UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No.      )

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Donegal Group Inc.

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NOTICE OF THE ANNUAL MEETING OF STOCKHOLDERS

WE WILL HOLD ON APRIL 21, 2011

 

To the Stockholders of

DONEGAL GROUP INC.:

 

We will hold our annual meeting of stockholders at 10:00 a.m., local time, on Thursday, April 21, 2011, at our principal executive offices, 1195 River Road, Marietta, Pennsylvania 17547. At our annual meeting, our stockholders will act on the following matters:

 

1. Election of the four nominees for Class A directors we name in our accompanying proxy statement, each for a term of three years and until the election of his or her respective successor;

 

2. Ratification of the selection of KPMG LLP as our independent registered public accounting firm for 2011;

 

3. Approval, by a non-binding vote of our stockholders, of the compensation of our named executive officers we describe in our accompanying proxy statement;

 

4. The determination, by a non-binding vote of our stockholders, of the frequency with which we submit to our stockholders for approval the compensation of our named executive officers;

 

5. Approval of our 2011 employee stock purchase plan so that we may continue to offer an employee stock purchase plan following the expiration of our 2001 employee stock purchase plan;

 

6. Approval of our 2011 equity incentive plan for employees so that we will have sufficient shares available under our equity incentive plan to continue this incentive compensation plan for our employees; and

 

7. Approval of our 2011 equity incentive plan for directors so that we will have sufficient shares available under our equity incentive plan to continue this incentive compensation plan for our directors.

 

No other director nomination or other matter may properly come before our annual meeting because none of our stockholders has timely submitted to us the information our by-laws require regarding any nomination for election as a Class A director or other proposed item of business. Therefore, under applicable law, no stockholder may validly present any such action at our 2011 annual meeting nor will we conduct a vote of our stockholders on any such matter.

 

Our board of directors has fixed the close of business on March 4, 2011 as the record date for the determination of our stockholders entitled to notice of, and to vote at, our annual meeting.

 

We include our 2010 annual report to stockholders with this notice of annual meeting and our proxy statement that accompanies this notice of annual meeting.

 

Please submit your proxy, whether or not you expect to attend our annual meeting in person, by mail, telephone or the internet as we describe in the accompanying proxy materials.

 

By order of our board of directors,

 

Donald H. Nikolaus,

President and Chief Executive Officer

 

March 18, 2011

Marietta, Pennsylvania

 

Important Notice Regarding the Availability of Proxy Materials for our Annual Meeting of
Stockholders on April 21, 2011

 

You may view the accompanying proxy statement for our 2011 annual meeting of stockholders and our
2010 annual report to stockholders on our website at www.donegalgroup.com. Any other information on our website does not constitute a part of the accompanying proxy statement or our 2010 annual report to stockholders.

 

DONEGAL GROUP INC.

 

PROXY STATEMENT

 

Our proxy statement contains information relating to our annual meeting of stockholders that we will hold on Thursday, April 21, 2011, at 10:00 a.m., local time, at our executive offices, 1195 River Road, Marietta, Pennsylvania 17547. On March 18, 2011, we mailed our proxy statement, the accompanying proxy card and our 2010 annual report to our stockholders of record as of the close of business on March 4, 2011. We will bear all of the costs of preparing and mailing our proxy materials to our stockholders. We will, upon request, reimburse brokers, nominees, fiduciaries, custodians and other record holders for their reasonable expenses in forwarding our proxy materials to the beneficial owners for whom they serve as record holders.

 

We use the following terms in this proxy statement:

 

 

CONTENTS

 

 

 

 

 

Unless we otherwise specify, the information in our proxy statement relates to our 2010 fiscal year. Our 2010 fiscal year began on January 1, 2010 and ended on December 31, 2010.

 

 

 

 

 

Our board of directors solicits proxies from our stockholders through this proxy statement for use in connection with our 2011 annual meeting of stockholders. We will hold our 2011 annual meeting of stockholders at our principal executive offices at 1195 River Road, Marietta, Pennsylvania 17547 at 10:00 a.m., prevailing time, on April 21, 2011.

 

At our 2011 annual meeting, our stockholders will act upon:

 

 

Like many publicly-owned companies, we have “advance notice by-laws.” Advance notice by-laws require that a stockholder provide us with prior notice of that stockholder’s intention to nominate a candidate for election as director at our 2011 annual meeting or to propose any other item of business for stockholder action at our 2011 annual meeting. The purpose of our advance notice by-laws is to assure that we can include in our proxy statement for the information of all of our stockholders all of the actions we propose to submit to a vote of our stockholders at our annual meeting or that any other stockholder intends to propose.

 

Because none of our stockholders has nominated a candidate for election as director or proposed any other item of business for transaction at our 2011 annual meeting of stockholders within the time limits our advance notice by-laws specify, no business other than the seven agenda items we list above may properly come before our 2011 annual meeting of stockholders or be submitted to a vote of our stockholders at our 2011 annual meeting other than procedural matters related to the conduct of our 2011 annual meeting.

 

The Delaware General Corporation Law, or the DGCL, our certificate of incorporation and our by-laws govern the conduct of business at our annual meeting, our relationships with our stockholders and the rights, powers, duties and obligations of our stockholders, directors, officers and employees.

 

Our by-laws state that the presence in person or by proxy of a majority of the total number of votes the holders of all of our outstanding shares of Class A common stock and Class B common stock as of the record date may cast constitutes a quorum at our annual meeting. Because Donegal Mutual owned approximately 66% of the aggregate voting power of our outstanding Class A common stock and our outstanding Class B common stock on the record date and because Donegal Mutual will attend our annual meeting, the presence of Donegal Mutual at our annual meeting will assure the presence of a quorum at our annual meeting and that our stockholders may conduct the business of our annual meeting.

 

Our by-laws and applicable provisions of the DGCL govern the organization and conduct of business at our annual meeting of stockholders. At the direction of our board of directors, Donald H. Nikolaus, our President and Chief Executive Officer, will call our annual meeting to order and will chair our annual meeting. As chair of our annual meeting, Mr. Nikolaus will determine, in his reasonable discretion, the order of business our stockholders will conduct at our annual meeting and the procedural manner in which we conduct our annual meeting. We have historically conducted the voting on the proposals we have submitted to our stockholders as the first items of business at our annual meeting. Mr. Nikolaus will then report on our results of operations for 2010 and our outlook for 2011. After Mr. Nikolaus completes his remarks, he will respond to appropriate questions from our stockholders.

 

Our stockholders of record as of the close of business on March 4, 2011, the record date our board of directors designated for our 2011 annual meeting, are our stockholders who may vote at our annual meeting. Stockholders of record, including persons duly appointed as proxies by stockholders of record, may attend and vote at our annual meeting. We reserve the right to request photographic identification, such as a driver’s license, before we permit a stockholder or a proxy for a stockholder to attend our annual meeting. Even if you currently plan to attend our annual meeting in person, we recommend that you return your proxy using one of the methods we describe below under “How do I vote my shares?” By doing so, we can then include your vote if you later decide not to attend, or you are unable to attend, our annual meeting of stockholders.

 

You are a stockholder of record if your name appears on the list of our stockholders as of the record date that our transfer agent prepares for our annual meeting. For example, you are a stockholder of record if you receive dividend checks and proxy materials directly from us. During the ten days that precede our annual meeting, you may, upon proper request, inspect at our principal executive offices in Marietta, Pennsylvania an alphabetical list of the holders of record of our Class A common stock and our Class B common stock during normal business hours for any purpose germane to our annual meeting.

 

If a bank or broker holds your shares as your nominee, we consider you the beneficial owner of shares held in “street name” by your bank or broker, and we consider your nominee as the stockholder of record of your shares. Your bank or broker will send you, as the beneficial owner, a separate package describing the procedure for voting your shares. You should follow the instructions your bank or broker provides you on how to vote your shares.

 

Election of Class A Directors.  The four nominees our board of directors nominated for election as Class A directors in accordance with our by-laws, who are the only nominees eligible for election as Class A directors at our annual meeting, and who receive the highest number of FOR votes cast by the holders of our Class A common stock and our Class B common stock, voting together as a single class, will become Class A directors for a term of three years and until our stockholders elect their successors. If you properly submit your proxy and mark Withhold Authority, the proxies will not vote your shares with respect to the nominee or nominees as to which you so indicate but we will count your shares as present at our annual meeting in determining whether a quorum exists. Our certificate of incorporation and by-laws do not authorize cumulative voting in the election of our directors.

 

Ratification of the Selection of KPMG LLP.  Ratification of the selection of KPMG LLP as our independent registered public accounting firm for 2011 requires the affirmative vote of a majority of the voting power of our outstanding Class A common stock and our Class B common stock present in person or by proxy at our annual meeting.

 

Approval of the compensation of our named executive officers we describe in this proxy statement.  Approval, by a non-binding vote of our stockholders, of the compensation of our named executive officers we

describe in this proxy statement requires the affirmative vote of a majority of the voting power of our outstanding shares of Class A common stock and our outstanding shares of Class B common stock present in person or by proxy at our annual meeting. We identify our named executive officers in the Summary Compensation Table on page 31 in this proxy statement. Although the vote to approve the compensation of our named executive officers we describe in this proxy statement is not binding on us, our board of directors will review the outcome of the voting and take the voting results into account in making future determinations with respect to the compensation of our named executive officers.

 

Determination of the frequency of our stockholder vote to approve the compensation of our named executive officers.  Determination, by a non-binding vote of our stockholders, of the submission to our stockholders for approval once every one year, two years or three years the compensation of our named executive officers. This determination requires the affirmative vote of the holders of a majority of the voting power of our outstanding shares of Class A common stock and our outstanding shares of Class B common stock present in person or by proxy at our annual meeting for either every year, every two years or every three years. Our board of directors recommends that stockholders vote once every three years for the approval of the compensation of our named executive officers. Although the periodic vote to approve the compensation of our named executive officers is not binding on us, our board of directors will review the outcome of the voting and take the voting results into account in making future determinations with respect to the frequency with which we submit the compensation of our named executive officers to our stockholders for approval.

 

Approval of our 2011 employee stock purchase plan.  Approval of our 2011 employee stock purchase plan requires the affirmative vote of a majority of the voting power of our outstanding shares of Class A common stock and our outstanding shares of Class B common stock present in person or by proxy at our annual meeting.

 

Approval of our 2011 equity incentive plan for employees.  Approval of our 2011 equity incentive plan for employees requires the affirmative vote of the holders of a majority of the voting power of our outstanding shares of Class A common stock and our outstanding shares of Class B common stock present in person or by proxy at our annual meeting.

 

Approval of our 2011 equity incentive plan for directors.  Approval of our 2011 equity incentive plan for directors requires the affirmative vote of the holders of a majority of the voting power of our outstanding shares of Class A common stock and our outstanding shares of Class B common stock present in person or by proxy at our annual meeting.

 

Although we consider abstentions and broker non-votes as outstanding shares entitled to vote at our annual meeting and count those shares in determining the number of votes necessary for a majority, it will not affect the determination of the presence of a quorum, because the presence of Donegal Mutual at the annual meeting assures the presence of a quorum at our annual meeting. Broker non-votes are shares held by brokers or nominees for which we have not received voting instructions from the beneficial owner of, or person otherwise entitled to vote the shares, and as to which the broker or nominee does not have discretionary voting power.

 

As of March 4, 2011, we had outstanding:

 

 

Therefore, the holders of all of our outstanding Class A common stock may in the aggregate cast a total of 2,001,306 votes on each matter submitted to a vote of our stockholders at our annual meeting, and the holders of all of our outstanding Class B common stock may cast in the aggregate a total of 5,576,775 votes on each matter submitted to a vote of our stockholders at our annual meeting.

As of March 4, 2011, Donegal Mutual owned 8,355,184 shares, or 41.7%, of our outstanding Class A common stock and 4,198,339 shares, or 75.3%, of our outstanding Class B common stock. Donegal Mutual therefore has the right to cast approximately two-thirds of the total number of votes that may be cast at our annual meeting on all matters presented for a vote of our stockholders at our annual meeting.

 

Donegal Mutual has advised us that it will vote all of its shares of our Class A common stock and our Class B common stock as follows:

 

 

Therefore, based on the votes Donegal Mutual will cast at our 2011 annual meeting, at our 2011 annual meeting our stockholders will:

 

 

If the certified list of the holders of our Class A common stock and Class B common stock as of the record date that our independent transfer agent prepared includes your name, you are a stockholder of record and you may attend our annual meeting and vote in person or vote by proxy. The proxies our board of directors has named will vote your shares as you direct. If you prefer, you may vote your proxy by telephone, by using the internet or by mail by following the instructions we have set forth on your proxy card. The deadline for stockholders of record to vote telephonically or using the internet is 3:00 p.m., local time, on April 20, 2011. We must receive proxies submitted by mail or by express delivery services by 3:00 p.m., local time, on April 20, 2011.

You may vote by proxy in one of three following ways:

 

Vote by telephone — use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a week. Have your proxy card available when you call. When requested, enter your control numbers listed on your proxy card and then follow the prompts. The telephone number is 1-800-652-VOTE (8683).

 

Vote through the internet — use the internet to vote your proxy 24 hours a day, 7 days a week. Have your proxy card available when you access the web site. When requested, enter your control numbers listed on your proxy card, and then create and submit your ballot over the internet. The website address is www.investorvote.com/DGIC.

 

Vote by mail — mark, sign and date your proxy card and return it in the postage-paid envelope we have provided you.

 

If a broker, bank, nominee or other holder of record holds your shares, see “How do I vote the shares I hold in street name?” below.

 

If you are not a stockholder of record, but you are a “beneficial owner” as of the close of business on March 4, 2011, which means that the list of record stockholders our independent transfer agent prepared as of the close of business on March 4, 2011 does not include your name or the name of the designee you have selected, you must either direct the holder of record of your shares how to vote your shares on the matters our stockholders will consider and vote upon at our annual meeting or you must first obtain a form of proxy from your holder of record that you may then vote as if you were a holder of record. Your broker or nominee may vote your shares only on those proposals as to which your broker or nominee has the discretion to vote your shares. Under the NASDAQ Global Select Market, or NASDAQ, corporate governance rules, your broker or nominee does not have discretion to vote your shares on non-routine matters such as the election of directors or proposals 3, 4, 5, 6 and 7.

 

 

If you participate in Donegal Mutual’s 401(k) plan, you may vote your shares of Class A common stock and Class B common stock credited to your 401(k) plan account as of the close of business on March 4, 2011 by completing, signing and returning the proxy card that accompanies this proxy statement.

 

Our board of directors unanimously recommends that you vote:

 

 

Unless you mark your proxy card to the contrary, the proxies our board of directors has appointed will vote your shares as indicated above.

 

You may revoke your proxy at any time prior to the closing of voting at our annual meeting. If you are a stockholder of record, you may revoke your proxy by:

 

 

However, if you attend our annual meeting and do not submit a ballot, our proxies will vote the proxy you most recently submitted.

 

If a bank, broker, nominee or other person is the holder of record of the shares you own, you should follow the instructions of the bank, broker, nominee or other holder of record regarding the revocation of your proxy.

 

If you have any questions about our annual meeting or voting your shares, please call Sheri O. Smith, our corporate secretary at (800) 877-0600 or e-mail Ms. Smith at sherismith@donegalgroup.com.

 

The table below lists each person whom we believe owns beneficially 5% or more of the outstanding shares of our Class A common stock and 5% or more of the outstanding shares of our Class B common stock as of March 4, 2011, except as otherwise noted.

 

 

 

 

The following table shows the amount and percentage of our outstanding Class A common stock and our outstanding Class B common stock that each of our directors and nominees for director, each of our executive officers named in the Summary Compensation Table and all of our executive officers and directors as a group owned beneficially as of the close of business on March 4, 2011. The total shown for each person includes shares that the person owned jointly, in whole or in part, with the person’s spouse, or individually by the person’s spouse and shares purchasable upon the exercise of stock options that are currently exercisable or are exercisable within 60 days of March 4, 2011. Ownership is less than 1% unless otherwise indicated. The

business address of each of our officers and directors listed below is c/o Donegal Group Inc., 1195 River Road, Marietta, Pennsylvania 17547.

 

 

 

 

Section 16(a) of the Securities Exchange Act of 1934, or the Exchange Act, requires that each of our executive officers, each of our directors and each holder of 10% or more of our Class A common stock or our Class B common stock report his or her ownership of our Class A common stock and our Class B common stock to the SEC. Such persons also must file statements of changes in such ownership with the SEC. Our executive officers and directors have advised us in writing that each of them made all required filings on a timely basis during 2010, although one director subsequently timely amended his report to correct an error.

 

Gregory M. Shepard reported on July 12, 2010 on a Schedule 13D that he held beneficially more than 10% of our Class A common stock. However, we have no record that indicates that Mr. Shepard made a timely filing or any filing under Section 16(a) of the Exchange Act reporting his greater than 10% beneficial ownership of our Class A common stock or of any change in that ownership since July 12, 2010.

 

A group of local residents and business owners in Lancaster County, Pennsylvania formed Donegal Mutual in 1889 to provide property and casualty insurance. Now, 122 years later, Donegal Mutual and we have over $1.0 billion in assets and over $500 million in surplus. Donegal Mutual and we now conduct business in 22 Mid-Atlantic, Midwestern, New England and Southern states. An important part of our business culture is to maintain and strengthen our founding principles and values.

 

Since 1986, Donegal Mutual and the insurance companies subsidiaries of DGI have conducted business together as the Donegal Insurance Group. During 2010, A.M. Best Company reported that the Donegal Insurance Group ranked 116th among property and casualty insurance companies in the United States based on 2009 net premiums written and assigned the Donegal Insurance Group an A.M. Best rating of A (Excellent). The Donegal Insurance Group has also received the Ward’s Top 50 award for each of the last six years.

 

In the mid-1980s, Donegal Mutual recognized the desirability, as a mutual insurance company, of developing additional sources of capital and surplus so it could remain competitive and have the surplus to expand its business and assure its long-term viability. Donegal Mutual determined to implement a downstream holding company structure as one of its strategic responses. Accordingly, in 1986, Donegal Mutual formed us as a downstream holding company. Initially, Donegal Mutual owned all of our outstanding common stock. We in turn formed Atlantic States as our wholly owned property and casualty insurance company subsidiary. We subsequently effected a public offering to provide the surplus necessary to support the business Atlantic States began to receive on October 1, 1986 as its share under a proportional reinsurance agreement, or the pooling agreement, between Donegal Mutual and Atlantic States that became effective on that date.

 

Under the pooling agreement, Donegal Mutual and Atlantic States pool substantially all of their respective premiums, losses and loss expenses. Donegal Mutual then cedes 80% of the pooled business to Atlantic States. Our insurance subsidiaries pay dividends to us annually. For the year ended December 31, 2010, our insurance subsidiaries paid a total of $12.0 million in dividends to us, which is a major source of the funds for the dividends we pay to our stockholders. Donegal Mutual received $5.5 million in dividends from us for the year ended December 31, 2010.

 

As the capital of Atlantic States and our other insurance subsidiaries has increased, the underwriting capacity of our insurance subsidiaries, including Atlantic States, has increased proportionately. The size of the underwriting pool has increased substantially. Therefore, as we originally planned in the mid-1980s, Atlantic States has successfully raised the capital necessary to support the growth of its direct business as well as accept increases in its allocation of business from the underwriting pool. Atlantic States’ allocation of the pooled business has increased from an initial allocation of 35% in 1986 to an 80% allocation since March 1, 2008. We do not anticipate any further changes in the pooling agreement between Atlantic States and Donegal Mutual in the foreseeable future, including any change in the participation of Atlantic States in the underwriting pool.

 

Since we established Atlantic States in 1986, Donegal Mutual and our insurance subsidiaries have conducted business together, while retaining their separate legal and corporate existences. As such, Donegal Mutual and our insurance subsidiaries share the same business philosophies, the same management, the same employees, the same facilities and we offer the same types of insurance products. We believe Donegal Mutual’s majority voting interest in us fosters our ability to implement our business philosophies, enjoy management continuity, maintain superior employee relations and provide a stable environment within which we can grow our businesses.

 

In addition, as the Donegal Insurance Group, Donegal Mutual and our insurance subsidiaries share a combined business plan to achieve market penetration and underwriting profitability objectives. The products

Donegal Mutual and our insurance subsidiaries offer are generally complementary, which permits the Donegal Insurance Group to offer a broad range of products in a given market and to expand the Donegal Insurance Group’s ability to service an entire personal lines or commercial lines account. Distinctions within the products Donegal Mutual and our insurance subsidiaries offer generally relate to specific risk profiles within similar classes of business, such as preferred tier products versus standard tier products. We and Donegal Mutual do not allocate all of the standard risk gradients to one company. As a result, the underwriting profitability of the business the individual companies write directly will vary. However, since the underwriting pool homogenizes the risk characteristics of all business Donegal Mutual and our insurance subsidiaries write directly, Donegal Mutual and Atlantic States share the underwriting results in proportion to their respective participation in the underwriting pool. We receive 80% of the results of the underwriting pool because Atlantic States has an 80% participation in the pool. The business Atlantic States derives from the pool represents a significant percentage of our total revenues. However, that percentage has gradually decreased over the past few years as we have acquired a number of other companies in other jurisdictions.

 

In April 2001, we recapitalized. We effected a one-for-three reverse stock split of our common stock and renamed it Class B common stock and issued two shares of our Class A common stock as a stock dividend for each post-reverse stock split share of our Class B common stock. Our Class A common stock has one-tenth of a vote per share and our Class B common stock has one vote per share. As a result of the reverse split and the stock dividend, each of our stockholders as of April 19, 2001 continued to own the same number of shares of our common stock, with one-third of the shares being shares of our Class B common stock and two-thirds of the shares being shares of our Class A common stock. As a result, the relative voting power and equity interest of our then stockholders remained constant, and Donegal Mutual’s continued ownership of more than a majority of the voting power of our outstanding common stock better enabled us to maintain our long-term relationship with Donegal Mutual, which our board of directors believes is a central part of our business strategy.

 

We effected our recapitalization because we believed a capital structure that has more than one class of publicly traded securities offered us a number of benefits. The principal benefit from our recapitalization is our ability to issue our Class A common stock or securities convertible into or exchangeable for our Class A common stock for financing, acquisition and compensation purposes without materially adversely affecting the relative voting power of any of our stockholders, including Donegal Mutual. At the time of our recapitalization, our board of directors recognized that our recapitalization was likely to favor longer-term investors, including Donegal Mutual, and could discourage attempts to acquire us, which our board of directors believed to be remote in any event because Donegal Mutual has owned more than a majority of the voting power of our common stock since our formation in 1986.

 

Every DGI stockholder has invested in our Class A common stock or our Class B common stock with the prior knowledge that Donegal Mutual has greater than majority voting control of us for the reasons previously discussed, and that Donegal Mutual intends to retain that greater than majority voting control for the long-term future because it believes that greater than majority voting control is in our long-term best interests and the long-term best interests of Donegal Mutual.

 

We believe our relationships with Donegal Mutual since 1986 have made a substantial contribution to our growth, financial condition and success in the property and casualty insurance industry, and will continue to be a benefit to us, to our stockholders and to the policyholders of our insurance subsidiaries for the long-term future. These relationships provide us and our insurance subsidiaries with many advantages. We believe these advantages include the following:

 

 

 

We and Donegal Mutual have maintained a coordinating committee since our formation in 1986. The coordinating committee consists of two members of our board of directors, neither of whom is a member of Donegal Mutual’s board of directors, and two members of Donegal Mutual’s board of directors, neither of whom is a member of our board of directors. The purpose of the coordinating committee is to establish and maintain a process for an ongoing evaluation of the transactions between Donegal Mutual, our insurance subsidiaries and us. The coordinating committee considers the fairness of each intercompany transaction to Donegal Mutual and its policyholders and to us and our stockholders. Any change to an agreement between Donegal Mutual and us, or any new agreement between Donegal Mutual and us, is also subject to the applicable provisions of the Pennsylvania Insurance Company Law of 1921, as amended.

 

The coordinating committee approval process for a new agreement between Donegal Mutual and us or one of our insurance subsidiaries or a change in such an agreement is as follows:

 

 

 

The coordinating committee also meets annually to review each existing agreement between Donegal Mutual and us or our insurance subsidiaries, including a number of reinsurance agreements between Donegal Mutual and our insurance subsidiaries. The purpose of this annual review is to examine the results of the reinsurance agreements over the immediately preceding year and for the five preceding years and to determine if the results of the existing agreements between Donegal Mutual and us remain fair and equitable to us and our stockholders and fair and equitable to Donegal Mutual and its policyholders or if Donegal Mutual and we should mutually agree to certain adjustments. In the case of these reinsurance agreements, the adjustments typically relate to the reinsurance premiums, losses and reinstatement premiums. These agreements are ongoing in nature and will continue in effect throughout 2011 in the ordinary course of business.

 

Robert S. Bolinger and John J. Lyons serve as our members of the coordinating committee. See “Proposal 1 — Election of Directors” for certain information about Messrs. Bolinger and Lyons. Dennis J. Bixenman and John E. Hiestand serve as Donegal Mutual’s members of the coordinating committee. Certain information about Mr. Bixenman and Mr. Hiestand is as follows:

 

Mr. Bixenman, age 64, has been a director of Donegal Mutual since 2006 and is currently a Vice President and Senior Consultant at Williams & Co. Consulting, Inc., an environmental and business consulting

firm with its headquarters in Sioux Falls, South Dakota. Mr. Bixenman is a certified public accountant with extensive experience in auditing and preparing financial statements. Mr. Bixenman beneficially owns 1,555 shares of our Class A common stock and no shares of our Class B common stock. In 2010, Donegal Mutual paid directors and meeting fees of $34,000 in cash to Mr. Bixenman and granted him a restricted stock award of 311 shares as director compensation.

 

Mr. Hiestand, age 72, has been a director of Donegal Mutual since 1983 and has been a self-employed provider of insurance administrative services for more than the past five years. Mr. Hiestand beneficially owns 5,901 shares of our Class A common stock and 157 shares of our Class B common stock. In 2010, Donegal Mutual paid directors and meeting fees of $32,250 in cash to Mr. Hiestand and granted him a restricted stock award of 311 shares as director compensation.

 

Donegal Mutual provides facilities, personnel and other services to us and our insurance subsidiaries. Donegal Mutual allocates certain related expenses to Atlantic States in accordance with the relative participation of Donegal Mutual and Atlantic States in the pooling agreement. Our insurance subsidiaries other than Atlantic States reimburse Donegal Mutual for their respective personnel costs and bear their proportionate share of information services costs based on their written insurance premiums compared to the total written insurance premiums of the Donegal Insurance Group. Charges for these services totaled $64.0 million in 2010.

 

We lease office equipment and automobiles to Donegal Mutual and Southern. Donegal Mutual and Southern made total lease payments to us of $922,937 in 2010.

 

Donegal Mutual and Atlantic States participate in an underwriting pool. Both companies pool substantially all of their respective premiums, losses and loss expenses and receive an allocated percentage of their combined underwriting results. The underwriting pool excludes certain intercompany reinsurance Donegal Mutual assumes from our insurance subsidiaries. Since March 1, 2008, Atlantic States has had an 80% share of the results of the pool and Donegal Mutual has had a 20% share of the results of the pool.

 

Donegal Mutual and Atlantic States may amend or terminate the pooling agreement at the end of any calendar year by mutual agreement, subject to approval by the boards of directors of Donegal Mutual and Atlantic States and by the coordinating committee. Our 2010 annual report to stockholders contains additional information describing the underwriting pool.

 

In addition to the underwriting pool and third-party reinsurance agreements, our insurance subsidiaries have various ongoing reinsurance agreements with Donegal Mutual. These agreements include:

 

 

 

The coordinating committee annually reviews each of the agreements and transactions we have previously described between Donegal Mutual and our insurance subsidiaries and the results thereof to each of Donegal Mutual and us for the most recent year and for the past five years. In February 2011, the coordinating committee determined that the terms of such agreements were fair and equitable to us and our stockholders and, fair and equitable to Donegal Mutual and its policyholders. Accordingly, the coordinating committee unanimously approved the terms of such agreements and transactions for 2011.

 

We refer you to footnote 3 of the notes to our financial statements included in our annual report to stockholders for further information about the reinsurance agreements between Donegal Mutual and our insurance subsidiaries. The intent of these catastrophe and excess of loss reinsurance agreements is to lessen the effects of a single large loss, or an accumulation of smaller losses arising from one event, to levels that are appropriate given each insurance subsidiary’s size, underwriting profile and surplus position.

 

We own 48.2% and Donegal Mutual owns 51.8% of Donegal Financial Services Corporation, or DFSC. DFSC has entered into an agreement to acquire Union National Financial Corporation, or UNFC, and its wholly-owned subsidiary Union National Community Bank, or UNCB. The stockholders of UNFC have approved the acquisition, subject to approval by the Office of Thrift Supervision, or OTS. At December 31, 2010, UNFC had consolidated assets of $448.0 million. DFSC owns 100% of Province Bank FSB, or Province Bank, a federal savings bank with offices in Marietta, Columbia and Lancaster, Pennsylvania. We and Donegal Mutual conduct banking operations in the ordinary course of business with Province Bank.

 

Donegal Mutual leases 3,600 square feet in a Donegal Mutual-owned building in Marietta, Pennsylvania to Province Bank. In addition, Province Bank leases 3,000 square feet of space in a building in Lancaster, Pennsylvania from DFSC. Both leases provide for an annual rent based on an independent appraisal. Donegal Mutual and Province Bank are also parties to an administrative services agreement whereby Donegal Mutual provides various human resources services, principally payroll and employee benefits administration, administrative support, facility and equipment maintenance services and purchasing, to Province Bank, subject to the overall limitation that the costs Donegal Mutual charges to Province Bank may not exceed the costs of independent vendors for similar services and further subject to annual maximum cost limitations specified in the administrative services agreement.

 

Our board of directors has adopted corporate governance guidelines to assist our board committees in the discharge of their respective responsibilities. Each committee of our board has a written charter that sets forth the purposes, goals and responsibilities of the committee as well as qualifications for committee membership, procedures for committee membership, appointment and removal of committee members, committee structure and operations of committee reporting to our board of directors. The charters of the committees of our board of directors provide our stockholders with a description of the manner in which our board and its committees functions. You may view these charters on our website at http://www.donegalgroup.com.

 

The number of members of our board of directors cannot be less than seven nor more than twelve. Our board of directors fixes the size of our board of directors, and may increase or decrease the size of our board of directors from time to time by resolution. Currently, our board of directors has fixed the number of directors at 11. Our board of directors has three classes, with terms expiring at successive annual meetings.

 

Because Donegal Mutual owns more than a majority of the combined voting power of our outstanding shares of Class A common stock and our outstanding shares of Class B common stock, applicable NASDAQ regulations classify us as a “controlled company.” As we are a controlled company, we are exempt from a number of NASDAQ corporate governance requirements, including the requirement that a majority of the members of our board of directors be independent.

 

The composition of our board is, however, subject to the corporate governance rules of the Pennsylvania Insurance Holding Companies Act, or the Holding Companies Act. The Holding Companies Act requires that the board of directors of a Pennsylvania-domiciled insurance company or a company that controls a Pennsylvania-domiciled insurance company, such as we do, maintain a committee or committees that undertake certain corporate governance responsibilities. The Holding Companies Act further requires that the members of the committee or committees be solely directors who are not officers or employees of the Pennsylvania-domiciled insurance company or its holding company and who do not own beneficially a 10% or greater interest in the voting stock of such insurance company or its holding company. We maintain an audit committee, a compensation committee and a nominating committee that comply with the requirements of the Holding Companies Act.

 

Pursuant to the Holding Companies Act, our committees annually perform the following responsibilities:

 

 

We expect our directors to attend our board of directors meetings, meetings of board committees on which they serve and our meetings of stockholders. We expect our directors to devote the time necessary to fulfill their responsibilities as directors. During 2010, each of our directors attended 75% or more of the meetings of our board of directors and committees of our board on which that director serves. All of the members of our board of directors attended our 2010 annual meeting of stockholders.

 

Our board of directors has delegated some of its authority to the following four committees of our board of directors:

 

 

In addition, together with Donegal Mutual, we jointly maintain a coordinating committee. We refer you to “Our Relationship with Donegal Mutual — The Coordinating Committee.”

The following table shows the number of meetings each committee of our board of directors held in 2010 and the attendance of the members of those committees at their meetings. Ms. Gilmartin and Messrs. Kraft and Moore are not currently serving as a member of the committees of our board of directors.

 

 

 

 

Members: Glatfelter, Nikolaus (Chairperson) and Sherbahn. Our executive committee has the authority to take all action that our full board of directors can take, consistent with the DGCL, our certificate of incorporation and our by-laws between meetings of our board of directors.

 

The responsibilities of our executive committee include the following matters:

 

 

Our executive committee has a written charter. The full text of our executive committee charter may be reviewed on our website at http://www.donegalgroup.com. Our executive committee reviews its charter annually.

 

Members: Bolinger, Garcia, Lyons and Wampler (Chairperson). Each member of our audit committee satisfies the independence requirements of the SEC and NASDAQ and is in compliance with applicable provisions of the Holding Companies Act and the Sarbanes-Oxley Act of 2002. Mr. Wampler, who is a certified public accountant, serves as the financial expert member of our audit committee.

 

The responsibilities of our audit committee include the following matters:

 

 

 

Our audit committee has a written charter. The full text of our audit committee’s charter may be viewed on our website at http://www.donegalgroup.com. Our audit committee reviews its charter annually.

 

Members: Glatfelter (Chairperson) and Sherbahn

 

The responsibilities of our nominating committee include the following matters:

 

 

Our nominating committee has a written charter. You may view this charter on our website at http://www.donegalgroup.com. Our nominating committee reviews its charter annually.

 

Members: Glatfelter and Sherbahn (Chairperson). Because the employees who provide services to us are employees of Donegal Mutual for reasons of efficiency and cost savings and because our insurance subsidiaries are members of the Donegal Insurance Group along with Donegal Mutual and us, our compensation committee and the compensation committee of Donegal Mutual conduct joint meetings from time to time. The members of the Donegal Mutual compensation committee are Frederick W. Dreher, Philip H. Glatfelter, II and R. Richard Sherbahn. Following these joint meetings, our compensation committee meets and makes compensation determinations with respect to our executive officers and other employees.

 

The responsibilities of our compensation committee include the following matters:

 

 

Our compensation committee has a written charter. You may view the charter of our compensation committee on our website at http://www.donegalgroup.com. Our compensation committee reviews its charter annually.

 

See “Executive Compensation — Compensation Discussion and Analysis” for further information.

 

See “Our Relationship with Donegal Mutual — The Coordinating Committee” for a description of our coordinating committee.

 

In addition to the committees our board of directors maintains, we and Donegal Mutual have a risk management committee. Our risk management committee consists of 14 of our and Donegal Mutual’s officers, including all of our executive officers. The purpose of our risk management committee is to assess and monitor the major strategic, operational, regulatory, informational and external risks that affect our business and the business of Donegal Mutual and our and Donegal Mutual’s internal and external resources for assessing and controlling risk.

 

Our risk management committee is responsible for:

 

 

Our risk management committee meets quarterly and annually evaluates its performance of its responsibilities.

 

No member of our compensation committee is a former or current officer of Donegal Mutual or DGI, nor does any member of our compensation committee have any other interlocking relationships, based on current SEC rules and regulations.

 

We have a written related person policy regarding the review, approval or ratification involving certain persons that SEC rules and regulations require us to disclose specified information reporting any related person transactions in our proxy statement and other filings we make with the SEC. This policy applies, in our case, to any transactions with related parties with the exception of those transactions that require the prior approval of our coordinating committee because the parties to the transactions are Donegal Mutual and us. See “Our Relationship with Donegal Mutual — The Coordinating Committee.” Our related person policy establishes procedures for the approval of transactions between us and related persons because we recognize that related persons transactions can present a heightened risk of a conflict of interest and can create the appearance of impropriety. Applicable SEC regulations define a “related person” as including our directors, our executive officers, holders of 5% or more of any class of our common stock and each of their immediate family members. Our policy requires that all proposed related person transactions must receive the approval of our audit committee before we can enter into the transaction. In addition, if the transaction continues for more than one year, our audit committee must annually approve the continuation of the transaction.

 

Donald H. Nikolaus, our President and one of our directors and the President and a director of Donegal Mutual, is a partner in the law firm of Nikolaus & Hohenadel. Such firm has served as general counsel to Donegal Mutual since 1970 and as our general counsel since 1986, principally in connection with the defense of claims litigation arising in Lancaster, Dauphin and York counties of Pennsylvania. We pay such firm its customary fees for such services. We paid Nikolaus & Hohenadel legal fees of $445,231 in 2009 and $420,760 in 2010.

 

Patricia A. Gilmartin, one of our directors and a director of Donegal Mutual, is an employee of Associated Donegal Insurance Brokers. That firm has no affiliation with us except that it receives insurance commissions in the ordinary course of business from our insurance subsidiaries and Donegal Mutual in accordance with their standard commission schedules and agency contracts.

Frederick W. Dreher, a director of Donegal Mutual, is a partner in the law firm of Duane Morris LLP, which, since 1986, has represented us, our insurance subsidiaries and Donegal Mutual in certain legal matters. We pay Duane Morris LLP its customary fees for such services. We paid Duane Morris LLP legal fees of $1,611,823 in 2009 and $2,555,384 in 2010.

 

Our objectives for our director compensation program is to attract highly-qualified individuals to serve on our board of directors and to align the interests of our directors with the interests of our stockholders. Our compensation committee reviews our director compensation program at least annually to confirm that the compensation of the members of our board of directors remains competitive and appropriate and to recommend any changes it proposes to our board of directors.

 

 

Under our equity incentive plan for directors, each of our directors and each director of Donegal Mutual who is not also one of our directors receives an annual restricted stock award of 311 shares of our Class A common stock as of the first business day of each year, provided the director served as a member of our board of directors or the board of directors of Donegal Mutual during any portion of the preceding year. Effective for 2012, we have increased the number of shares comprising the annual restricted stock award from 311 shares to 400 shares. Each of our directors and each of the directors of Donegal Mutual is also eligible to receive non-qualified options to purchase shares of our Class A common stock in an amount our board of directors determines from time to time. Donegal Mutual reimburses us for the restricted stock awards granted to those directors of Donegal Mutual who are not also members of our board of directors.

The following table sets forth a summary of the compensation we paid to our non-officer directors during 2010.

 

The following table summarizes the outstanding equity awards our directors held as of December 31, 2010, excluding the awards our chief executive officer, Mr. Nikolaus holds, which we have reported elsewhere in this proxy statement:

 

 

In addition to the compensation we describe above, we reimburse our directors for expenses they incur in connection with attendance at our board of directors’ meetings, committee meetings and stockholders’ meetings. We also reimburse our directors for the reasonable expenses they incur associated with other business activities related to their service on our board of directors, such as participation in director education programs.

 

We operate pursuant to our code of business conduct and ethics because of the importance to us of conducting our business based on integrity and earning the trust of the people with whom we do business. Our code of business conduct and ethics seeks to provide guidance to our employees and independent agents for dealing with the legal and ethical issues that can arise in our business dealings with others. You may view our code of business conduct and ethics on our website at http://www.donegalgroup.com.

 

We also maintain an internal audit department that evaluates our business and financial processes and controls and reports regularly to our audit committee.

 

The DGCL, the Holding Companies Act and our by-laws govern the election of our directors by our stockholders. Because Donegal Mutual has owned more than a majority of the voting power of our common stock since our inception, Donegal Mutual has always had the ability to control the election of all of our directors.

 

The following discussion summarizes these provisions and describes the process our nominating committee follows in connection with the nomination of candidates for election as directors by our stockholders.

 

Our by-laws provide that:

 

 

In accordance with these by-law provisions, on April 22, 2010, our board of directors appointed a nominating committee consisting of R. Richard Sherbahn and Philip H. Glatfelter, II. Neither Mr. Sherbahn nor Mr. Glatfelter is an officer or employee of Donegal Mutual or us or a beneficial owner of a 10% or greater interest in our Class A common stock or our Class B common stock.

 

Our stockholders may nominate candidates for election as directors at any annual meeting of our stockholders provided they comply with the advance notice provisions of our by-laws. We describe those procedures under “Stockholder Proposals” in this proxy statement. Our nominating committee may also consider candidates our management proposes. We do not use executive search firms to identify director candidates.

 

With the exception of applicable regulations of the SEC, the listing application standards of NASDAQ and the Holding Companies Act, our nominating committee does not have any specific, minimum qualifications for the nomination of candidates for election as our directors. Our nominating committee may take into account such factors as it deems appropriate. These factors include the judgment, skill, diversity and business experience of the candidate, the interplay of the candidate’s experience with the experience of the other members of our board of directors and the extent to which the candidate would contribute to the overall effectiveness and experience of our board of directors.

 

Our nominating committee and our board of directors considers, at a minimum, the following factors in identifying and evaluating potential new board members, including any candidates nominated by our stockholders, or the continued services of our current board members:

 

 

 

Since our formation in 1986, and because Donegal Mutual has had a greater than majority voting control of us since our inception in 1986, our board has always included a meaningful number of directors who also serve as members of the board of directors of Donegal Mutual. The Donegal Mutual representation on our board of directors has ranged from six of eight directors in 1986 to five of 11 directors in 2010. This membership will increase to 6 of 11 directors following our annual meeting if our board of directors’ nominees for election as Class A directors receive a plurality of the votes cast at our annual meeting. It is our intent and the intent of Donegal Mutual to maintain a significant presence of Donegal Mutual directors on our board as long as Donegal Mutual owns more than a majority of the voting power of our common stock.

 

In nominating director candidates, our nominating committee takes into account the relative diversity of our policyholder and stockholder base. Our nominating committee does not discriminate against any director candidate on the basis of race, color, religion, sex, national origin, age, ancestry or disability.

 

Our nominating committee met on February 23, 2011 to evaluate the performance and qualifications of the Class A members of our board of directors whose terms will expire at our 2011 annual meeting. After considering the performance and qualifications of the Class A members of our board of directors during 2010, our nominating committee nominated the candidates named below for election as Class A directors. On March 7, 2011, our board of directors accepted the report of our nominating committee and approved the nomination by our nominating committee of the four persons named below as candidates for election as Class A directors at our annual meeting.

 

Our board of directors currently has 11 members, and consists of four Class A directors, four Class B directors and three Class C directors. We elect each director for a three-year term and until the election of the director’s successor. The current three-year terms of our directors expire at our annual meeting in 2011 (Class A), 2012 (Class B) and 2013 (Class C), respectively, and upon the election of their respective successors.

 

We will elect four Class A directors at our annual meeting. Unless you have marked your proxy card to the contrary, we have instructed the proxies named on your proxy card to vote for the election of the four nominees named below. With the exception of Mr. Hess, each nominee for election as a Class A director is currently a Class A director.

 

If any of the named nominees becomes unavailable for any reason, our board of directors will designate a substitute nominee. Our board of directors believes each nominee will be able to serve if elected. A majority of our board of directors may fill any vacancy that arises in our board of directors until the expiration of the term of the class of directors in which the vacancy occurs.

 

The names of our four nominees for election as Class A directors, and our Class B directors and our Class C directors who will continue in office after our annual meeting until the expiration of their respective

terms and the election of their respective successors, together with certain information regarding them, are as follows:

 

 

 

 

Our board of directors recommends a vote FOR the election of our four nominees for Class A directors named above.

 

 

Class B Directors

 

 

Class C Directors

 

 

Mr. Bolinger retired in 2001 as chief executive officer of Susquehanna Bancshares, Inc., a position he held from 1982 to 2001. Susquehanna Bancshares, Inc. had approximately $14 billion in assets at December 31, 2010 and is one of the major financial institutions in the Mid-Atlantic area where we conduct a substantial portion of our business. From 2000 to 2002, Mr. Bolinger served as chairman of the board of Susquehanna Bancshares, Inc. We believe Mr. Bolinger’s experience as the chief executive officer of a major financial institution qualifies him to serve on our board of directors.

 

Mrs. Gilmartin has been an employee since 1969 of Associated Donegal Insurance Brokers, which has no affiliation with us, except that Associated Donegal Insurance Brokers receives insurance commissions in the ordinary course of business from our insurance subsidiaries and Donegal Mutual in accordance with their standard commission schedules and agency contracts. Mrs. Gilmartin has been a Donegal Mutual director for 31 years and plays an important role in the relationship between Donegal Mutual and us and our respective insurance agents. Mrs. Gilmartin, who has been a registered insurance agent for over 50 years, helps provide us with insight into the concerns of agents. We believe the long experience of Mrs. Gilmartin as an insurance agent and her long association as one of our directors qualifies her to serve on our board of directors.

 

Mr. Glatfelter, who has extensive banking experience, retired in 1989 as a vice president of Meridian Bank, a position he held for more than five years prior to his retirement. Mr. Glatfelter has been a director of Donegal Mutual for 29 years and has been instrumental in promoting the growth of Donegal Mutual and us. Mr. Glatfelter was Vice Chairman of the Board of Donegal Mutual from 1991 to 2001 and has been our Chairman of the Board and Chairman of the Board of Donegal Mutual since 2001. He also serves on the board of directors of Province Bank, our banking affiliate. Mr. Glatfelter is also a director of a Lancaster County-based water utility and has served as a director and chairman of several community-based non-profit

entities. We believe Mr. Glatfelter’s extensive experience with financial institutions and long service on our board of directors qualifies him to continue to serve on our board of directors.

 

Mr. Hess has been a certified public accountant for more than 30 years, became a partner in Hess & Hess, certified public accountants, in 1982 and was the managing partner of that firm from 1998 to 2010. Effective January 1, 2011, Hess & Hess merged with Bertz & Co. and operates under the name Bertz, Hess & Co., LLP. Mr. Hess has been a director of Donegal Mutual since 2009 and a director of Conestoga Title Insurance Company, an indirect subsidiary of Donegal Mutual, since 2005. Mr. Hess’ background brings significant auditing and tax expertise to our board of directors as well as experienced business management skills, which we believe qualifies Mr. Hess to become one of our directors.

 

Mr. Kraft has served as one of our directors since December 2009. Mr. Kraft has been the chief executive officer of Clyde W. Kraft Funeral Home, Columbia, Pennsylvania since 1995. Mr. Kraft served as a director of Central Savings and Loan Association in Columbia, Pennsylvania from 1980 to 1992. After Farmers First Bank acquired Central Savings and Loan Association, Mr. Kraft served as a member of the regional board of Farmers First Bank. Mr. Kraft currently serves on the board of directors of a Lancaster County-based water utility and Conestoga Title Insurance Company. Mr. Kraft is also registered as an insurance agent with the Commonwealth of Pennsylvania. Mr. Kraft has been a director of Donegal Mutual since 2003. We believe Mr. Kraft’s experience with financial institutions qualifies him to continue to serve as a member of our board of directors.

 

Mr. Lyons has been president of Keefe Ventures, LLC, a manager of private investment funds since 2002. Mr. Lyons was also president and portfolio manager for investment funds affiliated with Keefe Managers, Inc. from 1999 until 2007. Mr. Lyons has significant experience in the turnaround of troubled financial institutions, serving as president and chief executive officer of Gateway-American Bank, Ft. Lauderdale, Florida; Regent National Bank, Philadelphia, Pennsylvania; Monarch Savings Bank, Clark, New Jersey and Jupiter-Tequesta National Bank, Tequesta, Florida, from 1990 to 1998. Mr. Lyons was vice chairman of the investment firm Advest, Inc., Hartford, Connecticut, subsequent to that firm’s purchase of his bank consulting practice in 1989. Mr. Lyons began his banking career as an examiner for the Federal Deposit Insurance Corporation in 1961. Mr. Lyons currently manages a private equity fund called Keefe Ventures Fund, LP which invests in community banking organizations. Mr. Lyons’ extensive investment banking experience and his services as a senior executive officer of a major financial institution demonstrates his value as a member of our board of directors.

 

Mr. Mahan has been a managing director in the Investment Banking Division of Stifel Nicolaus & Company, Incorporated, or Stifel Nicolaus, and, previously, Legg Mason Wood Walker, Incorporated, prior to the acquisition of the Legg Mason Capital Markets Division by Stifel Nicolaus on December 1, 2005. Mr. Mahan joined Legg Mason in 1996 and served as a principal from 2001 to 2004. Mr. Mahan specializes in corporate finance with a focus on mergers and acquisitions, including experience with a variety of corporate transactions involving mergers and acquisitions. Mr. Mahan’s expertise benefits our analysis of acquisition opportunities and makes him a desirable member of our board of directors.

 

Mr. Moore served as a consultant from May 2008 to November 2008 to a medical malpractice insurance company. Mr. Moore is currently a principal at Huguenot Capital. Prior thereto, Mr. Moore was president and chief executive officer of Luminent Mortgage Capital, Inc., or Luminent, from May 2007 to May 2008 and was president and chief operating officer of Luminent from March 2005 to May 2007. From 2000 to 2005, Mr. Moore was executive vice president, Capital Markets, of Radian Guaranty, Inc., or Radian. For five years prior to joining Luminent in March 2005, Mr. Moore was the executive vice president of capital markets for Radian. Prior to his service at Radian, Mr. Moore held several senior level positions in the mortgage industry, including First Union National Bank from 1997 to 2000, Nationsbanc Capital Markets from 1994 to 1997, Citicorp Securities from 1989 to 1994 and First Boston from 1984 to 1989. We believe the experience of Mr. Moore in mortgage securities amply qualifies him to serve as a member of our board of directors.

 

Mr. Nikolaus has been president and chief executive officer of Donegal Mutual since 1981 and a director of Donegal Mutual since 1972. He has been our president and chief executive officer since 1986. Mr. Nikolaus also serves as the chairman and chief executive officer of Province Bank and as chairman or president of each of our insurance subsidiaries. Prior to the formation of Province Bank, Mr. Nikolaus served as a director of

several regional banks. Mr. Nikolaus has also served as chairman of the Insurance Federation of Pennsylvania. Mr. Nikolaus has been a partner in the law firm of Nikolaus & Hohenadel since 1972. Mr. Nikolaus also currently serves as an executive officer and director of several Lancaster County-based water utilities. The status of Mr. Nikolaus as our chief executive officer for over 25 years provides a strong foundation for the continuation of Mr. Nikolaus as a member of our board of directors.

 

Mr. Sherbahn, who was a certified financial planner for many years, owned and operated Sherbahn Associates, Inc., a life insurance and financial planning firm, from 1974 to 2007 and has been a licensed insurance agent since 1956. Mr. Sherbahn has been a director of Donegal Mutual for 43 years. Mr. Sherbahn played a principal role in Donegal Mutual’s decision to form us and his long-term association with Donegal Mutual and us supports the continuation of Mr. Sherbahn as one of our directors.

 

Mr. Wampler is a certified public accountant and served as a principal of the accounting firm of Brown Schultz Sheridan & Fritz, a position held from 1998 to until his retirement in 2005. For 28 years prior thereto, he was a partner in the accounting firm of KPMG LLP where his practice focused on property and casualty insurance companies. Mr. Wampler is also a member of the subscribers advisory committee of the third largest medical professional liability insurer in Pennsylvania. We believe his background brings expertise to our board of directors in understanding statutory accounting principles as well as generally accepted accounting principles and in analyzing and maintaining internal controls over financial reporting.

 

Six of our 11 directors and nominees for director (Mrs. Gilmartin and Messrs. Glatfelter, Hess, Kraft, Nikolaus and Sherbahn) also serve as directors of Donegal Mutual with whom we have a variety of inter-company agreements providing for, among other things, the pooling of underwriting results, reinsurance and expense-sharing. See “Stock Ownership — Our Relationship with Donegal Mutual.” We believe our board membership appropriately represents our public stockholders, who collectively own about 33.6% of the combined voting power of our Class A common stock and our Class B common stock, and Donegal Mutual, which owns 66.4% of the combined voting power of our Class A common stock and Class B common stock.

 

Our audit committee has appointed KPMG LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2011. Although our by-laws do not require that we submit our audit committee’s appointment of KPMG LLP to our stockholders for ratification, we do so as a matter of good corporate governance.

 

Representatives of KPMG LLP will attend our annual meeting and will respond to appropriate questions. The KPMG LLP representatives will also be able to make a statement if they determine to do so.

 

Our board of directors recommends that you vote “FOR” the ratification of the appointment of KPMG LLP as our independent registered public accounting firm for 2011.

 

Even if our stockholders ratify the appointment of KPMG LLP, our audit committee in its discretion may select a different independent registered public accounting firm at any time during the year if it determines that such a change would be in our best interests and in the best interests of our stockholders.

 

2010 Performance Review

 

In a year marked by an unusual frequency of severe storms, intense competition and a poor economic climate in the United States, our results of operations for 2010, although modestly better than 2009, were below our historical expectations. We did, however, maintain our strong financial condition in 2010. The

following table illustrates our net revenues and our net income for the year ended December 31, 2010 and the price of our Class A common stock at December 31, 2010 compared to the same date with respect to 2009.

 

 

The compensation of our named executive officers in 2010 consisted of two principal elements:

 

 

We paid no incentive bonuses in 2010 to our named executive officers because the formula we use to determine those annual bonuses resulted in no bonus pool for allocation to our officers, including our named executive officers for 2010. In addition, our named executive officers are eligible to participate in our 401(k) plan to which we make contributions on a formula basis, health and other insurance programs in which all of our full-time employees may participate.

 

2010 Total Direct Compensation of Our Named Executive Officers

 

Because our underwriting profitability in 2010 was less than in many prior years, the actual pay of our named executive officers in 2010 was less than many prior years because we did not pay any bonuses in 2010 based on our underwriting profitability. Our annual incentive bonus program thus clearly reinforces our pay for performance compensation philosophy for our named executive officers.

 

Our 2010 compensation programs for our named executive officers reflect best practices, and we have designed them to balance risk and reward in our overall business strategy. The above description of compensation programs that apply to our named executive officers serves to emphasize that we tie a significant percentage of the total compensation of our named executive officers directly to our underwriting profitability. In addition, our annual incentive bonus based on our underwriting profitability causes our named executive officers to evaluate carefully the taking of excessive risk because increased underwriting losses would adversely affect their compensation. Finally, our compensation programs for our named executive officers do not have the practical effect of providing guaranteed compensation to our named executive officers. We therefore believe the compensation of our named executive officers in 2010 directly aligned the interests of our named executive officers with the interests of our stockholders.

 

We believe we have provided information in the above discussions and in the “Executive Compensation” section of this proxy statement that we have implemented compensation programs for our named executive officers that are appropriate and effectively align the interests of our named executive officers and the interests of our stockholders and support the creation of long-term value. Accordingly, our board of directors recommends that you vote FOR the approval of the compensation of our named executive officers we describe in this proxy statement.

 

Our compensation committee does not restrict its evaluation of the performance of our named executive officers to predetermined formulas or a limited set of criteria. Our compensation committee considered our progress during 2010 in achieving the short-term and long-term objectives we describe below:

 

 

We believe we have continued to achieve this objective in 2010 notwithstanding increased severe weather events and prevailing economic conditions. Our statutory combined ratio for 2010 was 102.9% compared to the property and casualty industry combined ratio of 103.0% projected by A.M. Best Company for 2010. We believe our underwriting results were reasonable in light of a challenging underwriting environment, intense competition in a soft market and unexpectedly adverse weather conditions.

 

 

We believe we achieved this objective for the five years ended December 31, 2010 because our compound rate of revenue growth for that period was 5% despite a soft insurance market and intense competition.

 

 

We believe we achieved this goal in 2010 because we received this award for the sixth straight year.

 

 

One measure of our achievement of this objective in 2010 was the acquisition of MICO as of December 1, 2010 which enabled us to commence business in Michigan.

 

 

During 2010, we continued to expand the use of our state-of-the-art systems to all of our subsidiaries. We also received the 2010 Interface Partner Award from Applied Systems, an insurance technology company, in recognition of our achievements in agency-insurer communications.

 

 

We believe we achieved this objective for the five years ended December 31, 2010 because our compound rate of book value growth for that period was 6.5%.

 

Our compensation committee believes that each component of our executive compensation is consistent with our overall compensation philosophy of pay for performance. We have designed the components of our executive compensation to complement each other and to reward the achievement of our short-term and long-term business objectives. Our compensation committee recognizes the individual fulfillment of our objectives through adjustments to base salary and by awarding cash bonuses and granting stock options.

 

The compensation of our chief executive officer is higher than the compensation of our other named executive officers because of our chief executive officer’s breadth of executive and operating responsibilities for the entire Donegal Insurance Group. The relationship between the compensation of our chief executive officer and the compensation of our other named executive officers is also influenced by the fact that we do not have a chief operating officer. Our compensation committee also considers individual fulfillment of duties, teamwork, development, time in position, expenses and internal equity among our named executive officers and their ability to collaborate and communicate effectively with our other executive officers.

 

On an overall basis, our compensation committee believes that we made progress in achieving the targets our board of directors established for these objectives at the start of 2010. Our performance and book value growth in 2010 were the basis of the decisions our compensation committee made at its meetings in December 2010 and February 2011 with respect to adjustments to base salary and our decision to pay no annual cash bonuses to our named executive officers because of our underwriting results.

 

We believe the specific compensation decisions we made for each of our named executive officers in 2010 appropriately reflects our financial and operational performance in 2010. Our compensation committee also evaluates the achievement by our named executive officers of our other corporate objectives, and the contribution of each of our named executive officers to those achievements in each such officer’s primary area of responsibility. We use our discretion in making compensation decisions after reviewing our performance and the objective performance of our named executives based on financial and operational objectives. We do not have any form of employment, severance or change-of-control agreements with any of our named executive officers.

 

Our compensation committee oversees our compensation and benefit plans and policies. Its oversight of our compensation process includes reviewing and recommending for approval by our board of directors equity awards to our executive officers and all compensation decisions relating to our executive officers.

 

Our compensation committee determined that the primary objectives of our compensation programs for our executive officers are to:

 

 

We believe we achieved this objective because three of our five executive officers named in our summary compensation table have worked with us for all 25 years since our formation in 1986, and our other two named executive officers have worked for us for 23 and 17 years, respectively.

 

 

We believe we achieved this objective through our compound annual growth rate, which was 5.0% for the five years ended December 31, 2010, and through the compound rate of growth in our book value, which was 6.5% for the five years ended December 31, 2010.

 

 

Our results, including the fact that we paid no annual incentive bonuses to our named executive officers in 2010, demonstrate that our compensation systems do not reward the undue taking of risk.

 

To achieve these objectives, we compensate our executive officers through a combination of base salary, annual cash bonuses principally based on our underwriting income and long-term equity compensation.

 

Our compensation committee believes that our underwriting profitability-based bonus plan and our performance-based equity ownership programs create incentives that are designed to result in long-term stockholder value. We have designed the following elements of our compensation programs to promote the creation of long-term value and that we therefore believe discourages behavior that could lead to excessive risk:

 

 

In December 2010, we retained Towers Watson, a nationally-recognized compensation consulting firm, to assess the competitiveness of our compensation program for approximately 20 of our key executive officers compared with a peer group of property and casualty insurance companies as well as advice with respect to the design of compensation programs in the future for our key executive officers. We have also retained Towers Watson to assist us in developing a leadership succession program. We do not expect the completed work product of Towers Watson until later this year at which time our compensation committee and our board of directors will consider the reports and recommendations of Towers Watson.

 

Our officers receive the following compensation:

 

 

 

The primary form of equity compensation that we have historically awarded to our officers, including our named executive officers, is stock options. Our compensation committee receives preliminary recommendations for periodic stock option grants from our chief executive officer for our officers other than himself. Our compensation committee then reviews our chief executive officer’s recommendations and recommends stock option grants for all of our officers, including our chief executive officer, to our board of directors for approval.

 

Our stock option plans authorize us to grant options to purchase shares of our Class A common stock to our employees, officers and directors.

 

In accordance with NASDAQ rules, we do not grant stock options that have exercise prices below the fair market value of our Class A common stock on the date of grant.

 

We do not reduce the exercise price of stock options if the price of our Class A common stock subsequently declines below the exercise price unless we first obtain stockholder approval. However, we do adjust the exercise price of previously granted stock options to reflect recapitalizations, stock or extraordinary dividends, stock splits, mergers, spin-offs and similar events as permitted by the applicable stock option plan.

 

In assessing the performance of our named executive officers in light of the objectives our board of directors establishes, our compensation committee reviews specific achievements associated with attainment of the objectives, the degree of difficulty of the objectives and the extent to which significant unforeseen obstacles or favorable circumstances affected their performance. As part of its oversight of the compensation of our named executive officers, our compensation committee recommended the following compensation adjustments for 2010 for our named executive officers:

 

 

Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code, generally does not allow us to deduct annual compensation we pay to any of our named executive officers that is in excess of $1 million for federal income tax purposes. However, compensation paid pursuant to a performance-based plan is generally not subject to the Section 162(m) limitation.

Although our compensation committee is aware of the Section 162(m) limitation, our compensation committee believes that it is equally important to maintain flexibility and the competitive effectiveness of the compensation of our named executive officers. Our compensation committee may, therefore, from time to time, authorize compensation that is not deductible for federal income tax purposes if our compensation committee believes it is in our best interests and the best interests of our stockholders to do so.

 

For a number of years, we have had a cash incentive compensation plan for our officers, including our named executive officers, that is tied to a formula that is based on the annual underwriting income and other financial metrics of the Donegal Insurance Group. The formula operates as follows:

 

 

If the Donegal Insurance Group’s surplus for the year is below an amount the Plan specifies, we reduce the executive incentive compensation pool by 50%.

 

We provide our named executive officers with the same employee benefits that all of our other employees receive under our broad-based benefit plans. These plans provide for health benefits, life insurance and other welfare benefits.

 

We do not provide our named executive officers with any retirement or welfare plan benefits that we do not provide to all of our other employees.

 

In order to align further management’s interests with the interests of our stockholders and to support good corporate governance practices, it is the intention of our board of directors to adopt a recoupment policy applicable to our annual bonus based on the underwriting results of our insurance subsidiaries and to stock options we have granted to our executive officers promptly following the definitive adoption of regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act.

 

The following table shows the compensation we paid during 2008, 2009 and 2010 for services rendered in all capacities to our chief executive officer, our chief financial officer and our three other most highly compensated executive officers. We refer to these officers, who we name in the table below, as our named executive officers. We do not have employment agreements with any of our named executive officers, nor do we provide any of them with restricted stock awards, non-equity incentive plan compensation, deferred compensation or pension benefits with the exception of two of our executive officers who receive an annual restricted stock award of 311 shares (400 shares beginning in 2012) as part of their compensation as members of our board of directors and the Donegal Mutual board of directors.

 

Based on the compensation paid to our named executive officers in 2010, their salaries accounted for 69.1% of their total compensation in 2010 and none of them received any performance-based bonus.

 

 

 

 

During 2010, we granted non-qualified options to purchase shares of our Class A common stock at an exercise price of $14.00 per share to our named executive officers, one-third of which are currently vested. On the date we granted the options, the closing market price of our Class A common stock was $12.06.

 

 

We have an equity incentive plan for employees and an equity incentive plan for our directors. Under these plans, our board of directors, upon the recommendation of our compensation committee, may grant options to purchase our Class A common stock and, in the case of our directors, restricted stock awards as well as stock options. Grants under the plans can take the form of incentive stock options, non-qualified stock options, stock units and other stock-based awards. With the exception of an annual fixed restricted stock award to our directors, all of our incentive compensation grants have been stock options. The purpose of the plans is to provide long-term incentive awards to our employees and directors as a means to attract, motivate, retain and reward talented persons.

 

As of December 31, 2010, we had reserved 756,500 shares of our Class A common stock for future grants under our 2007 equity incentive plan for employees and 88,572 shares of our Class A common stock for future grants under our 2007 equity incentive plan for directors. If shares covered by an option are not issuable for any reason, we may again grant options to purchase those shares. The total number of reserved shares will increase to 3,900,000 shares if our stockholders approve our 2011 equity incentive plan for employees and our 2011 equity incentive plan for directors.

 

Our board of directors may adjust the number and kind of shares available for grants and options under our plans and the exercise price of outstanding options in the event of a merger, consolidation, reorganization, stock split, stock dividend or other event affecting the number of outstanding shares of our common stock. Unless otherwise provided in individual option agreements, unvested options do not automatically accelerate in the event of a business combination or in the event of the sale of all or substantially all of our assets.

 

Our board of directors, upon the recommendation of our compensation committee, has:

 

 

Our board of directors has the authority to suspend, amend or terminate our stock incentive plans, except as would adversely affect the rights of persons holding outstanding awards without the consent of such persons.

 

The following table summarizes the outstanding equity awards our named executive officers held at December 31, 2010:

 

 

The following table summarizes stock options exercised by our named executive officers and, in the case of our named executive officers who are also directors, restricted stock awards vested, during 2010:

 

 

 

 

None of our named executive officers participated in or had an account balance in qualified or non-qualified defined benefit plans that we sponsored in 2009 or 2010, and we contemplate none for 2011. However, our compensation consultant, Towers Watson, is currently evaluating types of pension benefits as part of its review of our compensation structure.

 

None of our named executive officers participated in or had account balances in non-qualified deferred compensation plans or other deferred compensation plans that we maintained in 2008, 2009 or 2010, and we contemplate none for 2011. However, as noted above, we expect to receive advice from our compensation consultant and that advice may include some form of non-qualified deferred compensation plans in the future.

 

Our certificate of incorporation includes a provision that limits, to the maximum extent permitted by Delaware law, the liability of our directors and officers to us and to our stockholders for money damages except for liability resulting from:

 

 

This limitation does not, however, apply to violations of the federal securities laws, nor does it limit the availability of non-monetary relief in any action or proceeding.

 

Our certificate of incorporation and by-laws obligate us, to the maximum extent permitted by Delaware law, to indemnify any person who is or was a party to, or is threatened to be made a party to, any threatened or pending action, suit or proceeding by reason of the fact that such person is or was one of our directors or officers, or, while one of our directors or officers, is or was serving, at our request, as a director or officer of another entity. Insofar as indemnification for liabilities arising under the federal securities laws may be permitted to our officers and directors pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in such laws and is unenforceable.

 

In addition, our certificate of incorporation and by-laws permit us, at our expense, to purchase and maintain insurance to protect us and any director, officer or employee against any liability of any character asserted against or incurred by us or any such director, officer or employee or arising out of any such person’s corporate status, whether or not we would have the power to indemnify such person against such liability under Delaware law. We also maintain and intend to continue to maintain directors’ and officers’ liability insurance.

 

Our compensation committee held a joint meeting with the compensation committee of the board of directors of Donegal Mutual. The compensation committees reviewed and discussed the compensation discussion and analysis that appears under the caption “Executive Compensation Discussion and Analysis” with management.

 

Based on the review and discussion by our compensation committee with management and the joint meeting with the members of the compensation committee of Donegal Mutual, the members of our compensation committee then held a separate meeting at which our compensation committee reviewed our success in meeting our corporate objectives for 2010 and the individual performance of our named executive officers and then recommended to our board of directors that our board of directors approve the inclusion of the compensation discussion and analysis set forth in this proxy statement under the caption “Executive Compensation Discussion and Analysis” for filing with the SEC and the incorporation by reference of such compensation discussion and analysis in our annual report on Form 10-K for the year ended December 31, 2010 for filing with the SEC.

 

 

The following table sets forth information regarding our equity compensation plans:

 

 

The provisions of the Dodd-Frank Act require that we submit to a non-binding advisory vote of the holders of our Class A common stock and our Class B common stock a proposal that our stockholders approve the compensation of our named executive officers we describe in this proxy statement under “Executive Compensation”. We submit to an advisory vote of our stockholders at our 2011 annual meeting the compensation of our named executive officers as summarized in this section and more fully described in the “Executive Compensation” section of this proxy statement. Although the vote of our stockholders on this proposal is not binding on us, the outcome of this vote will provide important information to our board of directors and to its compensation committee as they determine the compensation of our named executive officers in future years.

 

Donegal Mutual has advised us that it will vote all of its shares for the approval of the compensation of our named executive officers as we describe such compensation in this proxy statement. We refer you to the “Executive Compensation” section of this proxy statement. Therefore, our stockholders will approve the compensation of our named executive officers during 2010 we describe in the “Executive Compensation” section of this proxy statement even if all of our stockholders other than Donegal Mutual vote against the approval of such proposal.

 

We have designed the compensation available to our named executive officers to implement our compensation philosophy for our named executive officers. Our compensation philosophy for our named executive officers focuses on the alignment of the interests of our executive officers with the interests of stockholders in achieving long-term value and pay for performance. In the course of establishing the compensation of our named executive officers described in this proxy statement, our compensation committee with the assistance of our head of human resources, we determined that the use of performance-based incentives to motivate our named executive officers to achieve short-term incentives, such as the cash bonuses we base on the annual underwriting profitability of our insurance subsidiaries and long-term business goals, such as the stock options we grant. We did not make use of any compensation consultants in determining the 2010 compensation of our named executive officers.

 

The basic principles of our compensation for our named executive officers are compensation plans that award pay for performance and serve to align the incentive compensation, both short-term and long-term, of our named executive officers with the short-term and long-term interests of our stockholders. Because our results of operations in 2009 and 2010 have not met our expectations, the compensation of our named executive officers in 2090 and 2010 was less than their compensation in 2008. Given our performance, we believe these reductions are appropriate given our compensation philosophy for our named executive officers.

Our board of directors recommends that you vote FOR approval of the following resolution relating to the compensation of our named executive officers that we describe in this proxy statement:

 

“RESOLVED, that the stockholders of DGI approve the compensation DGI paid to its named executive officers that DGI has disclosed in its proxy statement with respect to its 2011 annual meeting of stockholders pursuant to the compensation disclosure rules of the SEC, including the compensation disclosure and analysis, or CDA, the compensation tables and the narrative disclosures that accompany those tables in DGI’s proxy statement for its 2011 annual meeting of stockholders.”

 

The provisions of the Dodd-Frank Act require that we submit to a non-binding vote of the holders of our Class A common stock and our Class B common stock no less frequently than every six years a proposal that our stockholders approve, on a non-binding and advisory basis, the compensation of our named executive officers.

 

The enclosed proxy card provides you with choices on this item. You may vote that we submit a proposal to our stockholders for approval of the compensation of our named executive officers every year, every two years or every three years. You may also abstain from voting on this item. However you decide to vote, you are not voting to approve or disapprove the recommendation of our board of directors with respect to this item.

 

For the reasons we describe below, we recommend that our stockholders hold an advisory and non-binding vote once every three years to approve the compensation of our named executive officers:

 

 

On-going communication with our stockholders is an important part of our system of corporate governance. We are open to receiving communications from our stockholders about any aspect of our business, including our executive compensation programs. We believe our communications with our stockholders and the ability of our stockholders to contact us at any time provides for our accountability to our stockholders and lessens the need for more frequent advisory votes on the compensation of our named executive officers.

 

Accordingly, we recommend that you select “Three Years” when you vote on the frequency of our conduct of advisory votes by our stockholders on our executive compensation programs. Our board of directors will review the non-binding vote of our stockholders on the frequency of advisory votes on the compensation of our named executive officers and take that vote into account.

 

Donegal Mutual has advised us that it will vote all of its shares for three years for the frequency of stockholder advisory votes on our executive compensation programs. Because Donegal Mutual controls approximately two-thirds of the voting power of our Class A common stock and our Class B common stock,

our stockholders will approve the proposal to hold an advisory vote of our stockholders to approve the compensation of our named executive officers once every three years.

 

Our board of directors recommends that our stockholders select three years on the proposal recommending the frequency of advisory votes on the compensation of our named executive officers. However, by asking our stockholders to vote to determine the frequency of our submission to our stockholders of a proposal to approve the compensation of our named executive officers, we are not asking our stockholders to approve the future compensation of our named executive officers. We are asking our stockholders whether we should submit the compensation of our named executive officers to our stockholders for approval every year, every two years or every three years.

 

Our board of directors adopted our 2011 Employee Stock Purchase Plan, or our 2011 Purchase Plan, on March 7, 2011, subject to stockholder approval of our 2011 Purchase Plan at our annual meeting of stockholders and the listing on NASDAQ of the shares of our Class A common stock reserved for issuance pursuant to our 2011 Purchase Plan. The purpose of our 2011 Purchase Plan is to provide our eligible employees with an opportunity to acquire or to increase their proprietary interest in us by providing our employees with a convenient opportunity to purchase shares of our Class A common stock at a discount from market prices prevailing at the time of purchase. We believe our 2011 Purchase Plan meets the requirements of Section 423 of the Code.

 

We have reserved 300,000 shares of our Class A common stock for issuance under our 2011 Purchase Plan. Our 2011 Purchase Plan provides for appropriate adjustments in the event that we effect a stock split, a stock dividend, share combination or spinoff and certain other types of transactions we specify in our 2011 Purchase Plan, including mergers, consolidations, reorganizations and reclassifications. We will list on NASDAQ our shares of Class A common stock reserved for issuance under our 2011 Purchase Plan.

 

Subject to stockholder approval of our 2011 Purchase Plan at our annual meeting and the listing of our shares of our Class A common stock we have reserved for issuance under our 2011 Purchase Plan, we will discontinue our 2001 Employee Stock Purchase Plan, or our Prior Purchase Plan, and will not issue any additional shares of our Class A common Stock under our Prior Purchase Plan.

 

A committee of three employees, or the purchase plan committee, will administer our 2011 Purchase Plan. Our board of directors will appoint the members of the purchase plan committee. The purchase plan committee has the authority to amend our 2011 Purchase Plan rules and regulations from time to time for the purpose of operating our 2011 Purchase Plan. Any interpretation or construction by the purchase plan committee with respect to our 2011 Purchase Plan will be final and conclusive as to all participants absent contrary action by our board of directors. Any interpretation or construction of our 2011 Purchase Plan by our board of directors will be final and conclusive as to all participants in our 2011 Purchase Plan.

 

All of the full-time employees of Donegal Mutual and all of our respective subsidiaries, as well as all full-time employees of each company from which we or Donegal Mutual assume 100% quota-share reinsurance, who have completed one month of employment prior to the beginning of an enrollment period under our 2011 Purchase Plan will be eligible to participate in our 2011 Purchase Plan. An employee who is otherwise eligible to purchase shares of our Class A common stock under our 2011 Purchase Plan may not do so, however, if exercising a right to purchase shares of our Class A common stock under our 2011 Purchase Plan would either (i) cause the employee to own shares of our Class A common stock that possesses 5% or more of the total combined voting power or value of all of our outstanding Class A common stock or any of our subsidiaries or (ii) cause the employee to have purchase rights under all of our stock purchase plans or any of our or Donegal Mutual’s subsidiaries that meet the requirements of Section 423 of the Code that accrue at a rate that exceeds $25,000 of the fair market value of our Class A common stock or any of our respective subsidiaries for each calendar year in which such right is outstanding. Separation from employment for any reason will constitute an automatic withdrawal from further participation in our 2011 Purchase Plan.

Our 2011 Purchase Plan provides for semi-annual subscription periods. The subscription periods extend from January 1 through June 30 and from July 1 through December 31, respectively, beginning on July 1, 2011 and ending on June 30, 2021. We will treat employees enrolled in our Prior Purchase Plan as of June 30, 2011 as automatically enrolled for participation in our 2011 Purchase Plan. Thereafter, enrollment for participation in our 2011 Purchase Plan will occur during the 30 calendar days preceding each subscription period.

 

Payroll deduction is the only payment method available for the purchase of Class A common stock under our 2011 Purchase Plan. Employees may invest a maximum of 10% of their base pay towards the purchase of our Class A common stock in any subscription period. At a minimum, an employee who wishes to participate in our 2011 Purchase Plan must authorize a payroll deduction that would be sufficient to enable such employees to purchase at least ten shares of our Class A common stock during any subscription period.

 

We will hold subscriptions we receive under our 2011 Purchase Plan during each subscription period in a plan account we will maintain for each participant. At the end of each subscription period, we will divide the amount contained in each employee’s plan account by the subscription price for the applicable subscription period, and we will then credit the plan account of the employee with the resulting number of whole shares purchased. The subscription price for any subscription period will be equal to the lesser of 85% of our Class A common stock as reported on NASDAQ on the last trading day before the first day of the enrollment period with respect to such subscription period or 85% of the closing price of our Class A common stock as reported on NASDAQ on the last trading day of such subscription period.

 

An employee may not assign any of the employee’s rights under our 2011 Purchase Plan, except by will or by the laws of descent and distribution. During an employee’s lifetime, only the employee may exercise the employee’s subscription rights under our 2011 Purchase Plan.

 

Upon the termination of an employee’s employment or an employee’s withdrawal from our 2011 Purchase Plan, we will refund to the employee the amount of any cash credited to the employee’s 2011 Purchase Plan account without interest. Withdrawal from our 2011 Purchase Plan by one of our executive officers who is subject to Section 16 of the Exchange Act, except for withdrawal because of the termination of the executive officer, will become effective only at the end of a subscription period. Once an employee has withdrawn from our 2011 Purchase Plan, we will make no further payroll deduction with respect to that employee. An employee’s withdrawal from our 2011 Purchase Plan during one subscription period does not restrict that employee’s right to participate in our 2011 Purchase Plan during any subsequent subscription period under our 2011 Purchase Plan. A retiring employee or the beneficiary of a participating employee upon the death of that employee may elect to purchase the appropriate number of whole shares of our Class A common stock using the date of retirement or death as if it were the last day of a subscription period.

 

Our 2011 Purchase Plan will remain in effect until June 30, 2022 or until the 300,000 shares of our Class A common stock we have reserved for purchase under our 2011 Purchase Plan have been purchased. Our board of directors has the right to terminate our 2011 Purchase Plan at any time without prior notice, provided, however, that any such termination shall not adversely affect an employee’s rights under our 2011 Purchase Plan. Without the approval of our stockholders, we may not amend our 2011 Purchase Plan to: