SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for the Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-12
DELPHI FINANCIAL GROUP, INC.
(Name of Registrant as Specified in Its Charter)
________________________________________________________________________________
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(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:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
______________________________________________________________________
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
______________________________________________________________________
(4) Date Filed:
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[DELPHI FINANCIAL LOGO]
April 10, 2007
Dear Stockholder,
It is a pleasure to invite you to Delphi Financial Group, Inc.'s 2007 Annual
Meeting of Stockholders, to be held on May 8, 2007 at the University Club, One
West 54th Street, New York, New York, commencing at 10:00 a.m., Eastern Daylight
Time. We hope that you will be able to attend and review the year with us.
Whether or not you plan to attend the meeting, please exercise your right to
vote as an owner of Delphi Financial Group, Inc. We ask that you review the
proxy materials and then mark your votes on the enclosed proxy card and return
it in the envelope provided as soon as possible.
At the meeting the stockholders will be electing directors and voting on the
adoption of an amendment to the 2003 Employee Long-Term Incentive and Share
Award Plan, as described in the enclosed formal Notice of Annual Meeting of
Stockholders and Proxy Statement. We will also report on the progress of Delphi
Financial Group, Inc. and respond to questions posed by stockholders.
We look forward to seeing you at the Annual Meeting.
Sincerely,
/s/ ROBERT ROSENKRANZ
----------------------------------------
Robert Rosenkranz
Chairman of the Board
DELPHI FINANCIAL GROUP, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 8, 2007
To the Stockholders of Delphi Financial Group, Inc.:
Notice is hereby given that the 2007 Annual Meeting of Stockholders of Delphi
Financial Group, Inc. will be held at the University Club, One West 54th Street,
New York, New York on May 8, 2007, commencing at 10:00 a.m., Eastern Daylight
Time, for the following purposes:
1. To elect twelve directors to serve for a term of one year, one of whom
shall be elected by the holders of the Class A Common Stock, voting as
a separate class.
2. To consider and vote upon an amendment to increase the number of
shares available under the 2003 Employee Long-Term Incentive and Share
Award Plan as described herein.
3. To transact such other business as properly comes before the meeting
or any adjournment thereof.
The Board of Directors has fixed the close of business on March 30, 2007 as the
record date for stockholders entitled to notice of and to vote at the meeting or
any adjournment of the meeting. The list of stockholders entitled to vote at the
meeting shall be available at the offices of Delphi Capital Management, Inc.,
590 Madison Avenue, New York, New York, for a period of ten days prior to the
meeting date.
A copy of Delphi Financial Group, Inc.'s 2006 Annual Report, including its
Annual Report on Form 10-K for the fiscal year ended December 31, 2006, is being
mailed to stockholders together with this notice.
Your attendance at this meeting is very much desired. However, whether or not
you plan to attend the meeting, please sign the enclosed Proxy and return it in
the enclosed envelope. If you attend the meeting, you may revoke the Proxy and
vote in person.
By Order of the Board of Directors,
/s/ ROBERT ROSENKRANZ
----------------------------------------
Robert Rosenkranz
Chairman of the Board
DELPHI FINANCIAL GROUP, INC.
1105 NORTH MARKET STREET, SUITE 1230
WILMINGTON, DE 19899
PROXY STATEMENT
This Proxy Statement is furnished for the solicitation by the Board of Directors
(the "Board of Directors" or the "Board") of Proxies for the Annual Meeting of
Stockholders of Delphi Financial Group, Inc., a Delaware corporation (the
"Company"), scheduled to be held on May 8, 2007 at the University Club, One West
54th Street, New York, New York, commencing at 10:00 a.m., Eastern Daylight
Time. The submission of a signed Proxy will not affect the stockholder's right
to attend the meeting and vote in person. Any person giving a Proxy may revoke
it at any time before it is exercised by the delivery of a later dated signed
Proxy or written revocation sent to the Investor Relations Department of the
Company, 1105 North Market Street, Suite 1230, Wilmington, DE 19899 or by
attending the Annual Meeting and voting in person.
Management of the Company is not aware of any matters other than those set forth
herein that may come before the meeting. If any other business should properly
come before the meeting, the persons named in the enclosed Proxy will have
discretionary authority to vote the shares represented by the effective Proxies
and intend to vote them in accordance with their best judgment in the interests
of the Company.
The Company's 2006 Annual Report, including its Annual Report on Form 10-K for
the fiscal year ended December 31, 2006, is being mailed together with this
Proxy Statement to each stockholder of record as of the close of business on
March 30, 2007.
MAILING AND VOTING OF PROXIES
This Proxy Statement and the enclosed Proxy were first mailed to stockholders on
or about April 10, 2007. Properly executed Proxies, timely returned, will be
voted and, where the person solicited specifies by means of a ballot a choice
with respect to the election of the director nominees chosen by the Board, the
shares will be voted as indicated by the stockholder. Each share of the
Company's Class A Common Stock, par value $.01 per share (the "Class A Common
Stock"), entitles the holder thereof to one vote and each share of the Company's
Class B Common Stock, par value $.01 per share (the "Class B Common Stock" and,
together with the Class A Common Stock, the "Common Stock"), entitles the holder
thereof to a number of votes per share equal to the lesser of (i) the number of
votes such that the aggregate of all outstanding shares of Class B Common Stock
will be entitled to cast 49.9% of all of the votes represented by the aggregate
of all outstanding shares of Class A Common Stock and Class B Common Stock or
(ii) 10 votes. Based on the shares of Common Stock outstanding as of March 30,
2007, the Class B Common Stock will have the number of votes described in clause
(i) of the preceding sentence. Proposals submitted to a vote of stockholders
will be voted on by holders of Class A Common Stock and Class B Common Stock
voting together as a single class, except that holders of Class A Common Stock
will vote as a separate class to elect one director (the "Class A Director"). If
the person solicited does not specify a choice with respect to the election of
any nominee for director, the shares will be voted "for" such nominee. Proxies
marked as abstaining (including Proxies containing broker non-votes) on any
matter to be acted upon by stockholders will be treated as present at the
meeting for purposes of determining a quorum but will not be counted as votes
cast on such matters.
As of March 30, 2007, Mr. Robert Rosenkranz, by means of beneficial ownership of
the general partner of Rosenkranz & Company, L.P. and direct ownership, had the
power to vote all of the outstanding shares of Class B Common Stock, which as of
such date represented 49.9% of the voting power of the Common Stock. Mr.
Rosenkranz has entered into an agreement with the Company not to vote or cause
to be voted certain shares of Common Stock, if and to the extent that such
shares would cause him and Rosenkranz & Company, L.P., collectively, to have
more than 49.9% of the combined voting power of the Company's stockholders.
Rosenkranz & Company, L.P. and Mr. Rosenkranz have informed the Company that
they intend to vote in favor of the election of all director nominees chosen by
the Board for which they are entitled to vote and in favor of the proposed
amendment to the 2003 Employee Long-Term Incentive and Share Award Plan.
SOLICITATION OF PROXIES
The cost of soliciting Proxies will be borne by the Company. It is expected that
the solicitation of Proxies will be primarily by mail. The Company has retained
Morrow & Company, Inc. to assist with the solicitation for a fee of $5,000 plus
reasonable out-of-pocket expenses. Proxies may also be solicited by officers and
employees of the Company, at no additional cost to the Company, in person or by
telephone, telegram or other means of communication. Upon written request, the
Company will
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reimburse custodians, nominees and fiduciaries holding the Company's Common
Stock for their reasonable expenses in sending proxy materials to beneficial
owners and obtaining their Proxies.
STOCKHOLDERS ENTITLED TO VOTE AND SHARES OUTSTANDING
Holders of record of Common Stock at the close of business on March 30, 2007
will be eligible to vote at the meeting. The Company's stock transfer books will
not be closed. As of the close of business on March 30, 2007, the Company had
outstanding 43,716,852 shares of Class A Common Stock and 5,671,744 shares of
Class B Common Stock.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock by each of the Company's directors and
executive officers, each person known by the Company to own beneficially more
than five percent of the Common Stock and all directors and executive officers
of the Company as a group as of March 30, 2007. This information assumes the
exercise by each person (or all directors and officers as a group) of such
person's stock options and the exercise by no other person (or group) of stock
options. Unless otherwise indicated, each beneficial owner listed below is
believed by the Company to own the indicated shares directly and have sole
voting and dispositive power with respect thereto.
Amount and
Nature of Percent
Name of Beneficial Owner Ownership of Class
------------------------ ---------- ---------
Class B Common Stock:
Five or greater percent owner:
Rosenkranz & Company, L.P................................ 5,582,247(1) 73.4%
Directors, Nominees for Director and Executive Officers:
Robert Rosenkranz......................................... 7,606,985(1) 100.0%
Kevin R. Brine............................................ -- --
Edward A. Fox............................................. -- --
Steven A. Hirsh........................................... -- --
Harold F. Ilg............................................. -- --
James M. Litvack.......................................... -- --
James N. Meehan........................................... -- --
Philip R. O'Connor........................................ -- --
Donald A. Sherman......................................... -- --
Robert M. Smith, Jr....................................... -- --
Robert F. Wright.......................................... -- --
Directors, Nominees for Director and Officers as a group
(14 persons).............................................. 7,606,985 100.0%
Class A Common Stock:
Five or greater percent owners:
EARNEST Partners, LLC..................................... 3,636,108(2) 8.3%
Dimensional Fund Advisors, L.P............................ 3,004,756(3) 6.9%
Directors, Nominees for Director and Executive Officers:
Robert Rosenkranz......................................... 121,172(1) *
Edward A. Fox............................................. 153,146(4) *
Thomas W. Burghart........................................ 137,463(5) *
Lawrence E. Daurelle...................................... 117,347(6) *
Robert M. Smith, Jr....................................... 114,154(7) *
Donald A. Sherman......................................... 73,306(8) *
Harold F. Ilg............................................. 72,435(9) *
Philip R. O'Connor........................................ 38,870(10) *
James N. Meehan........................................... 30,911(11) *
Steven A. Hirsh........................................... 29,648(12) *
Kevin R. Brine............................................ 20,205(9) *
Robert F. Wright.......................................... 18,072(13) *
James M. Litvack.......................................... 8,432(9) *
Directors, Nominees for Director and Officers as a group
(14 persons).............................................. 1,064,639(14) 2.4%
* Amount is less than 1% of Class.
(1) Mr. Rosenkranz, as the beneficial owner of the general partner of
Rosenkranz & Company, L.P., has the power to vote the shares of Class B
Common Stock held by Rosenkranz & Company, L.P. Accordingly, Mr. Rosenkranz
may be deemed to be the beneficial owner of all of the shares of the
Company held by Rosenkranz & Company, L.P. In addition, Mr. Rosenkranz has
direct or beneficial ownership of 89,497 additional shares of Class B
Common Stock and direct or beneficial ownership of 121,172 shares of Class
A Common Stock. The remaining indicated shares of Class B Common Stock
consist of 1,073,166
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shares of Class B Common Stock which may be acquired pursuant to stock
options within 60 days and 862,075 deferred shares of Class B Common Stock.
The address of Rosenkranz & Company, L.P. and Mr. Rosenkranz is 590 Madison
Avenue, New York, NY 10022.
(2) Based on a Schedule 13G, dated February 12, 2007, filed with the Securities
and Exchange Commission, EARNEST Partners, LLC is deemed to have beneficial
ownership of 3,636,108 shares of the Company's Class A Common Stock owned
by clients of EARNEST Partners, LLC, of which EARNEST Partners, LLC is
considered a beneficial owner since it shares the power to make investment
decisions for those clients. No EARNEST Partners, LLC client's interest
relates to more than five percent of the class. The address of EARNEST
Partners, LLC is 1180 Peachtree Street NE, Suite 2300, Atlanta, GA 30309.
(3) Based on a Schedule 13G, dated February 1, 2007, filed with the Securities
and Exchange Commission, Dimensional Fund Advisors, L.P. (formerly
Dimensional Fund Advisors, Inc.) is deemed to have beneficial ownership of
3,004,756 shares of the Company's Class A Common Stock owned by commingled
group trusts and separate accounts that are managed by Dimensional Fund
Advisors, L.P. All securities are owned by advisory clients of Dimensional
Fund Advisors, L.P., no one of which, to the knowledge of Dimensional Fund
Advisors, L.P., owns more than five percent of the class. Dimensional Fund
Advisors, L.P. disclaims beneficial ownership of all such securities. The
address of Dimensional Fund Advisors, L.P. is 1299 Ocean Avenue, 11th
Floor, Santa Monica, CA 90401.
(4) Of the indicated shares of Class A Common Stock, 15,000 shares are
presently owned by Mr. Fox. The remaining shares indicated may be acquired
pursuant to stock options within 60 days. Mr. Fox's address is c/o Delphi
Capital Management, Inc., 590 Madison Avenue, New York, NY 10022.
(5) Of the indicated shares of Class A Common Stock, 2,463 shares are presently
owned by Mr. Burghart. The remaining shares indicated may be acquired
pursuant to stock options within 60 days. Mr. Burghart's address is c/o
Reliance Standard Life Insurance Company, Two Commerce Square, 2001 Market
Street, Suite 1500, Philadelphia, PA 19103.
(6) Of the indicated shares of Class A Common Stock, 4,847 shares are presently
owned by Mr. Daurelle. The remaining shares indicated may be acquired
pursuant to stock options within 60 days. Mr. Daurelle's address is c/o
Reliance Standard Life Insurance Company, Two Commerce Square, 2001 Market
Street, Suite 1500, Philadelphia, PA 19103.
(7) Of the indicated shares of Class A Common Stock, 2,938 shares are presently
owned by Mr. Smith. Of the shares presently owned, Mr. Smith has sole
voting and dispositive power with respect to 1,494 shares and shared voting
and dispositive power with respect to 1,444 shares. The remaining shares
indicated consist of 64,800 shares of Class A Common Stock which may be
acquired pursuant to stock options within 60 days and 46,416 Class A Common
Stock restricted share units. Mr. Smith's address is c/o Delphi Capital
Management, Inc., 590 Madison Avenue, New York, NY 10022.
(8) Of the indicated shares of Class A Common Stock, 2,340 shares are presently
owned by Mr. Sherman. The remaining shares indicated consist of 53,822
shares of Class A Common Stock which may be acquired pursuant to stock
options within 60 days and 17,144 Class A Common Stock restricted share
units. Mr. Sherman's address is c/o Delphi Capital Management, Inc., 590
Madison Avenue, New York, NY 10022.
(9) All of the indicated shares of Class A Common Stock may be acquired
pursuant to stock options within 60 days. Mr. Ilg's address is c/o Safety
National Casualty Corp., 2043 Woodland Parkway, Suite 200, St. Louis, MO
63146. Messrs. Brine's and Litvack's addresses are c/o Delphi Capital
Management, Inc., 590 Madison Avenue, New York, NY 10022.
(10) Of the indicated shares of Class A Common Stock, 1,485 shares are presently
owned by Mr. O'Connor. The remaining shares indicated may be acquired
pursuant to stock options within 60 days. Mr. O'Connor's address is c/o
Delphi Capital Management, Inc., 590 Madison Avenue, New York, NY 10022.
(11) Of the indicated shares of Class A Common Stock, 2,878 shares are presently
owned by Mr. Meehan. The remaining shares indicated consist of 27,672
shares of Class A Common Stock which may be acquired pursuant to stock
options within 60 days and 361 Class A Common Stock restricted shares which
will vest within 60 days.
(12) Of the indicated shares of Class A Common Stock, 20,425 shares are
presently owned by Mr. Hirsh; of such shares, Mr. Hirsh has sole voting and
dispositive power with respect to 14,366 shares and shared voting and
dispositive power with respect to 6,059 shares. Mr. Hirsh disclaims
beneficial ownership as to such 6,059 shares. The remaining shares
indicated may be acquired pursuant to stock options within 60 days. Mr.
Hirsh's address is c/o Delphi Capital Management, Inc., 590 Madison Avenue,
New York, NY 10022.
(13) Of the indicated shares of Class A Common Stock, 6,666 shares are directly
owned by Mr. Wright. In addition, each of Mr. Wright and a corporation
wholly owned by Mr. Wright may be deemed to beneficially own 2,974 shares
of such stock. The remaining shares indicated may be acquired pursuant to
stock options within 60 days.
(14) Includes 787,231 shares of Class A Common Stock which may be acquired
pursuant to stock options within 60 days and 91,505 Class A Common Stock
restricted share units.
ELECTION OF DIRECTORS
The Board of Directors consists of twelve members. Each director is elected
annually to serve until his successor has been elected and qualified, or he has
resigned or been removed from office. All nominees for election are currently
directors of the Company and have been previously elected by the stockholders.
The Company's Restated Certificate of Incorporation provides that the holders of
Class A Common Stock are entitled to vote as a separate class to elect the Class
A Director so long as the outstanding shares of Class A Common Stock represent
at least 10% of the aggregate number of outstanding shares of the Company's
Class A and Class B Common Stock. As of the date of this Proxy Statement, this
condition continues to be satisfied. Mr. Philip R. O'Connor was elected by the
holders of the Class A Common Stock in 2006 as the Class A Director and the
Board of Directors has unanimously recommended Mr. O'Connor for election as the
Class A Director.
It is intended that the shares of Common Stock represented by Proxies will be
voted "for" the election of all such nominees unless a contrary direction is
indicated on the Proxy. While it is not expected that any of the nominees will
be unable to qualify for or
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accept office, if for any reason any nominee shall be unable to do so, Proxies
that would otherwise have been voted "for" such nominee will instead be voted
"for" a substitute nominee selected by the Board.
Nominees for Director
The following sets forth information as to each nominee for election at the 2007
Annual Meeting, including his age, positions with the Company, length of service
as a director of the Company, other directorships currently held, if any,
principal occupations and employment during the past five years and other
business experience.
ROBERT ROSENKRANZ, 64, has served as the Chief Executive Officer of the Company
since May 1987 and has served as Chairman of the Board of Directors of the
Company since April 1989. He served as President of the Company from May 1987 to
April 2006. He also serves as Chairman of the Board or as a Director of the
Company's principal subsidiaries. Mr. Rosenkranz has served since October 1978
as either sole or managing general partner of Rosenkranz & Company, L.P. or as
beneficial owner of its general partner. Mr. Rosenkranz founded Acorn Partners,
L.P. in 1982 as a multi-manager, multi-strategy fund of hedge funds and, in
2004, founded Pergamon Advisors LLC, an investment adviser that, along with
related entities, pursues a market neutral equity investment strategy.
DONALD A. SHERMAN, 56, has served as the President and Chief Operating Officer
of the Company since April 2006 and has served as a Director of the Company
since August 2002. Mr. Sherman served as Chairman and Chief Executive Officer of
Waterfield Mortgage Company, Inc. ("Waterfield") since 1999 and as President of
Waterfield from 1989 to 1999. Prior to his service at Waterfield, Mr. Sherman
served as President of Hyponex Corporation and was previously a partner in the
public accounting firm of Coopers and Lybrand. Mr. Sherman also serves as a
Director of the Company's principal subsidiaries.
ROBERT M. SMITH, JR., 55, has served as Executive Vice President of the Company
and Delphi Capital Management, Inc. ("DCM") since November 1999 and as a
Director of the Company since January 1995. He has also served as the Chief
Investment Officer of Reliance Standard Life Insurance Company ("RSLIC") and
First Reliance Standard Life Insurance Company ("FRSLIC") since April 2001. From
July 1994 to November 1999, he served as Vice President of the Company and DCM.
Mr. Smith also serves as a Director of the Company's principal subsidiaries.
KEVIN R. BRINE, 56, has served as a Director of the Company since July 2004. He
is Managing Director of Brine Management LLC and Trustee of SCB, Inc.
Previously, he was a partner and board member of Sanford C. Bernstein & Co. Over
his twenty-two year career at Sanford C. Bernstein & Co., Mr. Brine had senior
management responsibilities for the firm's U.S. Private Client Business and
Global Institutional Asset Management. He is also a trustee of a number of
non-profit institutions such as New York University, the Whitney Museum of
American Art, and the Alliance for the Arts, The World Monuments Fund and the
American Academy in Rome.
LAWRENCE E. DAURELLE, 55, has served as a Director of the Company since August
2002. He also has served as President and Chief Executive Officer of RSLIC,
FRSLIC and Reliance Standard Life Insurance Company of Texas ("RSLIC-Texas")
since October 2000. He served as Vice President and Treasurer of the Company
from August 1998 to April 2001. He also serves as a Director of RSLIC, FRSLIC
and RSLIC-Texas. From May 1995 until October 2000, Mr. Daurelle was Vice
President and Treasurer of RSLIC, FRSLIC and RSLIC-Texas.
EDWARD A. FOX, 70, has served as a Director of the Company since March 1990. He
served as Chairman of the Board of SLM Corporation from August 1997 until May
2005. He also serves as a director of Capmark Financial Group, Inc. He served as
Chairman of the Board of SLM Corporation from August 1997 until May 2005. From
May 1990 until September 1994, Mr. Fox was the Dean of the Amos Tuck School of
Business Administration at Dartmouth College, and from April 1973 until May
1990, he was President and Chief Executive Officer of the Student Loan Marketing
Association.
STEVEN A. HIRSH, 67, has served as a Director of the Company since August 2005.
He has also served as Director of RSLIC and FRSLIC since January 1988. He
currently serves as Chairman of the Board and President of Astro Communications,
Inc., a provider of industrial lighting products. He previously served as a
portfolio manager with William Harris & Company and predecessor firms for
thirty-seven years.
HAROLD F. ILG, 59, has served as a Director of the Company since August 2002. He
also has served as Chairman of the Board of Safety National Casualty Corporation
("SNCC") since January 1999, as well as the President and a Director of Safety
National Re since 1997. He serves on the Board of Directors of RSLIC, FRSLIC,
and RSLIC-Texas. From April 1999 until October 2000, he served as President and
Chief Executive Officer of RSLIC, FRSLIC, and RSLIC-Texas. Prior to January
1999, he served as Vice Chairman of the Board of SNCC, where he has been
employed in various capacities since 1978.
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JAMES M. LITVACK, 65, has served as a Director of the Company since August 2005.
He has also served as a Director of FRSLIC since April 1990. He is an economic
consultant and previously taught economics for 31 years at Princeton University,
where he also served as Assistant Dean of the Faculty and as Executive Director
of the Ivy League. He has served on numerous commissions advising on financial
issues for the State of New Jersey.
JAMES N. MEEHAN, 62, has served as a Director of the Company since May 2003. He
also has served as a Director of RSLIC since July 1988 and FRSLIC since April
1993. Mr. Meehan retired from Banc of America Securities/Bank of America as a
Managing Director in May 2002 after 15 years of service with the organization
and its predecessors. During his tenure, he was responsible for the bank's
commercial relationships with the insurance industry. Mr. Meehan also serves as
a director of Bristol West Holdings, Inc., reassure America Life Insurance
Company and American Fuji Fire and Marine Insurance Company.
ROBERT F. WRIGHT, 81, has served as a Director of the Company since August 2005.
He has also served as a Director of RSLIC and RSLIC-Texas since April 1990 and
as a Director of FRSLIC since October 1989. He serves as the President and Chief
Executive Officer of Robert F. Wright Associates, Inc., a business consultancy
which he founded in 1988. Mr. Wright also serves as a director of U.S.I.
Holdings Corporation, The Navigators Group, Inc. and Universal American
Financial Corp.
Nominee for Class A Director
PHILIP R. O'CONNOR, 58, has served as a Director of the Company since May 2003.
He also has served as a Director of RSLIC since March 1993. Dr. O'Connor is
currently on leave as Illinois Market Vice President of Constellation New
Energy, Inc., a provider of competitive retail electricity, while serving as a
ministerial advisor with Iraq Power Alliance under the auspices of Joint
Contracting Command - Iraq, U.S. Department of Defense. Dr. O'Connor is
currently the President of PROactive Strategies, a provider of policy analysis
and advice on insurance regulation. Dr. O'Connor served as the Illinois Director
of Insurance from 1979 to 1982. From 1983 through 1985, Dr. O'Connor was
Chairman of the Illinois Commerce Commission, the utility regulatory body of
Illinois, and he served on the Illinois State Board of Elections from 1998 until
April 2004. After 1985, Dr. O'Connor formed Palmer Bellevue Corporation, an
energy and insurance consulting firm that became a part of Coopers and Lybrand
in 1993. In 1998, he established the Midwest business of Constellation
NewEnergy, Inc. He also serves as a member of the Board of the Big Shoulders
Foundation for the schools of the Archdiocese of Chicago.
DIRECTORS' ATTENDANCE
The Board of Directors held five meetings during 2006. Each incumbent director
attended at least 75% of the aggregate of (i) the total number of meetings held
during the period for which such incumbent was a director, and (ii) the total
number of meetings held by all committees of the Board of Directors on which
such incumbent served. Directors are encouraged to attend the Company's annual
meetings of stockholders where practicable. Eleven directors then serving
attended last year's annual meeting. The non-management members of the Board of
Directors of the Company hold regularly scheduled executive sessions on a
quarterly basis, and the presiding director for these sessions is selected by
rotating among the chairs of the committees of the Board.
COMMUNICATION WITH BOARD OF DIRECTORS
Any stockholder or interested party may communicate with the Board of Directors,
any Board committee or any individual director(s) by directing such
communication in writing to the Company's Secretary, c/o Delphi Capital
Management, Inc., 590 Madison Avenue, New York, New York 10022. The
communication should indicate whether the communicating party is a stockholder
and whether it is a Board, Board committee or individual director communication,
as the case may be. The Secretary will forward such communication to the members
of the Board or of the relevant committee or individual director(s), as
indicated in such communication.
CORPORATE GOVERNANCE
DIRECTOR INDEPENDENCE
The Board has adopted categorical standards for evaluating the independence of
its members. Under these standards, a director is presumed to be independent if
(i) neither the director nor any immediate family member of the director (a
"family member") is currently employed or has been employed (as an executive
officer, in the case of a family member) by the Company during the past three
years; (ii) neither the director nor any family member has received in any
twelve-month period within the past three years more than $100,000 in direct
compensation from the Company, other than director and committee fees, or in the
case of a family member, compensation received for service as a non-executive
employee of the Company; (iii) neither the director nor any
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family member (a) is a current partner (or, in the case of a director, an
employee) of a firm that is the Company's external or internal auditor, (b)
within the last three years was a partner or employee of such a firm and
personally worked on the Company's audit within that time, or, (c) in the case
of a family member, is a current employee of such a firm and participates in the
Company's audit, assurance or tax compliance (but not tax planning) practice;
(iv) neither the director nor any family member is currently employed or has
been employed during the past three years as an executive officer of another
company where any of the Company's present executives at the same time serves or
served on that other company's compensation committee; and (v) the director is
not an executive officer, and no immediate family member of the director is an
employee, of a company that during the past three full calendar years made
payments to, or received payments from, the Company for property or services in
an amount which, in any single fiscal year, exceeded the greater of $1 million
or 2% of such other company's consolidated revenues. In addition, under such
standards, a director is not deemed to have a material relationship with the
Company that impairs the director's independence as a result of (i) the
director's or any family member's being an executive officer, director or
trustee of a foundation, university or other charitable or not-for-profit
organization to which the Company or its charitable foundation makes
contributions that did not exceed the greater of $1 million or 2% of such
organization's consolidated gross revenues in any single fiscal year during the
preceding three years; (ii) the director's beneficial ownership of less than 5%
of the outstanding equity interests of an entity that has a business
relationship with the Company; (iii) the director being an officer or director
of an entity that is indebted to the Company, or to which the Company is
indebted, where the total amount of the indebtedness was less than 3% of the
total consolidated assets of such entity as of the end of the previous fiscal
year; or (iv) the director's (or an entity of which such director is an officer,
employee or director) obtaining products or services form the Company on terms
generally available to customers of the Company for such products or services.
In making its independence determinations with respect to Messrs. Brine, Fox,
Hirsh, Litvack, Meehan, O'Connor and Wright, the Board determined that none of
such directors had any relationship with the Company that would be contrary to
the provisions of these standards or the listing standards of the New York Stock
Exchange. The Company's director independence standards are available on its
website (www.delphifin.com/corp_governance) and in print to any shareholder upon
request.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors maintains three committees: the Stock Option and
Compensation Committee (the "Compensation Committee"), the Nominating and
Corporate Governance Committee (the "Governance Committee"), and the Audit
Committee. Each of such committees is comprised solely of individuals who are
directors who are independent as described above. Descriptions of these
committees and their respective duties follow.
COMPENSATION COMMITTEE
The responsibilities of the Compensation Committee include, among others,
oversight and approval of the compensation of the Company's key executives,
including the Chief Executive Officer, administration of the stock option and
other stock-related plans of the Company, and making recommendations regarding
the compensation of the Company's outside directors. The Compensation
Committee's written charter is available on the Company's website
(www.delphifin.com/corp_governance) and in print to any shareholder upon
request. The committee's membership consists of Messrs. Wright (Chairman),
Meehan and O'Connor. The Compensation Committee held eight meetings during 2006.
The Compensation Committee's report is included on page 11 of this Proxy
Statement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Meehan, O'Connor, and Wright, the members who served on the Compensation
Committee during 2006, are not "insiders" within the meaning of the Securities
Act and there were no "interlocks" within the meaning of the Securities Act.
GOVERNANCE COMMITTEE
The Governance Committee consists of Messrs. O'Connor (Chairman), Brine and Fox.
The Governance Committee, among other things, identifies and recommends to the
Board nominees for election as Directors, recommends committee appointments to
the Board, oversees the Board's performance evaluation processes and reviews
proposed and existing related party transactions pursuant to the Company's
review policy for such transactions. See "Certain Relationships and Related
Party Transactions." The Governance Committee's responsibilities and authority
are described in greater detail in its written charter. This charter, along with
the Company's Corporate Governance Guidelines and other Company corporate
governance-related documents, are available on the Company's website
(www.delphifin.com/corp_governance) and in print to any shareholder upon
request. The Governance Committee met five times in 2006.
6
For purposes of identifying Board nominees, the Governance Committee relies
primarily on personal contacts of members of the Board and does not maintain a
formal process in this regard. The Governance Committee will consider
stockholder recommendations of Board nominees which are made in accordance with
the requirements set forth below. The Company has not engaged the services of
any third party search firm in connection with the identification or evaluation
of potential Board nominees. While the Governance Committee has not adopted
specific, minimum qualifications for director nominees, the Board has adopted,
on the recommendation of the Governance Committee, criteria for the evaluation
of such nominees, which form part of the Company's Corporate Governance
Guidelines. These criteria provide that the Board should be composed of
individuals who have demonstrated substantial achievements in business,
government, education or other relevant fields, and who possess the requisite
intelligence, experience and education to make meaningful contributions to the
Board, as well as high ethical standards and a dedication to exercising
independent business judgment. The evaluative factors contained in the criteria
address, in addition to various factors relevant to these general attributes,
whether the nominee has the ability, in light of his or her personal
circumstances, to devote sufficient time to carrying out his or her duties and
responsibilities effectively.
The Governance Committee will consider stockholder recommendations of Board
nominees which are made in accordance with the following procedures. Any such
recommendation must be sent to the Secretary of the Company, c/o Delphi Capital
Management, Inc., 590 Madison Avenue, New York, New York 10022 and must be
received by the Secretary no later than November 30 of the calendar year
preceding the Annual Meeting of Stockholders. The recommendation must include
information demonstrating that the person submitting the recommendation is in
fact a stockholder, the proposed candidate's written consent to the nomination,
background information regarding the proposed candidate and an undertaking by
the proposed candidate to provide any further information requested by the
Governance Committee, including by means of an in-person interview. The
Secretary will forward the recommendation to each member of the Governance
Committee. The Governance Committee, with reference to the Board member criteria
discussed above and taking into account the Board's then-current needs, size and
composition and any other factors it deems relevant, will determine whether to
accept such recommendation.
AUDIT COMMITTEE
The Audit Committee is governed by a charter adopted by the Board of Directors,
a copy of which is available on the Company's website
(www.delphifin.com/corp_governance) and in print to any shareholder upon
request. Pursuant to such charter, the Audit Committee assists the Board of
Directors in its oversight of the integrity of the Company's financial
statements, the Company's compliance with legal and regulatory requirements, the
qualifications and independence of the Company's independent auditor, and the
performance of the Company's internal audit function and independent auditor.
Management has the primary responsibility for the Company's financial statements
and its reporting process, including its systems of internal controls, and for
the assessment of the effectiveness of the Company's internal control over
financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.
The independent auditor is responsible for performing an audit of the Company's
consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States), expressing opinions as to
the conformity of such financial statements with generally accepted accounting
principles and as to the effectiveness of the Company's internal control over
financial reporting, and for attesting to management's report regarding the
effectiveness of the Company's internal control over financial reporting. Mr.
Meehan is the Chairman of the Audit Committee. Each of the current members of
the Audit Committee meets the criteria for independence set forth in Rule 10A-3
under the Securities Exchange Act, in addition to the independence standards
referenced above. See "Election of Directors." The Board of Directors has
determined that Mr. Meehan is an "audit committee financial expert" as that term
is defined the rules of the Securities and Exchange Commission. Further
information concerning the Audit Committee and its activities is set forth in
the Audit Committee's report included on page 28 of this Proxy Statement. The
Committee held eight meetings during 2006.
CODE OF ETHICS
The Company has a written Code of Conduct that is applicable to all of the
Company's directors and employees, as well as a written Code of Ethics that
applies specifically to the Company's Chief Executive Officer, President and
Chief Operating Officer, Executive Vice President and Vice President and
Treasurer. Such Codes are available on the Company's website
(www.delphifin.com/corp_governance) and in print to any shareholder upon
request. The Company intends to satisfy any disclosure requirements under Item
5.05 of Form 8-K regarding an amendment to, or a waiver from, a provision of the
Code of Ethics by posting such information on its website at the aforementioned
address.
7
PROPOSAL TO INCREASE SHARES AVAILABLE UNDER THE 2003
EMPLOYEE LONG-TERM INCENTIVE AND SHARE AWARD PLAN
Amendment to Share Plan. The 2003 Employee Long-Term Incentive and Share Award
Plan (the "Share Plan") was adopted by the Board of Directors and approved by
the Company's stockholders in 2003 and, with stockholder approvals, was amended
in 2004 and 2006. The Board of Directors has further amended the Share Plan,
subject to stockholder approval, to increase the aggregate number of shares of
Class A Common Stock reserved for issuance under the Share Plan by 2,000,000 to
a total of 7,250,000. The stockholders are now requested to approve this
amendment to the Share Plan. The purpose of the amendment is to ensure that a
sufficient number of shares will be available under the Share Plan for the
granting of stock options and other equity-related awards to employees and other
individuals who, in the Committee's judgment, can make substantial contributions
to the long-term profitability and value of the Company, its subsidiaries or
affiliates.
The following summary of the Share Plan, as amended, is qualified in its
entirety by reference to the text of the Share Plan document attached as
Appendix A to this Proxy Statement.
General. The Share Plan is intended to provide incentives to attract, retain and
motivate employees and other participants in order to achieve our long-term
growth and profitability objectives. The Share Plan provides for the grants of
awards to employees and other individuals who, in the Committee's judgment, can
make substantial contributions to the long-term profitability and value of the
Company, its subsidiaries or affiliates. The types of awards that may be granted
are stock options, restricted shares, restricted share units, and other
share-based awards (the "Awards"). An aggregate of 7,250,000 shares of Class A
Common Stock, inclusive of the 2,000,000 additional shares contemplated by the
proposed amendment to the Share Plan, have been reserved for issuance under such
plan. In addition, the maximum number of shares of Class A Common Stock with
respect to which options may be granted to an eligible participant under the
Share Plan during any calendar year will be 1,125,000 shares of Class A Common
Stock, and the maximum number of shares of Class A Common Stock with respect to
which Awards intended to qualify as qualified performance-based compensation
(other than options) may be granted to an eligible participant during any
calendar year will be the equivalent of 337,500 shares of Class A Common Stock.
These share amounts are subject to antidilution adjustments in the event of
certain changes in the capital structure of the Company, as described below.
Shares issued pursuant to the Share Plan will be either authorized but unissued
or treasury shares of Class A Common Stock.
Administration. The Share Plan is administered by the Compensation Committee,
which consists entirely of non-employee directors within the meaning of Rule
16b-3 of the Securities Exchange Act of 1934 (the "Exchange Act"), and each of
whom is an outside director within the meaning of Section 162(m) ("Section
162(m)") of the Internal Revenue Code of 1986, as amended (the "Code"). Such
committee determines the persons who will receive Awards, the types of Awards to
be received and the terms and conditions thereof, and has the authority to waive
conditions relating to an Award or accelerate vesting of Awards. Approximately
1,410 employees are currently eligible to participate in the Share Plan.
Awards. Incentive stock options ("ISOs") intended to qualify for special tax
treatment in accordance with the Code and nonqualified stock options not
intended to qualify for special tax treatment under the Code may be granted for
such number of Shares as the Compensation Committee determines. Such committee
is authorized to set the terms relating to an option, including exercise price,
vesting provisions (including any performance-related conditions to vesting) and
the time and method of exercise. However, the exercise price of options will not
be less than the fair market value of the Class A Common Stock on the date of
grant, and the term will not be longer than ten years from the date of grant of
the options. The terms of ISOs will comply with the provisions of Section 422 of
the Code. ISOs may only be granted to employees.
Awards of restricted shares will consist of Class A Common Stock and will be
subject to such restrictions on transferability and other restrictions, if any,
as the Compensation Committee may impose. Such restrictions will lapse under
such circumstances as such committee may determine, including upon the
achievement of performance criteria referred to below. Except as otherwise
determined by such committee, eligible employees granted restricted shares will
have all of the rights of a stockholder, including the right to vote restricted
shares and receive dividends thereon, and unvested restricted shares will
generally be forfeited upon termination of service during the applicable
restriction period.
A restricted share unit will entitle the holder thereof to receive either shares
of Class A Common Stock or cash, as determined by the Compensation Committee, at
the end of a specified deferral period. Restricted share units will also be
subject to such restrictions as such committee may impose. Such restrictions
will lapse under circumstances as such committee may determine, including upon
the achievement of performance criteria referred to below. Except as otherwise
determined by the Compensation Committee, restricted share units subject to
deferral or restriction will be forfeited upon termination of service during any
applicable deferral or restriction period.
8
The Compensation Committee is also authorized, subject to limitations under
applicable law, to grant other Share-based awards that may be denominated in,
valued in, or otherwise based on, the Class A Common Stock, as deemed by such
committee to be consistent with the purposes of the Share Plan.
If the Compensation Committee determines that an award of restricted shares or
restricted share units or an other Share-based award to be granted under the
Share Plan should qualify as "qualified performance-based compensation" for
purposes of Section 162(m), the grant, vesting and/or settlement of such an
Award shall be contingent upon achievement of preestablished performance
objectives set forth below. The performance objectives may vary from individual
to individual and will be based upon one or more of the following performance
criteria as such committee may deem appropriate: appreciation in value of the
Class A Common Stock; total stockholder return; operating income or earnings
and/or growth thereof; net income; pretax earnings; pretax earnings before
interest, depreciation and amortization; pro forma net income; return on equity;
return on designated assets; return on capital; economic value added; earnings
per share; revenues; expenses (including expense ratio); loss ratio; combined
ratio; new business production; operating profit margin; operating cash flow;
free cash flow; cash flow return on investment; operating margin; net profit
margin; or any of the above criteria as compared to the performance of a
published or special index or benchmark deemed applicable by such committee.
Change of Ownership. In the event of a change of ownership (as defined in the
Share Plan), all Awards granted under the Share Plan then outstanding but not
then exercisable (or subject to restrictions) shall become immediately
exercisable, all restrictions shall lapse, and any performance criteria shall be
deemed satisfied, unless otherwise provided in the applicable Award agreement.
Capital Structure Changes. If the Compensation Committee determines that any
dividend, recapitalization, share split, reorganization, merger, consolidation,
spin-off, repurchase, or other similar corporate transaction or event affects
the Class A Common Stock such that an adjustment is appropriate in order to
prevent dilution or enlargement of the rights of eligible participants under the
Share Plan, then such committee shall make such equitable changes or adjustments
as it deems appropriate, including adjustments to (i) the number and kind of
shares which may thereafter be issued under the Plan, (ii) the number and kind
of shares, other securities or other consideration issued or issuable in respect
of outstanding Awards, and (iii) the exercise price, grant price or purchase
price relating to any Award.
Amendment and Termination. The Share Plan may be amended, suspended or
terminated by the Board of Directors at any time, in whole or in part. However,
any such amendment, suspension or termination shall be subject to stockholder
approval (i) if, and to the extent, required under the rules of any stock
exchange or automated quotation system on which the Shares may then be listed or
quoted, and (ii) as it applies to ISOs, to the extent required under Section 422
of the Code. In addition, no amendment, suspension, or termination of the Plan
may materially and adversely affect the rights of a participant under any Award
theretofore granted to him or her without such participant's consent. The
Compensation Committee may waive any conditions or rights of, amend any terms
of, or amend, suspend or terminate, any Award granted, provided that, without
such participant's consent, such amendment, suspension or termination may not
materially and adversely affect the rights of a participant under any Award
previously granted to him or her.
Effective Date and Term. The Share Plan became effective as of April 1, 2003.
Unless earlier terminated, the Share Plan will expire on April 1, 2013, and no
further awards may be granted thereunder after such date.
Market Value. The per share closing price of the Class A Common Stock on March
30, 2007 was $40.23.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the federal income tax consequences of the Share
Plan, based upon current provisions of the Code, the Treasury regulations
promulgated thereunder and administrative and judicial interpretations thereof,
and does not address the consequences under any state, local or foreign tax
laws.
Stock Options. In general, the grant of an option will not be a taxable event to
the recipient and will not result in a deduction to the Company. The tax
consequences associated with the exercise of an option and the subsequent
disposition of Shares acquired on the exercise of such option depend on whether
the option is a nonqualified stock option or an ISO.
Upon the exercise of a nonqualified stock option, the participant will recognize
ordinary taxable income equal to the excess of the fair market value of the
Shares received upon exercise over the exercise price. The Company will
generally be entitled to a deduction in an equivalent amount. Any gain or loss
upon a subsequent sale or exchange of the Class A Common Stock received will be
capital gain or loss, long-term or short-term, depending on the holding period
for the Class A Common Stock.
9
Generally, a participant will not recognize ordinary taxable income at the time
of exercise of an ISO and no deduction will be available to the Company,
provided the option is exercised while the participant is an employee or within
three months following termination of employment (longer, in the case of
disability or death). If an ISO granted under the Share Plan is exercised after
these periods, the exercise will be treated for federal income tax purposes as
the exercise of a nonqualified stock option. Also, an ISO granted under the
Share Plan will be treated as a nonqualified stock option to the extent it
(together with other ISOs granted to the participant by the Company) first
becomes exercisable in any calendar year for Class A Common Stock having a fair
market value, determined as of the date of grant, in excess of $100,000.
If Class A Common Stock acquired upon exercise of an ISO are sold or exchanged
more than one year after the date of exercise and more than two years after the
date of grant of the option, any gain or loss will be long-term capital gain or
loss. If Class A Common Stock acquired upon exercise of an ISO are disposed of
prior to the expiration of these one-year or two-year holding periods (a
"Disqualifying Disposition"), the participant will recognize ordinary income at
the time of disposition, and the Company will generally be entitled to a
deduction in an amount equal to the excess of the fair market value of the Class
A Common Stock at the date of exercise over the exercise price. Any additional
gain will be treated as capital gain, long-term or short-term, depending on how
long the Class A Common Stock has been held. Where Class A Common Stock is sold
or exchanged in a Disqualifying Disposition (other than certain related party
transactions) for an amount less than their fair market value at the date of
exercise, any ordinary income recognized in connection with the Disqualifying
Disposition will be limited to the amount of gain, if any, recognized in the
sale or exchange, and any loss will be a long-term or short-term capital loss,
depending on how long the Class A Common Stock has been held.
Although the exercise of an ISO as described above would not produce ordinary
taxable income to the participant, it would result in an increase in the
participant's alternative minimum taxable income and may result in an
alternative minimum tax liability.
If an option is exercised through the use of Class A Common Stock previously
owned by the participant, such exercise generally will not be considered a
taxable disposition of the previously owned Class A Common Stock and, thus, no
gain or loss will be recognized with respect to such previously owned Class A
Common Stock upon such exercise. The amount of any built-in gain on the
previously owned Class A Common Stock generally will not be recognized until the
new Class A Common Stock acquired on the option exercise is disposed of in a
sale or other taxable transaction.
Restricted Shares. A participant who receives restricted shares will generally
recognize ordinary income at the time that they "vest"; i.e., when they are not
subject to a substantial risk of forfeiture. The amount of ordinary income so
recognized will be the fair market value of the Class A Common Stock at the time
the income is recognized (determined without regard to forfeiture conditions),
less the amount, if any, paid for the Class A Common Stock. This amount is
generally deductible for federal income tax purposes by the Company. Dividends
paid with respect to unvested Class A Common Stock will be ordinary compensation
income to the participant (and generally deductible by the Company). Any gain or
loss upon a subsequent sale or exchange of the Class A Common Stock, measured by
the difference between the sale price and the fair market value on the date the
Class A Common Stock vests, will be capital gain or loss, long-term or
short-term, depending on the holding period for the Class A Common Stock. The
holding period for this purpose will begin on the date following the date the
Class A Common Stock vests.
In lieu of the treatment described above, a participant may elect immediate
recognition of income under Section 83(b) of the Code. In such event, the
participant will recognize as income the fair market value of the restricted
stock at the time of grant (determined without regard to forfeiture conditions),
and the Company will generally be entitled to a corresponding deduction.
Dividends paid with respect to Class A Common Stock as to which a proper Section
83(b) election has been made will not be deductible to the Company. If a Section
83(b) election is made and the restricted stock is subsequently forfeited, the
participant will not be entitled to any offsetting tax deduction.
Other Awards. With respect to restricted share units and other Share-based
awards under the Share Plan not described above, generally, in the case of a
payment to a participant with respect to any such Award granted under the Share
Plan, the amount of cash and the fair market value of any other property
received will be ordinary income to such participant and will be allowed as a
deduction for federal income tax purposes to the Company.
Deductibility Limit on Compensation in Excess of $1 Million. Section 162(m)
generally limits the deductible amount of annual compensation paid (including,
unless an exception applies, compensation otherwise deductible in connection
with Awards granted under the Share Plan) by a public company to its chief
executive officer and certain other executive officers to no more than $1
million each. Stock options granted and other Awards made under the Share Plan
to date have been structured so that compensation arising out of such awards
will be deductible and the Company will continue to do so in the future where
this result can be achieved consistent with the purposes of the Company's
compensation programs. See "Compensation Discussion and Analysis - Tax
Considerations" at page 15 below.
10
NEW PLAN BENEFITS
Any future awards under the Share Plan will be made at the discretion of the
Compensation Committee, and therefore it is not presently possible to determine
either the benefits or amounts that will be received in the future by employees
or other individuals pursuant to the Share Plan. See "Amendment to Share Plan."
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends a vote FOR approval of the amendment to the
2003 Employee Long-Term Incentive and Share Award Plan.
EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT
The Stock Option and Compensation Committee has reviewed and discussed the
following Compensation Discussion and Analysis with management, and based on
such review and discussion, recommended to the Board of Directors that such
Compensation Discussion and Analysis be included in the Company's proxy
statement relating to the 2007 Annual Meeting of Stockholders.
Robert F. Wright, Chairman
James N. Meehan
Philip R. O'Connor
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis describes the material elements of
compensation for the Company's executive officers identified in the Summary
Compensation Table below (who are referred to below as the "named executive
officers") and the process by which such elements are established by the
Compensation Committee.
COMPENSATION OBJECTIVES AND APPROACH
The objectives of our compensation programs are to attract, motivate and retain
executives and employees who will make substantial contributions toward the
Company's meeting the financial, operational and strategic objectives that we
believe will build substantial value for the Company's stockholders. In an
effort to achieve these objectives, the key elements of such programs consist of
base salary, annual cash bonuses and share-based compensation. The Company
emphasizes share-based compensation awards as a large proportion of the named
executive officers' total compensation in order to align their interests with
those of the Company's stockholders by providing rewards to such officers that
will appreciate in value to the extent that the market price of the Company's
common stock increases over time. These awards entail substantial vesting
requirements to facilitate continued employee retention and, in certain cases,
are contingent on the satisfaction of multi-year performance goals, as described
below.
COMPENSATION CONSULTANT AND PEER GROUP
In order to assist the Compensation Committee in performing its functions, the
committee in 2005 engaged Steven Hall & Partners ("SHP"), an expert independent
compensation consulting firm whose key personnel had been associated with
another consulting firm utilized by the Company prior to its engagement of SHP.
SHP provides research, analysis and recommendations to the Compensation
Committee regarding the named executive officers' and outside directors'
compensation, including as to both equity and non-equity compensation. SHP's
services and fees are subject to the review and approval of the Compensation
Committee on an ongoing basis. SHP does not perform services for the Company
other than in its role as consultant to the Compensation Committee.
In connection with its services, SHP has assisted the Compensation Committee in
establishing a peer comparator group for compensation analysis purposes. This
group utilized in 2006 consisted of the following companies in the life and
property and casualty insurance sectors, reflecting the presence of the
Company's insurance subsidiaries in both sectors: Commerce Group, Inc.; FBL
Financial Group, Inc., Harleysville Group Inc., HCC Insurance Holdings, Inc.,
Jefferson-Pilot Corporation, PMA Corporation, Presidential Life Corporation,
Reinsurance Group of America, Inc., StanCorp Financial Group, Inc., Torchmark
Corporation, Universal American Financial Corp., W.R. Berkley Corporation and
Zenith National Insurance Corp. SHP also
11
compiles published compensation survey data for the Compensation Committee's
information and use in this regard. The Compensation Committee does not target
compensation levels for the named executive officers to specified percentiles
for the companies in the comparator group; rather, the compensation information
relating to the members of such group is one of a number of factors that the
Compensation Committee considers in establishing the level and components of the
compensation to the named executive officers. In addition, such information is
used in the evaluation of whether the Company's compensation practices are
competitive in the marketplace.
COMPENSATION DETERMINATION PROCESS
Mr. Rosenkranz makes recommendations to the Compensation Committee regarding the
elements of compensation of the named executive officers other than him, and the
Compensation Committee has full authority and discretion to accept, reject or
modify these recommendations. The Compensation Committee independently
determines the elements of Mr. Rosenkranz's compensation. The Compensation
Committee's compensation determinations regarding the named executive officers
are subject to full Board review. These determinations are generally made
annually, and occur at the Compensation Committee's first regular meeting of
each calendar year occurring in February, in which cash bonuses and share-based
awards relating to the named executive officers' performance during the
preceding calendar year are granted, and any base salary adjustments for the
current year are implemented. In preparation for these meetings, the
Compensation Committee holds an interim meeting, generally in the preceding
December, in which Mr. Rosenkranz presents his preliminary recommendations
regarding the compensation matters relating to the other named executive
officers to be acted upon in the February meeting, based on the anticipated
full-year financial results for the Company and its subsidiaries. SHP generally
participates in the Compensation Committee's deliberations relating to these
matters, and provides advice and input as appropriate in this connection.
The Compensation Committee reviews and approves each element of compensation of
the named executive officers. In establishing the levels and components of
compensation to the named executive officers, the Committee, as a threshold
matter, evaluates the Company's (in the case of the named executive officers who
are officers of the Company) and the relevant operating subsidiary's (in the
case of the named executive officers employed by such subsidiary) overall
performance for the year, and conducts individualized evaluations with regard to
each individual in determining the appropriateness of each individual's elements
and levels of compensation, considering, in certain cases, self-evaluations
prepared by such officers and Mr. Rosenkranz's input regarding these
evaluations.
In setting Mr. Rosenkranz's compensation, the Compensation Committee also
considers the amounts earned by him under the investment consulting and
management arrangements described below in order to assess the appropriateness
of the overall remuneration in which Mr. Rosenkranz has a financial interest,
and has concluded that such remuneration is fairly reflective of the substantial
value furnished to the Company by him and his related entities. These
arrangements are subject to review and approval at inception, and to regular
periodic review, under the Company's Review Policy for Related Party
Transactions. In addition, with regard to Mr. Sherman, the Compensation
Committee takes into account the payments received by him in respect of his
services to various entities in which Mr. Rosenkranz has direct and indirect
financial interests. See "Certain Relationships and Related Party Transactions"
at page 27 below.
Key elements considered in the Compensation Committee's evaluations include
corporate or subsidiary performance compared to the financial, operational and
strategic goals for the applicable period, the officer's contributions to such
performance and the officer's other accomplishments for the benefit of the
Company during such period. In these evaluations, the Compensation Committee
does not apply rigid formulas or necessarily react to short-term changes in
financial performance. Such evaluations also take into account the nature, scope
and level of the named executive officer's responsibilities and the officer's
level of experience, past levels of compensation and changes in such levels,
tenure with the Company, other opportunities potentially available to such
officer and the comparator group compensation data discussed above. In addition,
the members of the Compensation Committee interact with each of the named
executive officers in connection with the regular meetings of the Company's
Board of Directors, which provides the committee with an additional basis for
evaluating such officer and his performance. Based on all of these general
evaluative factors and the additional factors described below, the Compensation
Committee makes its assessments and determines the components and levels of
compensation for each named executive officer.
The compensation decisions for each of the named executive officers relating to
2006 reflect, among other things, the strong financial and operational
performance of the Company and its subsidiaries for the year. A discussion of
such performance is contained in the Management's Discussion and Analysis
section of our 2006 Annual Report on Form 10-K.
12
CASH COMPENSATION
Base salaries for the named executive officers are established by the
Compensation Committee, and adjusted on an annual basis, based on the
considerations described in the preceding section. The base salary amounts paid
to the named executive officers during 2006 are shown in the Summary
Compensation Table at page 16 below.
Cash bonuses for the named executive officers, which are shown in the Summary
Compensation Table in the Bonus and Non-Equity Incentive Compensation columns,
as applicable, are established and determined in various ways. For Messrs.
Rosenkranz and Sherman, various objective performance goals were adopted for the
2006 fiscal year under the Company's Annual Incentive Compensation Plan, which
plan is described further below. Such performance goals, for Mr. Rosenkranz,
included (1) the attainment by the Company of operating earnings per share of at
least $2.71; (2) an operating return on equity percentage of at least 11%; (3)
the performance of the Company's stock exceeding that of the S&P 500 Insurance
Index; (4) the performance on a total return basis of the Company's investment
portfolio exceeding that of the Lehman Brothers U.S. Aggregate Index by at least
100 basis points (1%); (5) the Company's either (a) deploying with a new
external or internal investment manager assets of at least $50 million which
achieve a total return exceeding that of such Lehman index by at least 200 basis
points (2%) or (b) introducing a new category of insurance liabilities in the
amount of at least $100 million with the related spread income, based upon the
supporting investment subportfolio, exceeding 100 basis points (1%); and (6) the
Company's completing one of a specified group of capital markets and acquisition
transactions. For each goal attained, Mr. Rosenkranz had the opportunity to earn
a cash award equal to 50% of his 2006 base salary, except for the operating
earnings per share element, where the percentage was 100%, subject to the
ability of the Compensation Committee to exercise negative discretion to reduce
such award amounts. Operating earnings per share and operating return on equity
are both non-GAAP financial measures under which the after-tax effects of
realized investment gains and losses, as applicable, and results from
discontinued operations are excluded in order to focus on the performance of the
Company's continuing insurance operations. The 2006 bonus structure for Mr.
Sherman involved the same performance goals, but in relation only to the portion
of 2006 during which he was employed by the Company, which commenced in April
2006. For each such goal attained, Mr. Sherman had the opportunity to earn a
cash award equal to 30% of his 2006 annualized base salary, except for the
operating earnings per share element, where the percentage was 50%, subject to
the ability of the Compensation Committee to exercise discretion to reduce such
award amounts. These percentages reflected a target level for Mr. Sherman's
bonus of approximately 70% of that of Mr. Rosenkranz, adjusted to reflect the
partial year of service.
These bonus structures were designed to give Messrs. Rosenkranz and Sherman the
opportunity to earn awards based on the accomplishment of objectives believed to
be of significant benefit to the Company, while also permitting the Compensation
Committee to exercise discretion in adjusting the amount of these awards in a
manner consistent with the full tax deductibility by the Company of such awards
under Section 162(m). See "Tax Considerations" at page 15 below. For 2006,
Messrs. Rosenkranz's and Sherman's goals were achieved, other than the capital
markets and acquisitions-related goal and, in the case of Mr. Sherman, the new
investment or insurance liability-related goal. The Compensation Committee then
applied negative discretion, applying the evaluative factors discussed in the
preceding section, to establish their respective 2006 cash bonus amounts at
levels considered to be appropriate in light of the general evaluative factors
discussed above.
Mr. Smith's cash bonus for 2006, as in previous years, was determined on a
discretionary basis based on the Compensation Committee's evaluation of elements
of Company performance and achievements for the year of a similar nature to
those addressed by the performance goals discussed above for Messrs. Rosenkranz
and Sherman, and the extent and nature of Mr. Smith's contributions toward the
achievement of such goals, in addition to the general evaluative factors
described above.
The annual cash bonus for Mr. Burghart, who is employed in the operations of
RSLIC, are established under the RSLIC management incentive compensation plan.
Under this plan, actions relating to his compensation are subject to the review
and approval of the Compensation Committee. The criterion determining the level
of the bonus attainable under this plan for 2006 consisted of the attainment by
RSLIC and its affiliated life insurance companies on a stand-alone basis of an
operating income target for the year of $125.1 million which, if attained,
resulted in Mr. Burghart's earning a bonus equal to 50% of his base salary,
subject, in both cases, to a discretionary 10% upward or downward adjustment,
applicable to all participants in the RSLIC plan, based on an assessment of
other aspects of RSLIC's corporate performance for the year, such as steps taken
during the year to build for future corporate achievement and its teamwork with
other members of the Company's corporate group. If the operating income target
was not attained, any bonus would have been payable solely on a discretionary
basis. As with those of the performance goals for Messrs. Rosenkranz and Sherman
discussed above, this operating income target is a non-GAAP financial measure
under which the after-tax effects of realized investment gains and losses, as
applicable, and results from discontinued operations are excluded in order to
focus on the performance of RSLIC's continuing insurance operations. In 2006,
RSLIC achieved this operating income target, and, based on the aforementioned
assessment, the resulting bonus earned by Mr. Burghart was adjusted upward by
10%.
13
Under the employment agreement for Mr. Ilg, who is employed in the operations of
SNCC, his annual cash bonuses are determined on a discretionary basis and are
subject to the approval of the Compensation Committee. For further information
relating to this employment agreement, see the "Potential Payments on
Termination or Change in Control" section beginning at page 23 below. Mr. Ilg's
bonus has generally been determined on a team basis along with the other four
members of executive management of SNCC, with such individuals' bonuses being
established at the same percentage of their respective base salaries. Based upon
the Compensation Committee's evaluation of SNCC's corporate performance on a
stand-alone basis and the performance of its executive management team applying
the general evaluative factors described above, Mr. Ilg's bonus for 2006 was
established at 100% of his 2006 base salary.
SHARE-BASED COMPENSATION
General
As noted above, the Company believes that a large component of its officers'
compensation should consist of share-based incentive compensation, which
appreciates in value to the extent that the market price of our common stock
increases. Accordingly, the Compensation Committee has in recent years made, and
intends in the future to continue to make, annual and other grants of
share-based awards to the named executive officers and other key employees in
such amounts as the Committee believes will accomplish the objectives of our
compensation programs. As discussed below, the holder's ability to realize any
financial benefit from these awards typically requires the fulfillment of
substantial vesting requirements, performance contingency-related in some cases
and time-related in others. Accordingly, we believe that these awards provide
substantial benefit to the Company in creating appropriate performance
incentives and in facilitating the long-term retention of employees who add
significant value.
Share-based awards to the named executive officers take two different forms:
options to purchase the Company's common stock and deferred or restricted share
units ("Share Units"), which entitle the recipient to receive a number of shares
of Company common stock equal to the number of such units upon the completion of
a specified deferral period, along with dividend equivalents during the period
that such units are outstanding. Such compensation is awarded under the
Company's 2003 Share Plan, its Second Amended and Restated Employee Stock Option
Plan and, in the case of Mr. Rosenkranz, under its Amended and Restated
Long-Term Performance-Based Incentive Plan. Summary descriptions of these plans
begin at page 17 below.
Options
Options give the holder the right, generally for a period of ten years, to
purchase a specified number of shares of Company stock at the exercise price,
which is the closing price on the New York Stock Exchange of the Company's stock
on the date of grant. The options have value to the holder only to the extent
that the price of our stock increases above the exercise price and the holder
remains employed during the vesting period, which is generally five years, thus
providing a substantial incentive to remain employed by the Company. Employees
generally forfeit any options not vested at the time that their employment
terminates. In addition, options serve to align employees' interests with those
of our stockholders by providing an incentive to make contributions that will
assist in increasing the market price of our stock. We do not backdate options
or grant options retroactively, nor do we reprice options.
For the named executive officers employed by our insurance subsidiaries, we have
emphasized the use of performance-contingent incentive options. These options'
vesting is contingent upon the attainment by RSLIC, in the case of Mr. Burghart,
and SNCC, in the case of Mr. Ilg, of financial performance goals for specified
three and five year performance periods relating to the respective subsidiaries'
cumulative pre-tax operating income (as defined in the option agreements) for
these periods. Pre-tax operating income, in both cases, is a non-GAAP financial
measure that applies various adjustments in order to focus on the performance of
the subsidiaries' continuing insurance operations. In both cases, the options
become exercisable if the specified goal is met; otherwise, a reduced number of
such options become exercisable based on where the performance achieved falls
within a specified range. If specified minimum performance targets for the
five-year performance periods are not satisfied, the options are forfeited in
their entirety. Thus, we believe that these options provide substantial
incentives for performance that will serve the interests of the Company and its
stockholders. RSLIC attained its performance goal for the three-year performance
period consisting of the 2004, 2005 and 2006 fiscal years. Accordingly, 50% of
Mr. Burghart's options became exercisable in February 2007.
Share Units
Share Units give the holder the right to receive one share of Company Class A or
Class B common stock for each unit held and to receive dividend equivalents
while the units are outstanding. As in the case of the options that we grant,
Share Units are subject to substantial vesting requirements that provide the
Company with significant benefits from the standpoint of employee retention. All
of these requirements have been time-based to date. In addition, the terms of
all Share Units granted to date require the employee
14
to continue to hold such units during his entire term of employment with the
Company, even after the applicable vesting period has been satisfied, thus
further aligning the holders' interests with those of the Company's stockholders
on a long-term basis, particularly in light of the downside risk to the holder
of a decrease in their value to the extent that the price of our stock declines
during the holding period. These terms also serve to ensure that the
compensation to the named executive officers associated with the Share Units
will be fully tax deductible by the Company pursuant to Section 162(m).
Grants for 2006 and Granting Practices
In the cases of Messrs. Rosenkranz and Smith, share-based awards have been made
by the Compensation Committee over time on a discretionary basis, primarily in
connection with the annual performance evaluations discussed above. At the
February 2007 meeting of the Compensation Committee, 73,475, 17,144 and 13,470
Share Units were awarded to Messrs. Rosenkranz, Sherman and Smith, respectively,
and Messrs. Sherman and Mr. Smith received 51,432 and 10,000 options,
respectively, all in respect of their performance during 2006. In addition, Mr.
Sherman received an award of 150,000 options in April 2006 in connection with
his appointment as President and Chief Operating Officer and an award of 19,000
options in June 2006 in order to compensate him for the forfeitures of various
director options that resulted from such appointment. All of such options vest
in five equal annual installments beginning one year after the grant date. The
Share Unit awards vest in three equal annual installments beginning one year
after the grant date, in the case of Mr. Rosenkranz, and in three equal
installments beginning on the third anniversary of the grant date, in the cases
of Messrs. Sherman and Smith.
In recent years, the Company has granted share-based awards to employees at a
regular time each year, the date of the regular Compensation Committee meeting
held in February in which, as discussed above, the named executive officers'
performance evaluations are conducted. Such meetings have in each case been
scheduled significantly in advance of their being held, without regard to any
information or expectations regarding future Company financial performance or
announcements. However, for 2007, a change in the timing of share-based awards
was made, whereby the awards made at the Committee's meeting held on February 7,
2007, were by their terms made effective on February 16, 2007, the third day of
market trading of the Company's stock following its public announcement of
fourth quarter and full year 2006 financial results. All option grants are made
directly by the Compensation Committee, which has not delegated any
option-granting authority to management.
EMPLOYMENT AND SEVERANCE AGREEMENTS
The named executive officers, except as described below in the "Potential
Payments on Termination or Change in Control" section beginning at page 23 below
with respect to Messrs. Smith and Ilg, do not have employment, severance or
change-of-control agreements. The other named executive officers serve on an
at-will basis, which would enable the Company to terminate their employment and
to determine the terms of any severance arrangement at such time. In addition,
the terms of the Company's share-based awards, as discussed above, subject such
awards to forfeiture if specified vesting requirements are not satisfied prior
to a named executive officer's leaving the Company.
TAX CONSIDERATIONS
Section 162(m) limits the deductibility of certain compensation for the Chief
Executive Officer and the other named executive officers in excess of $1 million
per year unless certain specified conditions are met. The Compensation Committee
intends to establish and maintain executive compensation levels and programs
that will serve the purposes described in this Compensation Discussion and
Analysis. The Committee has structured the Company's current executive
compensation arrangements in order to avoid limitations on deductibility, and
will continue to do so in the future where this result can be achieved
consistent with achieving these purposes.
15
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Company and its
subsidiaries for the fiscal year ended December 31, 2006 to the Chief Executive
Officer, Vice President and Treasurer (Chief Financial Officer), and the other
three most highly compensated executive officers of the Company and its
subsidiaries.
Change in
Pension
Value and
Nonqualified
Non-Equity Deferred
Stock Option Incentive Plan Compensation All Other
Name and Principal Salary ($) Bonus ($) Awards ($) Awards ($) Compensation Earnings Comp ($) Total
Position Year (1) (2) (3) (4) ($) (2) ($) (5) (6) (7) $
------------------ ---- ---------- --------- ---------- ---------- -------------- ------------ ---------- ----------
Robert Rosenkranz, ..... 2006 $755,000 $ -- $3,000,000 $ -- $1,500,000 $1,824,326 $233,814 $7,313,140
Chief Executive Officer
of the Company
Thomas W. Burghart, .... 2006 187,751 -- -- 464,389 103,032 32,570 12,648 800,390
Vice President and
Treasurer of the
Company
Donald A. Sherman, ..... 2006 531,404 -- 700,000 246,958 700,000 -- 69,195 2,247,557
President and Chief
Operating Officer of
the Company
Harold F. Ilg, ......... 2006 510,512 531,783 -- 796,264 -- -- 12,100 1,850,659
Chairman of the Board of
SNCC
Robert M. Smith, Jr., .. 2006 410,000 550,000 550,000 112,620 -- 31,399 11,111 1,665,130
Executive Vice President
of the Company
(1) Amounts include amounts deferred by the named executive officers, where
applicable, under RSLIC's Retirement Savings (401(k)) Plan and Nonqualified
Deferred Compensation Plan.
(2) Bonus amounts paid under the Company's Annual Incentive Compensation Plan
and the RSLIC 2006 Management Incentive Plan are reported in the column
"Non-Equity Incentive Plan Compensation."
(3) Amounts represent the Company's compensation costs for financial reporting
purposes according to Statement of Financial Accounting Standard No. 123
(Revised) ("SFAS 123R") relating to Share Units awarded in relation to 2006
performance. See Notes A and M to the Consolidated Financial Statements
contained in the Company's 2006 Annual Report on Form 10-K. Effective on
February 16, 2007, 73,475 Share Units were awarded to Mr. Rosenkranz, and
17,144 and 13,470 Share Units were awarded to Messrs. Sherman and Smith,
respectively. These amounts do not necessarily reflect the values that will
ultimately be realized with respect to these awards.
(4) Amounts represent the Company's compensation costs relating to stock
options for financial reporting purposes for the year according to SFAS
123R. See Notes A and M to the Consolidated Financial Statements contained
in the 2006 Annual Report on Form 10-K for the assumptions made in
determining SFAS 123R values. The Company's compensation costs consisting
of the options' SFAS 123R grant date values are recognized ratably over the
periods of service required for the grants to vest. Accordingly, ratable
amounts were expensed in 2006 for grants made in 2002, 2003, 2004 and 2005.
Because the grants to Messrs. Sherman and Smith of options to purchase
51,432 and 10,000 shares of Class A Common Stock, respectively, in relation
to their 2006 performance were made in February 2007, no compensation costs
relating to these options were recognized by the Company in 2006. These
amounts do not necessarily reflect the values that will ultimately be
realized with respect to the related option awards.
For Mr. Sherman, the Company's compensation costs relating to stock options
include the costs for options granted to him under the outside directors
stock plan prior to his appointment as President and Chief Operating
Officer. Upon such appointment, all of such director options not then
vested were forfeited; accordingly, these costs have been reduced to
reflect the reversal of previously accrued costs with respect to the
forfeited options.
(5) Amounts consist of estimates of the increase in actuarial present value of
the named executive officer's accrued benefit under the Company's
retirement plans in 2006. The key assumptions underlying these estimates
are described in footnote 4 to the Pension Benefits Table on page 21. No
amount is payable from the plans before a participant attains age 55
(except in the case of a disability retirement). These amounts do not
necessarily reflect the benefits that will ultimately be realized with
respect to these plans. No above-market earnings, for purposes of SEC
rules, are paid under any Company non-qualified deferred compensation
program.
(6) The amounts indicated in the All Other Compensation column include the
following perquisites, personal benefits, and other items of compensation:
Mr. Rosenkranz: $12,358 for tax gross-up of group life insurance benefit,
$86,640 for personal use of Company car services, $130,616 relating to the
services of a personal assistant and $3,700 for personal use of a
Company-provided car. In addition, the Company permitted the use of office
space by personnel associated with a public policy initiative of a
foundation sponsored by Mr. Rosenkranz; however, no aggregate incremental
cost to the Company was associated with such use.
Mr. Sherman: $19,813 for personal use of Company car services and $45,040
for relocation and related expenses.
(7) The Company and its subsidiaries paid certain amounts in 2006 under related
party transactions to entities in which Mr. Rosenkranz had financial
interests, portions of which were in turn earned by Mr. Rosenkranz in
addition to the amounts set forth above. See "Certain Relationships and
Related Transactions."
16
The following table provides information on stock options and Share Units
granted during the year ended December 31, 2006 to each of the named executive
officers. The expenses recognized by the Company for financial reporting
purposes in 2006 relating to these awards are included in the Option Awards
column of the Summary Compensation Table, with the exception of the Share Units
granted with respect to the named executive officer's performance during 2005.
GRANTS OF PLAN-BASED AWARDS IN 2006
Estimated Possible Payouts Estimated Future Payouts
Under Non-Equity Incentive Under Equity Incentive
Plan Awards(1) Plan Awards
------------------------------ --------------------------
Threshold Target Maximum Target
Grant Amount Amount Amount Threshold Number Maximum
Name Date $ $ $ # # #
---- ---------- --------- ------- ---------- --------- ------ -------
Robert Rosenkranz.... 02/08/2006 $ -- $ -- $2,265,000 $-- $-- $--
Thomas W. Burghart... 02/08/2006 85,150 93,666 103,032 -- -- --
Donald A. Sherman.... 04/19/2006 -- -- 1,057,000 -- -- --
06/08/2006 -- -- -- -- -- --
Harold F. Ilg........ -- -- -- -- -- -- --
Robert M. Smith, Jr.. 02/08/2006 -- -- -- -- -- --
02/08/2006 -- -- -- -- -- --
All Other All Other
Stock Option Exercise
Awards: Awards: or Base Grant
Number of Number of Price of Date Fair
Shares of Securities Option Value of
Stock Underlying Awards Stock and
or Units Options per Share Option
Name # # ($/sh) Awards
---- -------- ---------- --------- ----------
Robert Rosenkranz.... $73,356(2) $ -- $ -- $2,299,955
Thomas W. Burghart... -- -- -- --
Donald A. Sherman.... -- 150,000(3) 36.0533 1,747,995
-- 19,000(4) 34.6200 212,040
Harold F. Ilg........ -- -- -- --
Robert M. Smith, Jr.. -- 15,000(5) 31.3533 151,800
11,163(6) -- -- 349,997
(1) The amounts indicated in the Maximum Amount column reflect the maximum
possible 2006 cash incentive plan awards for the named executive officers,
where applicable. The actual 2006 awards for such officers are indicated in
the Non-Equity Incentive Plan Compensation column of the Summary
Compensation Table. See "Compensation Discussion and Analysis - Cash
Compensation."
(2) Class B Common Stock Share Units granted with respect to Mr. Rosenkranz's
performance during 2005, which vest in three substantially equal annual
installments beginning on February 8, 2007. Dividend equivalents are paid
with respect to these Share Units at the same rate and at the same time as
the Company's regular common stock dividends.
(3) Options for Class A Common Stock become exercisable in five equal annual
installments, beginning on April 19, 2007.
(4) Options for Class A Common Stock become exercisable in five equal annual
installments, beginning on June 8, 2007.
(5) Options for Class A Common Stock become exercisable in five equal annual
installments, beginning on February 8, 2007.
(6) Class A Common Stock Share Units granted with respect to Mr. Smith's
performance during 2005, which vest in three equal annual installments
beginning on February 8, 2009. Dividend equivalents are paid with respect
to these Share Units at the same rate and at the same time as the Company's
regular common stock dividends.
Summary descriptions of the Company's cash and share-based incentive
compensation plans follow:
ANNUAL INCENTIVE COMPENSATION PLAN
Under the Company's Annual Incentive Compensation Plan (the "Annual Incentive
Plan"), its executive officers may earn annual bonus compensation contingent
upon the attainment of certain pre-established performance goals adopted by the
Compensation Committee in accordance with the plan's terms. The Compensation
Committee may exercise negative discretion to reduce the amount that would
otherwise be payable under an award by reason of the applicable performance
goals having been achieved. We intend that compensation payable under the Annual
Incentive Plan will constitute "qualified performance-based compensation" under
Section 162(m), and, consequently, should not be subject to its $1 million limit
on deductibility thereunder. Messrs. Rosenkranz and Sherman were the
participants in the Annual Incentive Plan for 2006. See "Compensation Discussion
and Analysis - Cash Compensation."
LONG-TERM INCENTIVE COMPENSATION PLAN
The Amended and Restated Long-Term Performance-Based Incentive Plan (the
"Long-Term Incentive Plan") for Robert Rosenkranz, the Chairman and Chief
Executive Officer of the Company, is intended to provide Mr. Rosenkranz with a
compensation arrangement that will reward him for his contributions to the
performance of the Company and enhancement of the interests of the Company's
stockholders. The Compensation Committee administers the Long-Term Incentive
Plan and has the authority to determine the number of shares subject to any
award, to grant awards annually as deemed appropriate in accordance with the
plan and to interpret the plan.
17
Following each fiscal year of the Company for which the Long-Term Incentive Plan
is in effect, the Compensation Committee determines whether and to what extent
to grant an award for such year (including the number of shares subject to any
Award it determines to grant), and the composition of such award as between
restricted or deferred shares of Class B Common Stock and options to purchase
Class B Common Stock, based on such criteria relating to Mr. Rosenkranz's
performance, the Company's performance, the Company's stock performance and such
other factors for or relating to such year as it, in its sole discretion, deems
relevant or, if applicable, the extent to which Mr. Rosenkranz is entitled to an
award for such Fiscal Year based on the satisfaction of the performance criteria
previously established by the Compensation Committee in its sole discretion for
such year.
The exercise price of options granted under the Long-Term Incentive Plan is
equal to the closing price on the New York Stock Exchange of the Company's Class
A Common Stock on the date of grant, and the term of the options is ten years
from the date of grant. Options will become exercisable thirty days after the
date of grant. Mr. Rosenkranz is entitled to receive restricted or deferred
shares of Class B Common Stock awarded under the Long-Term Incentive Plan in
connection with various specified events of termination of his employment,
subject to the satisfaction of any supplemental vesting requirements imposed by
the Compensation Committee in connection with the granting of an Award. The
Long-Term Incentive Plan also provides for payments to Mr. Rosenkranz in respect
of any "golden parachute" excise tax imposed with respect to Awards granted
under the plan. See the "Potential Payments on Termination or Change in Control"
section, beginning at page 23 below.
The Long-Term Incentive Plan will terminate on December 31, 2013.
EMPLOYEE STOCK OPTION PLANS
Second Amended and Restated Employee Stock Option Plan
The Second Amended and Restated Employee Stock Option Plan (the "Employee Option
Plan") was originally adopted in 1987 and amended and restated in 1994 and in
1997. The Employee Option Plan provides for a total of 7,650,000 shares of Class
A Common Stock which may be issued upon exercise of options granted thereunder.
Through March 30, 2007, options for 7,570,536 shares of Class A Common Stock
have been granted, net of option forfeitures and expirations. As of March 30,
2007, options covering 5,752,476 shares of Class A Common Stock have been
exercised. These exercises reduced the total number of outstanding options
exercisable for Class A Common Stock to 1,818,060 shares, of which options for
1,219,851 shares of Class A Common Stock were vested as of March 30, 2007.
Options currently outstanding under the Employee Option Plan expire between 2008
and 2017. Options granted under the Employee Option Plan have a maximum term of
ten years and become exercisable at such times and in such amounts as are
determined by the Compensation Committee at the time of grant. The price per
share upon the exercise of an option is 100% of the fair market value of the
Class A Common Stock on the date of the grant, which, under the plan, is equal
to the closing price per share of the Class A Common Stock, as reported on the
New York Stock Exchange for such date.
2003 Employee Long-Term Incentive and Share Award Plan
Under the Share Plan, a total of 7,250,000 shares of Class A Common Stock,
including the 2,000,000 shares that would be added by the proposed amendment to
such plan, are reserved for issuance upon the exercise of options, restricted
shares, restricted share units (representing the right to receive shares of
Class A Common Stock or cash, as applicable, at the end of the specified
deferral period), and other share-based awards granted thereunder. For a
description of the Share Plan and the proposed amendment thereto, see "Proposal
to Increase Shares Available Under the 2003 Employee Long-Term Incentive and
Share Award Plan."
As of March 30, 2007, performance-contingent incentive options for 4,162,552
shares of Class A Common Stock and 91,144 Class A Common Stock Share Units have
been granted under the Share Plan. 787,500 options were vested as of March 30,
2007. Options currently outstanding under the Share Plan expire between 2013 and
2016. The Share Units that have been granted to date under the Share Plan are
subject to time-vesting provisions of various durations.
18
The following table provides information concerning unexercised options, stock
that has not vested, and equity incentive plan awards for each named executive
officer outstanding as of the end of the most recently completed fiscal year.
Each outstanding award is represented by a separate row, which indicates the
number of securities underlying the award.
OUTSTANDING EQUITY AWARDS AT 2006 FISCAL YEAR END
Option Awards Stock Awards
---------------------------------------------------------- ------------------------------------------------
Equity Equity
Incentive Incentive
Equity Plan Plan
Incentive Awards: Awards:
Plan Number of Market or
Awards: Market Unearned Payout Value
Number of Number of Number of Number of Value of Shares, of Unearned
Securities Securities Securities Shares or Shares or Units Shares, Units
Underlying Underlying Underlying Units of Units of or Other or Other
Unexercised Unexercised Unexercised Option Option Stock that Stock that Rights that Rights that
Options (#) Options (#) Unearned Exercise Expiration Have not Have not have not have not
Name Exercisable Unexercisable Options (#) Price ($) Date Vested (#) Vested ($) Vested (#) Vested ($)
---- ----------- ------------- ----------- --------- ---------- ---------- ---------- ----------- -------------
Robert Rosenkranz..... 536,583 -- -- $17.0142 01/14/2008
536,583 -- -- 21.5996 01/15/2009
30,000 (1) $1,213,800 -- --
31,257 (1) 1,264,658 -- --
73,356 (2) 2,967,984 -- --
Thomas W. Burghart.... 22,500 -- -- $14.6667 05/22/2010
112,500 -- 112,500 (3) 27.8733 04/22/2014
-- -- 75,000 (4) 31.1000 12/28/2015
Donald A. Sherman..... 6,420 -- -- $17.5245 08/14/2012
7,668 -- -- 19.5600 05/29/2013
5,696 -- -- 26.3333 05/06/2014
4,038 -- -- 27.8533 05/25/2015
-- 150,000 (5) -- 36.0533 04/19/2016
-- 19,000 (5) -- 34.6200 06/08/2016
Harold F. Ilg......... 33,750 -- -- $13.1111 01/11/2010
38,685 -- -- 13.1111 01/11/2010
-- -- 337,500 (6) 19.3111 05/28/2013
Robert M. Smith, Jr... 28,800 -- -- $21.5729 01/21/2009
18,000 27,000 (5) -- 25.8667 02/11/2014
3,000 12,000 (5) -- 29.4333 02/09/2015
-- 15,000 (5) -- 31.3533 02/08/2016
11,598 (7) $ 469,255 -- --
10,185 (8) 412,085 -- --
11,163 (9) 451,655 -- --
(1) Class B Common Stock Share Units, 30,000 of which were granted on
02/11/2004 and 31,257 of which were granted on 02/09/2005, in both cases
along with other Share Units that have vested in prior years, subject to
the requirement that Mr. Rosenkranz's retirement, upon which he will be
entitled to receive the underlying shares, occur on or after his attainment
of age 65. This requirement will be fully eliminated with respect to all of
such Share Units on August 5, 2007.
(2) Class B Common Stock Share Units granted on 02/08/2006, subject to the
requirement that a retirement that would otherwise entitle Mr. Rosenkranz
to receive the underlying shares must occur on or after February 8, 2009.
This requirement will be eliminated in three substantially equal
installments, beginning on the first anniversary of the grant date.
(3) Options for Class A Common Stock granted on 04/22/2004 become exercisable
only to the extent that a specified cumulative financial performance target
for the 2004-2008 period is satisfied. The indicated number of options
would become exercisable if such target is fully attained.
(4) Options for Class A Common Stock granted on 12/28/2005 become exercisable
only to extent that a specified cumulative financial performance target for
the 2004-2008 period is satisfied. The indicated number of options would
become exercisable if such target is fully attained.
(5) Options for Class A Common Stock vest in equal annual installments over the
first five years of their respective ten year terms.
(6) Options granted on 05/28/2003 become exercisable to the extent that a
specified cumulative financial performance target for the 2003-2007 period
is satisfied; otherwise, such options will be forfeited. The indicated
number of options would become exercisable if such target is fully
attained.
(7) Class A Common Stock Share Units granted on 02/11/2004 vest in ten equal
annual installments beginning on February 9, 2010.
(8) Class A Common Stock Share Units granted on 02/09/2005 vest in ten equal
annual installments beginning on February 9, 2011.
(9) Class A Common Stock Share Units granted on 02/08/2006 vest in three equal
annual installments beginning on February 8, 2009.
19
The table below provides information relating to the number of shares of stock
acquired by the named executive officers during fiscal year 2006 upon the
exercise of options and the number of such officers' Share Units that vested
during such year.
OPTION EXERCISES AND STOCK VESTED IN 2006
Options Awards Stock Awards
--------------------------- -------------------------
Number of Number of
Shares Value Shares Value
Acquired on Realized on Acquired on Realized on
Name Exercise (#) Exercise ($) Vesting (#) Vesting ($)
---- ------------ ------------ ----------- -----------
Robert Rosenkranz 493,392 $11,872,749 (1) $ (1)
Thomas W. Burghart -- -- -- --
Donald A. Sherman 7,302 142,004 -- --
Harold F. Ilg 79,970 1,704,097 -- --
Robert M. Smith, Jr. 40,739 832,239 -- --
(1) During 2006, the vesting requirements with respect to 30,000 and 31,257 of
the Class B Common Stock Share Units granted to Mr. Rosenkranz on
02/11/2004 and 02/09/2005, respectively, were satisfied. However, under
these units' terms, the underlying shares of Class B Common Stock, which
based on the closing price of the Company's Class A Common Stock on the
vesting dates, had an aggregate value of $2,305,713, will not be acquired
by him until after the termination of his employment. See "Compensation
Discussion and Analysis - Share-Based Compensation - Share Units." These
underlying shares are included in the Aggregate Balance column of the table
contained in the Nonqualified Deferred Compensation section below.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes the number of shares of Class A Common Stock and
Class B Common Stock issuable under the Company's equity compensation plans as
of December 31, 2006.
(c)
Number of
Securities
Remaining
Available
for Future
(a) (b) Issuance Under
Number of Weighted- Equity
Securities average Compensation
To be Issued Exercise Plans (Excluding
Upon Exercise Price of Securities
of Outstanding Outstanding Reflected
Options Options in Column (a))
-------------- ----------- ----------------
Equity compensation plans
approved by stockholders:
Class A Common Stock ....... 6,627,002 $23.37 2,269,752 (1) (2)
Class B Common Stock ....... 1,073,166 19.31 6,544,714 (3)
--------- ---------
Total ................... 7,340,168 22.78 8,814,466
========= =========
Equity compensation plans
not approved by
stockholders ............... None -- None
(1) Of these shares, 465,025 shares of Class A Common Stock were available for
purchases pursuant to the Company's Employee Stock Purchase Plan. These
shares may be purchased by the employee at 85% of the market value under
the terms and conditions set forth in the plan.
(2) The number of securities remaining available for future issuance is not
reduced by the 17,144 Class A Common Stock Share Units and the 13,470 Class
A Common Stock Share Units awarded under the Share Plan to Messrs. Sherman
and Smith, respectively, relating to their performance during 2006, since
these Share Units were not granted until 2007.
(3) Under the Long-Term Incentive Plan, a maximum award of up to 357,723 shares
measured by reference to Stock Units, plus the Carryover Award Amount, as
then effect, per year over a ten-year term may be granted. A Stock Unit
consists of restricted or deferred shares of the Company's Class B Common
Stock, each of which individual shares represent one Stock Unit, and
options to purchase shares of Class B Common Stock, each of which
individual options represents one-third of one Stock Unit. The Carryover
Award Amount consists of 715,446 restricted or deferred shares and options
to purchase 2,146,329 shares of Class B Common Stock. The number of
securities remaining available for future issuance is not reduced by the
73,475 Class B Common Stock Share Units awarded to Mr. Rosenkranz related
to his performance during 2006, since these Share Units were not granted
until 2007.
20
RETIREMENT PLAN BENEFITS
The table below shows the present value of the accumulated benefits payable to
the named executive officers under the RSLIC Pension Plan (the "Pension Plan"),
the RSLIC Supplemental Executive Retirement Plan (the "RSLIC SERP") and the
Delphi Capital Management, Inc. Pension Plan for Robert Rosenkranz (the "DCM
Pension Plan"), utilizing assumptions consistent with those used for purposes of
the Company's financial statements as of December 31, 2006. Descriptions of the
terms of these plans follow.
PENSION BENEFITS
AS OF FISCAL YEAR END
DECEMBER 31, 2006
Number of Present Payments
Years Value of During
Credited Accumulated Last Fiscal
Name Plan Name Service (#) (3) Benefit ($) (4) Year ($)
---- ---------------- --------------- --------------- -----------
Robert Rosenkranz Pension Plan 19 $ 509,691 $--
DCM Pension Plan 29 8,086,222 --
Thomas W. Burghart Pension Plan 27 236,201 --
RSLIC SERP 27 77,733 --
Donald A. Sherman (1) (1) (1) (1)
Harold F. Ilg (2) (2) (2) (2)
Robert M. Smith, Jr. Pension Plan 13 183,589 --
RSLIC SERP 13 107,359 --
(1) As of December 31, 2006, Mr. Sherman had completed less than one year of
service and thus was not eligible for pension benefits.
(2) Mr. Ilg does not participate in such plans.
(3) Equals the number of years of credited service as of December 31, 2006. One
year of credited service is provided for every year of employment in which
1,000 hours are completed. The years of Mr. Rosenkranz's credited service,
for purposes of the DCM Pension Plan, include ten years of service provided
to Rosenkranz & Company, L.P. prior to the formation of the Company.
(4) Estimated actuarial present values determined using the same assumptions
and methods used in determining expense in the Company's 2006 financial
statements, including, among others, a discount rate of 5.65%, the use of
the 1994 Group Annuity Reserving Mortality Table, the election of a
straight life annuity and the commencement of benefits at age 65. With
respect to the amount indicated for Mr. Rosenkranz, $2,914,696 of such
amount results from the additional years of credited service described in
footnote 3 to this table.
PENSION PLAN
The Pension Plan is a noncontributory, qualified defined benefit pension plan
that provides retirement and, in certain instances, death benefits to employees
of RSLIC, FRSLIC and DCM.
Formula. The annual benefit under the Pension Plan at an employee's normal
retirement age of 65 is determined by multiplying the employee's years of
service up to 35 years by the sum of (i) 0.85% of the employee's average
compensation (which, for such purpose, consists primarily of the employee's
taxable income as reported on Form W-2, with certain exclusions) for the five
consecutive calendar years in the last ten years of participation prior to
retirement for which such average would be the highest ("Average Compensation")
up to the employee's Social Security covered compensation level, (ii) 1.5% of
the employee's Average Compensation in excess of the Social Security covered
compensation level, and (iii) 1% of the employee's Average Compensation
multiplied by the employee's years of service in excess of 35. Under the Code,
compensation includible for purposes of determining benefits under the Pension
Plan for 2006 was $220,000. Employees are eligible to participate in the Pension
Plan following the completion of one year of service and the attainment of age
21 and generally continue to accrue benefits until termination of employment.
Vesting. Benefits vest after five years of service with RSLIC, FRSLIC and/or
DCM.
Retirement Age. A participant becomes eligible to receive benefits at the normal
retirement age of 65. Early retirement at the attainment of age 55 is available
to a participant with at least ten years of service. At present, Messrs.
Rosenkranz and Smith satisfy these eligibility requirements. If early retirement
is elected, benefits are reduced by 6.67% for each of the first five years, and
3.3% for each of the next five years, by which the retirement commencement date
precedes the normal retirement age.
Forms of Benefit. Employees may elect to receive pension benefits under a single
life annuity, otherwise, in the case of married employees, benefits will be
distributed in the form of a 50% joint and survivor benefit. Optional forms of
payment also include
21
actuarially reduced 100% contingent annuities and life annuities with 10 years
certain. The Pension Plan also provides survivor benefits to the spouses of an
employee who dies with a vested benefit.
RSLIC SERP
The RSLIC SERP provides employees of RSLIC, FRSLIC and DCM with the opportunity
for supplemental retirement income by increasing the amount of compensation
includible for purposes of determining pension benefits above the amount
permitted under the Pension Plan due to the Code limit discussed in the
preceding section. The RSLIC SERP is not qualified under the Code and is
unfunded. Retirement benefits under the RSLIC SERP are calculated in
substantially the same manner as under the Pension Plan, except that
compensation includible under the RSLIC SERP for 2006 was $ 328,860. This amount
will be increased annually by the Social Security Cost of Living Adjustment in
the future. The benefit payable under the Pension Plan is deducted from the
benefit calculated under the RSLIC SERP. The other terms and conditions of the
RSLIC SERP are substantially similar to those of the Pension Plan.
DCM PENSION PLAN
The Delphi Capital Management, Inc. Pension Plan for Robert Rosenkranz (the "DCM
Pension Plan") is a nonqualified defined benefit pension plan that provides
Robert Rosenkranz with retirement benefits supplemental to those furnished under
the Pension Plan.
The annual benefit under the DCM Pension Plan at age 65 is determined by adding
(i) Mr. Rosenkranz's years of service (which, for this purpose, include years of
service with Rosenkranz & Company, L.P. prior to the formation of the Company)
up to 35 years multiplied by the sum of (a) 0.85% of his Average Compensation up
to the Social Security covered compensation level and (b) 2% of his Average
Compensation in excess of the Social Security covered compensation level, plus
(ii) 1% of his Average Compensation multiplied by his years of service in excess
of 35, and subtracting from such sum the amount of the benefit payable to him
under the Pension Plan. The DCM Pension Plan is unfunded; however, plan payments
are unconditionally guaranteed by the Company under a guarantee agreement
between the Company and Robert Rosenkranz. Mr. Rosenkranz does not participate
in the RSLIC SERP.
The other terms and conditions of the DCM Pension Plan are substantially similar
to those of the Pension Plan.
NONQUALIFIED DEFERRED COMPENSATION
Under the Reliance Standard Life Insurance Company Nonqualified Deferred
Compensation Plan (the "Deferred Compensation Plan"), certain employees of
RSLIC, FRSLIC and DCM, including the named executive officers employed by these
companies, can elect on an annual basis to defer from 1% to 10% of their cash
compensation to be earned during the following year, with deferred amounts, plus
investment earnings thereon, to be paid in accordance with the officers'
elections with regard to the timing and form of distributions following the
termination of employment. Amounts deferred can be allocated to accounts that
provide for investment returns comparable to those of the mutual fund options
available under RSLIC's 401(k) plan. Participant accounts are funded with
matching contributions equal to 50% of the amounts deferred by the participant,
up to a maximum match of 4% of the participant's total compensation, reduced by
the matching contributions made for the participant to the 401(k) Plan.
As part of the share-based component of the Company's compensation program,
Share Units are granted to certain of the named executive officers. As discussed
above, a holder of Share Units is not entitled to receive the underlying shares
of Company common stock until after the termination of his employment;
accordingly, the ability of the holder to realize financial benefit from his
Share Units, other than dividend equivalents thereon, is deferred until such
termination. See "Compensation Discussion and Analysis - Share-Based
Compensation."
Executive Registrant Aggregate Aggregate Aggregate
Contributions Contributions Earnings Withdrawals/ Balance
In Last In Last In Last Distributions In At Last
Name Fiscal Year ($) Fiscal Year ($) Fiscal Year ($) Last Fiscal Year ($) Fiscal Year End ($)
---- --------------- --------------- --------------- -------------------- -------------------
Robert Rosenkranz $ -- $ -- $ -- $241,837 (1) $31,906,756 (2)
Thomas W. Burghart 9,387 (3) 1,168 669 -- 11,313
Donald A. Sherman -- -- -- -- --
Harold F. Ilg -- -- -- -- --
Robert M. Smith, Jr. -- -- 4,747 10,103 (1) 1,344,849 (4)
22
(1) Amounts consist of dividend equivalents paid in 2006 with respect to the
applicable Share Units described in footnotes 2 and 4.
(2) Includes 653,987 vested and 134,613 unvested Class B Common Stock Share
Units, as to which the underlying shares of Class B Common Stock will not
be received by Mr. Rosenkranz until after the termination of this
employment, assuming, in the case of the unvested units, the satisfaction
of their vesting requirements. See "Compensation Discussion and Analysis -
Share-Based Compensation - Share Units." The grants of these Share Units
were previously reported as compensation to Mr. Rosenkranz in prior years'
proxy statements in the Summary Compensation Tables for the years as to
which such grants were made.
(3) The amount indicated in the Executive Contributions column is included in
the Salary amount for Mr. Burghart reflected in the Summary Compensation
Table.
(4) Includes, in addition to amounts deferred under the Deferred Compensation
Plan, 32,946 unvested Class A Common Stock Share Units as to which the
underlying shares of Class A Common Stock will not be received by Mr. Smith
until after the termination of his employment, assuming the satisfaction of
the units' vesting requirements. See "Compensation Discussion and Analysis
- Share-Based Compensation - Share Units." The grants of these Share Units
were previously reported as compensation to Mr. Smith in prior years' proxy
statements in the Summary Compensation Tables for the years as to which
such grants were made.
POTENTIAL PAYMENTS ON TERMINATION OR CHANGE IN CONTROL
The Company does not have in place change of control-related severance
agreements for any of its employees, including the named executive officers, nor
does it have employment agreements with the named executive officers, except as
described in this section. This section contains information relating to
benefits that would have been payable under such agreements, and under other
existing plans and arrangements, based on a hypothetical termination of the
relevant named executive officer's employment on December 31, 2006. These
benefits are in addition to those generally furnished to all salaried employees
of the subsidiary by which the named executive officer is employed that would
have applied in the event of such termination, depending on the circumstances;
for example, disability and group life insurance benefits, retirement savings
plan distributions and accrued vacation pay.
Under an agreement with Mr. Smith, entered into in connection with his hiring in
1994, if his employment is terminated by the Company without good and reasonable
cause he will be entitled to a severance payment of six months of base salary,
with such severance to be extended by up to six additional months of base salary
to the extent that he does not obtain new employment during this subsequent
period, plus health benefits during the severance period.
SNCC is party to an employment agreement with Mr. Ilg, the five year term of
which will expire in December 2007, pursuant to which Mr. Ilg serves as the
Chairman of SNCC. The agreement established a minimum base salary, provides for
an annual discretionary bonus and entitles him to receive various benefits
maintained for SNCC's senior executives. Under this agreement, if Mr. Ilg's
employment were terminated by SNCC other than for cause or by him for good
reason, he would be entitled to receive a lump sum payment equal to the total
base salary amounts payable for the longer of the remaining term of the
agreement or 18 months and to the continuation of medical and other welfare
benefits during the longer of such periods. In addition, if his employment
terminated due to death, his estate or beneficiary would be entitled to receive
six months' base salary continuation.
In addition, under the terms of Mr. Ilg's performance incentive options
described above (see "Compensation Discussion and Analysis - Share-Based Awards
- Options"), if his employment were terminated during the options' 2003-2007
performance period due to his death or disability, by SNCC without cause or by
him with good reason, such options would vest based on SNCC's financial
performance for the full period, but the number of such vested options would be
pro-rated to reflect the portion of the period during which he was not employed.
In addition, if an employment termination by SNCC other than for cause or by Mr.
Ilg for good reason were to occur following a change of ownership of the
Company, and SNCC had, at that point, satisfied its minimum financial
performance requirement under his performance incentive options discussed above
for the portion of the performance period then having elapsed, he would, unless
the vesting of these options was then accelerated in its entirety, be entitled
to receive an amount equal to the Black-Scholes value of the options. For this
purpose, "change of ownership" has the same definition as described below in
relation to the Share Units. In addition, for purposes of Mr. Ilg's employment
agreement and performance incentive options:
- "cause" means, as to a termination of Mr. Ilg's employment by SNCC,
his (a) willful and continued failure to perform substantially his
duties (other than as a result of incapacity), (b) willful misconduct
which is materially injurious to SNCC, (c) material breach of such
agreement, (d) being prohibited in writing by SNCC's domiciliary
insurance regulator from serving as an SNCC executive officer; or (e)
non-appealable conviction of or plea of nolo contendere to a felony.
- "good reason" means, as to a voluntary termination by Mr. Ilg of his
employment, (a) SNCC's having assigned to him any duties inconsistent
with, or having materially diminished, his position, authority, duties
or responsibilities; (b) SNCC's discontinuance of, material reduction
in or diminution of participation in his employee benefits so as to
materially adversely affect his benefits or compensation as a whole
unless such action is applicable to all SNCC executives or plan
participants, as applicable,
23
(c) his having been required to be based elsewhere than SNCC's home
office; (d) SNCC's material breach of the agreement; or (e) any
termination by SNCC of his employment other than in accordance with
the agreement.
The terms of Mr. Burghart's performance incentive options contain provisions
that correspond to those of Mr. Ilg's options in relation to the employment
termination events described above, but which, where relevant, relate to the
financial performance of RSLIC for the 2004-2008 period. In addition, for
purposes of these provisions, the definitions of "cause," "change of ownership,"
"disability" and "good reason" are substantially similar to those described
below in relation to the Share Units.
The terms of the Company's options granted on a time-vesting basis do not
provide for acceleration of their vesting due to the holder's death, disability,
retirement or voluntary or involuntary termination of employment, but do provide
for their full acceleration in the event of a change of ownership event with
respect to the Company, which is defined as described below with respect to the
Share Units.
Under the Share Units' terms, the receipt by the holder of the underlying shares
of Company common stock will occur only following his termination of employment.
Accordingly, to the extent that the Share Units' time-vesting requirement has
then been met, the termination of a named executive officer's employment for any
reason other than by the Company for cause, including a voluntary termination or
retirement, will, subject to a further six-month deferral period where required
by Section 409A of the Code, entitle such officer to receive the number of
shares of Company Class A or Class B common stock that corresponds to the number
of Share Units that had become vested at the time of such termination. In
addition, each of the Share Unit awards, to the extent not then already vested,
will vest in its entirety upon a change of ownership with respect to the Company
or the holder's termination of employment due to death or disability, by the
Company without cause or voluntary termination for good reason, as these terms
as defined in the applicable award agreements and, in the case of Mr.
Rosenkranz, the Long-Term Incentive Plan. For these purposes:
- "cause" means, as to the termination by the Company of a named
executive officer's employment, the officer's (a) conviction of a
felony or other crime involving fraud, dishonesty or moral turpitude,
(b) fraud with respect to the business of the Company, or (c) gross
neglect of his duties.
- a "change of ownership" occurs if (a) the current members of the Board
of Directors and subsequent members who meet specified Board approval
requirements cease to constitute a majority of the Board; (b) the
stockholders approve a merger, consolidation, recapitalization or
reorganization of the Company, reverse split of any class of voting
securities of the Company, or an acquisition of securities or assets
by the Company, or the sale or disposition by the Company of all or
substantially all of the Company's assets, or if any such transaction
is consummated without stockholder approval, unless in any such case
the Company's voting stockholders receive in the transaction voting
securities representing more than 60% of the voting power of the
surviving or transferee entity; or (c) the stockholders approve a plan
of complete liquidation of the Company.
- "disability" means an illness, injury, accident or condition causing
the named executive officer to be unable to substantially perform the
duties and responsibilities of his position for 180 days during a
period of 365 consecutive calendar days.
- "good reason" means, as to a named executive officer's voluntary
termination of employment: (a) failure to reelect him to his officer
position (except for termination for cause or due to disability); (b)
reduction in the officer's base salary; (c) the failure to continue in
effect any retirement, life insurance, medical insurance or disability
plan unless substantially comparable benefits are provided; (d) an
involuntary termination of the officer's employment for cause that is
not effected in compliance with specified procedural requirements or
(e) in the case of Mr. Rosenkranz only, the termination of employment
to enter public service.
In addition, the terms of the Share Units, as well as the options granted to Mr.
Rosenkranz under the Long-Term Incentive Plan, entitle the holder to receive
payment in respect of any "golden parachute" excise tax imposed by Section 4999
of the Code in respect of the vesting of such units or options due to a change
of control as described in Section 280G of the Code in order to adjust, on an
after-tax basis, for the amount of any such tax. Under these terms, no such
payments would have been required with respect to a change of ownership event
having occurred at December 31, 2006.
24
The table below reflects the estimated amounts of the compensation and benefits
that would have been payable to the named executive officers under the plans and
arrangements described in this section in the various events of termination of
employment specified in the table's columns. The amounts shown assume that such
terminations were effective as of December 31, 2006, and thus include only
amounts and awards having been earned or received through this date. The actual
amounts that would be paid to a named executive officer upon termination of
employment would be determined only at the time of such termination.
Involuntary Involuntary
Not For Good
For Cause Reason Change of
Termination Termination Ownership Disability Death
----------- ----------- ---------- ------------ ----------
ROBERT ROSENKRANZ:
Share Unit Vesting Acceleration ..... $5,446,442 $5,446,442 $5,446,442 $5,446,442 $5,446,442
THOMAS W. BURGHART
Black-Scholes Option Payment ........ -- -- 2,325,750(1) -- --
Post-Employment Option Vesting ...... 1,270,802(2) 1,270,802(2) -- 1,270,802(2) 1,270,802(2)
DONALD A. SHERMAN
Option Vesting Acceleration ......... -- -- 771,961 -- --
HAROLD F. ILG
Cash Severance ...................... 765,768 765,768 -- -- 255,256
Black-Scholes Option Payment ........ -- -- 7,330,500(3) -- --
Post-Employment Option Vesting ...... 5,710,203(4) 5,710,203(4) -- 5,710,203(4) 5,710,203(4)
Health and Welfare Benefits ......... 32,375 32,375 -- -- --
ROBERT M. SMITH, JR
Cash Severance ...................... 410,000(5) -- -- -- --
Option Vesting Acceleration ......... -- -- 662,940 -- --
Share Unit Vesting Acceleration ..... 1,332,995 1,332,995 1,332,995 1,332,995 1,332,995
Health and Welfare Benefits ......... 8,220(5) -- -- -- --
(1) Amount assumes the occurrence of a change of ownership event followed by
the termination of Mr. Burghart's employment without cause or his voluntary
termination of employment with good reason, all occurring on December 31,
2006, in connection with which the vesting of his performance incentive
options was not accelerated in full.
(2) Amount reflects the intrinsic value of Mr. Burghart's performance incentive
options at December 31, 2006 that would be received following the
conclusion of RSLIC's 2004-2008 performance period, assuming the full
satisfaction by RSLIC of its specified cumulative financial performance
target for such period.
(3) Amount assumes the occurrence of a change of ownership event followed by
the termination of Mr. Ilg's employment without cause or his voluntary
termination of employment with good reason, all occurring on December 31,
2006, in connection with which the vesting of his performance incentive
options was not accelerated in full.
(4) Amount reflects the intrinsic value of Mr. Ilg's performance incentive
options at December 31, 2006 that would be received following the
conclusion of SNCC's 2003-2007 performance period, assuming the full
satisfaction by SNCC of its specified cumulative financial performance
target for such period.
(5) Amount assumes the maximum twelve month severance period.
25
DIRECTORS' COMPENSATION
The following table sets forth compensation paid by the Company to the
non-employee directors of the Company during 2006.
Fees Non-Equity Nonqualified
Earned or Incentive Deferred
Paid in Stock Option Plan Compensation All Other
Cash (1) Awards (2) Awards (3) Compensation Earnings Compensation (4) Total
Name $ $ $ $ $ $ $
---- --------- ---------- ---------- ------------ ------------ ---------------- --------
Kevin R. Brine .......... $64,750 $ -- $ 76,233 $-- $-- $40,000 $180,983
Edward A. Fox ........... 56,750 -- 121,826 -- -- 39,260 217,836
Steven A. Hirsh ......... 61,750 -- 64,829 -- -- 8,000 134,579
James M. Litvack ........ 61,750 -- 59,897 -- -- 13,900 135,547
James N. Meehan ......... 68,500 52,919 41,856 -- -- -- 163,275
Philip R. O'Connor ...... 66,500 -- 88,763 -- -- 18,200 173,463
Donald A. Sherman ....... 750 -- (5) -- -- -- 750
Robert F. Wright ........ 58,250 -- 59,897 -- -- 19,000 137,647
(1) Fees earned reflect the amount of cash forgone by the director in respect
of the annual retainer for Board service, where applicable, in addition to
Board and committee meeting fees. As discussed below, outside directors
have the ability to elect to receive options or restricted shares, in lieu
of cash, in payment of the annual retainer. Pursuant to the advance
elections made for 2006, on May 4, 2006, the following directors received
options to purchase Class A Common Stock in lieu of all or part of their
annual retainers in the following amounts: Messrs. Brine and O'Connor -
4,328 options; Mr. Hirsh - 2,597 options; and Messrs. Litvack and Wright -
2,163 options. The exercise price under such options is $34.67. In
addition, pursuant to his advance election made for 2006, Mr. Meehan
received 1,443 restricted shares of Class A Common Stock on the same date.
Further information relating to the terms of these options and restricted
shares is contained in the discussion below.
(2) Represents compensation costs for financial reporting purposes for the year
according to SFAS 123R. See Notes A and M to the Consolidated Financial
Statements in the 2006 Annual Report on Form 10-K for the assumptions made
in determining SFAS 123R values. These amounts do not necessarily reflect
the values that will ultimately be realized with respect to these awards.
At December 31, 2006, Mr. Meehan held 722 unvested restricted shares with a
grant date fair value of $34.67.
(3) Represents compensation costs for financial reporting purposes for the year
according to SFAS 123R. See Notes A and M to the Consolidated Financial
Statements in the 2006 Annual Report on Form 10-K for the assumptions made
in determining SFAS 123R values. These amounts do not necessarily reflect
the values that will ultimately be realized with respect to these awards.
At December 31, 2006, the aggregate number of options under awards granted
in 2006 and prior years was: Mr. Brine - 33,920; Mr. Fox -189,698; Mr.
Hirsh - 27,185; Mr. Litvack - 26,394; Mr. Meehan - 43,870; Mr. O'Connor -
53,633; and Mr. Wright - 26,394. The SFAS 123R grant date fair value was
$11.27 for options granted in 2006.
(4) Includes Company matches of charitable gifts under the program discussed
below.
(5) The Company's compensation costs for financial reporting purposes for the
year according to SFAS 123R relating to options received by Mr. Sherman in
his former capacity as an outside director, including the reversal of
previously accrued expenses due to the forfeiture of certain of these
options, are reflected in the amount set forth for him in the Option Awards
column of the Summary Compensation Table, rather than in this table.
The Company pays its directors who are not officers or employees of the Company
or any of the Company's affiliates (each, an "outside director") annual
compensation consisting of options to purchase Class A Common Stock, restricted
shares of Class A Common Stock or cash in an amount as described in the
following sentence (the "Annual Retainer"), and a fee of $750 plus expenses for
each Board of Directors or committee meeting attended, except that the fee is
$1,000 for Audit Committee meetings. The amount of the Annual Retainer, if paid
in cash, for an outside director who has not previously served as an officer or
employee of the Company or any of its subsidiaries, is $50,000, and for an
outside director who has so served, is $25,000. In addition to option or
restricted share grants in respect of the Annual Retainer, outside directors
also receive certain option grants on an annual formulaic basis and are eligible
to receive grants of options at such times and in such amounts as are determined
by the committee consisting of the full Board of Directors of the Company in its
discretion. All of these grants are made pursuant to the Second Amended and
Restated Directors Stock Plan (the "Directors Stock Plan").
The Directors Stock Plan was adopted in 1994, amended and restated in 1997 and
in 2003 and was further amended in February 2007. Under the Directors Stock
Plan, each outside director in office on the business day following the
Company's Annual Meeting of Stockholders is granted options to purchase shares
of Class A Common Stock. Prior to the 2007 amendment, the number of options was
determined pursuant to the following formula: number of options = 5,963
multiplied by [1+(.125 multiplied by the number of calendar years of continuous
service of such outside director to that point, including any portion of a
calendar year of service as a full year)]. The 2007 amendment replaced this
formula with the following: number of options = (a) $100,000 multiplied by
three, divided by (b) the fair market value of a share of Class A Common Stock
of the Company on the
26
business day following each Annual Meeting of Stockholders. This formula assumes
that the value of an option on the Company's stock is equal to one-third of the
value of a share of such stock. The option exercise price is the closing price
per share of the Class A Common Stock, as reported through the New York Stock
Exchange on the grant date. Options granted prior to 2007 vest in five equal
annual installments so long as the director continues to serve on the Board,
commencing on the first anniversary of the date of the grant. Options granted in
2007 and after will vest in three equal annual installments, beginning on May
1st of the year following the year in which the grant is made, and will vest in
their entirety upon the death or disability of a director then serving on the
Board. All options have a term of ten years from the date of grant.
The Directors Stock Plan also provides for the Annual Retainer to be paid
through the grant of options, unless such director elects in advance to receive
the Annual Retainer in cash or in restricted shares. Options (or, if elected by
the outside director, restricted shares) are granted on the first business day
following the date on which each outside director is elected, reelected or
appointed. The number of options granted is equal to (a) three times the
director's Annual Retainer for the applicable period divided by (b) the closing
price per share of the Class A Common Stock, as reported on the New York Stock
Exchange on the grant date, and the exercise price is equal to such closing
price. If restricted shares are elected by an outside director, the number of
restricted shares granted is equal to the nearest number of whole shares
determined by dividing the Annual Retainer by such closing price on the date of
grant. Options or restricted shares granted vest in four quarterly installments
and options expire ten years from the date of grant. The number of options or
restricted shares that an outside director may receive in respect of the Annual
Retainer is dependent upon the time at which such director is elected and the
closing price of the Class A Common Stock on the date of grant and, therefore,
is not determinable in advance.
In addition to the formulaic annual option grants under the Directors Stock
Plan, as described above, a committee consisting of the full Board of Directors
of the Company may make grants of options to outside directors at such times and
in such amounts as are determined by such committee in its discretion. As is the
case for options granted under the formulaic provisions of the plan, the
exercise price for any options granted under this provision is the closing price
per share of the Class A Common Stock, as reported on the New York Stock
Exchange for the grant date and such options expire ten years from the date of
grant. Grants under this provision are made primarily in situations where the
formulaic provisions would not effectively operate; for example, where a new
outside director joins the Board on a date other than the annual grant date.
The Company has a matching charitable gifts program for its outside directors
under which the Company matches, on a two-to-one basis, charitable contributions
made by the director to qualified educational institutions and institutions
dedicated to the advancement of the arts, under which the maximum amount of the
Company's matching contributions for any one director in any calendar year is
$40,000.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has since 2004 had in place a review policy for related party
transactions, and, in February 2007, amended such policy in certain respects.
Under this policy, such transactions are subject to a prior review and approval
process under which such transactions are initially reviewed by the Governance
Committee. If, based on this review, this committee recommends to the full Board
that the transaction be approved, such recommendation is submitted to the Board
for consideration and, if deemed appropriate, acceptance. Such acceptance
requires the affirmative vote of a majority of the disinterested directors. In
addition, under the policy, existing related party transactions are subject to
ongoing review by the Governance Committee and the Board on at least an annual
basis. This policy is available on the Company's website
(www.delphifin.com/corp_governance) and in print to any shareholder upon
request. All related party transactions in effect have either been pre-approved
under such policy or, where entered into before the adoption of such policy,
have received periodic review under the policy.
Pursuant to two consulting agreements, RSLIC and the Company pay to Rosenkranz
Asset Managers LLC ("RAM"), a wholly owned subsidiary of Rosenkranz & Company,
L.P., fees associated with the formulation of the investment and other
strategies for the Company and its subsidiaries. These fees amounted to $6.0
million for the year ended December 31, 2006; of such amount, $3.7 million was
earned by Mr. Rosenkranz due to his direct and indirect financial interests in
Rosenkranz & Company, L.P. These fees generally increase at an annual rate of
10% and are expected to be $6.6 million for calendar year 2007. The Company
believes that the fees charged under these agreements are comparable to fees
charged by unaffiliated third parties for consulting services of considerably
narrower scope than the services provided thereunder. Pursuant to an expense
allocation agreement, a subsidiary of the Company received periodic payments
from RAM, Acorn Partners, L.P. and various other entities in which Mr.
Rosenkranz has direct and indirect personal beneficial interests, in respect of
expenses associated with certain shared office space, facilities and personnel.
The total amount of these payments for 2006 was $8.1 million. In addition, RAM
made payments to Messrs. Sherman and Chad Coulter, the Company's Senior Vice
President, Secretary and General Counsel, in the amounts of $400,000 and
$200,000, respectively, in respect of services rendered by them during 2006 to
various entities other than the Company in which Mr. Rosenkranz has financial
interests. During 2006, a subsidiary of the Company maintained investment
27
management arrangements pursuant to a discrete investment program with entities
of which Mr. Rosenkranz and his related entities own a substantial majority of
the financial interests. Under such arrangements, management and
performance-based fees are paid to such entities, which also provide similar
services to unaffiliated third parties on comparable terms. The Company believes
that such fees, which totaled $2.0 million for 2006, are comparable to fees
charged by unaffiliated third parties in connection with similar investment
programs. As of December 31, 2006, the amount invested under such arrangements
was $67.9 million. An additional investment in the amount of $33.0 million was
made in January 2007. Also during 2006, subsidiaries of the Company maintained
limited partner investments in an investment partnership whose general partners
are controlled and beneficially owned by Mr. Rosenkranz. The amount of such
investments, as of December 31, 2006, totaled $25.2 million. The partnership has
waived, as to the Company's subsidiaries, the imposition of all fees that
otherwise apply to investments by its limited partners.
AUDIT COMMITTEE REPORT
During 2006, the Audit Committee approved the selection of the Company's
independent auditor, Ernst & Young LLP, to audit the Company's consolidated
financial statements. The Audit Committee discussed with the Company's
independent and internal auditors the overall scope and plans for their
respective audits, and regularly met with such auditors, with and without
management present, to discuss the results of their audits, their evaluations of
the Company's internal controls, the progress and results of management's
assessment of internal control over financial reporting pursuant to Section 404
of the Sarbanes-Oxley Act of 2002 and such other matters as the Audit Committee
deemed appropriate.
The Audit Committee met with management and the independent auditor to review
and discuss the Company's audited consolidated financial statements for the
fiscal year ended December 31, 2006, and discussed with the independent auditor
the matters required to be discussed by Statement of Auditing Standards No. 61,
"Communication with Audit Committees." In addition, the Audit Committee
discussed with the independent auditor the auditor's independence, including the
matters contained in the written disclosures and letter required by Independence
Standards Board Standard No. 1, "Independence Discussions with Audit
Committees." The Audit Committee considered whether the provision of non-audit
services to the Company was compatible with maintaining the auditor's
independence and also reviewed the amount of fees paid to the independent
auditor for audit and non-audit services. Based on such review and discussions,
the Audit Committee recommended to the Board of Directors that the audited
financial statements be included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2006 for filing with the Securities and Exchange
Commission.
James N. Meehan, Chairman
Kevin R. Brine
Steven A. Hirsh
James M. Litvack
INDEPENDENT AUDITOR
The Audit Committee engaged the firm of Ernst & Young LLP to serve as the
Company's independent auditor for 2006 and 2007. A representative of Ernst &
Young LLP is expected to be present at the Annual Meeting to respond to
appropriate questions and to make a statement if such representative desires.
For 2006 and 2005, Ernst & Young LLP billed the Company for the following
professional services:
Audit Fees. Fees for audit services were $2,077,000 in 2006 and $1,994,000 in
2005, including fees associated with the annual audit and the audit of internal
control over financial reporting, reviews of the condensed financial statements
included in the Company's quarterly reports on Form 10-Q and statutory audits
required for the Company's insurance subsidiaries.
Audit-Related Fees. Fees for audit-related services were $151,000 in 2006 and
$175,000 in 2005.
Tax Fees. Fees for tax services, including tax compliance, advice and planning,
were $67,000 in 2006 and $117, 000 in 2005.
All Other Fees. Services other than the types described above that were rendered
by Ernst & Young LLP, primarily advisory services for actuarial software, were
$20,000 in 2006 and $0 in 2005.
Audit and Non-audit Services Pre-approval Policy. The Audit Committee has
adopted a formal policy concerning the pre-approval of audit and non-audit
services to be provided by the Company's independent auditor. The policy
requires that the Audit Committee pre-approve all services to be performed by
the independent auditor, including audit services, audit-related services, tax
28
services and permitted non-audit services. Pursuant to such policy, the annual
audit engagement terms and fees are subject to the specific pre-approval of the
Audit Committee, and such committee periodically pre-approves fee levels or
budget amounts for specifically enumerated categories of other services. The
term of any such pre-approval is 12 months from the date thereof, unless the
Audit Committee specifically provides for a different period. Services not
falling within such categories of pre-approved services require the specific
pre-approval of the Audit Committee. The Audit Committee may delegate
pre-approval authority to one or more of its members, and has presently
delegated such authority to its Chairman. The Audit Committee pre-approved all
services provided by Ernst & Young LLP during 2006 and 2005.
FINANCIAL STATEMENTS AVAILABLE
Consolidated financial statements for Delphi Financial Group, Inc. are included
in the Company's 2006 Annual Report on Form 10-K for the year ended December 31,
2006, which is being mailed together with this Proxy Statement. Additional
copies of the Form 10-K and the Annual Report to Stockholders may be obtained
without charge by submitting a written request to the Investor Relations
Department, Delphi Financial Group, Inc., 1105 North Market Street, Suite 1230,
Wilmington, Delaware 19899.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To the Company's knowledge, based solely on its review of Forms 3, 4 and 5 and
amendments thereto furnished to the Company pursuant to Section 16 of the
Securities Exchange Act of 1934 and written representations that no other
reports were required for such persons, all persons subject to these reporting
requirements filed the required reports on a timely basis, except that Robert M.
Smith, Jr., the Company's Executive Vice President, inadvertently did not file
in a timely manner a Form 4 report with respect to a transaction by an immediate
family member.
29
SUBMISSION OF STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the 2008 Annual Meeting of
Stockholders must be received by the Company at 1105 North Market Street, Suite
1230, Wilmington, Delaware 19899, by December 1, 2007.
By Order of the Board of Directors,
/s/ ROBERT ROSENKRANZ
----------------------------------------
Robert Rosenkranz
Chairman of the Board
30
APPENDIX A
DELPHI FINANCIAL GROUP, INC.
2003 EMPLOYEE LONG-TERM INCENTIVE AND SHARE AWARD PLAN
1. PURPOSES
The purposes of the 2003 Long-Term Incentive and Share Award Plan are to advance
the interests of Delphi Financial Group, Inc. and its shareholders by providing
a means to attract, retain, and motivate employees of the Company and its
Subsidiaries and Affiliates and other participants upon whose judgment,
initiative and efforts the continued success, growth and development of the
Company is dependent.
2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set forth
below:
(a) "AFFILIATE" means any entity other than the Company and its
Subsidiaries that is designated by the Board or the Committee as a participating
employer under the Plan; provided, however, that the Company directly or
indirectly owns at least 30% of the combined voting power of all classes of
stock of such entity or at least 30% of the ownership interests in such entity.
(b) "AWARD" means any Option, Restricted Share, Restricted Share Unit, or
Other Share-Based Award granted to an Eligible Person under the Plan.
(c) "AWARD AGREEMENT" means any written agreement, contract, or other
instrument or document evidencing an Award.
(d) "BOARD" means the Board of Directors of the Company.
(e) "CODE" means the Internal Revenue Code of 1986, as amended from time to
time. References to any provision of the Code shall be deemed to include
successor provisions thereto and regulations thereunder.
(f) "COMMITTEE" means the Stock Option and Compensation Committee of the
Board, or such other Board committee (which may include the entire Board) as may
be designated by the Board to administer the Plan; provided, however, that,
unless otherwise determined by the Board, the Committee shall consist of two or
more directors of the Company, each of whom is a "non-employee director" within
the meaning of Rule 16b-3 under the Exchange Act, to the extent applicable, and
each of whom is an "outside director" within the meaning of Section 162(m) of
the Code, to the extent applicable; provided, further, that the mere fact that
the Committee shall fail to qualify under either of the foregoing requirements
shall not invalidate any Award made by the Committee which Award is otherwise
validly made under the Plan.
(g) "COMPANY" means Delphi Financial Group, Inc., a corporation organized
under the laws of Delaware, or any successor corporation.
(h) "ELIGIBLE PERSON" means (i) an employee of the Company, a Subsidiary or
an Affiliate, including any director who is an employee, or (ii) another
individual who, in the Committee's judgment, can make substantial contributions
to the long-term profitability and value of the Company, its Subsidiaries or
Affiliates. Notwithstanding any provision of this Plan to the contrary, an Award
may be granted to an employee, in connection with his or her hiring, prior to
the date the employee first performs services for the Company, a Subsidiary or
an Affiliate; provided, however, that any such Award shall not become vested
prior to the date the employee first performs such services
(i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
from time to time. References to any provision of the Exchange Act shall be
deemed to include successor provisions thereto and regulations thereunder.
(j) "FAIR MARKET VALUE" means, with respect to Shares or other property,
the fair market value of such Shares or other property determined by such
methods or procedures as shall be established from time to time by the
Committee. If the Shares are listed on any established stock exchange or a
national market system, unless otherwise determined by the Committee in good
faith, the Fair Market Value of Shares shall mean the closing price per Share on
the applicable date (or, if the Shares were not traded on that day, the next
preceding day on which the Shares were traded) on the principal exchange or
market system on which the Shares are traded, as such prices are officially
reported on such exchange.
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(k) "ISO" means any Option intended to be and designated as an incentive
stock option within the meaning of Section 422 of the Code.
(l) "NQSO" means any Option that is not an ISO.
(m) "OPTION" means a right, granted under Section 5(b), to purchase Shares.
(n) "OTHER SHARE-BASED AWARD" means a right, granted under Section 5(e),
that relates to or is valued by reference to Shares.
(o) "PARTICIPANT" means an Eligible Person who has been granted an Award
under the Plan.
(p) "PLAN" means this 2003 Employee Long-Term Incentive and Share Award
Plan.
(q) "RESTRICTED SHARES" means an Award of Shares under Section 5(c) that
may be subject to certain restrictions and to a risk of forfeiture.
(r) "RESTRICTED SHARE UNIT" means a right, granted under Section 5(d), to
receive Shares or cash at the end of a specified deferral period.
(s) "RULE 16B-3" means Rule 16b-3, as from time to time in effect and
applicable to the Plan and Participants, promulgated by the Securities and
Exchange Commission under Section 16 of the Exchange Act.
(t) "SHARES" means Class A common stock, $.01 par value per share, of the
Company.
(u) "SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations (other than the last corporation in the unbroken chain) owns shares
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in the chain.
3. ADMINISTRATION
(a) AUTHORITY OF THE COMMITTEE. The Plan shall be administered by the
Committee, and the Committee shall have full and final authority to take the
following actions, in each case subject to and consistent with the provisions of
the Plan:
(i) to select Eligible Persons to whom Awards may be granted;
(ii) to designate Affiliates;
(iii) to determine the type and number of Awards to be granted, the
number of Shares to which an Award may relate, the terms and conditions of any
Award granted under the Plan (including, but not limited to, any exercise price,
grant price, or purchase price, any restriction or condition, any schedule for
lapse of restrictions or conditions relating to transferability or forfeiture,
exercisability, or settlement of an Award, and waiver or accelerations thereof,
and waivers of performance conditions relating to an Award, based in each case
on such considerations as the Committee shall determine), and all other matters
to be determined in connection with an Award;
(iv) to determine whether, to what extent, and under what
circumstances an Award may be settled, or the exercise price of an Award may be
paid, in cash, Shares, other Awards, or other property, or an Award may be
canceled, forfeited, exchanged, or surrendered;
(v) to determine whether, to what extent, and under what circumstances
cash, Shares, other Awards, or other property payable with respect to an Award
will be deferred either automatically, at the election of the Committee, or at
the election of the Eligible Person;
(vi) to prescribe the form of each Award Agreement, which need not be
identical for each Eligible Person;
(vii) to adopt, amend, suspend, waive, and rescind such rules and
regulations and appoint such agents as the Committee may deem necessary or
advisable to administer the Plan;
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(viii) to correct any defect or supply any omission or reconcile any
inconsistency in the Plan and to construe and interpret the Plan and any Award,
rules and regulations, Award Agreement, or other instrument hereunder;
(ix) to accelerate the exercisability or vesting of all or any portion
of any Award or to extend the period during which an Award is exercisable;
(x) to determine whether uncertificated Shares may be used in
satisfying Awards and otherwise in connection with the Plan; and
(xi) to make all other decisions and determinations as may be required
under the terms of the Plan or as the Committee may deem necessary or advisable
for the administration of the Plan.
(b) MANNER OF EXERCISE OF COMMITTEE AUTHORITY. The Committee shall have
sole discretion in exercising its authority under the Plan. Any action of the
Committee with respect to the Plan shall be final, conclusive, and binding on
all persons, including but not limited to the Company, Subsidiaries, Affiliates,
Eligible Persons, any person claiming any rights under the Plan from or through
any Eligible Person, and shareholders. The express grant of any specific power
to the Committee, and the taking of any action by the Committee, shall not be
construed as limiting any power or authority of the Committee. The Committee may
delegate to other members of the Board or officers or employees of the Company
or any Subsidiary or Affiliate the authority, subject to such terms as the
Committee shall determine, to perform administrative functions.
(c) LIMITATION OF LIABILITY. Each member of the Committee shall be entitled
to, in good faith, rely or act upon any report or other information furnished to
him or her by any officer or employee of the Company or any Subsidiary or
Affiliate, the Company's independent certified public accountants, or other
professional retained by the Company to assist in the administration of the
Plan. No member of the Committee, and no officer or employee of the Company
acting on behalf of the Committee, shall be personally liable for any action,
determination, or interpretation taken or made in good faith with respect to the
Plan, and all members of the Committee and any officer or employee of the
Company acting on their behalf shall, to the fullest extent permitted by law, be
indemnified and protected by the Company with respect to any such action,
determination, or interpretation.
(d) LIMITATION ON COMMITTEE'S DISCRETION. Anything in this Plan to the
contrary notwithstanding, in the case of any Award which is intended to qualify
as "qualified performance-based compensation" within the meaning of Section
162(m) of the Code, the Committee shall have no discretion to increase the
amount of compensation payable under the Award to the extent such an increase
would cause the Award to lose its qualification as such qualified
performance-based compensation.
4. SHARES SUBJECT TO THE PLAN
(a) Subject to adjustment as provided in Section 4(c) hereof, the total
number of Shares reserved for issuance in connection with Awards under the Plan
shall be 7,250,000. No Award may be granted if the number of Shares to which
such Award relates, when added to the number of Shares previously issued under
the Plan and the number of shares to which outstanding Awards then relate,
exceeds the number of Shares reserved under the preceding sentence. If any
Awards are forfeited, canceled, terminated, exchanged or surrendered or such
Award is settled in cash or otherwise terminates without a distribution of
Shares to the Participant, any Shares counted against the number of Shares
reserved and available under the Plan with respect to such Award shall, to the
extent of any such forfeiture, settlement, termination, cancellation, exchange
or surrender, again be available for Awards under the Plan. Upon the exercise of
any Award granted in tandem with any other Awards, such related Awards shall be
canceled to the extent of the number of Shares as to which the Award is
exercised.
(b) Subject to adjustment as provided in Section 4(c) hereof, the maximum
number of Shares (i) with respect to which Options may be granted during a
calendar year to any Eligible Person under this Plan shall be 1,125,000 Shares,
and (ii) with respect to Restricted Shares, Restricted Share Units or Other
Share-Based Awards intended to qualify as qualified performance-based
compensation within the meaning of Section 162(m) of the Code, shall be the
equivalent of 337,500 Shares during a calendar year to any Eligible Person under
this Plan.
(c) In the event that the Committee shall determine that any dividend in
Shares, recapitalization, Share split, reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, or share exchange, or other
similar corporate transaction or event, affects the Shares or the value thereof
such that an adjustment is appropriate in order to prevent dilution or
enlargement of the rights of Eligible Persons under the Plan, then the Committee
shall make such equitable changes or adjustments as it deems appropriate,
including but not limited to the adjustment, in such manner as it may deem
equitable, of any or all of (i) the number and kind of shares which may
thereafter be issued under the Plan, (ii) the number and kind of shares, other
securities or other consideration issued or issuable in respect of outstanding
Awards, and (iii) the exercise price, grant price, or purchase price relating
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to any Award; provided, however, in each case that, with respect to ISOs, such
adjustment shall be made in accordance with Section 424(a) of the Code, unless
the Committee determines otherwise. In addition, subject to the limitations set
forth in Section 3(d) and Section 7 hereof, the Committee is authorized to make
adjustments in the terms and conditions of, and the criteria and performance
objectives, if any, included in, Awards in recognition of unusual or
non-recurring events (including, without limitation, events described in the
preceding sentence) affecting the Company or any Subsidiary or Affiliate or the
financial statements of the Company or any Subsidiary or Affiliate, or in
response to changes in applicable laws, regulations, or accounting principles.
(d) Any Shares distributed pursuant to an Award may consist, in whole or in
part, of authorized and unissued Shares or treasury Shares including Shares
acquired by purchase in the open market or in private transactions.
5. SPECIFIC TERMS OF AWARDS
(a) GENERAL. Awards may be granted on the terms and conditions set forth in
this Section 5. In addition, the Committee may impose on any Award or the
exercise thereof, at the date of grant or thereafter (subject to Section 9(d)),
such additional terms and conditions, not inconsistent with the provisions of
the Plan, as the Committee shall determine, including terms regarding forfeiture
of Awards or continued exercisability of Awards in the event of termination of
service by the Eligible Person.
(b) OPTIONS. The Committee is authorized to grant Options, which may be
NQSOs or ISOs, to Eligible Persons on the following terms and conditions:
(i) EXERCISE PRICE. The exercise price per Share purchasable under an
Option shall be determined by the Committee; provided, however, that the
exercise price per Share of an Option shall not be less than the Fair Market
Value of a Share on the date of grant of the Option. The Committee may, without
limitation, set an exercise price that is based upon achievement of performance
criteria if deemed appropriate by the Committee.
(ii) OPTION TERM AND EXERCISE PERIOD. The term of each Option shall be
determined by the Committee; provided, however, that such term shall not be
longer than ten years from the date of grant of the Option. The last day of the
term of an Option shall be referred to herein as its "Expiration Date." Subject
to Sections 5(b)(iii) through 5(b)(vi), Options may be exercised by a
Participant only for so long as such Participant is employed by the Company.
(iii) TERMINATION OF EMPLOYMENT EXCEPT BY DEATH, DISABILITY OR
DISCHARGE FOR CAUSE. Unless otherwise specified in an Award Agreement, in the
event that the employment of a Participant by the Company, its Subsidiaries or
Affiliates shall terminate for any reason other than death, disability, or
discharge for cause, Options may be exercised only within ninety (90) days after
such termination of employment or such longer period as may be established by
the Committee at the time of grant or thereafter, but (unless otherwise
determined by the Committee) only to the extent such Option was exercisable on
the last day of employment, and in no event may an Option be exercised after its
Expiration Date. Any portion of the Option which was not exercisable on such
last day shall expire immediately. Whether an authorized leave of absence or
absence for military or governmental service shall constitute termination of
employment for purposes of the Plan shall be determined by the Committee, which
determination shall be final and conclusive.
(iv) DEATH OR DISABILITY. Unless otherwise specified in an Award
Agreement, in the event a Participant shall die or become disabled while in the
employ of the Company, a Subsidiary or an Affiliate, Options may be exercised at
any time within one (1) year after the Participant's death or disability or such
longer period as may be established by the Committee at the time of grant or
thereafter, but (unless otherwise determined by the Committee) only to the
extent that such Option was exercisable on the last day of employment, and in no
event may an Option be exercised after its Expiration Date. During such one-year
period, the Option may be exercised by the Participant or a representative, or
in the case of death, by the executors or administrators of the Participant or
by any person or persons who shall have acquired the Option directly from the
Participant by bequest or inheritance. Whether a Participant shall have become
disabled for the purposes of the Plan shall be determined by the Committee,
which determination shall be final and conclusive.
(v) DISCHARGE FOR CAUSE. If a Participant is discharged for cause, all
unexercised Options shall terminate as of the date of discharge. Whether a
Participant is discharged for cause for purposes of the Plan shall be determined
by the Committee, which determination shall be final and conclusive.
(vi) RETIREMENT. Notwithstanding the provisions of Section 5(b)(iii)
hereof, the Committee may, at the time of grant of an Option or thereafter,
permit the Participant to exercise Options up to one (1) year following the
Participant's retirement under
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the Company's, its Subsidiary's or its Affiliate's, as applicable, retirement
policy or such longer period as may be established by the Committee at the time
of grant or thereafter; provided that in no event may an Option be exercised
after its Expiration Date.
(vii) NON-EMPLOYEE OPTIONEES. Section 5(b)(ii) (except for the first
sentence thereof) through (vi) shall not apply with respect to Options having
been granted to a Participant who is not an employee of the Company, a
Subsidiary, or an Affiliate (a "Non-Employee Optionee"). In the case of any such
Options, the Award Agreement shall set forth the applicable limitations on the
exercisability thereof, and the effect on such exercisability of death,
disability and any other events provided for therein, at the time of grant or
thereafter.
(viii) RIGHT OF COMPANY. In the case of a termination of an Optionee's
employment by reason of death, disability, retirement or discharge other than
for cause (or, in the case of a Non-Employee Optionee, to the extent provided in
the Award Agreement at the time of grant or thereafter) the Company may, but is
not obligated to, purchase unexercised Options held by such Participant and pay
such person the amount of cash equal to (i) the aggregate Fair Market Value of
the Shares underlying such Option (to the extent that such Options would have
been exercisable by the Participant upon termination of employment) as of the
date of termination of employment (or, in the case of a Non-Employee Optionee,
the date provided in the Award Agreement at the time of grant or thereafter),
less (ii) the aggregate exercise price under such option.
(ix) TIME AND METHOD OF EXERCISE. The Committee shall determine at the
date of grant or thereafter the time or times at which an Option may be
exercised in whole or in part (including, without limitation, upon achievement
of performance criteria if deemed appropriate by the Committee), the methods by
which such exercise price may be paid or deemed to be paid (including, without
limitation, broker-assisted exercise arrangements), the form of such payment
(including, without limitation, cash, Shares, notes or other property), and the
methods by which Shares will be delivered or deemed to be delivered to Eligible
Persons; provided, however, unless otherwise determined by the Committee that in
no event may any portion of the exercise price be paid with Shares acquired
either under an Award granted pursuant to this Plan, upon exercise of a stock
option granted under another Company plan or as a stock bonus or other stock
award granted under another Company plan unless, in any such case, the Shares
were acquired and vested more than six months in advance of the date of
exercise.
(x) ISOS. The terms of any ISO granted under the Plan shall comply in
all respects with the provisions of Section 422 of the Code, including but not
limited to the requirement that the ISO shall be granted within ten years from
the earlier of the date of adoption or shareholder approval of the Plan. ISOs
may only be granted to employees of the Company or a Subsidiary.
(c) RESTRICTED SHARES. The Committee is authorized to grant Restricted
Shares to Eligible Persons on the following terms and conditions:
(i) ISSUANCE AND RESTRICTIONS. Restricted Shares shall be subject to
such restrictions on transferability and other restrictions, if any, as the
Committee may impose at the date of grant or thereafter, which restrictions may
lapse separately or in combination at such times, under such circumstances
(including, without limitation, upon achievement of performance criteria if
deemed appropriate by the Committee), in such installments, or otherwise, as the
Committee may determine. Except to the extent restricted under the Award
Agreement relating to the Restricted Shares, an Eligible Person granted
Restricted Shares shall have all of the rights of a shareholder including,
without limitation, the right to vote Restricted Shares and the right to receive
dividends thereon. If Restricted Shares are intended to qualify as "qualified
performance-based compensation" for purposes of Section 162(m) of the Code, such
Restricted Shares shall be issued in accordance with the provisions of Section 7
below.
(ii) FORFEITURE. Except as otherwise determined by the Committee, at
the date of grant or thereafter, upon termination of service during the
applicable restriction period, Restricted Shares and any accrued but unpaid
dividends that are at that time subject to restrictions shall be forfeited;
provided, however, that the Committee may provide, by rule or regulation or in
any Award Agreement, or may determine in any individual case, that restrictions
or forfeiture conditions relating to Restricted Shares will be waived in whole
or in part in the event of terminations resulting from specified causes, and the
Committee may in other cases waive in whole or in part the forfeiture of
Restricted Shares.
(iii) CERTIFICATES FOR SHARES. Restricted Shares granted under the
Plan may be evidenced in such manner as the Committee shall determine. If
certificates representing Restricted Shares are registered in the name of the
Eligible Person, such certificates shall bear an appropriate legend referring to
the terms, conditions, and restrictions applicable to such Restricted Shares,
and the Company shall retain physical possession of the certificate.
(iv) DIVIDENDS. Dividends paid on Restricted Shares shall be either
paid at the dividend payment date, or deferred for payment to such date as
determined by the Committee, in cash or in unrestricted Shares having a Fair
Market Value equal to the amount of such dividends. Shares distributed in
connection with a Share split or dividend in Shares, and other property
distributed
A-5
as a dividend, shall be subject to restrictions and a risk of forfeiture to the
same extent as the Restricted Shares with respect to which such Shares or other
property has been distributed.
(d) RESTRICTED SHARE UNITS. The Committee is authorized to grant Restricted
Share Units to Eligible Persons, subject to the following terms and conditions:
(i) AWARD AND RESTRICTIONS. Delivery of Shares or cash, as the case
may be, will occur upon expiration of the deferral period specified for
Restricted Share Units by the Committee (or, if permitted by the Committee, as
elected by the Eligible Person). In addition, Restricted Share Units shall be
subject to such restrictions as the Committee may impose, if any (including,
without limitation, the achievement of performance criteria if deemed
appropriate by the Committee), at the date of grant or thereafter, which
restrictions may lapse at the expiration of the deferral period or at earlier or
later specified times, separately or in combination, in installments or
otherwise, as the Committee may determine. If Restricted Share Units are
intended to qualify as "qualified performance-based compensation" for purposes
of Section 162(m) of the Code, such Restricted Share Units shall be issued in
accordance with the provisions of Section 7 below.
(ii) FORFEITURE. Except as otherwise determined by the Committee at
date of grant or thereafter, upon termination of service (as determined under
criteria established by the Committee) during the applicable deferral period or
portion thereof to which forfeiture conditions apply (as provided in the Award
Agreement evidencing the Restricted Share Units), or upon failure to satisfy any
other conditions precedent to the delivery of Shares or cash to which such
Restricted Share Units relate, all Restricted Share Units that are at that time
subject to deferral or restriction shall be forfeited; provided, however, that
the Committee may provide, by rule or regulation or in any Award Agreement, or
may determine in any individual case, that restrictions or forfeiture conditions
relating to Restricted Share Units will be waived in whole or in part in the
event of termination resulting from specified causes, and the Committee may in
other cases waive in whole or in part the forfeiture of Restricted Share Units.
(e) OTHER SHARE-BASED AWARDS. The Committee is authorized, subject to
limitations under applicable law, to grant to Eligible Persons such other Awards
that may be denominated or payable in, valued in whole or in part by reference
to, or otherwise based on, or related to, Shares, as deemed by the Committee to
be consistent with the purposes of the Plan, including, without limitation,
unrestricted shares awarded purely as a "bonus" and not subject to any
restrictions or conditions, other rights convertible or exchangeable into
Shares, purchase rights for Shares, Awards with value and payment contingent
upon performance of the Company or any other factors designated by the
Committee, and Awards valued by reference to the performance of specified
Subsidiaries or Affiliates. The Committee shall determine the terms and
conditions of such Awards at date of grant or thereafter. Shares delivered
pursuant to an Award in the nature of a purchase right granted under this
Section 5(e) shall be purchased for such consideration, paid for at such times,
by such methods, and in such forms, including, without limitation, cash, Shares,
notes or other property, as the Committee shall determine. Cash awards, as an
element of or supplement to any other Award under the Plan, shall also be
authorized pursuant to this Section 5(e).
6. CERTAIN PROVISIONS APPLICABLE TO AWARDS
(a) STAND-ALONE, ADDITIONAL, TANDEM AND SUBSTITUTE AWARDS. Awards granted
under the Plan may, in the discretion of the Committee, be granted to Eligible
Persons either alone or in addition to, in tandem with, or in exchange or
substitution for, any other Award granted under the Plan or any award granted
under any other plan or agreement of the Company, any Subsidiary or Affiliate,
or any business entity to be acquired by the Company or a Subsidiary or
Affiliate, or any other right of an Eligible Person to receive payment from the
Company or any Subsidiary or Affiliate. Awards may be granted in addition to or
in tandem with such other Awards or awards, and may be granted either as of the
same time as or a different time from the grant of such other Awards or awards.
The per Share exercise price of any Option or purchase price of any other Award
conferring a right to purchase Shares which is granted, in connection with the
substitution of awards granted under any other plan or agreement of the Company
or any Subsidiary or Affiliate or any business entity to be acquired by the
Company or any Subsidiary or Affiliate, shall be determined by the Committee, in
its discretion.
(b) TERM OF AWARDS. The term of each Award granted to an Eligible Person
shall be for such period as may be determined by the Committee; provided,
however, that in no event shall the term of any Option exceed a period of ten
years from the date of its grant (or such shorter period as may be applicable
under Section 422 of the Code).
(c) FORM OF PAYMENT UNDER AWARDS. Subject to the terms of the Plan and any
applicable Award Agreement, payments to be made by the Company or a Subsidiary
or Affiliate upon the grant, maturation, or exercise of an Award may be made in
such forms as the Committee shall determine at the date of grant or thereafter,
including, without limitation, cash, Shares, notes or other property, and may be
made in a single payment or transfer, in installments, or on a deferred basis.
The Committee may make rules relating to installment or deferred payments with
respect to Awards, including the rate of interest to be credited with respect to
such
A-6
payments, and the Committee may require deferral of payment under an Award if,
in the sole judgment of the Committee, it may be necessary in order to avoid
nondeductibility of the payment under Section 162(m) of the Code.
(d) NONTRANSFERABILITY. Unless otherwise set forth by the Committee in an
Award Agreement, Awards shall not be transferable by an Eligible Person except
by will or the laws of descent and distribution and shall be exercisable during
the lifetime of an Eligible Person only by such Eligible Person or his guardian
or legal representative. An Eligible Person's rights under the Plan may not be
pledged, mortgaged, hypothecated, or otherwise encumbered, and shall not be
subject to claims of the Eligible Person's creditors.
(e) NONCOMPETITION. The Committee may, by way of the Award Agreements or
otherwise, establish such other terms, conditions, restrictions and/or
limitations, if any, of any Award, provided they are not inconsistent with the
Plan, including, without limitation, the requirement that the Participant not
engage in competition with the Company.
7. PERFORMANCE AWARDS GRANTED TO DESIGNATED PARTICIPANTS
(a) GENERAL. If the Committee determines that an award of Restricted Shares
or Restricted Share Units or an Other Share-Based Award to be granted to a
Participant should qualify as "qualified performance-based compensation" for
purposes of Section 162(m) of the Code, the grant, vesting and/or settlement of
such an Award shall be contingent upon achievement of preestablished performance
goals and other terms set forth in this Section 7.
(b) PERFORMANCE GOALS GENERALLY. The performance goals for such Awards
("Performance Awards") shall consist of one or more business criteria and a
targeted level or levels of performance with respect to each of such criteria,
as specified by the Committee consistent with this Section 7. Performance goals
shall be objective and shall otherwise meet the requirements of Section 162(m)
of the Code and regulations thereunder (including Regulation 1.162-27 and
successor regulations thereto). The Committee may determine that such
Performance Awards shall be granted, vested and/or settled upon achievement of
any one performance goal or that two or more of the performance goals must be
achieved as a condition to grant, vesting and/or settlement of such Performance
Awards. Performance goals may differ for Performance Awards granted to any one
Participant or to different Participants.
(c) BUSINESS CRITERIA. One or more of the following business criteria for
the Company, on a consolidated basis, and/or for specified subsidiaries or
business units of the Company (except with respect to the total stockholder
return and earnings per share criteria), shall be used by the Committee in
establishing performance goals for such Performance Awards: appreciation in
value of the Shares; total shareholder return; operating income or earnings; net
income; pretax earnings; pretax earnings before interest, depreciation and
amortization; pro forma net income; return on equity; return on designated
assets; return on capital; economic value added; earnings per share and/or
growth thereof; revenues; expenses (including expense ratio); loss ratio;
combined ratio; new business production; operating profit margin; operating cash
flow; free cash flow; cash flow return on investment; operating margin; or net
profit margin; or any of the above criteria as compared to the performance of a
published or special index or benchmark deemed applicable by the Committee.
(d) PERFORMANCE PERIOD; TIMING FOR ESTABLISHED PERFORMANCE GOALS.
Achievement of performance goals in respect of such Performance Awards shall be
measured over a performance period, as specified by the Committee. Performance
goals shall be established not later than 90 days after the beginning of any
performance period applicable to such Performance Awards, or at such other date
as may be required or permitted for "qualified performance-based compensation"
under Section 162(m) of the Code.
(e) SETTLEMENT OF PERFORMANCE AWARDS; OTHER TERMS. Settlement of such
Performance Awards shall be in cash, Shares or other property, in the discretion
of the Committee. The Committee may, in its discretion, reduce the amount of a
settlement otherwise to be made in connection with such Performance Awards, but
may not exercise discretion to increase any such amount payable to the
Participant in respect of a Performance Award subject to this Section 7.
(f) WRITTEN DETERMINATION. All determinations by the Committee as to the
establishment of performance goals or potential individual Performance Awards
and as to the achievement of performance goals relating to Performance Awards
under Section 7 shall be made in writing in the case of any award intended to
qualify under Section 162(m) of the Code.
A-7
8. CHANGE OF OWNERSHIP PROVISIONS
(a) ACCELERATION OF EXERCISABILITY AND LAPSE OF RESTRICTIONS. Unless
otherwise provided by the Committee at the time of the Award grant, in the event
of a Change of Ownership, (i) all outstanding Awards pursuant to which the
Participant may have rights the exercise of which is restricted or limited,
shall become fully exercisable at the time of the Change of Ownership, and (ii)
unless the right to lapse of restrictions or limitations is waived or deferred
by a Participant prior to such lapse, all restrictions or limitations (including
risks of forfeiture and deferrals) on outstanding Awards subject to restrictions
or limitations under the Plan shall lapse, and all performance criteria and
other conditions to payment of Awards under which payments of cash, Shares or
other property are subject to conditions shall be deemed to be achieved or
fulfilled and shall be waived by the Company at the time of the Change of
Ownership.
(b) DEFINITION OF CHANGE OF OWNERSHIP. For purposes of this Section 8, a
"Change of Ownership" shall be deemed to have occurred (1) if individuals who,
as of the effective date of this Plan, constitute the Board (the "Incumbent
Board") cease for any reason to constitute at least a majority of the directors
constituting the Board, provided that any person becoming a director subsequent
to the effective date of this Plan whose election, or nomination for election by
the Company's shareholders, was approved by a vote of at least three-quarters
(3/4) of the then directors who are members of the Incumbent Board (other than
an election or nomination of an individual whose initial assumption of office is
(A) in connection with the acquisition by a third person, including a "group" as
such term is used in Section 13(d)(3) of the Exchange Act, of beneficial
ownership, directly or indirectly, of 20% or more of the combined voting
securities ordinarily having the right to vote for the election of directors of
the Company (unless such acquisition of beneficial ownership was approved by a
majority of the Board who are members of the Incumbent Board), or (B) in
connection with an actual or threatened election contest relating to the
election of the directors of the Company, as such terms are used in Rule 14a-11
of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of
this Plan, considered as though such person were a member of the Incumbent
Board; or (2) if the stockholders of the Company approve a merger,
consolidation, recapitalization or reorganization of the Company, reverse split
of any class of voting securities of the Company, or an acquisition of
securities or assets by the Company, or the sale or disposition by the Company
of all or substantially all of the Company's assets, or if any such transaction
is consummated without stockholder approval, other than any such transaction in
which the holders of outstanding Company voting securities immediately prior to
the transaction receive, with respect to such Company voting securities, voting
securities of the surviving or transferee entity representing more than 60
percent of the total voting power outstanding immediately after such
transaction, with the voting power of each such continuing holder relative to
other such continuing holders not substantially altered in the transaction; or
(3) if the stockholders of the Company approve a plan of complete liquidation of
the Company.
9. GENERAL PROVISIONS
(a) COMPLIANCE WITH LEGAL AND TRADING REQUIREMENTS. The Plan, the granting
and exercising of Awards thereunder, and the other obligations of the Company
under the Plan and any Award Agreement, shall be subject to all applicable
federal, state and foreign laws, rules and regulations, and to such approvals by
any regulatory or governmental agency as may be required. The Company, in its
discretion, may postpone the issuance or delivery of Shares under any Award
until completion of such stock exchange or market system listing or registration
or qualification of such Shares or other required action under any state or
federal law, rule or regulation as the Company may consider appropriate, and may
require any Participant to make such representations and furnish such
information as it may consider appropriate in connection with the issuance or
delivery of Shares in compliance with applicable laws, rules and regulations. No
provisions of the Plan shall be interpreted or construed to obligate the Company
to register any Shares under federal, state or foreign law. The Shares issued
under the Plan may be subject to such other restrictions on transfer as
determined by the Committee.
(b) NO RIGHT TO CONTINUED EMPLOYMENT OR SERVICE. Neither the Plan nor any
action taken thereunder shall be construed as giving anyone the right to be
retained in the employ or service of the Company or any of its Subsidiaries or
Affiliates, nor shall it interfere in any way with the right of the Company or
any of its Subsidiaries or Affiliates to terminate anyone's employment or
service at any time.
(c) TAXES. The Company or any Subsidiary or Affiliate is authorized to
withhold from any Award granted, any payment relating to an Award under the
Plan, including from a distribution of Shares, or any payroll or other payment
to an Eligible Person, amounts of withholding and other taxes due in connection
with any transaction involving an Award, and to take such other action as the
Committee may deem advisable to enable the Company and Eligible Persons to
satisfy obligations for the payment of withholding taxes and other tax
obligations relating to any Award. This authority shall include authority to
withhold or receive Shares or other property and to make cash payments in
respect thereof in satisfaction of an Eligible Person's tax obligations;
provided, however, that the amount of tax withholding to be satisfied by
withholding Shares shall be limited to the minimum amount of taxes, including
employment taxes, required to be withheld under applicable Federal, state and
local law.
A-8
(d) CHANGES TO THE PLAN AND AWARDS. The Board may amend, alter, suspend,
discontinue, or terminate the Plan or the Committee's authority to grant Awards
under the Plan without the consent of shareholders of the Company or
Participants; provided, however, that any such amendment, alteration,
suspension, discontinuance or termination shall be subject to the approval of
the Company's shareholders (i) if, and to the extent, required under the rules
of any stock exchange or automated quotation system on which the Shares may then
be listed or quoted, and (ii) as it applies to ISOs, to the extent required
under Section 422 of the Code. Notwithstanding the foregoing, without the
consent of an affected Participant, no amendment, alteration, suspension,
discontinuation, or termination of the Plan may materially and adversely affect
the rights of such Participant under any Award theretofore granted to him or
her. The Committee may waive any conditions or rights under, amend any terms of,
or amend, alter, suspend, discontinue or terminate, any Award theretofore
granted, prospectively or retrospectively; provided, however, that, without the
consent of a Participant, no amendment, alteration, suspension, discontinuation
or termination of any Award may materially and adversely affect the rights of
such Participant under any Award theretofore granted to him or her.
(e) NO RIGHTS TO AWARDS; NO SHAREHOLDER RIGHTS. No Eligible Person or
employee shall have any claim to be granted any Award under the Plan, and there
is no obligation for uniformity of treatment of Eligible Persons and employees.
No Award shall confer on any Eligible Person any of the rights of a shareholder
of the Company unless and until Shares are duly issued or transferred to the
Eligible Person in accordance with the terms of the Award.
(f) UNFUNDED STATUS OF AWARDS. The Plan is intended to constitute an
"unfunded" plan for incentive compensation. With respect to any payments not yet
made to a Participant pursuant to an Award, nothing contained in the Plan or any
Award shall give any such Participant any rights that are greater than those of
a general creditor of the Company; provided, however, that the Committee may
authorize the creation of trusts or make other arrangements to meet the
Company's obligations under the Plan to deliver cash, Shares, other Awards, or
other property pursuant to any Award, which trusts or other arrangements shall
be consistent with the "unfunded" status of the Plan unless the Committee
otherwise determines with the consent of each affected Participant.
(g) NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the
Board nor its submission to the shareholders of the Company for approval shall
be construed as creating any limitations on the power of the Board to adopt or
utilize such other incentive arrangements as it may deem desirable, including,
without limitation, the granting of options and other awards otherwise than
under the Plan, and such arrangements may be either applicable generally or only
in specific cases.
(h) NOT COMPENSATION FOR BENEFIT PLANS. No Award payable under this Plan
shall be deemed salary or compensation for the purpose of computing benefits
under any benefit plan or other arrangement of the Company unless the Company, a
Subsidiary or Affiliate shall determine otherwise.
(i) NO FRACTIONAL SHARES. No fractional Shares shall be issued or delivered
pursuant to the Plan or any Award. The Committee shall determine whether cash,
other Awards, or other property shall be issued or paid in lieu of such
fractional Shares or whether such fractional Shares or any rights thereto shall
be forfeited or otherwise eliminated.
(j) GOVERNING LAW. The validity, construction, and effect of the Plan, any
rules and regulations relating to the Plan, and any Award Agreement shall be
determined in accordance with the laws of Delaware, without giving effect to
principles of conflict of laws thereof.
(k) EFFECTIVE DATE; PLAN TERMINATION. The Plan shall become effective as of
April 1, 2003 (the "Effective Date"), subject to approval by the shareholders of
the Company. The Plan shall terminate as to future awards on the date which is
ten (10) years after the Effective Date.
(l) TITLES AND HEADINGS. The titles and headings of the sections in the
Plan are for convenience of reference only. In the event of any conflict, the
text of the Plan, rather than such titles or headings, shall control.
A-9
[DELPHI FINANCIAL LOGO]
Dear Stockholder,
Please take note of the important information enclosed with this Proxy. Your
vote counts, and you are strongly encouraged to exercise your right to vote your
shares.
Please mark the boxes on this proxy card to indicate how your shares will be
voted. Then sign, detach and return the card in the enclosed postage paid
envelope.
Your card must be received prior to the 2007 Annual Meeting of Stockholders,
scheduled to be held on May 8, 2007.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
/S/ ROBERT ROSENKRANZ
-------------------------------------
Robert Rosenkranz
Chairman of the Board
FOLD AND DETACH HERE
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF DELPHI FINANCIAL
GROUP, INC. and, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this proxy will
be voted "FOR" all nominees for Director and "FOR" Proposals 2 and 3. The Board
of Directors recommends a vote "FOR" all nominees for Director and "FOR"
Proposals 2 and 3.
SIGNED:
--------------------------------
SIGNED:
--------------------------------
Please sign exactly as your name(s)
appear(s) hereon. Joint owners should
each sign personally. Trustees and other
fiduciaries should indicate the capacity
in which they sign, and where more than
one name appears, a majority must sign.
If a corporation or partnership, this
signature should be that of an
authorized officer who should state his
or her title.
DATED:
---------------------------------
IMPORTANT: Please mark, sign and date
this proxy and return it
promptly in the enclosed
envelope. No postage is
required if mailed in the
United States.
FOLD AND DETACH HERE
DELPHI FINANCIAL GROUP, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF DELPHI FINANCIAL
GROUP, INC.
The undersigned stockholder hereby appoints Robert Rosenkranz and Donald A.
Sherman, or either of them, as attorneys or proxies, each with full power of
substitution, and hereby authorizes each of them to represent and vote in the
manner designated below (or, if no designation is made, as provided on the
reverse side of this card), all of the shares of Class A Common Stock of Delphi
Financial Group, Inc. (the "Company") held of record by the undersigned at the
close of business on March 30, 2007 at the Company's 2007 Annual Meeting of
Stockholders scheduled to be held on May 8, 2007 at 10:00 a.m., EDT, or any
adjournments or postponements thereof.
The undersigned acknowledges receipt of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2006, Notice of Annual Meeting of
Stockholders and Proxy Statement dated April 10, 2007, and grants authority to
each of said proxies or their substitutes, and ratifies and confirms all that
said proxies may lawfully do in the undersigned's name, place and stead.
1. Election of Directors.
[ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY to vote
(except as written on the space for all nominees listed below
provided below)
Class A Director: Philip R. O'Connor
Directors: Robert Rosenkranz Donald A. Sherman Kevin R. Brine Lawrence E. Daurelle
Edward A. Fox Steven A. Hirsh Harold F. Ilg James M. Litvack
James N. Meehan Robert M. Smith, Jr. Robert F. Wright
INSTRUCTION: To withhold authority to vote for any individual nominee listed
above, write that nominee's name on the space provided below.
2. Approval of the amendment to the 2003 Employee Long-Term Incentive and
Share Award Plan to increase the number of shares available thereunder.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To transact such other business as properly comes before the meeting or any
adjournment thereof.
[ ] FOR [ ] AGAINST [ ] ABSTAIN