
terminated for reasons other than death, Permanent and Total Disability or
Retirement prior to the end of a Performance Period applicable to an Award, all
rights under such Award shall be deemed forfeited.
ARTICLE X
CHANGE IN CONTROL
10.1 Effects of Change in Control.
Notwithstanding any provision of this Plan to the contrary, upon the
occurrence of a "Change in Control" of the Company (as defined below), a
Participant shall be eligible to earn all Performance Share Units subject to
then-outstanding Awards in respect of Performance Periods that have not been
completed, without proration to account for the partial period of employment
service during such Performance Period. The determination as to the number of
Performance Share Units earned shall be based on the Company's degree of
achievement under the applicable Performance Measures in the same manner as
provided in Section 7.2 hereof, but based on Performance Levels prorated through
the full calendar quarter ending on or immediately prior to the effective date
of the Change in Control and actual performance under such prorated Performance
Levels for the same such period.
10.2 Definition of Change in Control.
For purposes of the Plan, "Change in Control" means:
(i) the consummation of any consolidation or merger of the Company pursuant
to which (x) the stockholders of the Company immediately prior to the merger or
consolidation do not represent, immediately after the merger or consolidation,
the beneficial owners (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934 (the "Exchange Act")) of 75% or more of the combined voting
power of the Company's (or the surviving entity's) then outstanding securities
ordinarily (and apart from rights occurring in special circumstances) having the
right to vote in the election of directors or (y) more than 25% of the shares of
the Common Stock are converted in whole or in part into cash, securities or
other property as a result of a tender, leveraged buyout or exchange offer, open
market purchases, privately negotiated purchases or otherwise;
(ii) the consummation of any sale, lease, exchange or transfer (in any
single transaction or series of related transactions) of all or substantially
all of the assets or business of the Company and its Subsidiaries; or
(iii) the occurrence of any event the result of which is that any "person"
(as such term is used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act),
other than (A) the Company or any Subsidiary, or (B) any employee benefit plan
sponsored by the Company or any Subsidiary, shall become the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of securities of the
Company representing more than 25% of the combined voting power of the Company's
then outstanding securities ordinarily (and apart from rights accruing in
special circumstances) having the right to vote in the election of directors, as
a result of a tender, leveraged buyout or exchange offer, open market purchases,
privately negotiated purchases, other arrangements or understandings or
otherwise.
ARTICLE XI
RIGHTS OF PARTICIPANTS
11.1 Beneficiaries.
Each Participant shall be entitled to designate, in a written notice
delivered to the Company by the Participant, the person or persons who will be
entitled to receive the amounts, if any, distributable under the
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Plan upon the Participant's death. The Participant may change his or her
designation of beneficiary at any time. If there is no such surviving
beneficiary, any amounts due with respect to the Participant shall be
distributable to the Participant's estate.
11.2 Employment.
Nothing in the Plan shall interfere with or limit in any way the right of
the Company or any Subsidiary to terminate any Participant's employment at any
time, nor confer upon any Participant any right to continue in the employ of the
Company or any Subsidiary.
11.3 Participation.
No Participant shall at any time have a right to be selected for
participation in the Plan for any Performance Period, despite having be selected
for participation in a previous Performance Period.
11.4 Nontransferability.
No Performance Share Units granted to or earned by a Participant may be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution.
11.5 Rights to Common Stock.
Awards of Performance Share Units do not give a Participant any rights
whatsoever with respect to shares of Common Stock until such time and to such
extent that distribution with respect to an Award is made in shares of Common
Stock.
11.6 Relationship to Other Benefits.
No distribution under the Plan shall be taken into account in determining
any benefits under any pension, retirement, group insurance, or other benefit
plan of the Company or any Subsidiary, except to the extent specifically
provided in any such plan.
ARTICLE XII
TERMINATION AND AMENDMENT
The Board may terminate, amend or modify the Plan at any time and in any
manner. Solely to the extent deemed necessary or advisable by the Board, for
purposes of complying with Section 162(m) or the rules of any securities
exchange or for any other reason, the Board may seek the approval of any such
amendment by the Company's stockholders. Any such approval shall be by the
affirmative votes of the stockholders of the Company present, or represented,
and entitled to vote at a meeting duly held in accordance with applicable state
law and the Certificate of Incorporation and By-Laws of the Company.
Notwithstanding the foregoing, no termination, amendment or modification of
the Plan shall in any manner adversely affect any outstanding Awards under the
Plan, without the written consent of the Participant to whom such Award was
granted.
ARTICLE XIII
LEGAL MATTERS
13.1 Tax Withholding; Section 83(b) Election.
In order to comply with all applicable federal and state income, social
security, payroll, withholding or other tax laws or regulations, the Committee
may establish such rules as it deems appropriate with respect to such laws and
regulations, including, without limitation, the establishment of rules to ensure
that all such taxes are withheld or collected from such Participant. Such rules
shall include, but shall not be limited to, the
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Committee's right to withhold from the distribution with respect to any Award
the amount necessary to satisfy all such withholding tax obligations. If a
Participant shall make an election pursuant to section 83(b) of the Code, the
Participant shall promptly furnish the Company with a copy of such election,
together with a payment equal to the amount of all federal, state, local or
other taxes required to be withheld.
13.2 Compliance with Law.
The Plan, the Awards granted hereunder, and the transfer by the Company of
shares of Common Stock pursuant to Awards shall be subject to all applicable
laws and regulations, including applicable federal and state securities laws and
regulations, and to approvals by any governmental or regulatory agency as may be
required. The Committee may take such action as it deems necessary to assure
compliance with any such law, regulation or required approval.
13.3 Severability.
If any provision of the Plan or any Award Certificate shall be determined
to be illegal or unenforceable by any court of law in any jurisdiction, the
remaining provisions hereof and thereof shall be severable and enforceable in
accordance with their terms, and all provisions shall remain enforceable in any
other jurisdiction.
13.4 Governing Law.
To the extent not preempted by federal law, the Plan, and all agreements
hereunder, shall be construed in accordance with and governed by the laws of the
State of Delaware.
13.5 Plan Binding on Successors.
The Plan shall be binding upon the Company, its Subsidiaries, their
successors and assigns, and the Participant, his executor, administrator and
permitted transferees.
13.6 Construction and Interpretation.
Whenever used herein, nouns in the singular shall include the plural, and
the masculine pronoun shall include the feminine gender. Headings of Articles
and Sections hereof are inserted for convenience and reference and constitute no
part of the Plan.
13.7 Rule 16b-3.
The Company intends that the Plan and the Awards satisfy the applicable
requirements of Rule 16b-3, so that the grant of Awards to Participants who are
or become subject to Section 16 of the Securities Exchange Act of 1934 shall
qualify for exemption under Rule 16b-3. If any provision of this Plan would
otherwise frustrate or conflict with the intent expressed in this Section 13.7,
that provision, to the extent possible, shall be interpreted and deemed amended
so as to avoid such conflict. To the extent of any remaining irreconcilable
conflict with such intent, such provision shall be deemed void as applicable to
such Participants with respect to whom such conflict exists.
13.8 Section 162(m).
The Company intends that the Plan and the Awards satisfy the applicable
requirements of Section 162(m), including the requirements for performance-based
compensation under Section 162(m)(4)(C), so that the Company's tax deduction for
remuneration in respect of such Awards granted to Participants who are or become
subject to Section 162(m) is not disallowed in whole or in part by the operation
of Section 162(m). In this connection, the material terms of the Performance
Measures must be disclosed to and reapproved by the stockholders of the Company
no later than the first stockholder meeting that occurs in the fifth year
following the year in which such stockholders previously approved the
Performance Measures. If any provision of this Plan (other than Article XII)
would otherwise frustrate or conflict with the intent expressed in this Section
13.8, that provision, to the extent possible, shall be interpreted and deemed
amended so as to avoid such conflict. To the extent of any remaining
irreconcilable conflict with such intent, such provision shall be deemed void as
applicable to such Participants with respect to whom such conflict exists.
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EXHIBIT C
EXECUTIVE RISK INC.
INCENTIVE COMPENSATION PLAN
(POOL A)
I. Purpose
The Plan is designed to:
- Reward successful management of the business
- Support retention of key executives
- Provide a vehicle through which the Board can base incentive compensation
on the Company's performance and the individual achievements of
Participants in the Plan.
II. Definitions
Unless otherwise expressly provided, the following definitions are
applicable throughout the remainder of this Plan:
(1) AFFILIATE means, with respect to any person, any other person directly
or indirectly controlling or controlled by or under direct or indirect
common control with such person. For purposes of this definition, the
term "control" (including, with correlative meanings, the terms
"controlled by" and "under common control with"), as used with respect
to any person, shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management or
policies of such person, whether through the ownership of voting
securities or by agreement or otherwise.
(2) AWARD means the dollar amount earned by a Participant under the Plan.
(3) BENEFICIARY means the person or persons designated, in a written
notice delivered to the Company, by the Participant to receive the
amount, if any, payable under the Plan upon the Participant's death.
If there is no such surviving Beneficiary, any amounts due with
respect to the Participant shall be payable to the Participant's
estate.
(4) BOARD means ERI's Board of Directors.
(5) BOOK VALUE PER SHARE means stockholders' equity per common share,
including or excluding with respect to any Plan Year, as determined by
the Committee within 90 days of the beginning of such Plan Year, the
effects of FAS 115.
(6) CEO means the Chief Executive Officer of ERI.
(7) CFO means the Chief Financial Officer and Chief Actuary of ERI.
(8) CHAIRMAN means the Chairman of ERI.
(9) COMMITTEE means the Committee on Directors and Compensation of the
Board.
(10) COMPANY means Executive Risk Inc. and its Subsidiaries.
(11) EPS means the consolidated operating earnings per common share on a
fully diluted basis of the Company (or Peer Group company, as
applicable).
(12) ERI means Executive Risk Inc.
(13) ERMA means Executive Risk Management Associates.
(14) EXPENSE RATIO means the expense ratio component of the Company's
combined ratio, prepared in accordance with generally accepted
accounting principles ("GAAP"), as reported in ERI's Annual Report to
stockholders.
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(15) GPW -- FACILITY means (i) the gross premiums written during the Plan
Year, on a direct or assumed reinsurance basis, by ERMA, UPEX and any
other Subsidiary or Affiliate of ERI acting as an agent or
underwriting manager for one or more insurance companies, plus (ii)
all gross premiums written during the Plan Year, on a direct or
assumed reinsurance basis, by the insurance company Subsidiaries of
ERI which are not included in the premiums identified in clause (i) of
this definition. For purposes of this definition, the gross premiums
written of the insurance company Subsidiaries of ERI shall be
calculated on a consolidated basis.
(16) GPW -- INSURANCE COMPANIES means the consolidated gross written
premiums of ERI's insurance company Subsidiaries for the Plan Year.
(17) KEY PERFORMANCE VARIABLES means the components of the Plan which are
weighted to determine all or a portion of each Participant's Award.
With respect to each Plan Year, such Variables must include Report
Year Loss Ratio and ROE and may include GPW -- Facility,
GPW -- Insurance Companies, Pre-tax Operating Earnings, EPS, Book
Value Per Share, Total Cash and Invested Assets, Expense Ratio and
Stock Price. Except as otherwise expressly provided or the context
otherwise requires, financial and accounting terms used in the Plan,
including terms defined herein as Key Performance Variables, are used
as defined for purposes of, and shall be determined in accordance
with, GAAP and as derived from (i) in the case of the Company, the
audited financial statements of the Company, prepared in the ordinary
course of business and (ii) as to Peer Group companies, the audited
financial statements of such companies and/or information with respect
to such companies published by one or more investment or financial
institutions not controlling, controlled by, or under common control
with the Company, such as Conning & Company or Fox-Pitt, Kelton, Inc.
(18) MAXIMUM means the level of performance, with respect to any Key
Performance Variable, which if met or exceeded will result in the
earning of the maximum Award allocation for such Key Performance
Variable under the Plan.
(19) PARTICIPANT means any member of the Company's management selected by
the Committee to whom an Award may be granted hereunder, as described
in Paragraph III(b). Such Participants may be referred to in other
incentive compensation plans of the Company as "Pool A employees."
(20) PEER GROUP means the insurance companies that are designated by the
Committee from time to time for purposes of measuring the relative
performance of the Company under a Key Performance Variable, with such
designation to be made with respect to a stipulated Plan Year within
the time periods specified in Paragraph III(e) hereof.
(21) PLAN means this Incentive Compensation Plan (Pool A).
(22) PLAN YEAR means the 12 month period used as the annual accounting
period by the Company.
(23) PRE-TAX OPERATING EARNINGS means the consolidated earnings of ERI
excluding realized gains and losses, taxes and the charge to earnings
resulting from this Plan and any similar plans and awards.
(24) REPORT YEAR LOSS RATIO means consolidated GAAP loss and loss
adjustment expenses incurred by ERI's insurance company Subsidiaries
for the report year corresponding to the Plan Year as a percentage of
consolidated GAAP earned premiums for such Plan Year.
(25) RESERVES means the estimate of expected consolidated loss and loss
adjustment expenses of the insurance company Subsidiaries of ERI as
determined by the firm of independent actuaries appointed by the Board
to provide a Statement of Actuarial Opinion concerning the annual
financial statements of the insurance company Subsidiaries of ERI.
Such determination shall be made in a manner consistent with Standards
of Practice issued by the Actuarial Standards Board (including the
Casualty Actuarial Society's Statement of Principles Regarding
Property and Casualty Loss and Loss Adjustment Expense Reserves).
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(26) RETURN ON EQUITY ("ROE") means consolidated return on equity of the
Company (or Peer Group company, as applicable), determined by dividing
the consolidated net income of the Company (or Peer Group company, as
applicable), excluding realized capital gains and losses (net of
taxes) by the average consolidated stockholders' equity of the
Company, (or Peer Group company, as applicable), excluding the effects
of FAS 115.
(27) SALARY means the aggregate of Participant's annual base salary and
annual variable compensation as of the last day of the Plan Year with
respect to which the Award relates, as established by the Board.
(28) SECTION 162(M) means Section 162(m) of the Internal Revenue Code of
1986, as amended, and applicable interpretive authority thereunder.
(29) STOCK PRICE means the average closing price on the New York Stock
Exchange for ERI Common Stock for the last 30 days of the Plan Year.
(30) SUBSIDIARY means any corporation in which 50% or more of the voting
stock is owned, directly or indirectly, by ERI and any unincorporated
entity in which ERI has a 50% or more capital interest or with respect
to which ERI has the power, directly or indirectly, to designate 50%
or more of the individuals exercising functions similar to a board of
directors.
(31) TARGET means the level of performance, with respect to any Key
Performance Variable, which if met will result in the earning of the
target Award allocation for such Key Performance Variable under the
Plan.
(32) THRESHOLD means the level of performance, with respect to any Key
Performance Variable, which if met will result in the earning of the
minimum Award allocation for such Key Performance Variable under the
Plan.
(33) TOTAL CASH AND INVESTED ASSETS means total cash and invested assets of
the Company as of the end of the Plan Year as set forth in ERI's
Annual Report to stockholders.
(34) UPEX means UAP Executive Partners.
(35) WEIGHTING means the percentage weight (out of 100%) allocated by the
Committee to each of the Key Performance Variables for purposes of
determining the amount of each Participant's Award.
III. Administration
(a) Committee
The Plan shall be administered by the Committee. Each Committee member
shall, at all times while serving, satisfy the requirements of an "outside
director" within the meaning of Section 162(m). The Committee shall have the
authority, in its sole discretion, to (i) interpret the Plan, adopt, amend and
rescind rules and regulations relating to the Plan and take all other action
necessary or advisable for the implementation and administration of the Plan,
(ii) delegate to a committee any or all of its responsibilities, functions, or
duties under the Plan, including the administration thereof; provided, however,
that the Committee may not delegate certain of its responsibilities hereunder if
such delegation would jeopardize compliance with the requirements of Section
162(m), (iii) approve the selection of employees who are to be Participants in
the Plan, and (iv) determine the annual Plan Thresholds, Targets, Maximums and
Weightings, and the Key Performance Variables, within 90 days of the beginning
of each Plan Year.
Decisions and determinations of the Committee on all matters relating to
the Plan shall be in its sole discretion and shall be conclusive. No member of
the Committee shall be liable for any action taken or decision made in good
faith relating to the Plan or any Award thereunder.
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(b) Eligibility for Participation
Participants shall be recommended to the Committee by the CEO and Chairman
for each Plan Year from the key management of the Company. Unless the Committee
should affirmatively state to the contrary, ERI's CEO, Chairman and CFO, as they
shall be appointed from time to time, are hereby selected as Participants. The
Committee may select other individuals as Participants and in making such
further selections, consideration will be given to the functions and
responsibilities of the individual, past and potential contributions to annual
results and sound growth, the value of his or her services to the Company and
any other factors deemed relevant by the Committee. Within 90 days of the
beginning of each Plan Year, the Committee shall identify which employees shall
be Participants with respect to such Plan Year.
Each Participant shall be notified in writing of his or her selection to
participate in the Plan and each of the Key Performance Variables and the
Weightings and percentages of Salary used to determine his or her Award for such
Plan Year.
(c) Effective Date and Term of the Plan
The Plan, as amended and restated, shall become effective as of January 1,
1997, subject to approval of the Plan by the stockholders of ERI at the 1997
annual meeting of ERI, but the provisions of the Plan as in effect prior to such
amendment and restatement shall apply to that portion of bonuses payable under
the Plan with respect to Plan Years prior to 1997 which remains to be paid to
employees. The Plan may be terminated as described in Paragraph IV(f) of the
Plan. All Awards made under the Plan prior to its termination shall remain in
effect until satisfied or otherwise terminated in accordance with the Plan and
the terms of such Awards.
(d) Plan Thresholds, Targets and Maximums
Each Participant's Award shall be the sum of those amounts, if any,
allocable to attainment of the Key Performance Variables, calculated pursuant to
Paragraph III(e) below.
As to each Plan Year, failure to meet the Threshold for any Key Performance
Variable shall mean that no Award allocation will be made for such Key
Performance Variable.
As to each Plan Year, the Committee shall establish a schedule of the
Thresholds, Targets and Maximums for Key Performance Variables, on an absolute
basis or on a relative basis by comparison to the Company's Peer Group within 90
days of the beginning of each such Plan Year. The respective percentages of
Salary which would apply if the Threshold, Target or Maximum objectives for all
Key Performance Variables for each Participant were met exactly shall be
determined by the Committee within 90 days of the beginning of each Plan Year.
(e) Determination of Award Level
At the completion of each Plan Year (subject to Paragraph III(g) below),
the Committee shall assess the performance of the Company and determine the
Award levels for each Participant, as described herein. The Committee shall
certify in writing (by resolution or otherwise) prior to the payment of an Award
that the applicable Key Performance Variables, the target levels and any other
material terms of the Plan were in fact satisfied.
The Award for each Participant shall be calculated as a percentage of the
Participant's Salary for the Plan Year; provided, however, that the maximum
Award for any Participant with respect to any Plan Year shall not exceed
$1,000,000.
Interpolation will be used to determine Award allocations for performance
between the Threshold, Target and Maximum levels for each Key Performance
Variable.
The dollar amount of each Award shall be the sum of the allocations for
each of the Key Performance Variables, which allocations shall equal the
individual's Salary times the Weighting percentage for the Key Performance
Variable times the applicable percentage of Salary for the performance level
achieved as
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provided in this Paragraph III(e). However, for any Plan Year, the CEO and the
Chairman of ERI may jointly recommend to the Committee that no Award be made for
a Participant or that an Award be made in an amount less than that derived from
the formula set forth in the foregoing sentence. Following receipt of such a
recommendation, the Committee shall determine whether the Participant shall
receive no Award, or a reduced Award, for the Plan Year and the decision of the
Committee shall be conclusive.
As and to the extent permitted by Section 162(m), in the event of (i) a
change in corporate capitalization, a corporate transaction or a complete or
partial corporate liquidation, or (ii) any extraordinary gain or loss or other
event that is treated for accounting purposes as an extraordinary item under
GAAP or (iii) any material change in accounting and actuarial policies or
practices affecting the Company and/or the Key Performance Variables, then, to
the extent any of the foregoing events was not anticipated at the time the Key
Performance Variables and the Threshold, Target and Maximum objectives were
established, the Committee may make adjustments to the Key Performance variables
and Threshold, Target and Maximum objectives, based solely on objective
criteria, so as to neutralize the effect of the event on all affected Awards.
The specific Key Performance Variables and Threshold, Target and Maximum
objectives with respect to an Award must be established by the Committee not
later than 90 days after the commencement of the applicable Plan Year and while
the performance relating to the Key Performance Variables and Threshold, Target
and Maximum objectives remains substantially uncertain. Notwithstanding anything
elsewhere in the Plan to the contrary, as and to the extent required by Section
162(m), the grant of an Award to a Participant must state, in terms of an
objective formula or standard, the method of computing the amount of
compensation payable to the Participant if the Threshold, Target and Maximum
objectives are attained, and must preclude discretion to increase the amount of
compensation payable that would otherwise be due upon attainment of such goals.
Notwithstanding the foregoing, the Committee may, in its sole discretion, reduce
the amounts payable to a Participant with respect to an Award for any reason
whatsoever.
(f) Payment of Awards
Each of the Awards for any Plan Year shall be paid out as follows:
(1) The portion of the Award allocable to all Key Performance Variables
other than ROE and Report Year Loss Ratio shall be paid in the month of
February following the Plan Year or, if calculation of payment is not
possible by that time, then as soon as is practicable thereafter.
(2) The portion of the Award allocable to ROE shall be paid within two
weeks of the first regularly scheduled Board Meeting of the second
calendar quarter following the Plan Year.
(3) The portion of the Award allocable to the Report Year Loss Ratio shall
be paid in the month of February or March of the fourth year following
the Plan Year and shall be adjusted upward or downward, by the
Committee, using a lookback adjustment, as described below. Interest
shall accrue on this portion of the award at a rate equal to the weekly
average rate for the most current three year U.S. Treasury Bond as
published in The Wall Street Journal for the week ended immediately
preceding the Committee meeting at which the Award originally was
approved.
The look-back adjustment shall be based upon a determination of the
total of paid losses and aggregate outstanding case loss Reserves
and/or incurred but not reported Reserves for the report year
corresponding to the Plan Year. The resulting Report Year Loss Ratio
figure will then be compared to the calculation determined for the
original Plan Year. If the result differs by more than plus or minus
one-half of one percent (0.5%), the Report Year Loss Ratio shall be
adjusted solely for purposes of this Plan and the portion of the Award
allocable to the Report Year Loss Ratio will be adjusted accordingly.
In determining the adjustment, if any, the Committee will base its
calculations on the estimates of Reserves prepared by the independent
actuarial firm retained by the Company to certify the Reserves to
state insurance departments. Notwithstanding the foregoing, amounts
payable pursuant to this Paragraph III(f)(3) shall not cause the
aggregate Award payable to any Participant for any Plan Year to exceed
the maximum annual Award payable to any Participant pursuant to
Paragraph III(e) hereof.
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(g) Conditions to Award Payouts
In order to receive any payment for any Award with respect to any Plan
Year, including without limitation payments of the portion of Awards for any
Plan Years allocable to Report Year Loss Ratio under Paragraph III(e) hereof, a
Participant must: (i) be actively employed by the Company on the day scheduled
hereunder for such payment; or (ii) have become disabled (which, for these
purposes, means the inability, due to physical or mental illness, to
substantially perform the duties of employment which the employee customarily
performed for the Company immediately prior to becoming disabled) before the day
scheduled hereunder for such payment; or (iii) have retired, (1) at age 65 or
greater or (2) at age 50 or greater so long as the Participant's age plus his or
her full years of employment by the Company equals or exceeds 60, before the day
scheduled hereunder for payment; or (iv) have been granted a leave of absence
before the day scheduled hereunder for such payment; or (v) have died before the
day scheduled hereunder for such payment.
Participants who have become disabled, retired or been granted a leave of
absence during the Plan Year and Beneficiaries of Participants who have died
during the Plan Year shall be eligible to receive a pro rata Award in respect to
such Plan Year equal to the full year Award (determined in accordance with
Paragraph III(e) hereof) multiplied by the actual number of whole months (or
fractions thereof) of active employment during such Plan Year divided by 12.
In any other case, including the case of a Participant who voluntarily
terminates or is terminated by the Company, except as provided in paragraph
III(h) hereof, all Award funds due, but not previously paid to the Participant,
shall be forfeited and retained by the Company.
(h) Deferral of Awards
Each Participant may elect to defer the receipt of 50% or 100% of the
aggregate amount of any Award payment otherwise payable at a specific time under
the Plan. In order to defer any such amount, the Participant shall file a form
with ERI confirming his or her election to have the payment of such amount
deferred to a future date.
No such future date shall be earlier than the January 1 of the third
calendar year after the calendar year in which such payment would otherwise be
made under the Plan, or later than December 31 of the seventh calendar year
after the calendar year in which the payment would otherwise be made under the
Plan or, if earlier, the calendar year in which the Participant will attain the
age of 70.
A deferral election must be filed no later than the December 31 preceding
the Plan Year with respect to which the deferred payment is to be made under the
Plan (or, if later, within 30 days after the date the individual first becomes a
Participant). Except as provided in the paragraph immediately below, any amounts
deferred shall be deemed to earn interest from the time they would have been
paid to the Participant but for an election under this Paragraph III(h), to such
time as the amounts are actually distributed to the Participant or his
Beneficiary. The rate of interest to be credited to amounts deferred hereunder
shall equal the weekly-average rate for the most current U.S. Treasury Bond
having a period of maturity closest to the period of deferral chosen as
published in The Wall Street Journal for the week ended immediately preceding
the week in which the payment would ordinarily be made under the Plan.
In the case of a Participant whose employment by the Company has terminated
for any reason other than death or disability, the principal balance of any
payment credited but deferred hereunder shall be distributed to the Participant
in a lump sum, on the earlier of (i) the future date elected by the Participant
for such distribution under this Paragraph III(h) or (ii) 30 days following the
termination of the Participant's employment. In such circumstances, no payment
of interest shall be paid to the Participant with respect to such deferred
amount, as payment of interest shall be deemed to have been waived. In the case
of a Participant who dies or terminates employment with the Company due to a
disability, the balance of any payment credited but deferred hereunder, together
with interest accrued pursuant to this Paragraph III(h), shall be distributed in
a lump sum to the designated Beneficiary of the Participant, or to the
Participant in the case of disability, on the earlier of (i) the future date
elected by the Participant for such distribution under this Paragraph III(h) or
(ii) the January 31 following the year in which the Participant dies or (iii)
six months
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after the Participant has left the employment of the Company due to such
disability. A Participant's deferred payment balance, together with interest
accrued pursuant to this Paragraph III(h), shall also be payable, upon the
Participant's request, in the event of an unforeseeable emergency (to the extent
reasonably needed to satisfy the emergency need), as determined by the Committee
in accordance with the standards set forth in Section 1.457-2(h)(4) of the
Treasury Regulations.
Title to and beneficial ownership of any assets, whether cash or
investments, with which the Company may choose to make payments of Awards,
including deferred payments with respect to Awards, shall at all times remain in
the Company and the Participant shall not have any property interest whatsoever
in any specific assets of the Company. In addition, the Participant's interest
in Awards, including deferred payments with respect to Awards, shall be limited
to the right to receive payments pursuant to the terms of the Plan and such
right shall be in no way secured.
IV. Miscellaneous
(a) Rights to Award
No person, other than a Participant or his or her designated Beneficiary or
legal representatives, shall have any claim or right to receive an Award under
this Plan. Neither a Participant to whom an Award has been made nor his or her
designated Beneficiary or legal representative shall have any right or interest
in the Award until payment thereof shall have become due in accordance with
Paragraph III(f) hereof.
(b) Non-Assignability
The rights of a Participant under the Plan are not assignable during his or
her lifetime, except by will or by the laws of descent and distribution.
(c) Right to Employment
Nothing in the Plan shall confer upon any Participant the right to continue
in the employ of the Company or affect the right of the Company to terminate the
employment of such Participant.
(d) Withholding Taxes
Plan payments are to be made in cash and shall be net of an amount
sufficient to satisfy any Federal, state and/or local withholding or other
employment tax requirements.
(e) Newly Eligible Employees
The Committee shall be entitled to make such rules, regulations,
determinations and Awards as it deems appropriate in respect of any employee who
becomes eligible to participate in the Plan after the commencement of a Plan
Year.
(f) Termination; Amendment
The Board shall have the right to terminate the Plan and the Committee
shall have the right to amend or suspend the Plan at any time, provided,
however, that (i) no such termination, amendment or suspension shall, without
the consent of the respective Participants, operate to annul an Award
attributable to any completed Plan Year and (ii) solely to the extent deemed
necessary or advisable by the Board, for purposes of complying with Section
162(m) or for any other reason, the Board may seek the approval of any such
amendment by the Company's stockholders. Any such approval shall be by the
affirmative votes of stockholders of the Company present, or represented, and
entitled to vote at a meeting duly held in accordance with applicable state law
and the Certificate of Incorporation and By-Laws of the Company.
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<PAGE> 49
(g) Beneficiaries
If a Participant dies prior to the completion of a Plan Year or prior to
the payment of an Award for a completed Plan Year, any funds due to the
Participant shall be paid to the Participant's Beneficiary.
(h) Section 162(m)
The Company intends that the Plan and the Awards satisfy the applicable
requirements of Section 162(m), including the requirements for performance-based
compensation under Section 162(m)(4)(C), so that the Company's tax deduction for
remuneration in respect of such Awards granted to Participants who are or become
subject to Section 162(m) is not disallowed in whole or in part by the operation
of Section 162(m). In this connection, the material terms of the Key Performance
Variables must be disclosed to and reapproved by the stockholders of the Company
no later than the first stockholder meeting that occurs in the fifth year
following the year in which such stockholders previously approved the Key
Performance Variables. If any provision of this Plan (other than Paragraph IV(f)
hereof) would otherwise frustrate or conflict with the intent expressed in this
Paragraph IV(h), that provision, to the extent possible, shall be interpreted
and deemed amended so as to avoid such conflict. To the extent of any remaining
irreconcilable conflict with such intent, such provision shall be deemed void as
applicable to such Participants with respect to whom such conflict exist.
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<PAGE> 50
EXHIBIT D
EXECUTIVE RISK INC.
NONQUALIFIED STOCK OPTION PLAN
PURPOSE OF THE PLAN.
The purpose of the Executive Risk Inc. Nonqualified Stock Option Plan (the
"Plan") is to further the long-term growth in earnings of Executive Risk Inc.
(the "Company") by offering special incentives in the form of a nonqualified
stock option plan for the benefit of those officers or employees of the Company
and of any of its Subsidiaries who will be largely responsible for such growth.
It is the express purpose of this Plan to provide such officers and employees
with the opportunity to acquire or increase their equity ownership in the
Company through the purchase of shares of the Company's Common Stock under a
plan which is not designed to meet the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code").
DEFINITIONS.
The singular shall include the plural and vice versa, and the use of one
gender shall be deemed to include the other whenever appropriate.
a. Beneficiary -- Any person who may, under a Participant's will or under
the laws of descent and distribution, including the Participant's personal
representative, succeed to the Participant's right to exercise any Option by
reason of the Participant's death.
b. Committee -- The Committee appointed by the Board of Directors of the
Company pursuant to Section 3 hereof.
c. Option -- A Participant's right to purchase one or more shares of Stock,
as granted and determined in accordance with the provisions of this Plan.
d. Option Price -- The amount to be paid for the purchase of shares of
Stock on exercise of an Option as determined by the Committee in accordance with
the provisions of this Plan.
e. Employee -- Any person, including any officer, employed by the Company
or any Subsidiary of the Company.
f. Employment -- The time period during which any individual is an
Employee.
g. Participant -- An Employee who becomes eligible to participate in this
Plan under Paragraph 4 hereof.
h. Permanent and Total Disability -- The inability of a Participant to
engage in his normal employment activity by reason of any medically determined
physical or mental impairment that can be expected to result in death or that
can be expected to last for a continuous period of not less than 12 months.
i. Stock -- The Company's $.01 par value common stock.
j. Subsidiary -- Any corporation of which 50 percent or more of the
combined voting power of all classes of stock is owned by the Company or a
Subsidiary of the Company.
3. ADMINISTRATION OF THE PLAN.
a. The Plan shall be administered by a Committee comprised of no fewer than
two persons which is a committee of the Board of Directors of the Company or a
subcommittee thereof. Solely to the extent deemed necessary or advisable by the
Board, each Committee member shall satisfy the requirements of (i) a
"nonemployee director" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934 (the "Exchange Act") and (ii) an "outside director" within
the meaning of Section 162(m) of the Code.
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<PAGE> 51
b. Subject to the provisions of the Plan, the Committee shall have
exclusive power to select the Employees to be granted Options pursuant to the
Plan, to determine the number of shares of Stock to be covered by any Option, to
determine the Option Price for any Stock, and to determine the conditions
subject to which Options may be granted or exercised. Notwithstanding the
foregoing, the maximum number of aggregate shares of Common Stock that may be
subject to Options granted to any Participant during the ten-year term of the
Plan under Section 5b hereof shall be 750,000 shares, subject to adjustment as
provided in Section 12c hereof.
c. Decisions and determinations by the Committee shall be final and binding
upon all parties, including stockholders, Participants, Beneficiaries, and other
Employees. The Committee shall have the authority to interpret the Plan, to
establish and revise rules and regulations relating to the Plan, and to make any
other determinations that it believes necessary or advisable for the
administration of the Plan.
d. It is the intent of the Company that the Plan comply in all respects
with Section 162(m) of the Code with respect to persons who are or may become
"covered employees" within the meaning of Section 162(m) of the Code, that any
ambiguities or inconsistencies in constructions of the Plan be interpreted to
give effect to such intention and that if any provision of the Plan is found not
to be in compliance with Section 162(m) of the Code, such provisions shall be
deemed null and void to the extent required to permit the Plan to comply with
Section 162(m) of the Code. The Committee may adopt rules and regulations under
the Plan in furtherance of the intent of the foregoing.
4. PARTICIPATION.
Participants in the Plan shall be selected by the Committee from among the
Employees.
5. TERMINATION OF PLAN.
The Plan shall terminate on November 13, 2003, which is the date ten years
after the date on which it was adopted by the Board of Directors of the Company,
but the Board of Directors may terminate the Plan at any time prior thereto.
Termination of the Plan under this Section 5b shall not alter or impair any of
the rights or obligations under any option previously granted under the Plan
without the consent of the holder of the option.
6. LIMITATIONS ON NUMBER OF SHARES SUBJECT TO OPTIONS.
The number of shares of Stock that may be issued pursuant to Options
granted under this Plan shall not exceed 3,000,000 shares. If any Options
granted under this Plan expire or terminate for any reason without having been
exercised in full, the unpurchased shares subject to such expired or terminated
Options may again be optioned under this Plan, subject to its terms.
7. DURATION OF OPTIONS.
Options granted to Participants shall be exercisable within 121 months
after the date of grant or within such shorter period as may be determined by
the Committee.
8. OPTION PRICE.
The Option Price for each share of Stock subject to any Option granted to
Participants shall be determined by the Committee in its sole discretion.
9. TERMS OF EXERCISE.
a. Medium of Payment. The Option Price for shares purchased through the
exercise of an Option shall be payable either in cash or in shares of Stock, as
determined by the Committee.
b. Transferability of Options. All Options shall be nontransferable except
(i) upon the Participant's death, by the Participant's will or the laws of
descent and distribution or (ii) on a case-by-case basis as may be
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<PAGE> 52
approved by the Committee in its discretion, in accordance with the terms
provided below. Each Option Agreement shall provide that the Participant may,
during his lifetime and subject to the prior approval of the Committee at the
time of proposed transfer, transfer all or part of the Option to a Permitted
Transferee (as defined below), provided that such transfer is made by the
Participant for estate or tax planning purposes or for donative purposes and no
consideration (other than nominal consideration) is received by the Participant
therefor. The transfer of an Option shall be subject to such other terms and
conditions as the Committee may in its discretion impose from time to time,
including a condition that the portion of the Option to be transferred be vested
and exercisable by the Participant at the time of transfer. Subsequent transfers
of an Option transferred under this paragraph 9.b. shall be prohibited other
than by will or the laws of descent and distribution upon the death of the
transferee.
For purposes hereof, a "Permitted Transferee" shall be any member of the
Participant's immediate family or a charitable institution (each as defined
below), or a trust for the exclusive benefit of such immediate family members
and/or charitable institution, or to a partnership, corporation or limited
liability company the equity interests of which are owned exclusively by the
Participant and/or one or more members of his immediate family. For purposes of
the preceding definition, (i) the "immediate family" of the Participant shall
mean and include the Participant's spouse, any descendant of the Participant or
his spouse (including descendants by adoption), and any descendant of either
parent of the Participant (including descendants by adoption), and (ii) a
"charitable institution" shall mean and include any organization described in
each of sections 170(b)(1)(A), 170(c), 2055(a) and 2522(a) of the Code, as well
as any charitable remainder trust created under section 664 of the Code, the
income beneficiary of which is a member of the Participant's immediate family or
a trust or other entity described above in this paragraph (b).
c. Transferability of Stock. All Options shall be granted on the condition
that the Participant shall not resell any Stock purchased by the exercise of an
Option except in compliance with all applicable state and federal securities
laws and regulations. Unless there is a registration statement in effect with
respect to the resale of Stock subject to an Option held by the Participant,
each Participant shall, prior to the exercise of any Option, deliver to the
Company a written representation in form satisfactory to the Committee that it
is his intention to acquire the shares for investment and not for resale, and
each Participant shall, prior to any transfer of Stock purchased through the
exercise of an Option, advise the Company of the proposed transfer and
demonstrate, to the satisfaction of the Committee, that such transfer is in
compliance with such laws and regulations.
d. Waiting period. An Option granted under the Plan shall be exercisable in
installments as follows: to the extent of 20 percent of the number of shares
originally covered thereby on the later of the date the Plan becomes effective
or the date on which the Participant holding such Option becomes an Employee,
and, to the extent of an additional 20 percent of the number of such shares, on
each of the first, second, third and fourth anniversaries of the date on which
such Participant becomes an Employee and such installments shall be cumulative.
Notwithstanding the foregoing, the Committee, in its sole discretion, may
prescribe a different installment exercise provision in an Option Agreement for
an Option granted to a Participant under the Plan.
e. Other Terms. The Committee shall have the power to determine such
additional terms for the exercise of Options not inconsistent with the terms of
this Plan as it deems appropriate.
10. TERMINATION OF EMPLOYMENT.
a. For Reasons Other Than Death, Disability or Retirement. If any
Participant's Employment should terminate for any reason other than his death,
his Permanent and Total Disability or his Retirement (as defined below) at a
time when one or more of the Participant's Options remains outstanding, then
each such Option shall terminate on the earlier to occur of (i) the date of
expiration of the Option provided in the Option Agreement or (ii) the date that
is three months after the date of such termination of Employment.
b. Participant's Death, Disability or Retirement. If a Participant's
Employment is terminated by reason of his death, Permanent and Total Disability
or his Retirement (as defined below) at a time when one or more of his Options
remains outstanding, then each such Option shall terminate on the earlier to
occur of (i) the date of expiration of the Option provided in the Option
Agreement or (ii) three years after the date of his
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<PAGE> 53
death, Permanent and Total Disability or Retirement. In the event of the
Participant's death, the Option shall be exercisable by the Participant's
Beneficiary. For purposes hereof, "Retirement" means termination of employment
with the Company (x) at age 65 or greater or (y) at age 50 or greater so long as
the Participant's age plus his full years of employment (measured based on 12
full calendar months of service) by the Company or any Subsidiary equals or
exceeds 60.
c. Notwithstanding the foregoing provisions of this Section 10, but subject
to the provisions of Section 7, the Committee, in its sole discretion, may
provide in an Option Agreement for any shorter or longer exercise period upon
termination of employment for any reason, and may extend the date upon which any
Option may expire in the event of a Participant's termination of employment for
any reason.
11. OPTION AGREEMENT.
Upon the grant of any Option hereunder, the Participant shall be required
to sign an Option Agreement, in such form as shall be prescribed by the
Committee, reflecting the terms and conditions of the Option. Each such Option
Agreement shall refer to this Plan and shall give notice to the Participant that
all Options are subject to the terms and conditions of this Plan.
12. MISCELLANEOUS PROVISIONS.
a. This Plan shall be governed by, and construed in accordance with
Delaware law.
b. No Employee or other person shall have any claim or right to become a
Participant of this Plan. Neither this Plan nor any action taken hereunder shall
be construed as giving to any Employee any right to remain employed.
c. In the event that there is any change in the Stock through merger,
consolidation, reorganization, recapitalization or otherwise, or if there shall
be any dividend on the Stock payable in such stock or if there shall be a stock
split, combination of shares or other changes in the Company's capital
structure, the number of shares available for option under this Plan shall be
proportionately adjusted by the Committee to reflect any such change and the
shares subject to Options previously granted and the price per share in each
Option shall be proportionately adjusted by the Committee as it deems equitable,
in its absolute discretion, to prevent dilution or enlargement of the
Participant's rights under the Option. The issuance of stock for consideration
and the issuance of stock rights shall not be considered a change in the
Company's capital structure. No adjustment provided for in this paragraph shall
require the issuance of any fractional share.
d. The Company shall at all times during the term of this Plan reserve and
keep available an amount of Stock sufficient to satisfy the requirements of this
Plan, and shall pay all fees and expenses necessarily incurred by the Company in
connection with the exercise of Options granted hereunder. In addition, to the
extent that the Stock is registered pursuant to any Federal or State securities
statutes and/or listed on any national, regional or local stock exchange, the
Company shall cause any and all Stock issued or to be issued under this Plan to
be so registered and/or listed, at the sole expense of the Company.
e. The Board of Directors of the Company may at any time terminate or amend
this Plan in any respect. Solely to the extent deemed necessary or advisable by
the Board, for purposes of complying with Section 162(m) of the Code or the
rules of any securities exchange or for any other reason, the Board may seek the
approval of any such amendment by the Company's stockholders. Any such approval
shall be by the affirmative votes of the stockholders of the Company present, or
represented, and entitled to vote at a meeting duly held in accordance with
applicable state law and the Certificate of Incorporation and By-Laws of the
Company. Notwithstanding the foregoing, no termination or amendment of the Plan
shall in any manner affect any Option theretofore granted without the consent of
the Optionee or his Beneficiary.
D-4
<PAGE> 54
EXECUTIVE RISK INC.
BOX 2002
SIMSBURY, CONNECTICUT 06070
PROXY
ANNUAL MEETING - MAY 9, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder hereby appoints Robert H. Kullas,
Stephen J. Sills and LeRoy A. Vander Putten, and each of them, the
proxies and attorneys of the undersigned to vote all shares of Common
Stock which the undersigned is entitled to vote at the 1997 Annual
Meeting of Stockholders of Executive Risk Inc., or any adjournment
thereof, upon the matters described at the bottom, and in their
discretion on such other business as may properly come before the
meeting or any adjournment, all in accordance with the accompanying
Notice and Proxy Statement, receipt of which is acknowledged.
PURSUANT TO THE RECOMMENDATION OF THE BOARD OF DIRECTORS, THIS PROXY
WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
THE ELECTION AS DIRECTOR EACH PERSON NAMED IN PROPOSAL 1 AND FOR
PROPOSALS 2 THROUGH 6 INCLUSIVE.
------------------------------------------------------------------------
1. ELECTION OF DIRECTORS -
FOR all nominees [ ] WITHHOLD AUTHORITY to vote [ ] *EXCEPTIONS [ ]
listed below for all nominees listed below
Nominees: 1--JOHN G. CROSBY, 2-- ROBERT V. DEUTSCH, 3--PATRICK A. GERSCHEL,
4--PETER GOLDBERG, 5--ROBERT H. KULLAS (INSTRUCTIONS: To withhold authority to
vote for any individual nominee, mark the "Exceptions" box and write that
nominee's name in the space below.)
*EXCEPTIONS ___________________________________________________________________
2. Approval of the Amended and Restated Certificate of Incorporation of
Executive Risk Inc.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. Approval of the Executive Risk Inc. Performance Share Plan, as amended and
restated.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. Approval of the Executive Risk Inc. Incentive Compensation Plan, as amended
and restated.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. Approval of the Executive Risk Inc. Nonqualified Stock Option Plan, as
amended and restated.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
6. Ratification of the appointment by the Board of Directors of Ernst & Young
LLP as the Independent Auditors of the Corporation.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
Please sign exactly as name
appears to the left. Please
sign in full corporate name by
President or other authorized
officer.
Dated:__________________________, 1997
______________________________________
(Signature)
