UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14C INFORMATION

Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934

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ERIE INDEMNITY COMPANY

(Name of Registrant as Specified In Its Charter)

 

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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD APRIL 20, 2010

 

To the Holders of Class A Common Stock and
Class B Common Stock of ERIE INDEMNITY COMPANY:

 

We will hold our 85th annual meeting of shareholders at 9:30 a.m., local time, on Tuesday, April 20, 2010, at the Auditorium of the F.W. Hirt-Perry Square Building, 100 Erie Insurance Place (Sixth and French Streets), Erie, Pennsylvania 16530 for the following purposes:

 

1. To elect 13 persons to serve as directors until our 2011 annual meeting of shareholders and until their successors are elected and qualified; and

 

2. To transact any other business that may properly come before our annual meeting and any adjournment, postponement or continuation thereof.

 

This notice and information statement, together with a copy of our annual report to shareholders for the year ended December 31, 2009, are being sent to all holders of Class A common stock and Class B common stock as of the close of business on Friday, February 19, 2010, the record date established by our board of directors. Holders of Class B common stock will also receive a form of proxy. Holders of Class A common stock will not receive proxies because they do not have the right to vote on any of the matters to be acted upon at our annual meeting.

 

Holders of Class B common stock are requested to complete, sign and return the enclosed form of proxy in the envelope provided, whether or not they expect to attend our annual meeting in person.

 

By order of our board of directors,

 

 

James J. Tanous

Executive Vice President,

Secretary and General Counsel

 

March 19, 2010

Erie, Pennsylvania

 

NOTICE OF INTERNET AVAILABILITY OF ANNUAL MEETING MATERIALS

 

Important Notice Regarding the Availability of our Information Statement for the Annual Meeting of Shareholders to be held on April 20, 2010.

 

Our information statement and annual report are available at http://www.erieindemnityinfostatement.com.

 

We Are Not Asking Holders of Our Class A Common Stock for a Proxy and
You Are Requested Not to Send Us a Proxy

 

ERIE INDEMNITY COMPANY

 

 

INFORMATION STATEMENT

 

 

 

Unless the context indicates otherwise, all references in this information statement to “we,” “us,” “our” or the “Company” mean Erie Indemnity Company and our three property and casualty insurance subsidiaries. Our property and casualty insurance subsidiaries are Erie Insurance Company, or “Erie Insurance Co.,” Erie Insurance Company of New York, or “Erie NY,” and Erie Insurance Property & Casualty Company, or “EI P&C.” We sometimes refer to Erie Insurance Exchange as the “Exchange” and to the Exchange, its subsidiary and our three property and casualty insurance subsidiaries as the “Property and Casualty Group.” In addition, we hold a 21.63% interest in the common stock (“EFL Common Stock”) of Erie Family Life Insurance Company, or “EFL,” a life insurance company. The Exchange owns the remaining 78.37% of EFL’s Common Stock.

 

 

TABLE OF CONTENTS

 

ERIE INDEMNITY COMPANY

 

100 Erie Insurance Place
Erie, Pennsylvania 16530

 

 

INFORMATION STATEMENT

 

INTRODUCTION

 

This information statement, which is first being mailed to the holders of our Class A common stock and our Class B common stock on or about March 19, 2010, is furnished to such holders to provide information regarding us and our 2010 annual meeting of shareholders. This information statement is also being furnished in connection with the solicitation of proxies by our board of directors from holders of Class B common stock to be voted at our 2010 annual meeting of shareholders and at any adjournment, postponement or continuation thereof. Our annual meeting will be held at 9:30 a.m., local time, on Tuesday, April 20, 2010 at the Auditorium of the F.W. Hirt — Perry Square Building, 100 Erie Insurance Place (Sixth and French Streets), Erie, Pennsylvania 16530. Holders of Class B common stock will also receive a form of proxy.

 

Only holders of Class B common stock of record at the close of business on February 19, 2010 are entitled to vote at our annual meeting. Each share of Class B common stock is entitled to one vote on each matter to be considered at our annual meeting. Except as otherwise provided in Sections 1756(b)(1) and (2) of the Pennsylvania Business Corporation Law of 1988, or “BCL,” in the case of adjourned meetings, a majority of the outstanding shares of Class B common stock will constitute a quorum at our annual meeting for the election of directors. Abstentions and shares of Class B common stock held by nominees as to which we have not received voting instructions from the beneficial owner, or other person entitled to vote such shares, and as to which the nominee does not have discretionary voting power, are considered outstanding shares of Class B common stock entitled to vote and such shares are counted in determining whether a quorum or a majority is present.

 

As of the close of business on February 19, 2010, we had 51,203,473 shares of Class A common stock outstanding, which are not entitled to vote on any matters to be acted upon at our 2010 annual meeting, and 2,546 shares of Class B common stock outstanding, which have the exclusive right to vote on all matters to be acted upon at our 2010 annual meeting.

 

There are two H.O. Hirt Trusts, one for the benefit of Susan Hirt Hagen, or “Mrs. Hagen,” and one for the benefit of F. William Hirt, or “Mr. Hirt,” until his death on July 13, 2007. The trust established for Mr. Hirt continues for the benefit of certain contingent beneficiaries as provided for in the trust agreement. The H.O. Hirt Trusts collectively own 2,340 shares of Class B common stock, which, because such shares represent 91.91% of the outstanding shares of Class B common stock entitled to vote at our 2010 annual meeting, is sufficient to determine the outcome of any matter submitted to a vote of the holders of our Class B common stock, assuming all of the shares held by the H.O. Hirt Trusts are voted in the same manner. As of the record date for our 2010 annual meeting, the individual trustees of the H.O. Hirt Trusts are Mrs. Hagen and Elizabeth Hirt Vorsheck, or “Mrs. Vorsheck,” and the corporate trustee is Sentinel Trust Company, L.B.A., or “Sentinel.” Mrs. Hagen and Mrs. Vorsheck are both currently directors of the Company and candidates for re-election to the board at our 2010 annual meeting.

 

Under the provisions of the H.O. Hirt Trusts, the shares of Class B common stock held by the H.O. Hirt Trusts are to be voted as directed by a majority of trustees then in office. If at least a majority of the trustees then in office of both of the H.O. Hirt Trusts vote for the election of the 13 candidates for director named below, such candidates will be elected as directors even if all shares of Class B common stock other than those held by the H.O. Hirt Trusts do not vote for such candidates. We have not been advised as of the date of this information statement how the trustees of the H.O. Hirt Trusts intend to vote at our annual meeting.

 

We operate as a property and casualty insurer through our subsidiaries and also as a provider of management services to the Exchange. Since 1925, we have served as the attorney-in-fact for the policyholders of the Exchange. As a reciprocal insurance exchange organized under the laws of the Commonwealth of

Pennsylvania, the Exchange is an unincorporated association of individuals, partnerships and corporations that agree to insure one another. Each applicant for insurance from the Exchange signs a subscriber’s agreement, which appoints us as the attorney-in-fact for the subscriber (policyholder). As attorney-in-fact, we are required to perform certain services relating to the sales, underwriting and issuance of policies on behalf of the Exchange.

 

The Property and Casualty Group writes personal and commercial lines of property and casualty insurance coverages exclusively through approximately 2,050 independent agencies comprised of more than 9,200 licensed agents and pool their underwriting results. Our financial results are not currently consolidated with those of the Exchange. As a result of the Exchange’s 94.5% participation in the underwriting results of the Property and Casualty Group, the underwriting risk of the Property and Casualty Group’s business is largely borne by the Exchange. Beginning with the first quarter 2010, we will be required to consolidate our financial results with those of the Exchange. For more information regarding this change to our financial reporting, see our Form 10-K for the fiscal year ended December 31, 2009, which we filed with the Securities and Exchange Commission, or “SEC,” on February 25, 2010.

 

We charge the Exchange a management fee calculated as a percentage, limited to 25%, of the direct written premiums of the Property and Casualty Group. Management fees accounted for 72.2%, 83.6% and 81.4%, respectively, of our revenues for the three years ended December 31, 2007, 2008 and 2009. The management fee rate was 25% during 2007, 2008 and 2009, and beginning January 1, 2010, the rate has been set at 25%.

 

The following table sets forth as of February 19, 2010, the amount of our outstanding Class B common stock owned by shareholders known by us to own beneficially more than 5% of our Class B common stock.

 

 

 

 

The following table sets forth as of February 19, 2010, the amount of the outstanding shares of Class A common stock and Class B common stock beneficially owned by (i) each director and candidate for director nominated by our Nominating and Governance Committee, or “nominating committee,” (ii) each executive officer named in the Summary Compensation Table and (iii) all of our executive officers and directors as a group.

 

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, or the “Exchange Act,” requires that the officers and directors of a corporation, such as us, that has a class of equity securities registered under Section 12 of the Exchange Act, as well as persons who own more than 10% of a class of equity securities of such a corporation, file reports of their ownership of such securities, as well as statements of changes in such ownership, with the corporation and the SEC. Based upon written representations we received from our officers and directors and shareholders owning more than 10% of any class of our stock, and our review of the statements of changes of ownership filed with us by our officers and directors and shareholders owning more than 10% of any class of our stock during 2009, we believe that all such filings required during 2009 were made on a timely basis.

 

Introduction

 

The election of directors by the holders of our Class B common stock is governed by provisions of the Pennsylvania Insurance Holding Companies Act, or the “Holding Companies Act,” in addition to provisions of the BCL, the Pennsylvania Associations Code and our bylaws. The following discussion summarizes these statutory and bylaw provisions and describes the process undertaken in connection with the nomination of candidates for election as directors by the holders of Class B common stock at our annual meeting.

 

Background of our Nominating Committee

 

Section 1405(c)(4.1) of the Holding Companies Act, which applies to us, provides that the board of directors of a domestic insurer must establish one or more committees comprised solely of directors who are not officers or employees of the insurer or of any entity controlling, controlled by or under common control with the insurer. Such committee or committees must have responsibility for, among other things, nominating candidates for election as directors by the shareholders.

 

Section 3.09 of our bylaws is consistent with this statutory provision and provides that (i) our board of directors must appoint annually a nominating committee that consists of not less than three directors who are not officers or employees of us or of any entity controlling, controlled by or under common control with us, and (ii) our nominating committee must, prior to each annual meeting of shareholders, determine and nominate candidates for the office of director to be elected by the holders of Class B common stock to serve terms as established by our bylaws and until their successors are elected.

 

In accordance with this bylaw provision, on May 5, 2009 our board of directors designated a nominating committee consisting of Jonathan Hirt Hagen, chair, Patricia A. Garrison-Corbin, Susan Hirt Hagen, Thomas W. Palmer and Elizabeth Hirt Vorsheck. Mrs. Garrison-Corbin served on the committee until her death on October 17, 2009. Consistent with the Holding Companies Act, none of these persons is an officer or employee of us or of any entity controlling, controlled by or under common control with us. Each member of our nominating committee is an independent director as defined in the rules applicable to companies listed on the NASDAQ Global Select Market^®, or “NASDAQ.”

 

Nominating Procedures

 

Under Section 2.07(a) of our bylaws, nominations of persons for election to our board of directors may be made at any meeting at which directors are to be elected (i) by or at the direction of our board of directors upon the recommendation of our nominating committee or (ii) by any holder of our Class B common stock.

 

With respect to nominations by or at the direction of our nominating committee, except as is required by rules promulgated by NASDAQ, the SEC or the Holding Companies Act, there are no specific, minimum qualifications that must be met by a candidate for our board of directors, and our nominating committee may take into account such factors as it deems appropriate. Our nominating committee generally bases its nominations on our general needs as well as the specific attributes of candidates that would add to the overall effectiveness of our board of directors. Specifically, among the significant factors that our nominating committee may take into consideration are judgment, skill, experience with businesses and other organizations of comparable size, the interplay of the candidate’s experience with the experience of other directors, and the extent to which the candidate would be a desirable addition to our board of directors and any committee of our board of directors.

 

We do not have a formal policy or guidelines regarding diversity of membership of our board of directors. Although our corporate governance guidelines recognize the value of having a board of directors that encompasses a broad range of skills, expertise, contacts, industry knowledge and diversity of opinion, our board has not attempted to define “diversity,” or otherwise require that the composition of our board include individuals from any particular background or who possess specific attributes. Our nominating committee will

continue to consider whether it would be appropriate to adopt a policy or guidelines regarding board diversity or define diversity as it relates to the composition of our board of directors.

 

In identifying and evaluating the individuals that it selects, or recommends that our board of directors select, as director nominees, our nominating committee utilizes the following process:

 

 

Actions Taken for Nominations

 

Our nominating committee met on February 20, 2010 for the purposes of evaluating the performance and qualifications of the current or proposed members of our board of directors and nominating candidates for election as directors by the holders of Class B common stock at our annual meeting.

 

Our bylaws provide that our board of directors shall consist of not less than 7, nor more than 16, directors, with the exact number to be fixed from time to time by resolution of our board of directors. Our nominating committee recommended at its February 20, 2010 meeting that the size of our board of directors be increased to 13 persons and that all directors as of such date be nominated to stand for re-election as directors by the holders of Class B common stock at our annual meeting. The committee also nominated two additional director candidates who do not currently serve on our board of directors.

 

On February 25, 2010, our board of directors accepted the report and recommendation of our nominating committee, set the number of directors to be elected at our annual meeting at 13 and approved the nomination of J. Ralph Borneman, Jr., Terrence W. Cavanaugh, Jonathan Hirt Hagen, Susan Hirt Hagen, Thomas B. Hagen, C. Scott Hartz, Claude C. Lilly, III, Lucian L. Morrison, Thomas W. Palmer, Martin P. Sheffield, Richard L. Stover, Elizabeth Hirt Vorsheck and Robert C. Wilburn for election as directors by the holders of Class B common stock at our annual meeting.

 

Candidates for Election

 

Unless otherwise instructed, the proxy holders will vote the proxies received by them for the election of the nominees named below. With the exception of Messrs. Sheffield and Stover, all of the nominees are currently directors. If a nominee becomes unavailable for any reason, it is intended that the proxies will be voted for a substitute nominee selected by our nominating committee. Our board of directors has no reason to believe the nominees named will be unable to serve if elected.

 

The biographies of each of the director nominees below contains information regarding that person’s principal occupation, positions held with the Company, service as a director, committee assignments, business experience, other director positions currently held or held at any time during the past five years, involvement in certain legal or administrative proceeding, if applicable, and the experiences, qualifications, attributes or

skills that caused our nominating committee to conclude that the person should serve as a member of our board of directors:

 

 

 

 

C Denotes committee chairperson.

 

Our board of directors has determined that each of the following directors and director nominees satisfies the definition of an “independent director” as set forth in the rules promulgated by NASDAQ:

 

Jonathan Hirt Hagen

Susan Hirt Hagen

Thomas B. Hagen

C. Scott Hartz

Claude C. Lilly, III

Lucian L. Morrison

Thomas W. Palmer

Martin P. Sheffield*

Richard L. Stover*

Elizabeth Hirt Vorsheck

Robert C. Wilburn

 

 

 

Required Vote. Cumulative voting rights do not exist with respect to the election of directors. Of the 13 candidates for election as a director, only those who receive the affirmative vote of holders of a majority of the shares of Class B common stock will be elected or re-elected to our board of directors.

 

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” EACH OF THE CANDIDATES FOR DIRECTOR NOMINATED BY OUR NOMINATING COMMITTEE.

 

Introduction

 

Our board of directors is currently comprised of 11 members. Each director is elected to serve for a term of one year. At our 2009 annual meeting, our voting shareholders elected 12 directors. On October 17, 2009, director Patricia A. Garrison-Corbin passed away resulting in a vacancy on our board. Vacancies on our board of directors may be filled only by persons elected by a majority of the remaining directors, or by our voting shareholders, in accordance with our bylaws. Following Mrs. Garrison-Corbin’s death, our board decided to not immediately fill her seat, reduced the size of the board to the 11 incumbent directors, and deferred additional consideration until our nominating committee next recommended the size of our board and composition of a slate of director nominees for election at our 2010 annual meeting. On February 25, 2010, our board of directors accepted our nominating committee’s recommendation to increase the number of directors from 11 to 13, effective at the 2010 annual meeting.

 

All directors hold office until their respective successors are elected and qualified, or until their earlier death, resignation or removal. There are no family relationships between any of our directors or executive officers, except for the following:

 

 

During 2009, each director attended more than 75% of the number of meetings of our board of directors and the standing committees of our board of directors of which such director was a member.

 

Board Leadership and Executive Sessions

 

The chairman of our board of directors is elected annually by the remaining directors on our board. In addition to presiding at all meetings of shareholders and of our board of directors, the chairman’s duties include setting priorities, establishing agendas for meetings of the board, providing board leadership, and communicating with the CEO on matters of strategic direction. The chairman also serves ex officio as a member of all other board committees of which he is not a designated member.

 

Our board of directors has no specific policy regarding separation of the offices of chairman of the board and chief executive officer. Although our bylaws permit the chairman to serve as chief executive officer, our board has determined that separating these positions is currently in the best interest of the Company and our shareholders. Given the length of time and different capacities in which our current chairman has served the Company, including as a prior chief executive officer, his status as an independent director under NASDAQ rules and the relatively recent appointment of our current CEO, our board believes that separating these positions is an important component of our management succession plan, and allows our chairman to lead the board in its independent oversight of management and our CEO to focus on the day-to-day issues affecting our business.

 

A majority of the directors on our board meet the definition of an “independent director” under NASDAQ rules. Our independent directors meet in executive session without management directors or management present. These sessions generally take place prior to or following regularly scheduled board meetings. The directors met in such sessions five times during 2009.

 

Risk Oversight

 

Our board of directors oversees our risk management process. This oversight is primarily accomplished through the board’s committees and management’s reporting processes. We do not have a formal risk committee; however, our audit committee focuses on risk related to accounting, internal controls, and financial

and tax reporting. The audit committee also assesses economic and business risks and monitors compliance with ethical standards. Our Executive Compensation and Development Committee, or “compensation committee,” identifies and oversees risks associated with our executive compensation policies and practices, and our nominating committee identifies and oversees risks associated with director independence, related party transactions and the implementation of corporate governance policies.

 

Committees of Our Board

 

Our board of directors met seven times in 2009. The standing committees of our board of directors are our executive committee, audit committee, compensation committee, nominating committee, charitable giving committee, investment committee, strategy committee and exchange relationship committee.

 

Our executive committee, which did not meet during 2009, has the authority, subject to certain limitations, to exercise the power of our board of directors between regular meetings.

 

Our audit committee met six times in 2009. Consistent with Section 1405(c)(4) of the Holding Companies Act and the Sarbanes-Oxley Act of 2002, or “Sarbanes-Oxley,” our audit committee has responsibility for the selection of independent registered public accountants, reviewing the scope and results of their audit and reviewing our financial condition and the adequacy of our accounting, financial, internal and operating controls. Our audit committee operates pursuant to a written charter, a copy of which may be viewed on our website at: http://www.erieinsurance.com.

 

Our compensation committee met ten times in 2009. Consistent with Section 1405(c)(4.1) of the Holding Companies Act and our bylaws, our compensation committee has responsibility for recommending to our board of directors, at least annually, the competitiveness and appropriateness of the salaries, short- and long-term incentive plan awards, terms of employment, non-qualified retirement plans, severance benefits and perquisites of our chief executive officer and our executive vice presidents and such other named executives as required by rules of the SEC or NASDAQ listing standards and such other responsibilities as our board of directors may designate. See Executive Compensation — Compensation Committee Interlocks and Insider Participation. Our compensation committee operates pursuant to a written charter, a copy of which may be viewed on our website at: http://www.erieinsurance.com.

 

Our nominating committee met five times in 2009. Consistent with Section 1405(c)(4.1) of the Holding Companies Act and our bylaws, our nominating committee has responsibility for identification of individuals believed to be qualified to become members of our board of directors and to recommend to our board of directors nominees to stand for election as directors; identification of directors qualified to fill vacancies on any committee of our board; and evaluation of the procedures and process by which each committee of our board of directors undertakes to self-evaluate such committee’s performance. Our nominating committee operates pursuant to a written charter, a copy of which may be viewed on our website at: http://www.erieinsurance.com.

 

DIRECTOR — SHAREHOLDER COMMUNICATIONS

 

Our shareholders may communicate with our board of directors through our secretary. Shareholders who wish to express any concerns to any of our directors may do so by sending a description of those concerns in writing addressed to a particular director, or in the alternative, to “Non-management Directors” as a group, care of our secretary at our headquarters, 100 Erie Insurance Place, Erie, Pennsylvania 16530. All such communications that are received by our secretary will be promptly forwarded to the addressee or addressees set forth in the communication.

 

Recognizing that director attendance at our annual meeting can provide our shareholders with an opportunity to communicate with directors about issues affecting us, we actively encourage our directors to attend our annual meeting. In 2009, eleven of our directors attended our annual meeting.

 

Overview

 

Our executive compensation program is developed and monitored by our compensation committee. The committee establishes the compensation philosophy and policies for our executive officers, which include our CEO and executive vice presidents. In fulfilling this role, the committee is responsible for establishing principles that guide the design of compensation programs for all executives. In so doing, it reviews the performance results of each executive and establishes individual compensation levels. During 2009, the compensation committee engaged an outside consultant, Hewitt Associates, to assist it with these duties in setting 2010 executive compensation. There were no additional services performed by Hewitt Associates for our organization in 2009.

 

In accordance with SEC regulations, our named executive officers (“NEOs”) for 2009, as presented in our Summary Compensation Table, include the following:

 

 

Mr. Garcia separated from service as our executive vice president and CFO on March 28, 2009 under the terms of his executive retention agreement. Ms. Dall joined us on March 30, 2009 as our current executive vice president and CFO. Although Mr. Ziegler is included hereafter as an NEO, as a senior vice president, his compensation is reviewed and set by our chief executive officer.

 

Compensation Committee Oversight

 

As described more fully in our Annual Report on Form 10-K, we have a formal enterprise risk management program that falls under the leadership of our CEO and executive management. The purpose of this program is to promote risk-intelligent decision making and, in turn, increase the likelihood of achieving our corporate objectives. Our board of directors receives regular reports advising them of potential organizational risks and supporting mitigating policies.

 

The compensation committee evaluates risks associated with the annual and long-term incentive compensation programs for our executive and senior leader team each year to ensure they do not negatively impact the value of the Company. The committee ensures that performance measures used in these programs align with our overall business strategy. One tool introduced in 2009 to mitigate inappropriate risk-taking by management is a stock retention requirement. Compliance with this retention requirement is now a prerequisite to continued participation in our annual incentive plan, or “AIP.” We believe that requiring executives to hold shares of our stock for an extended period of time discourages them from taking risks for short-term or immediate gain. In addition to the stock retention requirement, our compensation committee also has the ability to exercise discretion to reduce awards to any individual participant in the incentive plans. Finally, the committee balances compensation risk by comparing our property/casualty insurance results against a peer group in our long-term incentive plan, or “LTIP.” The committee closely monitors our results against those of our peers during the three-year performance period to see whether we are performing dramatically above or below the industry, which may be an indicator of inappropriate risk-taking by management.

Consistent with our pay-for-performance philosophy, we utilize an annual variable pay program for each member of our management team. Approximately 525 of our 4,200 full-time employees participate in this program. The performance measures used in this program are consistent with those used in the AIP for our executive and senior leaders. We believe this promotes alignment of efforts across the organization while minimizing conflict among management team members as they lead the organization to achieve operational goals each year. While the compensation committee does not directly oversee this variable pay program, changes to compensation programs for all employees are communicated to the committee when they occur.

 

Compensation Philosophy

 

The goal of our executive compensation program is to attract, motivate, retain and reward executives in a fiscally responsible manner. To achieve this objective, we design executive compensation programs that support our business strategy and encourage our executives to strive for performance that is better than the industry average. We provide a mix of fixed and variable compensation that is intended to motivate our executives to achieve sustainable financial success. We also believe our compensation program balances the interests of our primary stakeholders, our shareholders, with the policyholders of the Exchange.

 

Our variable compensation is tied directly to overall corporate performance in our annual and long-term incentive plans, thereby supporting a “pay-for-performance” philosophy. Because our executives have a greater ability to influence our financial performance through their decisions, the percentage of an executive’s total direct compensation (i.e., base salary, annual and long-term incentive plans) comprised of variable pay increases with their level of individual responsibility.

 

Base salary is a fixed level of income to our executives for the competencies and performance they demonstrate in their roles. Base salaries are linked to other compensation elements, including short- and long-term incentive plans. Targets in these plans are based upon a percentage of each executive’s base salary. Accordingly, it is important to consider all elements of our executive compensation program at the same time.

 

Setting Executive Compensation

 

The compensation committee did not engage consultants for recommendations concerning 2009 executive compensation. In setting 2009 executive compensation, the committee used an internally-prepared analysis of (1) market pay data collected from various published surveys from a broad group of property/casualty insurance companies and (2) data from publicly disclosed proxy materials of a select group of property/casualty insurance companies. In preparing the 2009 benchmark and survey data for our compensation committee’s consideration, we used the following methodology:

 

 

Executive Compensation Elements

 

We seek to achieve our compensation objectives as stated above by providing the following elements of executive compensation:

 

 

Base Salary

 

On March 30, 2009, Marcia A. Dall joined the Company as executive vice president and CFO. In determining the base salary for Ms. Dall, our CEO along with other management members considered a base salary that was commensurate with Ms. Dall’s previous experience, our public reporting responsibilities, and market data for this position. Based upon this review, Ms. Dall’s annual base salary was set at $400,000. Ms. Dall also received a signing bonus of $100,000 upon joining the Company in March 2009.

 

All of our remaining NEO base salaries were within the salary range set against the group of companies comprising our competitive market in 2009. With the economic conditions at the time, and the fact that we lowered our overall merit increase in line with expected premium growth for 2009 for all employees, Mr. Cavanaugh recommended that no increases to base salary be made for him and the executive vice presidents. The compensation committee agreed and determined that, for the executive team members, there would be no base pay increase in 2009.

 

Mr. Ziegler, a senior management team member, did receive an increase to his base pay in 2009 of 3.75 percent in accordance with normal merit increase practices for other employees within our organization.

 

Annual Incentive Plan (AIP)

 

For 2009, the compensation committee considered market data regarding pay mix and a 10-year executive compensation analysis. The committee determined that the target AIP award for all executive vice presidents should be set at 60% of base pay for the 2009 award. This represented an increase for Messrs. Tanous and Zavasky from 55% of base salary used in the 2008 AIP. With Ms. Dall joining us on March 30, 2009, the compensation committee determined that her award would be pro-rated based on the number of days in her position. In accordance with Mr. Garcia’s executive retention agreement, he was not eligible for an AIP bonus in 2009.

 

Once the target percentages are determined, our compensation committee, after discussion with our board of directors, establishes appropriate AIP performance measures that drive strong organizational performance. Our board of directors and management review our historical performance, operating goals and industry estimates to determine which areas need to be incented to help us achieve our strategic objectives in the following year.

 

The compensation committee then sets a minimum, or “threshold,” target and maximum for each performance measure. The maximum is intended to incent a participant’s performance to achieve a maximum

performance payout. Results between the threshold and target provide a partial payout when a portion of the goal is achieved. The target goals for the growth and profitability measures were set at a level equal to or better than projected average industry performance.

 

The company performance measures for the NEOs are noted in the table below. See the 2009 AIP Performance Measures and Weighting table for the specific measures assigned to each NEO.

 

2009 Company Performance Measures

 

 

 

 

The committee believes these performance measures promote growth while maintaining a strong underwriting discipline (through the statutory combined ratio).

 

2009 AIP Performance Measures and Weighting

 

 

The 2009 target and actual percentages for AIP awards earned are noted in the table below. AIP bonuses were paid on March 10, 2010.

2009 AIP Target and Actual Awards

 

 

 

 

We introduced the use of a funding qualifier for the 2009 AIP. The compensation committee determined that it would be appropriate to first consider our overall financial results before payout could be made based on the above property/casualty insurance measures. The funding qualifier is based on our net operating income (i.e., net income excluding realized gains or losses and impairments on investments and related taxes). In order for a payout to have been made under the AIP for 2009, net operating income must have been greater than 50% of 2008 net operating income, or greater than $71 million. For 2009, our net operating income totaled $109.6 million, thereby exceeding the threshold and funding the 2009 AIP.

 

Long-Term Incentive Plan (LTIP)

 

The purpose of our LTIP is to enhance our growth and profitability, and that of the Exchange, by providing longer term rewards to executives who are capable of having a significant impact on our performance. We accomplish this objective by providing eligible executives with incentives that are based on the attainment of certain performance goals over three-year performance periods and compared to an industry peer group selected by the compensation committee.

 

The peer group selected for the LTIP has remained the same since the plan’s inception and consists of: Allstate Insurance Group, Farmers Insurance Group, Government Employees Insurance Group (GEICO), Nationwide Insurance Group, Progressive Group of Insurance Companies, State Farm Insurance Group and USAA Group. This peer group was selected because, as a group, it represents the majority of personal lines property/casualty insurance business written in the United States and is considered to be our competition in all the markets in which we do business. It also provides a mixture by organizational type (i.e., stock, mutual and reciprocal insurers). The Property and Casualty Group contains four stock insurance companies and the Exchange, a reciprocal.

 

Given the nature of our business, underwriting profitability and return on investments are important to long-term financial strength. The Property and Casualty Group’s direct written premium growth is also important to our financial results as it is the primary driver of the management fee revenue we earn from the Exchange.

 

The tables below outline LTIP targets as a percentage of base salary, the criteria selected to ensure long-term sustainability and competitive positioning, as well as the weighting of the LTIP performance measures established by the compensation committee for the 2009-2011 performance period.

 

2009-2011 LTIP Targets

 

2009-2011 LTIP Performance Measures and Weighting

 

 

Similar to those in the AIP, the LTIP performance measure weightings established for Mr. Ziegler reflect his responsibilities as chief investment officer. In accordance with Mr. Garcia’s executive retention agreement, the 2009-2011 performance period was treated as having ended on December 31, 2009, and he is entitled to receive shares of our Class A common stock representing 33% of the earned award.

 

The 2007-2009 performance period is closed and participants have vested in those shares. Distribution of the shares will occur in the spring of 2010 since computations require peer group data for the year ended December 31, 2009, which is not yet available. For this performance period, we have information on eleven of the twelve measurement quarters and expect the payout to be at 197% of target. See Executive Compensation — Outstanding Equity Awards Table.

 

Beginning with the 2009-2011 performance period under the LTIP, awards will be paid in cash instead of stock. The committee introduced the share retention program as part of the AIP for 2009 in order to align the longer-term interests of our management with those of our shareholders.

 

Executive Compensation Changes for 2010

 

The compensation committee approved the following changes to our executive compensation programs for 2010:

 

 

All of the improvements described above were reviewed with the compensation committee’s compensation consultant, Hewitt Associates, which also validated the effectiveness of the existing executive compensation levels and plans.

 

Policy on Recoupment of Officer Bonuses

 

During 2008, the compensation committee considered the introduction of “clawback” provisions for future performance-based incentive compensation. The committee developed, and our board of directors approved, such a policy for our AIP and LTIP, effective July 1, 2009. To the extent permitted by law, our policy requires the reimbursement of all or a portion of any performance-based annual or long-term bonus paid to any officer after June 30, 2009 where (a) the payment was predicated upon the achievement of certain financial results that were subsequently the subject of a restatement, and (b) a lower payment would have been made to the officer based upon the restated financial results. In each such instance, the Company will, to the extent practicable, seek to recover the amount by which the officer’s bonus for the relevant period exceeded the lower payment that would have been made based on the restated financial results. We will not seek to recover bonuses paid more than two years prior to the date on which our board of directors was made aware of the need to restate our financial statements.

 

Our board of directors also approved a policy that, to the extent permitted by law, requires us to be reimbursed for any performance-based annual or long-term bonus we paid to any officer after June 30, 2009 where the officer’s employment with us has been terminated for cause either prior to the payment of the bonus or within six months thereafter.

 

Stock Retention Program

 

On December 9, 2008, our board of directors terminated the executive stock ownership program and replaced it with an officers’ stock purchase and retention program. This program applies to all officers who participate in our AIP. Each participant is required annually to purchase shares of our Class A common stock, the aggregate purchase price of which must equal at least ten percent (10%) of the value of the officer’s most recent AIP award. Shares of our Class A common stock previously acquired and shares purchased in an officer’s 401(k) savings plan do not count toward the minimum annual purchase requirement. However, shares of our Class A common stock acquired after 2009 by an officer under the Company’s 2004 LTIP, or under a similar plan or arrangement granted in lieu of the LTIP, may be used to satisfy these purchase requirements for 2010 and 2011. AIP participants are required to retain a portion of the stock purchased pursuant to this program until six months after the date on which such participant ceases to be an officer of the Company; however, the six-month post employment retention period does not apply in the event of the death of a participant.

 

The program provides that an officer who does not satisfy the minimum annual purchase requirement in any year shall not be eligible for an AIP award for the following year. Our compensation committee retains the discretion to grant exceptions to the purchase and retention requirements, and to suspend the program entirely, where the application of these requirements would result in a hardship. The first year during which participants are required to purchase stock is 2010.

 

Tax Implications of Executive Compensation

 

Section 162(m) of the Internal Revenue of 1986, or the “Code,” places a limit of $1.0 million on the amount of compensation that we may deduct in any one year with respect to each of our five most highly paid executive officers, subject to an exception for performance-based compensation that meets certain requirements. Our AIP and LTIP awards are performance-based and have been approved by our shareholders. As such, payments made under these plans are not included in the $1.0 million limit on deductible compensation. All of our compensation and individual incentive awards are subject to federal income, FICA and other tax withholdings as required by applicable law.

 

All compensation paid in 2009 to our NEOs is deductible under Section 162(m) of the Code, except for certain amounts paid to our CEO, Mr. Cavanaugh, who exceeded the deduction limit by approximately

$670,000. The excess amount relates to Mr. Cavanaugh’s restricted stock units and his 2008 AIP payment made outside of the plan. While our compensation committee strives to provide compensation opportunities to our executives in as tax-efficient a manner as possible, it recognizes that from time to time it may be in the best interest of our shareholders to provide non-tax deductible compensation.

 

Additional Benefits

 

We believe retirement benefits are an important part of a competitive reward opportunity that enables us to attract and retain top-tier leadership talent. Accordingly, we have maintained a tax-qualified defined benefit pension plan since 1946. The tax-qualified defined benefit pension plan has been available to all of our salaried employees since that time. We also provide a SERP to our NEOs in response to Code, which limits the maximum annual pension award that can be paid to any eligible employee. As illustrated in the Pension Benefits Table, an older NEO can produce a significantly higher present value compared to a younger, more highly paid NEO. This result occurs primarily because the nearer an NEO is to normal retirement age, the shorter the discount period used in calculating the present value of the benefits.

 

We maintain a deferred compensation plan in which executives are eligible to participate. This plan is an unfunded, non-qualified, deferred compensation arrangement created for a select group of management and highly compensated employees. Two of our NEOs participated in this plan in 2009. See Executive Compensation — Nonqualified Deferred Compensation.

 

Our executives also participate in the broad-based benefit plans offered generally to all of our full-time employees (e.g., 401(k) plan, health insurance and other employee benefits). Executive participation in these benefit plans is on the same terms as all of our other employees.

 

Agreements with Executive Officers

 

We have employment agreements with Mr. Cavanaugh, our president and CEO, and Mr. Tanous, our executive vice president, secretary and general counsel. In each case, these executives left established positions in mid-career to join us. The employment agreements were intended to provide Messrs. Cavanaugh and Tanous with a minimum level of financial security during the term of their agreement. Terms of these agreements and termination scenarios for all of our NEOs are included in Executive Compensation — Agreements with Executive Officers Including Termination and Change in Control.

 

The following table sets forth the compensation during 2009, 2008 and 2007 for our NEOs. Compensation disclosed herein is for services rendered in all capacities to us, EFL, the Exchange and their subsidiaries and affiliates. Compensation is allocated among us, the Exchange, EFL and their subsidiaries and affiliates according to an estimated proportion of the executives’ time dedicated to the affairs of the various entities.

Our share of total compensation expense for the NEOs in 2009, 2008 and 2007 was 54.4%, 56.2% and 53.3%, respectively. Amounts indicated are pre-individual income taxes.

 

Summary Compensation Table

 

 

 

 

Bonus

 

The bonus column includes signing, retirement and special merit bonuses, as well as terminated vacation payouts. Ms. Dall and Mr. Tanous each received a signing bonus of $100,000 upon joining the Company in March 2009 and April 2007, respectively.

 

Stock Awards: Long-Term Incentive Plans

 

The 2004 LTIP, administered by our compensation committee, became effective March 2, 2004 and was amended and restated effective January 1, 2009. The restatement of the LTIP adds a new form of award that provides for payment in cash and/or stock, and expands the list of performance measures that can be used to establish performance goals. Awards for the 2009-2011 performance period will be cash payments. Disclosure of the target and maximum award amounts appears, therefore, in the Grants of Plan-Based Awards Table, rather than the “Stock Awards” column of the Summary Compensation Table. The long-term plan’s specified performance criteria have not yet been satisfied and amounts have not been earned. Awards for the 2008-2010 and 2007-2009 performance periods are payable in restricted shares of Class A common stock and amounts shown in the Summary Compensation Table for 2008 and 2007 reflect the grant date fair value of these awards as further described below.

 

For 2008, the grant date fair value of the award was calculated by multiplying the target equity incentive plan award by the closing share price of $52.08 on April 7, 2008, the date our compensation committee

formally approved the 2004 LTIP performance goals for the 2008-2010 performance period. For this performance period, Mr. Cavanaugh was not an official participant in the LTIP, however, he will receive stock payments outside the plan equal to the amount he would have earned if he were a participant, pro-rated to reflect his service during the three-year performance period. Additionally, Mr. Cavanaugh was awarded 16,000 restricted stock units which will be earned ratably through July 2011; he will be paid dividends on these shares equal to the then-prevailing dividend rate per share multiplied by the number of shares that have not yet been issued. For Mr. Cavanaugh, the grant date fair value of the award was calculated by multiplying the target equity incentive plan award by the closing share price of $42.62 on July 14, 2008, the date of Mr. Cavanaugh’s employment agreement.

 

For 2007, the grant date fair value of the award was calculated by multiplying the target equity incentive plan award by the closing share price of $56.24 on February 22, 2007, the date our compensation committee formally approved the 2004 LTIP performance goals for the 2007-2009 performance period. For this performance period, Mr. Tanous was not an official participant in the LTIP, however, he will receive a stock payment outside the plan equal to the amount he would have earned if he were a participant, pro-rated to reflect his service during the three-year performance period. For Mr. Tanous, the grant date fair value of the award was calculated by multiplying the target equity incentive plan award by the closing share price of $52.55 on April 30, 2007, the date of Mr. Tanous’ employment agreement.

 

All Other Compensation

 

Supplemental Table for All Other Compensation

 

 

 

 

 

Pension Plan

 

Change in Pension Value and Non-Qualified Deferred Compensation Earnings

 

The Summary Compensation Table includes the net change in the present value of accrued benefits from December 31, 2008 to December 31, 2009 under our pension plan, a tax-qualified defined benefit pension plan, and our SERP, a non-qualified defined benefit arrangement.

 

We calculated the present values using assumptions consistent with those disclosures under FASB Accounting Standards Codification 715, “Compensation — Retirement Plans,” including for December 31, 2007, 2008 and 2009 discount rates of 6.62%, 6.06% and 6.11%, respectively, (5% post-retirement discount rate for our SERP).

 

There are no above-market or preferential non-qualified deferred compensation earnings to disclose in this column. See the discussion related to the Nonqualified Deferred Compensation Table for a description of the investment funds and earnings.

 

The Pension Benefits Table includes the present value of accrued benefits under our defined benefit pension plan and our SERP as of December 31, 2009. Messrs. Garcia, Zavasky and Ziegler are 100% vested in our pension plan. Messrs. Cavanaugh and Zavasky are 100% vested in our SERP plan. Messrs. Garcia and Ziegler were paid the value of their SERP agreements on December 12, 2008 and will not accrue additional SERP benefits.

Pension Benefits Table

 

 

 

 

The present value information presented in the Pension Benefits Table utilizes assumptions consistent with those used for fiscal year 2009 disclosure under FAS 87, including a 6.11% discount rate as of December 31, 2009 (5% post-retirement discount rate for our SERP) and assumes a retirement age of 65 and no pre-retirement decrements for our pension plan and our SERP.

 

Normal retirement age under both our pension plan and our SERP is age 65 because that is the earliest time that an executive could retire and commence benefit payments under the plans without any benefit reduction due to age.

 

Under our pension plan, the executive’s final average earnings are the average of the executive’s highest 36 consecutive months of compensation during his final 120 months of employment. Under our SERP, the executive’s final average earnings are the average of the executive’s highest 24 consecutive months of compensation during the executive’s final 120 months of employment. For this purpose, compensation includes base salary and a lump sum paid in lieu of a merit increase but excludes bonuses, deferred compensation plan payments and severance pay under any severance benefit plan. An executive’s compensation that exceeds annual limits imposed by the Code is excluded in computing benefits derived under our pension plan but included in computing benefits due under our SERP.

 

Each executive’s “credited service” is generally defined as the executive’s years of continuous employment with us as a covered employee, up to a maximum of 30 years. Mr. Zavasky has completed more than 30 years of service.

 

For purposes of determining the number of years of credited service that will be used to calculate the amount of the executive’s benefit, the executive, as well as all other employees, earns a full year of credited service for a partial year of employment as a covered employee.

 

Supplemental plan service in our SERP means employment with us as both a covered employee and SERP participant.

Our pension plan’s benefit formula at normal retirement age is 1.0% of the executive’s final average earnings up to the social security-covered compensation level (an amount published each year by the Social Security Administration) plus 1.5% of the final average earnings in excess of the social security covered compensation level with the resulting sum multiplied by the executive’s years of credited service, up to a maximum of 30 years. Our pension plan’s benefit is accrued in the form of a single life annuity with optional actuarially-equivalent forms of payment available.

 

The SERP’s benefit formula at normal retirement age is equal to 60% of SERP final average earnings, reduced proportionately for less than 30 years of credited service. This benefit is accrued in the form of a 10-year certain and life annuity. The executive’s benefit that is payable under our pension plan is subtracted from our SERP benefit. For purposes of this offset, such monthly benefits which are payable in a form other than a 10-year certain and life thereafter annuity are converted to a monthly benefit which is the actuarial equivalent of a 10-year certain and life thereafter annuity. The SERP has been amended to provide that, effective January 1, 2009, a lump sum is the only available form of payment.

 

Each executive may become eligible for a SERP benefit only in the event that:

 

 

 

Executives in our pension plan and our SERP are eligible for early retirement after attaining age 55 and completing at least 15 full years of service as a covered employee. The executive’s early retirement benefit under these plans is reduced by 0.25% for each complete calendar month up to 60 months and 0.375% for each complete calendar month in excess of 60 months by which the executive’s early retirement benefit commencement date precedes such executive’s normal retirement date. Messrs. Ziegler and Zavasky have satisfied the plans’ eligibility requirements for early retirement.

 

See also “Postretirement Benefits,” in the notes to consolidated financial statements included in our 2009 annual report that describes plan assumptions in more detail.

 

Nonqualified Deferred Compensation

 

We maintain a deferred compensation plan in which executives are eligible to participate. This plan is an unfunded, non-qualified, deferred compensation arrangement created for a select group of our management and highly compensated employees. Two of our NEOs participated in this plan during 2009.

 

The deferred compensation plan is an arrangement whereby the participants can elect to defer receipt of a portion of their compensation until a later date. Executives may elect to defer up to 100% of their annual salary and up to 100% of any cash award under our AIP. Those participating in the plan select hypothetical investment funds for their deferrals and are credited with the hypothetical returns generated.

 

Executives identify:

 

 

 

The following table summarizes NEO contributions, our contributions, credited earnings, withdrawals and the aggregate balance as of December 31, 2009. Ms. Dall and Mr. Tanous did not have any nonqualified deferred compensation in 2009.

 

Nonqualified Deferred Compensation Table

 

 

 

 

With the exception of the T. Rowe Price Science and Technology Fund, the plan’s hypothetical investment funds mirror investment options that are offered to the executives in our tax-qualified 401(k) plan. As in our 401(k) plan, executives participating in our deferred compensation plan may exchange investment funds daily. The return credited to their deferred compensation plan accounts is determined by the investment results of the hypothetical investment funds selected.

Additional Executive Compensation Disclosures

 

Grants of Plan-Based Awards Table

 

 

 

 

An executive’s target award is established by our compensation committee. The target number of performance units for each executive is based on a competitive total direct compensation target opportunity and an agreed-upon target pay mix. When our compensation committee approves target awards, it also approves the performance measures, performance goals and the calibration of shares and/or cash awarded at performance levels above and below the target performance goals.

 

Under the 2004 LTIP, the actual cash award paid to an executive at the end of a performance period may be more or less than the executive’s target. However, the cash award paid to an executive may not exceed $3 million at the end of a performance period. See also “Incentive Plans and Deferred Compensation,” in the notes to consolidated financial statements contained in our 2009 annual report.

Outstanding Equity Awards Table

 

 

All shares in the above table were valued using the closing share price of $39.02 at December 31, 2009. With the exception of Mr. Cavanaugh’s 11,200 restricted stock units, all shares noted are outstanding under the 2004 LTIP, and any shares earned vest as of December 31 in the last year of the performance period.

 

The 2008-2010 performance period is valued at the maximum value of 250% of target in the table above since we expect the payout to be 135% of target. For this performance period, shares have been pro-rated for Messrs. Cavanaugh and Garcia at 81% and 66%, respectively, based on their agreements with the Company.

 

The 2007-2009 performance period is closed and participants have vested in those shares. However, distribution of the shares will not occur until the spring of 2010 since computations require peer group data for the year ended December 31, 2009, which is not yet available. Accordingly, the amounts are reported in this table rather than the Option Exercises and Stock Vested in Fiscal Year 2009 table below. For this performance period, we have information on eleven of the twelve measurement quarters and expect the payout to be at 197% of target. Since the expected payout is above target, it is disclosed in the table above at the maximum amount of 250% of the target award.

 

Ms. Dall did not have any outstanding equity awards at December 31, 2009.

 

Option Exercises and Stock Vested in Fiscal Year 2009

 

 

Except for Mr. Cavanaugh, the number of shares acquired upon vesting relates to the 2004 LTIP performance period of 2006-2008. The 2004 LTIP shares were valued using a $35.72 share price, which was the average of the high and low stock price on June 15, 2009, the date of delivery of the shares.

In accordance with his employment agreement, Mr. Cavanaugh was awarded stock in the form of restricted stock units. On January 29, 2009, 1,600 shares were delivered to him using a $37.07 share price. On August 13, 2009, 3,200 shares were delivered to him using a $37.74 share price. The share price is the average of the high and low stock price on the date indicated.

 

Ms. Dall and Mr. Tanous did not vest in any shares during 2009.

 

We do not offer option awards to our executives.

 

Agreements with Executive Officers Including Termination and Change in Control

 

We have entered into employment agreements with Terrence W. Cavanaugh, our president and CEO, and James J. Tanous, our executive vice president, secretary and general counsel. In each case, these executives left established positions in mid-career to join us. As a result, the employment agreements were developed to provide Messrs. Cavanaugh and Tanous with a minimum level of financial security during the term of their agreement.

 

On July 14, 2008, we entered into an employment agreement with our current president and CEO, Terrence W. Cavanaugh. The compensatory provisions of Mr. Cavanaugh’s agreement include the following:

 

 

 

 

Unless terminated earlier as provided for in the document, Mr. Cavanaugh’s employment agreement expires December 31, 2011. For a discussion of compensation payable to Mr. Cavanaugh under various termination scenarios, see the Termination and Change in Control Table.

 

On April 30, 2007, we entered into an employment agreement with James J. Tanous, an executive vice president who also serves as our secretary and general counsel. Under the terms of his agreement, Mr. Tanous is entitled to the following compensation:

 

 

 

 

The term of Mr. Tanous’ agreement expires April 29, 2010. For a discussion of compensation payable to Mr. Tanous under various termination scenarios, see the Termination and Change in Control Table.

 

In 2007, we had substantially identical officer employment agreements with several officers, including Philip A. Garcia, our former executive vice president and CFO, and Douglas F. Ziegler, our senior vice president and chief investment officer. Each of these agreements was amended in December of 2005, as more fully described in our proxy statement dated March 16, 2007, and further amended in December of 2007, as more fully described in a Form 8-K filed by us on January 3, 2008. Each of the officer employment agreements provided that its term would expire on December 11, 2008, unless earlier terminated in accordance with its terms.

 

In connection with its review of the officer employment agreements for purposes of determining what changes were needed to comply with recently adopted changes to the federal tax laws regarding deferred compensation, and in the context of structuring a former president and CEO’s post-employment arrangement, our board of directors decided that it would not renew or extend the term of the officer employment agreements for any of the officers, including Messrs. Garcia and Ziegler, nor replace them with new agreements. Accordingly, the Company and Messrs. Garcia and Ziegler entered into an amendment and payment designation agreement dated December 31, 2007, which (a) confirmed that each of the officer employment agreements would expire on December 11, 2008, unless sooner terminated, (b) confirmed the continuation of certain provisions that provide post-expiration protection to each senior officer, and (c) set a specific date and method of payment of SERP benefits, as required by the new tax rules on deferred compensation.

 

During 2008, the officer employment agreements, as amended by the amendment and payment designation agreements, expired or were terminated as follows:

 

 

On June 25, 2008, we entered into an executive retention agreement with Mr. Garcia which was described in a Form 8-K filed by us on June 26, 2008. The retention agreement provides for the resolution of all matters related to Mr. Garcia’s continued employment during the retention period, as well as obligations of the Company to Mr. Garcia under his employment agreement, the Pre-2004 LTIP, the 2004 LTIP, the SERP and our deferred compensation plan. Mr. Garcia separated from the Company on March 28, 2009. The material compensatory provisions of Mr. Garcia’s retention agreement are as follows:

 

 

 

Salary and benefits expected under various termination scenarios are disclosed below for the NEOs who were employed as of December 31, 2009. We developed the compensation and benefit amounts disclosed in the table below considering a termination date of December 31, 2009 and they represent only payments estimated in addition to the other compensation disclosed herein.

 

Termination and Change in Control Table