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.
)
Filed by the Registrant
x
Filed by a Party other than the Registrant
¨
Check the appropriate box:
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Preliminary Proxy Statement
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
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x
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Definitive Proxy Statement
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¨
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Definitive Additional Materials
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Soliciting Material Pursuant to §240. 14a-12
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STATE AUTO FINANCIAL CORPORATION
(Name of Registrant as
Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
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(1)
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Title of each class of securities to which transaction applies:
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(2)
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Aggregate number of securities to which transaction applies:
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(3)
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Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
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(4)
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Proposed maximum aggregate value of transaction:
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¨
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Fee paid previously with preliminary materials.
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¨
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
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(1)
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Amount Previously Paid:
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(2)
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Form, Schedule or Registration Statement No.:
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STATE AUTO FINANCIAL CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To the Shareholders of
STATE AUTO FINANCIAL CORPORATION:
Notice is hereby given that the Annual Meeting of Shareholders of State Auto Financial Corporation (the
Company or STFC) will be held at the Companys principal executive offices located at 518 East Broad Street, Columbus, Ohio, on May
4, 2012, at 10:00 a.m., local time, for the following purposes:
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1.
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To elect three Class III directors, each to hold office for a three-year term and until a successor is elected and qualified;
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2.
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To consider and vote upon a proposal to modify a material term of the Companys Leadership Bonus Plan and to reaffirm the material terms of
such plan;
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3.
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To consider and vote upon a proposal to modify a material term of the Companys Long-Term Incentive Plan and to reaffirm the material terms of
such plan;
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4.
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To ratify the selection of Ernst & Young LLP as the Companys independent registered public accounting firm for 2012;
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5.
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To consider and vote upon, on a non-binding and advisory basis, the compensation of the Companys named executive officers as disclosed in the
Proxy Statement for the 2012 Annual Meeting of Shareholders; and
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6.
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To transact such other business as may properly come before the meeting or any adjournment thereof.
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The close of business on March 9, 2012, has been fixed as the record date for the determination of shareholders
entitled to notice of and to vote at the meeting and any adjournment thereof.
In order that your shares may
be represented at this meeting and to assure a quorum, please indicate your voting instructions by telephone, via the Internet or by signing and returning the enclosed proxy promptly. Instructions for indicating your voting instructions by telephone
or via the Internet are included on the enclosed proxy. A return addressed envelope, which requires no postage, is enclosed if you choose to submit your voting instructions by mail. In the event you are able to attend and wish to vote in person, at
your request we will cancel your proxy.
By Order of the Board of Directors
JAMES A. YANO
Secretary
Dated: April 3, 2012
PROXY STATEMENT TABLE OF CONTENTS
STATE AUTO FINANCIAL CORPORATION
PROXY STATEMENT
GENERAL
This Proxy Statement is
furnished in connection with the solicitation of proxies by the Board of Directors of State Auto Financial Corporation (the Company or STFC) to be used at its Annual Meeting of Shareholders to be held May 4, 2012 (the
Annual Meeting). Shares represented by properly executed proxies will be voted at the Annual Meeting in accordance with the choices indicated on the proxy. A proxy may be revoked at any time, insofar as it has not been exercised, by
delivery to the Company of a subsequently dated proxy or by giving notice of revocation to the Company in writing or in open meeting. A shareholders presence at the Annual Meeting does not by itself revoke the proxy.
The mailing address of the principal executive offices of the Company is 518 East Broad Street, Columbus, Ohio 43215. The
approximate date on which this Proxy Statement and the form of proxy are first being sent or given to shareholders is April 3, 2012.
This Proxy Statement, the form of proxy, and the Companys 2011 Annual Report to Shareholders are available at
www.proxyvote.com
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PROXIES AND VOTING
The close of business on March 9, 2012 has been fixed as the record date for the determination of shareholders
entitled to notice of and to vote at the Annual Meeting and any adjournment thereof. On the record date there were outstanding and entitled to vote 40,376,941 of the Companys common shares
,
without par value (the Common
Shares). Each Common Share is entitled to one vote.
A quorum must be present at the Annual Meeting in
order for the transaction of business to occur. A quorum is present if a majority of the outstanding Common Shares is present in person or by proxy at the Annual Meeting. Abstentions and broker non-votes will be considered as Common Shares
present at the Annual Meeting for purposes of determining the presence of a quorum.
Broker
non-votes and broker discretionary voting refer to the rules governing whether or not banks, brokers and other intermediaries (hereafter referred to collectively as brokers) may vote Common Shares held in street
name for the benefit of their customers. In general, brokers have discretionary voting authority on behalf of their customers with respect to routine matters when they do not receive timely voting instructions from their customers.
Brokers do not have discretionary voting authority on behalf of their customers with respect to non-routine matters, and a broker non-vote occurs when a broker does not receive voting instructions from its customer on a non-routine
matter.
For Proposal One (election of Class III directors), the nominees receiving the highest number of
votes will be elected as directors. Shareholders do not have the right to cumulate their votes in the election of directors. Abstentions will not be counted in determining the votes cast for the election of directors and will not have a positive or
negative effect on the outcome of the election. Proposal One is considered a non-routine matter under the broker discretionary voting rules, and therefore, brokers may not vote uninstructed Common Shares in the
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election of directors. Accordingly, if you hold your Common Shares in street name and you do not provide voting instructions to your broker as to how you want your Common Shares voted in the
election of directors, no vote will be cast on your behalf. Therefore, it is important that you provide voting instructions to your broker if you want your vote to count in the election of directors.
For Proposal Two (approval of the modification of a material term of the Leadership Bonus Plan and reaffirmation of the
material terms of such plan) and Proposal Three (approval of the modification of a material term of the Long-Term Incentive Plan and reaffirmation of the material terms of such plan), the vote required to approve these Proposals is the favorable
vote of a majority of the outstanding Common Shares voted on such Proposals. Abstentions on either of these Proposals have the same effect as not voting or expressing a preference, as the case may be, and will not have a positive or negative effect
on the outcome of these Proposals. Proposals Two and Three are considered non-routine matters, so if you do not instruct your broker as to how you want your Common Shares voted on these Proposals, no vote will be cast on your behalf. Therefore, it
is important that you provide voting instructions to your broker if you want your vote to count regarding Proposals Two and Three.
For Proposal Four (ratification of the selection of Ernst & Young LLP as the Companys independent registered public accounting firm), the vote required to approve such Proposal is the
favorable vote of a majority of the outstanding Common Shares that are voted on such Proposal. Abstentions will have the same effect as a vote against it. This Proposal is considered a routine matter, which means that if you hold your Common Shares
in street name and do not provide, in a timely manner, voting instructions to your broker as to how you want your Common Shares voted on Proposal Four, your broker may vote your Common Shares on this Proposal at its discretion.
Proposal Five (vote on compensation to the Companys named executive officers as described in this Proxy Statement)
is advisory only and therefore is not binding on our Board of Directors. However, the Compensation Committee may take into account the outcome of Proposal Five when considering future executive compensation arrangements. Abstentions on Proposal Five
have the same effect as not voting or expressing a preference, as the case may be, and will not have a positive or negative effect on the outcome of this Proposal. Proposal Five is considered a non-routine matter, so if you do not instruct your
broker as to how you want your Common Shares voted on this Proposal, no vote will be cast on your behalf.
All
Common Shares represented by properly executed proxies will be voted at the Annual Meeting in accordance with the choices indicated on the proxy. If no choices are indicated on a proxy, the Common Shares represented by that proxy will be voted as
follows: (1) for the election of the nominees listed in this Proxy Statement as Class III directors; (2) for the approval of the modification of a material term of the Leadership Bonus Plan and the reaffirmation of the material terms of
such plan; (3) for the approval of the modification of a material term of the Long-Term Incentive Plan and the reaffirmation of the material terms of such plan; (4) for the ratification of the selection of Ernst & Young LLP as the
Companys independent registered public accounting firm for 2012; and (5) for the approval of the compensation of the Companys named executive officers as disclosed in this Proxy Statement. Any proxy may be revoked at any time prior
to its exercise by delivering to the Company a subsequently dated proxy or by giving notice of revocation to the Company in writing or in open meeting. A shareholders presence at the Annual Meeting does not by itself revoke the proxy.
STATE AUTOMOBILE MUTUAL INSURANCE COMPANY (STATE AUTO MUTUAL), WHICH OWNS APPROXIMATELY 63% OF
THE OUTSTANDING COMMON SHARES, HAS EXPRESSED AN INTENTION TO VOTE FOR THE ELECTION OF THE NOMINEES LISTED IN THIS PROXY STATEMENT AND IN FAVOR OF EACH OF PROPOSALS TWO, THREE, FOUR AND FIVE.
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PROPOSAL ONE: ELECTION OF DIRECTORS
Nominees for Class III Directors
The number of directors currently is fixed at nine. Our Board of Directors is divided into three classes, Class I,
Class II and Class III, with three directors in each Class. The term of office of directors in one Class expires annually at each annual meeting of shareholders at such time as their successors are elected and qualified. Directors in each Class are
elected for three-year terms.
The term of office of the Class III directors expires concurrently with the
holding of the Annual Meeting. Eileen A. Mallesch, Robert P. Restrepo, Jr., and Paul S. Williams, the three persons recommended by the Nominating and Governance Committee of our Board and each of whom is an incumbent Class III director, have been
nominated for re-election as Class III directors at the Annual Meeting.
At the Annual Meeting, it is the
intention of the persons named in the accompanying form of proxy, unless a contrary position is indicated on such proxy, to vote the proxy for the election of the three nominees named below as Class III directors, each to hold office until the 2015
annual meeting of shareholders and until a successor is elected and qualified. Each of the nominees has consented to being named in this Proxy Statement and to serve if elected. In the event that any nominee named below is unable to serve (which is
not anticipated), the persons named in the proxy may vote it for another nominee of their choice.
Proxies
cannot be voted at the Annual Meeting for a greater number of persons than the three nominees named in this Proxy Statement.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF THE THREE NOMINEES NAMED BELOW AS CLASS III DIRECTORS.
Backgrounds of Class III Director Nominees (Terms expiring in 2015)
Eileen A. Mallesch
Eileen A. Mallesch, 56, has been a director since August 2010. Ms. Mallesch served as Senior Vice President and Chief Financial Officer of Nationwide Property and Casualty Insurance Company from
November 2005 to December 2009. She served as Senior Vice President and Chief Financial Officer of Genworth Life Insurance Company from April 2003 to November 2005. Prior to that, she was Vice President and Chief Financial Officer of General
Electric Financial Employer Services Group from 2000 to 2003. Ms. Mallesch is also a director of Bob Evans Farms, Inc., a publicly traded restaurant and food products company.
Ms. Mallesch has been nominated for re-election as a director because of her extensive knowledge and experience in
the areas of auditing, finance, enterprise risk management, taxation and mergers and acquisitions, in particular in the insurance industry. She also brings gender diversity to the Board.
Robert P. Restrepo, Jr.
Robert P. Restrepo, Jr.,
61, has been a director since 2006, when he was appointed to the Board in connection with being retained as President and Chief Executive Officer of the Company. Mr. Restrepo has served as the Chairman of the Board, President and Chief
Executive Officer of the Company, State Auto Property & Casualty Insurance Company (State Auto P&C), Milbank Insurance Company (Milbank) and Farmers Casualty Insurance Company (Farmers Casualty), each
a wholly owned subsidiary of the Company, and of State Auto Mutual, since 2006.
Mr. Restrepo has been
nominated for re-election as a director because of his extensive and valuable experience in operations, marketing, sales, and general management of a property and casualty insurance
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company, including his unique knowledge and understanding of the Companys operations as a result of his more than five years in serving as the Companys President and Chief Executive
Officer. He also has valuable experience in acquisitions, strategic planning and leadership development.
Paul S. Williams
Paul S. Williams, 52, has been a director since 2003. Mr. Williams has served as a Managing
Director with Major, Lindsey & Africa, LLC, an attorney search consulting firm, since May 2005. He was an officer of Cardinal Health, Inc., a global provider of products and services to healthcare providers and manufacturers, for more than
five years prior to that time, last serving as that companys Executive Vice President, Chief Legal Officer and Secretary. Mr. Williams is also a director of Bob Evans Farms, Inc., a publicly traded restaurant and food products company,
and Compass Minerals International, Inc., a publicly traded producer and distributor of inorganic minerals.
Mr. Williams has been nominated for re-election as a director because of his experience as a lawyer and as the
General Counsel of a publicly traded company and his knowledge in acquisitions and divestitures, legal and regulatory matters. Mr. Williams also brings racial diversity to the Board. In addition, Mr. Williams brings significant expertise
in human resources, leadership development and executive compensation policy matters to our Board. He is a well-respected leader in the area of diversity, frequently speaking on diversity-related issues.
Backgrounds of Continuing Class I Directors (Terms expiring in 2013)
Robert E. Baker
Robert E. Baker, 65, has been a director since 2007. Mr. Baker has served as Executive Vice President of DHR International, Inc., an executive search firm, since June 2010. Mr. Baker was
President of Puroast Coffee Inc., a maker of specialty coffee products, from October 2004 until accepting his current position. He served as Vice President of Corporate Marketing for ConAgra Foods, Inc., one of North Americas largest packaged
food companies, from April 1999 to October 2004. Mr. Baker was a director of CoolBrands International Inc., a publicly traded Canadian corporation focused on the marketing and selling of ice cream and frozen snack products, from February 2006
to November 2007. He was also a director of Natural Golf Corporation, a publicly traded company offering golf instruction and equipment, from January 2004 to July 2006.
Mr. Baker was last nominated in 2010 to serve as a director because of his experience as a senior executive of both
publicly traded and privately held companies and his former experience as a director of publicly traded companies. He also brings racial and geographic diversity to the Board. In addition, Mr. Baker brings significant expertise in marketing,
strategic planning and branding to the Board.
Thomas E. Markert
Thomas E. Markert, 54, has been a director since 2007. Mr. Markert has been an officer of the Business Solutions
Division of Office Depot, Inc., a global supplier of office products and services, since May 2008, currently serving as that companys Chief Strategy and Innovation Officer. He served as the Chief Executive Officer of Ipsos Loyalty Worldwide, a
division of Ipsos, a leading global provider of survey-based research, from May 2007 until accepting his current position. He also served as Global Chief Marketing and Client Service Officer of AC Nielsen, a leading global provider of marketing
research and information services, from January 2004 until May 2007. For more than five years prior thereto, Mr. Markert held various executive positions within AC Nielsen.
Mr. Markert was last nominated in 2010 to serve as a director because of his experience as a senior executive of
both publicly traded and privately held companies. He also brings geographic diversity to the Board. In addition, Mr. Markert brings significant expertise in marketing, branding and market research to the Board.
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Alexander B. Trevor
Alexander B. Trevor, 67, has been a director since 2006. Mr. Trevor has served as President of Nuvocom Incorporated,
a provider of patent litigation support services, since October 1996. He was a director of Applied Innovation Inc., a publicly traded provider of network management solutions for the communications industry, from 1997 to May 2007.
Mr. Trevor was last nominated in 2010 to serve as a director because of his experience as a senior executive and his
former experience as a director of a publicly traded company. He also brings geographic diversity to the Board. In addition, Mr. Trevor brings expertise in information technology and computer systems to the Board.
Backgrounds of Continuing Class II Directors (Terms expiring in 2014)
David J. DAntoni
David J. DAntoni, 67, has been a director since 1995. Mr. DAntoni served as Senior Vice President and Group Operating Officer for Ashland, Inc., a chemical, energy and transportation
construction company, from March 1999 until his retirement in September 2004. He also served as President of APAC, Inc., a subsidiary of Ashland, Inc., from July 2003 until January 2004, and Senior Vice President of Ashland, Inc. and President,
Ashland Chemical, a division of Ashland, Inc., from July 1988 until March 1999. Mr. DAntoni is also a director of OMNOVA Solutions Inc., a publicly traded producer of decorative and functional surfaces, coatings and specialty chemicals,
and Compass Minerals International, Inc., a publicly traded producer and distributor of inorganic minerals.
Mr. DAntoni was last nominated in 2011 to serve as a director because of his experience as a senior executive
of a publicly traded company, his experience as a director of publicly traded companies, and his knowledge with general management, acquisitions and divestitures. In addition, Mr. DAntoni brings significant expertise in regulatory and
environmental, health and safety matters to the Board.
David R. Meuse
David R. Meuse, 67, has been a director since 2006. Mr. Meuse has served as Principal of Stonehenge Financial
Holdings, Inc., a privately held provider of financial and advisory resources, since September 1999. Prior to that time, Mr. Meuse held executive positions at various investment banking firms, including Banc One Capital Holdings Corporation and
Meuse, Rinker, Chapman, Endres & Brooks. Mr. Meuse also serves on the board of directors of several privately held companies and non-profit organizations.
Mr. Meuse was last nominated in 2011 to serve as a director because of his experience as a senior executive, his
experience as a director of publicly traded companies, and his knowledge with acquisitions and divestitures. In addition, Mr. Meuse brings significant expertise in investments, investment management, and financial market matters to the Board.
S. Elaine Roberts
S. Elaine Roberts, 59, has been a director since 2002. Ms. Roberts has served as President and Chief Executive Officer of the Columbus Regional Airport Authority, a public port authority which
oversees the operations of Port Columbus International, Rickenbacker International and Bolton Field airports in Ohio, since January 2003. She served as Executive Director of the Columbus Airport Authority from December 2000 until accepting her
current position.
Ms. Roberts was last nominated in 2011 to serve as a director because of her
experience as a senior executive, in particular her senior management experience with the operation of a regulated entity. Ms. Roberts also has a legal background as an attorney, and she brings gender diversity to the Board.
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Majority Voting Policy for Incumbent Directors
Our Board of Directors has adopted a majority voting policy for incumbent directors (the Majority Voting
Policy) which is reflected in our Corporate Governance Guidelines. The Majority Voting Policy provides that if a nominee for director who is an incumbent director does not receive the vote of at least the majority of the votes cast at any
meeting for the election of directors at which a quorum is present, and no successor has been elected at such meeting, then that incumbent director will promptly tender his or her resignation to the Board of Directors. For purposes of the Majority
Voting Policy, a majority of votes cast means that the number of Common Shares voted for a directors election exceeds 50% of the number of votes cast with respect to that directors election or, in the case where the number of
nominees exceeds the number of directors to be elected, cast with respect to election of directors generally. Votes cast (i) include votes to withhold authority in each case, and (ii) exclude abstentions with respect to that
directors election or, in the case where the number of nominees exceeds the number of directors to be elected, abstentions with respect to election of directors generally.
The Nominating and Governance Committee will make a recommendation to our Board of Directors as to whether to accept or
reject the tendered resignation, or whether other action should be taken. Our Board of Directors will act on the tendered resignation, taking into account the Nominating and Governance Committees recommendation, and publicly disclose (by a
press release, a filing with the Securities and Exchange Commission or other broadly disseminated means of communication) its decision regarding the tendered resignation and the rationale behind the decision within 90 days from the date of the
certification of the election results. The Nominating and Governance Committee, in making its recommendation, and our Board of Directors, in making its decision, may each consider any factors or other information that the Nominating and Governance
Committee or Board, as the case may be, considers appropriate and relevant. The director who tenders his or her resignation will not participate in the recommendation of the Nominating and Governance Committee or the decision of our Board of
Directors with respect to his or her resignation. If such incumbent directors resignation is not accepted by our Board of Directors, such director will continue to serve until the next annual meeting and until his or her successor is duly
elected, or his or her earlier resignation or removal. If a directors resignation is accepted by our Board of Directors, then our Board of Directors, in its sole discretion, may fill any resulting vacancy pursuant to the provisions of our Code
of Regulations.
Beneficial Ownership Information for Directors and Named Executive Officers
The following table sets forth information with respect to Common Shares beneficially owned by directors, director
nominees and our Named Executive Officers or NEOs (those persons listed in the Summary Compensation Table on page 54 of this Proxy Statement) as of March 9, 2012:
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Name
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Common
Shares
Beneficially
Owned(1)
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Stock
Options(2)
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Restricted
Share
Units(3)
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Total Beneficial
Ownership of
Common Shares
and RSUs
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Percent
of
Class
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Robert E. Baker
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1,800
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0
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11,313
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13,113
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*
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David J. DAntoni
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63,935
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9,900
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14,604
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88,439
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*
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Eileen A. Mallesch
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3,800
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0
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5,227
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9,027
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*
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Thomas E. Markert
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500
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0
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11,313
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11,813
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*
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David R. Meuse
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55,000
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0
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12,951
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67,951
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*
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Robert P. Restrepo, Jr.
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89,675
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(4)(5)(6)
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208,898
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N/A
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298,573
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*
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S. Elaine Roberts
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1,000
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7,400
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14,604
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23,004
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*
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Alexander B. Trevor
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500
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0
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12,951
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13,451
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*
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Paul S. Williams
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325
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4,200
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14,604
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19,129
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*
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Steven E. English
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7,389
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68,029
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N/A
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75,418
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*
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Mark A. Blackburn
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44,581
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(7)
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158,622
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N/A
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203,203
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*
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Jessica E. Buss
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731
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4,370
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N/A
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5,101
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*
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Clyde H. Fitch
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11,961
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57,563
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N/A
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69,524
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*
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James A. Yano
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7,259
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33,347
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N/A
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40,606
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*
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Directors and Executive Officers, as a group (19 persons)
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314,159
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706,578
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1,020,737
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(8)
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2.5
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%(8)
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6
*
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Less than one (1%) percent.
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(1)
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Except as indicated in the notes to this table, the persons named in the table and/or their spouses have sole voting and investment power with
respect to all Common Shares shown as beneficially owned by them.
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(2)
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With respect to stock options, this table includes only stock options for Common Shares which are currently exercisable or exercisable within 60
days of March 9, 2012.
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(3)
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The amounts reported for Messrs. Baker, DAntoni, Markert, Meuse, Trevor and Williams and Mses. Mallesch and Roberts include Restricted
Share Units granted under the Outside Directors Restricted Share Unit Plan. See Board of Directors and Board CommitteesCompensation of Outside Directors and Outside Director Compensation Table for further information regarding this
plan.
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(4)
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Includes 17,180 Common Shares which are subject to a risk of forfeiture if, prior to March 4, 2013, Mr. Restrepos employment is
terminated or he violates any provision of the restricted share agreement applicable to these Common Shares. However, these Common Shares will not be forfeited, and will automatically vest, if, prior to March 4, 2013, Mr. Restrepo dies or
becomes disabled or his employment is terminated without cause or in connection with a change in control of the Company. These Common Shares are also subject to restrictions on transfer until March 4, 2013.
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(5)
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Includes 16,707 Common Shares which are subject to a risk of forfeiture if, prior to March 3, 2014, Mr. Restrepos employment is
terminated or he violates any provision of the restricted stock agreement applicable to these Common Shares. However, these Common Shares will not be forfeited, and will automatically vest, if, prior to March 3, 2014, Mr. Restrepo
dies or becomes disabled or his employment is terminated without cause or in connection with a change in control of the Company. These Common Shares are also subject to restrictions on transfer until March 3, 2014.
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(6)
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Includes 21,526 Common Shares which are subject to a risk of forfeiture if, prior to March 1, 2015, Mr. Restrepos employment is
terminated or he violates any provision of the restricted stock agreement applicable to these Common Shares. However, these Common Shares will not be forfeited, and will automatically vest, if, prior to March 1, 2015, Mr. Restrepo
dies or becomes disabled or his employment is terminated without cause or in connection with a change in control of the Company. These Common Shares are also subject to restrictions on transfer until March 1, 2015.
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(7)
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Common Shares beneficially owned by Mr. Blackburn as listed on his most recent Form 4 dated December 14, 2010.
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(8)
|
Does not include Restricted Share Units granted to directors.
|
7
PROPOSAL TWO: MODIFICATION OF A MATERIAL TERM OF THE LEADERSHIP
BONUS PLAN AND REAFFIRMATION OF THE MATERIAL TERMS OF SUCH PLAN
Proposal
At the Annual Meeting, shareholders will be asked to consider and vote upon a proposal to modify a material term of the
Companys Leadership Bonus Plan (the LBP) and to reaffirm the material terms of the LBP as modified and described herein. The modification that is being proposed is to expand the list of potential qualifying performance criteria
available to the Compensation Committee of the Companys Board of Directors (the Committee) in determining an award under the LBP, by adding (i) return on equity, (ii) return on assets, (iii) rate change and
(iv) economic profit as available performance criteria. The modification is proposed to enable the LBP to continue to provide appropriate and meaningful bonus awards and maintain the LBP on a competitive basis.
The LBP has been designed to take into account certain limits on the ability of a public corporation to claim tax
deductions for compensation paid to certain highly compensated executives. Section 162(m) of the Internal Revenue Code of 1986, as amended (the Code), generally denies a corporate tax deduction for annual compensation exceeding $1.0
million paid to the chief executive officer and the four other most highly compensated officers of a public corporation (covered employees). However, qualified performance-based compensation is exempt from this limitation.
Qualified performance-based compensation is compensation paid based solely upon the achievement of objective performance goals, the material terms of which are approved by the shareholders of the paying corporation.
At the 2007 annual meeting, shareholders first approved the material terms of the LBP in accordance with Code
Section 162(m). Code Section 162(m) requires that these material terms be reaffirmed every five years in order to permit the continued treatment of compensation paid under the LBP as qualified performance-based compensation. Prior to the
modification being presented at the Annual Meeting, one prior amendment has been made to the LBP, which did not impact material terms of the LBP.
The purpose of the LBP is to advance the interests of the Company and its shareholders by providing employees in leadership positions with an annual bonus incentive to achieve the strategic objectives of
the Company and focus management on key measures that drive superior financial and business performance and build shareholder value over the long term. The LBP is also intended to provide compensation opportunities that are externally competitive
and internally consistent with the Companys growth objectives and total reward strategies. These purposes will be achieved by providing bonus opportunities that reward executives, managers and key professionals who are in positions to make
significant contributions to the overall success of the Company.
Summary of the LBP
The following discussion describes the important aspects of the LBP. This discussion is intended to be a summary of the
material provisions of the LBP and is qualified in its entirety by reference to the full text of the LBP, which is attached to this Proxy Statement as Exhibit A. This summary may not include some details that may be important to you. For this
reason, you are encouraged to read the LBP in its entirety.
Eligibility
Persons who are employed by the Company or its parent or one of the Companys or its parents subsidiaries
or affiliates (the State Auto Companies) in an executive, management or selected professional position and who are responsible for or who contribute to the management, growth and/or profitability of the Company or a subsidiary, affiliate
or business segment in a material way are eligible to participate in the LBP.
8
Administration
The LBP is administered by the Committee. The Committees authority to administer the LBP includes, among other
things, the authority to grant bonus awards, including the number of awards, the frequency of awards, the terms and conditions of the awards, including the qualifying performance criteria applicable to the award. The Committee is also authorized to
interpret the provisions of the LBP. Awards may be granted alone or in addition to other awards granted under the LBP. No consideration is received by the Company or its subsidiaries for the granting of awards under the LBP.
Performance Criteria and Performance Period
Prior to the modification being voted on in connection with this Proposal, the performance criteria available in determining awards consisted of a list of 17 different targeted measures. If the
modification is approved, the Committee shall select the qualifying performance criteria from a list of 21 performance criteria. The qualifying performance criteria shall be based on one or more of the following performance measures of the State
Auto Companies over the performance period: (i) earnings; (ii) return on capital;
(iii) return on equity
;
(iv) return on assets
; (v)
rate change
; (vi) revenue; (vii) premiums; (viii) net
income; (ix) earnings per share; (x) combined ratio; (xi) loss ratio; (xii) expense ratio; (xiii) assets; (xiv) equity; (xv) cash flow; (xvi) stock price; (xvii) total shareholders return;
(xviii) premium growth; (xix) corporate surplus growth (defined as growth in State Auto Mutuals surplus less the impact of the value of its holdings of the Company);
(xx) economic profit
; and (xxi) individual
performance related to personal goals. (Underlining added to indicate the proposed additional performance criteria.) The Committee may, in its discretion, measure any of such qualifying performance criteria on an absolute or relative basis.
Performance criteria applicable to a covered employee will not include item (xxi) above, unless a separate bonus award is issued specific to such goals. Any bonus award issued to a covered employee that includes item (xxi) as a performance
criteria will not be performance-based compensation governed by Code Section 162(m).
The performance period applicable to any award is the twelve-month period beginning on each
January 1
st
and ending on December 31
st
, or such other period established by the Committee. An employee who
becomes eligible to participate in the LBP after the beginning of a performance period may participate in the LBP on a pro-rated basis for that performance period.
At the end of each performance period, the Committee shall certify in writing the extent to which the selected
performance criteria were met during the performance period.
Payment of Bonus
The amount of a participants bonus shall be paid in cash, in a single lump sum, on or before the
15
th
day of the third month after the end of the
performance period. The Committee may permit a participant to elect to defer the payment of any bonus in accordance with the terms and conditions for making a deferred compensation election under the State Auto Property & Casualty Insurance
Company Amended and Restated Incentive Deferred Compensation Plan (the Deferred Compensation Plan).
If a participant terminates employment with the Company due to death, disability or upon the attainment of early or
normal retirement age (as defined in the State Auto Insurance Companies Employee Retirement Plan (the Retirement Plan) and regardless of whether the participant is eligible to retire from the Retirement Plan) during an applicable
performance period, the final bonus determination shall be reduced to reflect participation prior to the termination of employment only. If the participants termination is due to death or disability, the bonus, if any, shall be equal to 100%
of the participants target bonus, prorated by multiplying the final bonus by a fraction, the numerator of which is the number of days of employment in the performance period through the date of employment termination, and the denominator of
which is the number of days in the performance period. If the participants termination is due to retirement (as defined above), the bonus, if any, shall be based on the
9
achievement of the performance criteria during the performance period and then prorated based on the length of time the participant was employed by the Company during the performance period. The
bonus amount shall be paid as soon as reasonable after the participants death, disability or retirement, unless otherwise elected by the participant under the provisions of the Deferred Compensation Plan.
If a participants employment with the Company is terminated before the end of the performance period due to
involuntary termination, all of the participants rights to any bonus for that performance period shall be forfeited unless otherwise determined by the Committee due to the business circumstances of the termination, including, but not limited
to, a termination in connection with the divestiture of a business segment, subsidiary or affiliate. Any bonus to be awarded shall be paid at the same time payments are made to participants who did not terminate during the performance period.
However, if a participants employment with the Company is terminated by the Company other than for cause during the fourth quarter of a performance period, the final bonus, if any, shall be reduced to reflect participation prior to
termination only. The bonus shall be based on the actual performance results at the end of the performance period and then prorated based on the length of time the participant was employed by the Company during the performance period. Whether an
involuntary termination is for cause shall be determined by the Committee, in its discretion. The bonus, if any, shall be paid at the same time payments are made to participants who did not terminate employment. If a participant
terminates employment for any other reason prior to the date the bonus, if any, is paid, the participants rights to any bonus for that performance period shall be forfeited.
Change in Control
In the event of a change in
control or potential change in control of the Company (generally defined by reference to the acquisition of a specified percentage of voting power, or a change in the composition of the Board of Directors, or an acquisition of the
Company that requires shareholder approval, or a transaction involving the Company or its affiliates that requires shareholder approval and has the effect of causing the Company to cease to be a public company), before the end of a performance
period, bonus amounts, if any, shall be determined based on the achievement of the performance criteria up to the date of the change of control or potential change of control and then prorated based on the length of time that the participant was
employed by the Company during the performance period.
Amendment and Termination
The Committee may at any time suspend, amend or terminate the LBP. However, except as otherwise provided in the LBP, the
Committee may not take any action that materially reduces any right of a participant to a payment or distribution under the LBP to which the participant has already become entitled without obtaining the consent of the impacted participant. In
addition, no amendment may be made by the Committee without shareholder approval if the amendment would effect any change which requires shareholder approval under any applicable laws or regulations.
Non-Transferability of Awards
No rights or interests of any participant in the LBP may be sold, pledged, transferred or assigned other than by will or pursuant to the laws of descent and distribution.
Forfeiture Events
The Committee may require that all or a portion of a bonus is subject to a repayment obligation upon (i) the violation of any non-competition and/or confidentiality obligations applicable to the
participant or (ii) a financial restatement where the amount of the participants bonus was calculated based on the achievement of certain financial results which were the subject of a subsequent financial restatement and in which the
participant engaged in fraudulent misconduct that caused or substantially contributed to the need for the restatement (if the participants bonus would have been lower if the financials had been properly reported).
10
Number of Awards
The number of awards that an employee may receive under the LBP is at the discretion of the Committee and therefore cannot
be determined in advance. The maximum amount payable to any participant for a bonus earned with respect to any single performance period shall not exceed $2.5 million. This amount will be pro-rated if the applicable performance period is less than a
full fiscal year.
Federal Income Tax Information
Bonus awards are paid in cash and are taxable compensation, subject to all applicable tax withholding unless the
participant makes an election to defer receipt of the bonus amount as provided in the Deferred Compensation Plan.
Shareholder Approval
The favorable vote of a majority of the outstanding Common Shares that are voted on this Proposal at the Annual Meeting is required to approve the LBPs amendment. Abstentions have the same effect as
not voting or expressing a preference, as the case may be, and will not have a positive or negative effect on the outcome of this Proposal. Broker non-votes will not have a positive or negative effect on the outcome of this Proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT OF THE LBP AND A VOTE
FOR REAFFIRMING THE MATERIAL TERMS OF THE LBP AS MODIFIED BY SUCH AMENDMENT.
11
PROPOSAL THREE: MODIFICATION OF A MATERIAL TERM OF THE
LONG-TERM INCENTIVE PLAN AND REAFFIRMATION OF THE MATERIAL TERMS OF SUCH PLAN
Proposal
At the Annual Meeting, shareholders will be asked to consider and vote upon a proposal to modify a material term of the
Companys Long-Term Incentive Plan (the LTIP) and to reaffirm the material terms of the LTIP as modified and described herein. The modification that is being proposed is to expand the list of potential qualifying performance
criteria available to the Committee in determining an award under the LTIP, by adding (i) return on equity, (ii) return on assets and (iii) economic profit as available performance criteria. The modification is proposed to enable the
LTIP to continue to provide appropriate and meaningful awards and maintain the LTIP on a competitive basis.
The LTIP has been designed to take into account certain limits on the ability of a public corporation to claim tax
deductions for compensation paid to certain highly compensated executives. As previously discussed, Code Section 162(m) generally denies a corporate tax deduction for annual compensation exceeding $1.0 million paid to a covered employee.
However, qualified performance-based compensation is exempt from this limitation. Qualified performance-based compensation is compensation paid based solely upon the achievement of objective performance goals, the material terms of which
are approved by the shareholders of the paying corporation.
At the 2007 annual meeting, shareholders first
approved the material terms of the LTIP in accordance with Code Section 162(m). Code Section 162(m) requires that these material terms be reaffirmed every five years in order to permit the continued treatment of compensation paid under the
LTIP as qualified performance-based compensation. Prior to the modification being presented at the Annual Meeting, two previous amendments have been made to the LTIP, neither of which impacted material terms of the LTIP.
The purpose of the LTIP is to align performance and results with the expectations of shareholders and the Companys
goals and to recognize and reward long-term operating performance as compared with the Companys peer group of property and casualty companies. The LTIP is also intended to provide compensation opportunities that are externally competitive and
internally consistent with the Companys growth objectives and total compensation strategies. These purposes will be achieved by providing award opportunities to executives with financial and operating responsibilities that can impact the
achievement of the Companys growth goals.
Summary of the LTIP
The following discussion describes the important aspects of the LTIP. This discussion is intended to be a summary of the
material provisions of the LTIP and is qualified in its entirety by reference to the full text of the LTIP, which is attached to this Proxy Statement as Exhibit B. This summary may not include some details that may be important to you. For this
reason, you are encouraged to read the LTIP in its entirety.
Eligibility
Persons who are employed by the Company or its parent or one of the Companys or its parents subsidiaries
or affiliates (the State Auto Companies) in a strategic position and who are responsible for or who contribute to the management, growth and/or profitability of the business of the Company in a material way are eligible to participate in
the LTIP.
Administration
The LTIP is administered by the Committee. The Committees authority to administer the LTIP includes, among other things, the authority to grant awards, including the number of awards, the frequency
of awards, the terms and conditions of the awards, including the qualifying performance criteria applicable to the award. Each award grant must be evidenced by a written award issued to the employee to whom the award was granted. In
12
granting awards, the Committee is required to consider the level and responsibility of an employees position, the employees performance, level of compensation and assessed potential,
as well as any other factors deemed relevant by the Committee. The Committee is also authorized to interpret the provisions of the LTIP. Awards may be granted alone or in addition to other awards granted under the LTIP. No consideration is received
by the Company or its subsidiaries for the granting of awards under the LTIP.
Performance Criteria and Performance Period
Prior to the modification being voted on in connection with this Proposal, the performance criteria
available in determining awards consisted of a list of 15 different targeted measures. If the modification is approved, the Committee shall select the qualifying performance criteria from a list of 18 performance criteria. The qualifying performance
criteria shall be based on one or more of the following performance measures of the State Auto Companies over the performance period: (i) earnings; (ii) return on capital;
(iii) return on equity;
(iv) return on
assets;
(v) revenue; (vi) premiums; (vii) net income; (viii) earnings per share; (ix) combined ratio; (x) loss ratio; (xi) expense ratio; (xii) assets; (xiii) equity; (xiv) cash flow;
(xv) stock price; (xvi) total shareholders return;
(xvii) economic profit;
(xviii) Company performance relative to the designated peer group determined by the groups statutory combined ratio, the Companys
book value per share and total group revenue growth, or any other performance goal approved by the shareholders of the Company in accordance with Code Section 162(m). (Underlining added to indicate the proposed additional performance criteria.)
The Committee may, in its discretion, measure any of such qualifying performance criteria on an absolute or relative basis.
The performance period applicable to any award is the three-year rolling period beginning on the date the award is granted and ending on December 31 of the third calendar year following the award,
calculated by including the year of the award as the first year in the three-year rolling period. An employee who becomes eligible to participate in the LTIP after the beginning of a performance period may participate in the LTIP on a pro-rated
basis for that performance period.
At the end of each performance period, the Committee shall certify in
writing the extent to which the selected performance criteria were met during the performance period.
Payment of Awards
The value of a participants award shall be paid in cash, in a single lump
sum, on or before the 15
th
day of the third month after
the end of the performance period. The Committee may permit a participant to elect to defer the payment of any award in accordance with the terms and conditions for making a deferred compensation election under the Deferred Compensation Plan.
If a participant terminates employment with the Company due to death or disability during an applicable
performance period, the final award determination shall be reduced to reflect participation prior to the termination of employment only. The award, if any, shall be equal to 100% of the participants target bonus, prorated by multiplying the
final award by a fraction, the numerator of which is the number of days of employment in the performance period through the date of employment termination, and the denominator of which is the number of days in the performance period. The award shall
be paid as soon as reasonable after the participants death or disability, unless otherwise elected by the participant under the provisions of the Deferred Compensation Plan.
If a participant terminates employment with the Company due to the attainment of early or normal retirement age (as
defined in the Retirement Plan and regardless of whether the participant is eligible to retire from the Retirement Plan) during an applicable performance period, the final award determination shall be reduced to reflect participation prior to the
termination of employment only. The award, if any, shall be based upon the actual performance results at the end of the performance period and then prorated based on the length of time that the participant was employed by the Company during the
performance period. The award shall be paid
13
at the same time payments are made to participants who did not terminate employment during the applicable performance period, unless otherwise elected by the participant under the provisions of
the Deferred Compensation Plan.
If a participants employment with the Company is terminated by the
Company other than for cause during a performance period, the final bonus, if any, shall be reduced to reflect participation prior to termination only. The bonus shall be based on the actual performance results at the end of the
performance period and then prorated based on the length of time the participant was employed by the Company during the performance period. Whether an involuntary termination is for cause shall be determined by the Committee, in its
discretion. The bonus, if any, shall be paid at the same time payments are made to participants who did not terminate employment. If a participant terminates employment prior to the last day of the performance period for any reason other than death,
disability, retirement or involuntary termination by the Company (other than for cause), the participants rights to any bonus for that performance period shall be forfeited. If a participant terminates employment for any other reason prior to
the date the bonus, if any, is paid, all of the participants rights to any bonus for that performance period shall be forfeited.
Change in Control
In the event of a change in control or potential change in control of the Company (generally defined by reference to the acquisition of a specified percentage of voting power, or a
change in the composition of the Board of Directors, or an acquisition of the Company that requires shareholder approval, or a transaction involving the Company or its affiliates that requires shareholder approval and has the effect of causing the
Company to cease to be a public company), all participants shall become vested in and entitled to their awards calculated based on their individual awards times a fraction, the numerator of which is the number of days from the beginning of the
performance period to the date of the change in control or potential change in control and the denominator of which is the total number of days in the performance period. The amount so calculated is the minimum amount payable as a final award for
the performance period in which the change in control or potential change in control occurs.
Amendment and Termination
The Committee may at any time suspend, amend or terminate the LTIP. However, except as otherwise
provided in the LTIP, the Committee may not take any action that materially reduces any right of a participant to a payment or distribution under the LTIP to which the participant has already become entitled without obtaining the consent of the
impacted participant. In addition, no amendment may be made by the Committee without shareholder approval if the amendment would effect any change which requires shareholder approval under any applicable laws or regulations.
Non-Transferability of Awards
No rights or interests of any participant in the LTIP may be sold, pledged, transferred or assigned other than by will or pursuant to the laws of descent and distribution.
Forfeiture Events
The Committee may require that all or a portion of an award is subject to a repayment obligation upon (i) the violation of any non-competition and/or confidentiality obligations applicable to the
participant or (ii) a financial restatement where the amount of the participants award was calculated based on the achievement of certain financial results which were the subject of a subsequent financial restatement and in which the
participant engaged in fraudulent misconduct that caused or substantially contributed to the need for the restatement (if the participants award would have been lower if the financials had been properly reported).
14
Number of Awards
The number of awards that an employee may receive under the LTIP is at the discretion of the Committee and therefore
cannot be determined in advance. The maximum amount payable to any participant for an award earned with respect to any single performance period shall not exceed $2.5 million. This amount will be pro-rated if the applicable performance period is
less than three years.
Federal Income Tax Information
Awards are paid in cash and are taxable compensation, subject to all applicable tax withholding unless the participant
makes an election to defer receipt of the value of the award as provided in the Deferred Compensation Plan.
Shareholder Approval
The favorable vote of a majority of the outstanding Common Shares that are voted on this Proposal at the Annual Meeting is required to approve the LTIPs amendment. Abstentions have the same effect
as not voting or expressing a preference, as the case may be, and will not have a positive or negative effect on the outcome of this Proposal. Broker non-votes will not have a positive or negative effect on the outcome of this Proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT OF THE LTIP AND A VOTE
FOR REAFFIRMING THE MATERIAL TERMS OF THE LTIP AS MODIFIED BY SUCH AMENDMENT.
15
PROPOSAL FOUR: RATIFICATION OF SELECTION OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee of the Companys Board of Directors has selected Ernst & Young LLP as the
Companys independent registered public accounting firm for 2012. Although not required, the Board of Directors is submitting the selection of Ernst & Young LLP to the Companys shareholders for ratification. Ernst &
Young LLP has served as the Companys independent registered public accounting firm since 1994. The Audit Committee and the Board of Directors believe that the appointment of Ernst & Young LLP for 2012 is appropriate because of the
firms reputation, qualifications and experience.
The favorable vote of a majority of the outstanding
Common Shares that are voted on this Proposal at the Annual Meeting is required to approve the ratification of the selection of Ernst & Young LLP.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR RATIFICATION OF THE SELECTION OF ERNST & YOUNG LLP AS THE COMPANYS INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR
2012.
The Audit Committee will reconsider the appointment of Ernst & Young LLP if its selection
is not ratified by the Companys shareholders. Even if the selection of Ernst & Young LLP is ratified by shareholders, the Audit Committee, in its discretion, could decide to terminate the engagement of Ernst & Young LLP and
to engage another independent registered public accounting firm if the Audit Committee determines such action to be necessary or desirable.
16
PROPOSAL FIVE: ADVISORY VOTE ON COMPENSATION PAID
TO NAMED EXECUTIVE OFFICERS AS DISCLOSED IN THIS PROXY STATEMENT
We are asking shareholders to approve, on a non-binding and advisory basis, the Companys compensation to its named
executive officers as disclosed in this Proxy Statement.
The Board of Directors and the Compensation
Committee believe that the policies and practices articulated in the Compensation Discussion and Analysis are effective in achieving the objectives of our executive compensation program. The Board of Directors urges you to read the
Compensation Discussion and Analysis, which describes in more detail how our executive compensation policies and practices operate and are designed to achieve the objectives of our executive compensation programs, as well as the tables,
notes and narrative disclosure relating to the compensation of the named executive officers, set forth on pages 27 through 72 of this Proxy Statement, which provide detailed information on the compensation of our named executive officers.
We are asking shareholders to approve the following advisory resolution at the Annual Meeting:
RESOLVED, that the shareholders of the Company approve, on an advisory basis, the compensation of the
Companys named executive officers as disclosed in the Proxy Statement for the Companys 2012 Annual Meeting of Shareholders under the Compensation Discussion and Analysis section and the tables, notes and narrative disclosure
relating to the compensation of the named executive officers of the Company.
This advisory vote on executive
compensation is not intended to address any specific item of compensation, but rather the overall compensation of our named executive officers and the policies and practices described in this Proxy Statement. This advisory vote on executive
compensation is advisory and, therefore, is not binding on the Company, the Board of Directors or the Compensation Committee. However, the Board of Directors and the Compensation Committee will review and consider the voting results when making
future decisions regarding our executive compensation program.
THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS A VOTE FOR APPROVAL OF THE COMPENSATION OF THE NAMED EXECUTIVE OFFICERS.
17
BOARD OF DIRECTORS AND BOARD COMMITTEES
Board Meetings
Our Board of Directors held six Board meetings during the fiscal year ended December 31, 2011. Five of our incumbent directors attended 100% of the Board meetings and the meetings of all committees
on which they served. Our other four directors attended 84% or more of the Board meetings and the meetings of all committees on which they served. Eight of our nine directors are independent as defined by the Nasdaq listing rules. See
Corporate GovernanceDirector Independence.
Board Committees and Committee Meetings
Our Board has established an Audit Committee, a Compensation Committee, a Nominating and Governance
Committee, an Investment Committee and a standing Independent Committee. All of the members of the Audit, Compensation, Nominating and Governance and Independent Committees are independent as defined by the Nasdaq listing rules. In addition, all of
the members of the Audit Committee are independent as defined by the applicable rules of the Securities and Exchange Commission (the SEC). Our Board has adopted charters for each of the foregoing committees. The current charters for each
of these committees, along with our Corporate Governance Guidelines, Board of Directors Ethical Principles, Employee Code of Business Conduct and Code of Ethics for Senior Financial Officers, are available on our website. To access these
documents, go to http://www.stateauto.com and click on Investors and then Corporate Governance.
The Audit Committee is charged with several responsibilities, including: (1) appointment, compensation, retention and oversight of the work performed by our independent registered public accounting
firm; (2) reviewing our accounting functions, operations and management; (3) considering the adequacy and effectiveness of our internal controls and internal auditing methods and procedures; (4) meeting and consulting with our
independent registered public accounting firm and with our financial and accounting personnel concerning the foregoing matters; (5) reviewing with our independent registered public accounting firm the scope of their audit and the results of
their examination of our financial statements; (6) participating in the process of administering our Employee Code of Business Conduct and our Board of Directors Ethical Principles set forth in our Corporate Governance Guidelines;
(7) establishing procedures for receipt, retention and treatment of compliance regarding accounting, internal accounting controls or auditing matters, including procedures for the confidential, anonymous submission by employees of concerns
regarding accounting or auditing matters; and (8) approving in advance any other work performed by our independent registered public accounting firm that it is permitted by law to perform for us. Present members of the Audit Committee are
Chairperson Eileen A. Mallesch, Thomas E. Markert, David R. Meuse, Alexander B. Trevor and Paul S. Williams. Based on a recommendation of the Audit Committee, our Board has designated Eileen A. Mallesch as the Audit Committee Financial
Expert. The Audit Committee held nine meetings during 2011.
The Compensation Committee is charged with
several responsibilities, including: (1) approving stock-based compensation plans and grants thereunder to employees or members of the Board; (2) evaluating and approving the compensation and fringe benefits provided to our executive
officers and adopting compensation policies applicable to our officers; and (3) evaluating the compensation provided to the members of the Board and its committees. Present members of the Compensation Committee are Chairperson Paul S. Williams,
Robert E. Baker, David J. DAntoni, David R. Meuse and S. Elaine Roberts. The Compensation Committee held seven meetings during 2011.
Our executive officers also serve as executive officers of State Auto Mutual, and, in general, during 2011 the compensation expenses associated with our executive officers were allocated 80% to us and our
subsidiaries and 20% to State Auto Mutual and its subsidiaries and affiliates under the Pooling Arrangement. During 2012, the compensation expenses will be allocated 65% to us and our subsidiaries and 35% to State Auto Mutual and its subsidiaries
and affiliates due to a change in the Pooling Arrangement. See also Related Person TransactionsTransactions Involving State Auto Mutual. It is for this reason that a director of State Auto
18
Mutual who is a member of State Auto Mutuals Nominating and Governance Committee attends the meetings of our Compensation Committee as a non-voting member. This State Auto Mutual director,
Roger P. Sugarman, is responsible to report matters discussed at our Compensation Committee meetings to State Auto Mutuals Nominating and Governance Committee. This person is independent as defined by the Nasdaq Marketplace Rules.
The Nominating and Governance Committee is charged with several responsibilities, including: (1) selecting nominees
for election as directors; (2) reviewing the performance of our Board and individual directors; (3) overseeing enterprise risk management on behalf of our Board (see Corporate GovernanceRisk OversightThe Boards Role
in Risk Oversight); and (4) annually reviewing and recommending to our Board changes to our Corporate Governance Guidelines and Board of Directors Ethical Principles. The members of the Nominating and Governance Committee are
Chairperson David J. DAntoni, Eileen A. Mallesch, David R. Meuse, Alexander B. Trevor and Paul S. Williams. The Nominating and Governance Committee met four times in 2011. See also Corporate GovernanceNomination of Directors
contained elsewhere in this Proxy Statement.
The Investment Committee oversees our investment functions and
those of our insurance subsidiaries. The members of the Investment Committee are Chairperson David R. Meuse, Robert E. Baker, David J. DAntoni, Eileen A. Mallesch, Thomas E. Markert, Robert P. Restrepo, Jr., S. Elaine Roberts and Alexander B.
Trevor. The Investment Committee met four times in 2011.
The standing Independent Committee principally
serves to review related person transactions between or among us and our subsidiaries, on the one hand, and State Auto Mutual and its subsidiaries and affiliates, on the other. The Independent Committee also helps determine which entity, our Company
or State Auto Mutual, is best suited to take advantage of transactional opportunities presented by a third party. The members of the standing Independent Committee are Chairperson Alexander B. Trevor, Robert E. Baker, David J. DAntoni, Eileen
A. Mallesch, Thomas E. Markert and S. Elaine Roberts. The Independent Committee, which only meets as needed, held two meetings in 2011.
Compensation of Outside Directors and Outside Director Compensation Table
Non-employee directors, who
we refer to as our outside directors, receive compensation for their services as members of our Board and of the Board committees on which they serve. The charter for the Compensation Committee requires this Committee to annually review
the compensation of outside directors and recommend any changes to our Board. In accordance with this requirement, the Compensation Committee reviewed director compensation at its November 2011 meeting with assistance from Pay Governance, LLC,
the compensation consultant utilized by the Compensation Committee. At this November meeting, Pay Governance discussed its report comparing our current director compensation to director compensation paid by organizations in the Companys peer
group. Pay Governance concluded that, based on this data, the target in total compensation for non-chairpersons should be increased by $10,000 to $125,000. Pay Governance recommended this $10,000 amount be added to the retainer, increasing it to
$75,000 from $65,000. After reviewing the data and considering Pay Governances comments, the Compensation Committee decided that, given the Companys recent financial performance, the outside directors total compensation would not
be increased this year but would be maintained at the 2011 level of $115,000 annually, with 55% to be paid in a cash retainer of $65,000 and 45% in equity compensation.
Our outside directors received two types of compensation in 2011an annual cash retainer of $65,000 and equity in
the form of Restricted Share Units (RSUs). No per meeting fees are payable to our directors, as our directors are expected to participate in all meetings of the Board and the committees on which they serve without the incentive of
additional compensation. As an exception to this policy, additional meeting fees could be paid if our Board determines extraordinary situations warrant special committees or a large number of meetings, but no additional meeting fees were paid in
2011. Each committee chairperson received an additional $5,000 annual
19
cash retainer, other than the chairpersons of the Audit Committee and the Compensation Committee, who received an additional annual cash retainer of $15,000 and $10,000, respectively. Our Lead
Director, Mr. Williams, was also paid a supplemental annual cash retainer of $20,000. Outside directors are reimbursed for travel expenses incurred in attending Board and committee meetings and an annual Board retreat. The Company also
reimburses travel expenses for one guest of each outside director attending the annual Board retreat, subject to applicable tax laws.
Outside directors may defer all or a portion of the cash fees under our deferred compensation plan for directors. The amount of cash compensation earned by each director in 2011, whether or not deferred,
is included in the amounts shown in column one of the 2011 Outside Director Compensation table set forth below in this section.
Outside directors also receive RSUs pursuant to our Outside Directors Restricted Share Unit Plan (the Directors RSU Plan). An RSU is a unit representing one Common Share. The value of
each RSU, on any particular day, is equal to the last reported sale price of a Common Share on the Nasdaq Stock Market on the most recent previous trading day. Under the Directors RSU Plan, promptly following the 2011 annual meeting of our
shareholders, each outside director was granted 2,991 RSUs. To determine the number of RSUs granted, the value of one RSU was equal to a Common Shares average daily price for the prior calendar year and divided into $50,000, the targeted
annual equity compensation for each director. In addition, whenever a dividend is made with respect to the Common Shares, participants receive, with respect to each RSU held in the account of the participant on the dividend record date, additional
RSUs in an amount equal to the value of the dividend. RSUs will be 100% vested upon the completion of six months of service as an outside director from the date of grant.
Our Compensation Committee, which functions as the administrative committee of the Directors RSU Plan, has the
authority to decrease or increase the annual award of RSUs to outside directors to a minimum of 500 and a maximum of 5,000 without further shareholder approval. Under the Directors RSU Plan, outside directors must, in general, hold their RSUs
until they conclude their Board service, after which time these RSUs are settled in cash or Common Shares, as elected by the outside director, with payments made in a single lump sum or annual installments over a five- or ten-year period, as
selected by the outside director. An outside director elected or appointed other than in connection with an annual meeting of our shareholders will be granted a pro rata amount of RSUs based upon the number of anticipated days to the next annual
meeting of shareholders.
2011 Outside Director Compensation
In 2011, our outside directors received the following compensation:
|
|
|
|
|
|
|
|
|
|
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|
|
Name
|
|
Fees Earned or
Paid in Cash
($)
|
|
|
Restricted
Share
Unit
Awards
($)(1)
|
|
|
Total
($)
|
|
Robert E. Baker
|
|
|
65,000
|
|
|
|
47,587
|
|
|
|
112,587
|
|
David J. DAntoni
|
|
|
70,000
|
|
|
|
47,587
|
|
|
|
117,587
|
|
Eileen A. Mallesch
|
|
|
80,000
|
|
|
|
47,587
|
|
|
|
127,587
|
|
Thomas E. Markert
|
|
|
65,000
|
|
|
|
47,587
|
|
|
|
112,587
|
|
David R. Meuse
|
|
|
70,000
|
|
|
|
47,587
|
|
|
|
117,587
|
|
S. Elaine Roberts
|
|
|
65,000
|
|
|
|
47,587
|
|
|
|
112,587
|
|
Alexander B. Trevor
|
|
|
70,000
|
|
|
|
47,587
|
|
|
|
117,587
|
|
Paul S. Williams
|
|
|
95,000
|
|
|
|
47,587
|
|
|
|
142,587
|
|
(1)
|
The total dollar amount shown in the Restricted Share Unit Awards column represents the cash value of the total number of RSUs awarded in 2011
valued at the closing price of Common Shares on the grant valuation date ($15.91 per RSU).
|
20
Outside Directors Ownership of Restricted Share Units and Stock Options
The following table sets forth the aggregate number of RSUs and stock options owned by each of our
current outside directors as of March 9, 2012. These outstanding options were awarded to our directors under prior director stock option plans, which were replaced by the Directors RSU Plan in 2005. No stock options have been granted to
any outside directors since 2004.
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|
|
|
|
|
|
Name
|
|
Number of
Restricted Share Units
|
|
|
Number of
Stock Options
|
|
Robert E. Baker
|
|
|
11,313
|
|
|
|
0
|
|
David J. DAntoni
|
|
|
14,604
|
|
|
|
9,900
|
|
Eileen A. Mallesch
|
|
|
5,227
|
|
|
|
0
|
|
Thomas E. Markert
|
|
|
11,313
|
|
|
|
0
|
|
David R. Meuse
|
|
|
12,951
|
|
|
|
0
|
|
S. Elaine Roberts
|
|
|
14,604
|
|
|
|
7,400
|
|
Alexander B. Trevor
|
|
|
12,951
|
|
|
|
0
|
|
Paul S. Williams
|
|
|
14,604
|
|
|
|
4,200
|
|
Outside directors receive no other forms of compensation than as described in this
section.
21
CORPORATE GOVERNANCE
Director Independence
The Nominating and Governance Committee has affirmatively determined that eight of our nine directors, namely Robert E. Baker, David J. DAntoni, Eileen A. Mallesch, Thomas E. Markert, David R.
Meuse, S. Elaine Roberts, Alexander B. Trevor and Paul S. Williams, are independent as defined by the Nasdaq listing rules. The Nominating and Governance Committee made this determination based upon its review of information included in
director questionnaires provided by each of the incumbent directors and a report by our General Counsel. This included information on the relationships between Mr. Meuse and Stonehenge Financial Holdings and RED Capital Group, two of his
affiliates. From time to time we make investments in debt and equity funds sponsored by affiliates of these two companies and receive securities broker-dealer services from an affiliate of RED Capital Group. The Nominating and Governance Committee
determined that Mr. Meuse is independent because our investments in the funds sponsored by, and the fees paid to, these two companies and their affiliates are not material to us or to them and Mr. Meuses relationships with these
companies do not interfere with his independent judgment in carrying out his responsibilities as a director.
Our Corporate Governance Guidelines expressly provide that four of the five standing committees are to be comprised
solely of independent directors. Our Boards Audit, Compensation, standing Independent, and Nominating and Governance Committees meet this standard. Our Board of Directors has concluded that the Investment Committee does not need to be
comprised solely of independent directors. Robert P. Restrepo, Jr., who is our employee and thus does not qualify as an independent director under the Nasdaq Marketplace Rules, is a member of the Investment Committee.
Communications with the Board
As further described in our Corporate Governance Guidelines, we provide a process by which security holders may send communications to our Board. Any security holder who desires to communicate with one or
more of our directors may send such communication to any or all directors through our Corporate Secretary, by e-mail to corporatesecretary@stateauto.com or in writing to the Corporate Secretary at our principal executive offices, 518 East Broad
Street, Columbus, Ohio 43215. Security holders should designate whether such communication should be sent to a specific director or to all directors. The Corporate Secretary is responsible for forwarding such communication to the director or
directors so designated by the security holder.
Director Attendance at Annual Meeting of Shareholders
Our Corporate Governance Guidelines provide that directors are expected to attend our annual meetings of
shareholders. All of our directors who were members of the Board at the time of last years annual meeting of shareholders attended that meeting.
Executive Sessions of Independent Directors
Our Board meets in executive session, without management present, prior to each regular quarterly Board meeting. Consistent with our Corporate Governance Guidelines and the Nasdaq listing rules, during
2011 there were four executive sessions with only independent directors present. In addition, following each regular quarterly Board meeting, our Board meets in executive session with the State Auto Mutual board of directors, without management
present. Our Corporate Governance Guidelines provide that the Lead Director acts as the presiding director at these executive sessions.
Nomination of Directors
The Nominating and Governance Committee sets the minimum qualifications for
persons it will consider to recommend for nomination for election or re-election (election and re-election are hereafter collectively referred
22
to as election) as a director of the Company. These minimum qualifications are described in the Nominating and Governance Committees charter, which is posted on our website as
set forth in this section. The following matters will be considered in the Nominating and Governance Committees determination of persons to recommend for nomination as directors of the Company: (i) freedom from relationships or conflicts
of interest that could interfere with that persons duties as a director of the Company or to its shareholders; (ii) status as independent based on the then-current Nasdaq rules; (iii) business or professional skill and experience;
(iv) temperament; (v) integrity; (vi) educational background; and (vii) judgment. The objective of the Nominating and Governance Committee in this regard is to nominate for election as directors persons who share our values and
possess the following minimum qualifications: high personal and professional integrity; the ability to exercise sound business judgment; an inquiring mind; professional demeanor; and the time available to devote to Board activities and the
willingness to do so. The Nominating and Governance Committee will consider these criteria in the context of an assessment of the perceived needs of our Board as a whole. Ultimately, the Nominating and Governance Committees intention is to
select nominees for election to our Board who the Nominating and Governance Committee believes will be effective, in conjunction with the other members of our Board, in collectively serving the long-term interests of the shareholders. In the context
of recommending an incumbent director to be re-nominated for election to our Board, the Nominating and Governance Committee will focus its assessment on the contributions of such person during his or her Board tenure and such persons
independence at that time.
As required by its charter, the Nominating and Governance Committee seeks to
achieve diversity of occupational and personal backgrounds. The Nominating and Governance Committee considers diversity as a factor in director nominations. In making such selections, the Nominating and Governance Committee views diversity in a
broad context to include race, gender, geography, industry experience and personal expertise.
In addition to
incumbent directors who will be evaluated for re-nomination as described above, the Nominating and Governance Committee may maintain a list of other potential candidates whom the Nominating and Governance Committee may evaluate pursuant to the
criteria set forth above for consideration as Board members. By following the procedures set forth below, shareholders may recommend potential candidates to be included on this list. As a matter of policy, the Nominating and Governance Committee
will consider and evaluate such candidates recommended by shareholders in the same manner as all other candidates for nomination to our Board who are not incumbent directors.
The charter of the Nominating and Governance Committee details the process by which our Board of Directors fills
vacancies on the Board. The Nominating and Governance Committees charter provides that, in the absence of extraordinary circumstances, when a director vacancy arises for any reason, the Nominating and Governance Committee will first look to
the list of names of potential nominees, as described above, and make a preliminary evaluation of such person(s) based on the criteria set forth above. If there are no names on the list or if all of the names on this list are eliminated following
such evaluation process, the Nominating and Governance Committee may solicit other potential nominees names from our other directors, directors of our parent, the Chairman or other persons who the Nominating and Governance Committee reasonably
believes would have the opportunity to possess first hand knowledge of a suitable candidate based on the criteria described above. The Nominating and Governance Committee may also hire a director search firm to identify potential candidates. Once
the Nominating and Governance Committee has preliminarily concluded that a person(s) may meet the criteria described above, the Nominating and Governance Committee will, at a minimum, obtain from such person(s) a completed Prospective Director
Questionnaire which shall solicit information regarding the persons business experience, educational background, personal information, potential conflicts of interest and information relating to the persons business, personal or family
relationships with the Company and other directors, among other matters. Following a review of such completed Prospective Director Questionnaire by the Nominating and Governance Committee and the Chairman and counsel for the Company, the Nominating
and Governance Committee will conduct at least one interview with a person(s) whose candidacy it desires to pursue. Based on all information secured from the prospective nominee, including a background check and a criminal record check, the
Nominating and Governance Committee will meet and decide whether or not to recommend
23
such person(s) for nomination for election as a director of the Company. Any decision by the Nominating and Governance Committee in this regard will reflect its judgment of the ability of the
person(s) to fulfill the objectives outlined above.
We have adopted procedures by which shareholders may
recommend individuals for membership to our Board. As described in its charter, it is the policy of the Nominating and Governance Committee to consider and evaluate candidates recommended by shareholders for membership on our Board in the same
manner as all other candidates for nomination to our Board who are not incumbent directors. If a shareholder desires to recommend an individual for Board membership, then that shareholder must provide a written notice to the Corporate Secretary of
the Company at 518 East Broad Street, Columbus, Ohio 43215 (the Recommendation Notice). For a recommendation to be considered by the Nominating and Governance Committee, the Recommendation Notice must contain, at a minimum, the
following: (i) the name and address, as they appear on our books, and telephone number of the shareholder making the recommendation, including information on the number of shares owned; (ii) if such person is not a shareholder of record or
if such shares are owned by an entity, reasonable evidence of such persons ownership of such shares or such persons authority to act on behalf of such entity; (iii) the full legal name, address and telephone number of the individual
being recommended, together with a reasonably detailed description of the background, experience and qualifications of that individual; (iv) a written acknowledgement by the individual being recommended that he or she has consented to that
recommendation and consents to our undertaking of an investigation into that individuals background, experience and qualifications in the event that the Nominating and Governance Committee desires to do so; (v) the disclosure of any
relationship of the individual being recommended with our Company or any of our subsidiaries or affiliates, whether direct or indirect; and (vi) if known to the shareholder, any material interest of such shareholder or individual being
recommended in any proposals or other business to be presented at our next annual meeting of shareholders (or a statement to the effect that no material interest is known to such shareholder).
Board Leadership
We are managed under the direction of our Board in the interest of all shareholders. Our Board delegates its authority to our senior executive team to manage the day-to-day operations and ongoing affairs
of our business. Our Board requires that our senior executive team review major initiatives and actions with our Board prior to implementation.
Mr. Restrepo serves as both Chairman and Chief Executive Officer under our leadership structure. He also holds these same positions with our parent, State Auto Mutual. Our Board believes this
leadership structure is appropriate given the overall corporate structure of our Company and State Auto Mutual. We and our subsidiaries operate and manage our businesses in conjunction with State Auto Mutual and its subsidiaries and affiliates under
various management and cost sharing agreements under the leadership and direction of the same senior management team. In addition, our insurance subsidiaries participate in a pooling arrangement with State Auto Mutual and certain of its insurance
subsidiaries and affiliates which covers all of the property and casualty insurance written by our insurance subsidiaries. See Related Person Transactions Transactions Involving State Auto Mutual. Because of the way our business
is operated, our Board believes separating the positions of Chairman and Chief Executive Officer would cause unnecessary complexity and complications and perhaps cause a split in our strategic direction, in particular since our Board has received no
indication from the State Auto Mutual Board that it is considering, or would consider, separating these positions in its leadership structure.
Our Board has adopted a counterbalancing governance structure which includes:
|
|
|
A designated independent Lead Director;
|
|
|
|
A Board composed entirely of independent directors other than the Chairman and Chief Executive Officer;
|
|
|
|
A Board composed entirely of directors independent from State Auto Mutual other than the Chairman and Chief Executive Officer;
|
24
|
|
|
Committees composed entirely of independent directors, with the exception of our Investment Committee; and
|
|
|
|
Established governance structures and processes and ethics guidelines.
|
Our Lead Directors responsibilities include, among other things, leading the executive session of our independent
directors, being a primary advisor to and principal point of contact with our Chairman and Chief Executive Officer, working with the Chairman and soliciting input from other Board members to develop a regular board meeting schedule and an agenda for
each meeting, securing input from other directors on agenda items, ensuring the adequate flow of information from management to our Board and delivering the Chief Executive Officers performance evaluation on behalf of the Compensation
Committee of our Board. In May 2011, our Board re-elected Paul S. Williams to serve as Lead Director. Mr. Williams has served in that position since May 2010. We believe our Board leadership is effective and appropriate for our Company, given
the specific circumstances of our overall corporate structure and operation in conjunction with State Auto Mutual, the established effectiveness of the Lead Directors role on the Board, the Nominating and Governance Committees
significant role in the nominee selection process for new or re-elected directors, the independence of eight of nine directors, and the effectiveness of the executive session meetings of independent directors at each regularly scheduled meeting of
our Board.
Risk Oversight
The Boards Role in Risk Oversight
Our
Boards role in the risk management process is one of oversight. Risk management activities are the responsibility of our management and include the development of strategies and implementation of actions intended to anticipate, identify,
assess, manage and appropriately mitigate identified risks.
The Nominating and Governance Committee has
primary responsibility for oversight of enterprise risk management on behalf of our Board. The Nominating and Governance Committee communicates with our Board and other Board committees on significant enterprise risk management matters. The
Nominating and Governance Committee meets quarterly with our director of enterprise risk management. The Nominating and Governance Committee also receives a quarterly report which assesses the current status of major risks inherent in our business,
including credit risks, market risks, underwriting risks, operational risks and strategic risks. In addition to meeting with the director of enterprise risk management, the Nominating and Governance Committee also meets periodically with our
officers responsible for the adequacy of business continuity and disaster recovery plans, information security and legal and regulatory compliance.
In addition to the enterprise risk management oversight provided by the Nominating and Governance Committee, a practice of the Audit Committee is to meet quarterly with the director of enterprise risk
management for a report on selected risk areas. We also utilize an internal enterprise risk management committee comprised of senior officers. Among other things, this internal committee addresses the identification, assessment and mitigation of
significant risks facing our Company.
Our Board reviews the enterprise risk management process annually, and
risk assessment and management is reflected in our Boards strategic planning process. The independent structure of the Board of Directors enables objective oversight of the risk management process.
Risk Assessment in Compensation Programs
Management reviewed the compensation policies and practices for our employees to determine whether any risks arising from
such policies and practices are reasonably likely to have a material adverse effect on the Company. Management consulted various persons in the course of this review, including members of our senior leadership, the corporate enterprise risk
management committee, the Compensation Committee (including a
25
member of the State Auto Mutual Nominating and Governance Committee), the Companys internal legal counsel, the outside legal counsel to the Compensation Committee and the compensation
consultant retained by the Compensation Committee. The processes involved in this review included:
|
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|
a review of the processes conducted by other registrants and recommended by compensation experts to evaluate compensation risk;
|
|
|
|
an analysis of the Companys overall compensation objectives pursuant to which the Companys compensation policies and practices were
implemented;
|
|
|
|
a review of the design and operation of the Companys compensation plans and programs;
|
|
|
|
the identification of risks that the Companys compensation policies and practices could potentially encourage;
|
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|
|
the identification of features of the Companys compensation policies and practices that could potentially mitigate the risks that the
Companys compensation policies and practices could potentially encourage; and
|
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|
|
an analysis of the materiality of the potential effects on the Company of the unmitigated risks as a whole.
|
Based on the review described above, management concluded that the Companys compensation policies and practices do
not encourage inappropriate risk-taking and the risks associated with the Companys compensation policies and practices are not reasonably likely to have a material adverse effect on the Company. Management briefed the Compensation Committee in
detail regarding its review, and the Compensation Committee agreed with managements conclusion.
Other
Governance Issues of Interest
Formal Stock Ownership Holding Periods
The Company has revised its Ownership Guidelines to require its Section 16 officers to hold the net amount of Common
Shares obtained through the exercise of stock options until the later of (i) the first anniversary of the date the officer exercised the stock options or (ii) the date on which the officer satisfies the Ownership Target Amounts. (See
Compensation Discussion and AnalysisStock Ownership Guidelines.)
Anti-Hedging Policy
The Board has adopted a policy prohibiting all Company employees and members of the Board from
engaging in certain hedging transactions with respect to Company securities held by them, including short sales and other transactions that shift the economic consequences of ownership of Company securities to a third party. The Board has also
adopted a policy prohibiting our Section 16 officers and members of the Board from holding Company securities in a margin account or otherwise pledging Company securities as collateral for a loan. (See Compensation Discussion and
AnalysisAnti-Hedging Policy.)
Availability of Corporate Governance Documents
The following documents are available on our website at www.stateauto.com under Investors and then under
Corporate Governance:
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The charters for our Audit Committee, Compensation Committee, Nominating and Governance Committee, Investment Committee and standing Independent
Committee;
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Our Corporate Governance Guidelines, including Board of Directors Ethical Principles;
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Our Employee Code of Business Conduct; and
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Our Code of Ethics for Senior Financial Officers.
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26
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis describes our executive compensation program as it pertains to our named
executive officers (NEOs).
Executive Summary
The Company implemented the following initiatives in 2011 to refresh and enhance our business strategies:
|
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We established renewal pricing goals for each of our Business Insurance lines and are monitoring our progress on a regular basis to produce modest
price increases from our renewal book.
|
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|
We effectively integrated our Specialty Insurance line, which we believe will be an important profit contributor as the commercial insurance market
stabilizes.
|
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|
|
We enhanced claim performance through restructuring and business process improvement efforts.
|
|
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We enhanced our focus on employee engagement, which resulted in an improvement in our overall engagement score.
|
These initiatives are intended to drive improved business performance and results of operations, resulting in
appreciation in the price of our Common Shares over the long-term rather than producing unsustainable short-term benefits. We believe that the efforts of our NEOs were crucial to the Company making progress against our long-term initiatives in 2011
despite short-term challenges and the occurrence of several extraordinary weather-related events that negatively impacted the Companys financial performance.
Performance Summary
Despite the efforts of our NEOs
to make progress with respect to the Companys long-term initiatives, our financial results for the most recent one and three years were generally below our target expectations.
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Financial Performance
. Financial results for 2011 were well below the Companys target objectives, which were based on the
companys annual financial plan.
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|
Premium growth experienced a 2.9% decrease from 2010 to 2011 and was 55% of the Companys targeted objective for premium growth in 2011.
|
|
|
|
Combined ratio experienced a 11.2% decrease from 2010 to 2011 and was below the Companys minimum performance expectation for 2011.
|
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|
|
Return on equity decreased from 2.9% in 2010 to (18.2)% in 2011 and was below the Companys minimum expectation for 2011.
|
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|
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Stock Price Performance
. Our performance discussed above contributed to a decline in the Companys stock price of 22% in 2011 and 62%
for the three years ending on December 31, 2011.
|
2011 Compensation Summary
The Companys recent financial results are reflected in the actual compensation earned by our NEOs for 2011, which
generally was less than the target amounts established for 2011.
|
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Base Salary
. The base salaries of our NEOs generally increased by approximately 3% in 2011, which is consistent with the practices of our
peers, and generally will not be increased for 2012. The base salary of our CEO will not be increased for 2012.
|
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|
|
Short-Term Incentive Compensation
. Annual bonus payouts approximated only 50% of target for all of our NEOs who participated in our
Leadership Bonus Plan (the LBP) in 2011, except for Mr. Restrepo and Ms. Buss whose annual bonus payouts approximated 40% and 140% of target, respectively. The
|
27
|
payout on the Company performance goals under the LBP was only 18.3% of the target LBP bonus (where the target percentage equals 100%) for all of our NEOs who participated in the LBP in 2011,
except for Ms. Buss whose payout on the Company performance goals under the LBP was 133% of her target Company performance LBP bonus.
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|
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Performance Award Units
. We awarded cash-based performance award units (PAUs) to our NEOs for the 2009-2011 performance period
pursuant to the State Auto Financial Corporation Long-Term Incentive Plan, as amended (LTIP). We have not determined the value of these PAUs because the final peer group data for the 2009-2011 performance period has not been released as
of the date of this Proxy Statement. However, based on preliminary performance information for the 2009-2011 performance period, we currently expect that the PAUs awarded to our NEOs for the 2009-2011 performance period will be valued substantially
below target.
|
|
|
|
Equity Compensation
. We awarded equity and equity-based compensation (in the form of stock options) in 2011 to our NEOs pursuant to our 2009
Equity Plan. All of the stock options awarded by the Committee to our NEOs in 2011 were underwater as of December 31, 2011 as the exercise price applicable to those stock options exceeded the market price of our Common Shares on that date.
|
The following table sets forth for each NEO (other than Mr. Blackburn who did not
participate in these programs in 2011): (i) the targeted bonus payout for the Company performance component of the LBP for 2011 and the actual payout for the Company performance component of the LBP for 2011; (ii) the targeted bonus payout
for the individual performance component of the LBP for 2011 and the actual payout for the individual performance component of the LBP for 2011; (iii) the targeted value of the PAUs granted for the 2009-2011 performance period and the amount
accrued by the Company with respect to the PAUs granted for the 2009-2011 performance period; and (iv) the targeted value of the equity compensation awarded to our NEOs in 2011 and the value of the equity compensation awarded to our NEOs in
2011 as of December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LBP Company
Performance
|
|
|
LBP Individual
Performance
|
|
|
PAUs
|
|
|
Equity
Compensation
|
|
|
TOTAL
|
|
|
|
Target
|
|
|
Actual
|
|
|
Target
|
|
|
Actual
|
|
|
Target
|
|
|
Accrued
|
|
|
Target
|
|
|
Value
|
|
|
Target
|
|
|
Value
|
|
Robert P. Restrepo, Jr.
|
|
|
468,000
|
|
|
|
85,800
|
|
|
|
156,000
|
|
|
|
127,776
|
|
|
|
492,750
|
|
|
|
349,853
|
|
|
|
555,495
|
|
|
|
227,048
|
|
|
|
1,672,245
|
|
|
|
790,477
|
|
Steven E. English
|
|
|
225,000
|
|
|
|
41,250
|
|
|
|
75,000
|
|
|
|
113,026
|
|
|
|
113,750
|
|
|
|
80,763
|
|
|
|
127,500
|
|
|
|
0
|
|
|
|
541,250
|
|
|
|
235,039
|
|
Jessica E. Buss
|
|
|
132,651
|
|
|
|
176,868
|
|
|
|
44,217
|
|
|
|
62,369
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
75,169
|
|
|
|
0
|
|
|
|
252,037
|
|
|
|
239,237
|
|
Clyde H. Fitch
|
|
|
191,250
|
|
|
|
35,063
|
|
|
|
63,750
|
|
|
|
83,322
|
|
|
|
104,000
|
|
|
|
73,840
|
|
|
|
93,925
|
|
|
|
0
|
|
|
|
452,925
|
|
|
|
192,225
|
|
James A. Yano
|
|
|
120,000
|
|
|
|
22,000
|
|
|
|
40,000
|
|
|
|
52,421
|
|
|
|
75,000
|
|
|
|
53,250
|
|
|
|
68,000
|
|
|
|
0
|
|
|
|
303,008
|
|
|
|
127,671
|
|
Modifications to Executive Compensation Program
The Committee has considered the results of the advisory vote at our 2011 Annual Meeting of Shareholders regarding the
compensation paid to our NEOs in its evaluation of our executive compensation program, including when deciding to implement the following modifications to our executive compensation program:
|
|
|
CEOs Change of Control Payments Modified.
The new executive agreement entered into between the Company and our CEO substantially
reduces the amounts payable to him upon a Change of Control (as defined below in Change of Control Agreements with Named Executive Officers). In exchange for accepting this reduction in payments upon a Change of Control, the terms of
Mr. Restrepos employment agreement and executive agreement were extended until Mr. Restrepo reaches mandatory retirement age.
|
Under his previous executive agreement, upon a Change of Control, Mr. Restrepo would be entitled to receive, among other things, a cash payment equal to 2.99 times the sum of (i) the
maximum
possible awards Mr. Restrepo could receive under each of the LBP and the LTIP for the fiscal year in which the Change of Control occurs or the immediately preceding fiscal year, whichever are higher, and (ii) the
total bonus payable to Mr. Restrepo under the Quality Performance Bonus Plan (QPB) during the fiscal year immediately preceding the year in which the Change of Control occurs.
28
Mr. Restrepos new executive agreement revises this payment so
that he would only be entitled to receive an amount equal to 2.99 times the
average
of the annual aggregate bonus earned by Mr. Restrepo under each of the LBP and QPB (but not the LTIP) during the two fiscal years immediately
preceding the year in which the Change of Control occurs if his employment is terminated during the term of his executive agreement under the circumstances set forth below under Change of Control Agreements with Named Executive
OfficersRestrepo Executive Agreement.
If a Change of Control had occurred on December 31,
2011, Mr. Restrepo would have been entitled to receive approximately $4,060,356 more under his previous executive agreement than he would have been entitled to receive under his new executive agreement, assuming for purposes of this comparison
that his new executive agreement was effective on December 31, 2011.
|
|
|
Tax Gross-Up Payments Eliminated.
The executive change in control agreements between the Company and our NEOs no longer entitle the NEOs to
any tax gross-up payments (See Potential Payments Upon Termination or Change of Control on page 67 of this Proxy Statement). The previous versions of these agreements required the Company to pay to the NEO such amounts as would be
necessary to compensate the NEO for any excise tax paid or incurred by the NEO due to any severance payment or other benefit provided under the NEOs change in control agreement.
|
|
|
|
Double Trigger Vesting of Equity Awards To Be Implemented.
The Company has revised the award agreements applicable to future
awards made pursuant to the 2009 Equity Plan (including those awards made in 2012) to accelerate the vesting of such awards upon a change of control only if the recipients employment with the Company terminates within one year of the change in
control, provided, that if the change in control involves a change in the ownership of the Company and the successor entity does not provide benefits of equal or greater value at the time of the change in control transaction, the award will
automatically vest upon the closing of the transaction.
|
|
|
|
Formal Stock Ownership Holding Periods Adopted.
The Company has revised its Ownership Guidelines (as defined below in Stock Ownership
Guidelines) to require its Section 16 officers to hold the net amount of Common Shares obtained through the exercise of stock options or vesting of restricted stock until the later of (i) the first anniversary of the date the officer
exercised the stock options or (ii) the date on which the officer satisfies the Ownership Target Amounts (as defined below in Stock Ownership Guidelines).
|
|
|
|
Anti
-
Hedging Policy Adopted.
The Board has adopted a policy prohibiting all Company employees, including our NEOs, and members of the
Board from engaging in certain hedging transactions with respect to Company securities held by them, including short sales and other transactions that shift the economic consequences of ownership of Company securities to a third party. The Board has
also adopted a policy prohibiting our executive officers and members of the Board from holding Company securities in a margin account or otherwise pledging Company securities as collateral for a loan.
|
|
|
|
Compensation Consultant Independent
. The Committees independent compensation consultant, Pay Governance, LLC, is engaged directly by
the Committee and performs services solely on behalf of the Committee. Prior to Pay Governances engagement, the Committee had engaged Towers Watson, which provided the Company and the State Auto Group other consulting services.
|
Impact of State Auto Group on Compensation of NEOs
An understanding of the structure of our Company and our relationship with State Auto Mutual and the other members of the
State Auto Group (See page 78 of this Proxy Statement for the list of the Companys subsidiaries included in the State Auto Group) is relevant to a discussion of our executive compensation program. We and our subsidiaries operate and manage our
businesses in conjunction with State Auto Mutual and the other members of the State Auto Group under various pooling, management and cost sharing agreements under the leadership and direction of the same senior management team (See Related
Person TransactionsTransactions Involving State Auto Mutual on page 78 of this Proxy Statement for a discussion of these
29
agreements). Our NEOs are also officers of State Auto Mutual and provide services to our Company, State Auto Mutual and the other members of the State Auto Group. For example, Mr. Restrepo
serves as the Chairman, President and Chief Executive Officer of both the Company and State Auto Mutual.
Accordingly, when determining the amount of the compensation of our NEOs, the Committee takes into account the services
our NEOs perform on behalf of the Company and the services they perform on behalf of State Auto Mutual and the other members of the State Auto Group. The Committee targets the total amount of each element of compensation payable to our NEOs at or
close to the median compensation level in our competitive market, which we define as insurance companies similar in size to the State Auto Group, as opposed to insurance companies similar in size to the Company (See Benchmarking of
Executive Compensation Program Elements on page 34 of this Proxy Statement). The total revenues of the median company within the NEO Peer Group for the year ended December 31, 2010 (the companies in the NEO Peer Group used for 2011
compensation decisions were selected on the basis of 2010 financial data) were $1.476 billion. The total assets of the median company within the NEO Peer Group were $4.233 billion at December 31, 2010. The total revenues of the Company for the
year ended December 31, 2010 were $1.355 billion. The total assets of the Company were $2.722 billion at December 31, 2010. The net written premiums of the State Auto Group (as determined in accordance with statutory accounting principles)
for the year ended December 31, 2010 were $1.667 billion. The total admitted assets of the State Auto Group (as determined in accordance with statutory accounting principles) were $3.557 billion at December 31, 2010.
Because our NEOs perform services on behalf of the Company, State Auto Mutual and other members of the State Auto Group,
we generally allocated the compensation expenses associated with the services performed by our NEOs in 2011 80% to the Company and its subsidiaries and 20% to State Auto Mutual and certain of its subsidiaries and affiliates. The compensation of our
NEOs as disclosed in this Proxy Statement, however, includes all compensation expenses associated with the services performed by our NEOs on behalf of the Company, State Auto Mutual and the State Auto Group. As a result, a compensation analysis
conducted with respect to the Company and its peers may reach inaccurate conclusions regarding the Company if the analysis uses the compensation information disclosed in this Proxy Statement without taking into account that such information includes
compensation provided to our NEOs for services they performed on behalf of State Auto Mutual and the other members of the State Auto Group. Effective as of January 1, 2012, we revised the allocation of the compensation expenses associated with
the services performed by our NEOs so that going forward 65% of these expenses will be allocated to the Company and its subsidiaries and 35% will be allocated to State Auto Mutual and certain of its subsidiaries and affiliates. The following table
allocates the compensation reported for each NEO (other than Mr. Blackburn) in the Total column of the Summary Compensation Table on page 54 of this Proxy Statement between the Company, on the one hand, and State Auto Mutual and certain
of its subsidiaries and affiliates, on the other hand, in accordance with compensation expense allocation percentages in effect on December 31, 2011 (i.e., 80% to the Company and 20% to State Auto Mutual and certain of its subsidiaries and
affiliates):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
State Auto
Financial
|
|
|
State
Auto
Mutual
|
|
|
State Auto
Financial
|
|
|
State
Auto
Mutual
|
|
|
State Auto
Financial
|
|
|
State
Auto
Mutual
|
|
Robert P. Restrepo, Jr.
|
|
|
2,045,178
|
|
|
|
511,295
|
|
|
|
2,286,226
|
|
|
|
571,556
|
|
|
|
1,683,365
|
|
|
|
420,841
|
|
Steven E. English
|
|
|
656,741
|
|
|
|
164,185
|
|
|
|
735,686
|
|
|
|
183,922
|
|
|
|
627,877
|
|
|
|
156,969
|
|
Jessica E. Buss
|
|
|
547,108
|
|
|
|
136,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clyde H. Fitch
|
|
|
535,430
|
|
|
|
133,857
|
|
|
|
676,802
|
|
|
|
169,200
|
|
|
|
570,191
|
|
|
|
142,548
|
|
James A. Yano
|
|
|
460,310
|
|
|
|
115,077
|
|
|
|
536,814
|
|
|
|
139,214
|
|
|
|
487,058
|
|
|
|
121,764
|
|
Other Compensation Governance Policies and Practices
We endeavor to maintain governance practices that are consistent with what we consider to represent current best
practices, including with respect to the oversight of our executive compensation program. In addition to the
30
new compensation policies and practices described above in Modifications to Executive Compensation Program, we also maintain the following compensation policies and practices:
|
|
|
Clawback Obligations Imposed in Change of Control Agreements .
The executive change of control agreements entered into between
the Company and Mr. English, Ms. Buss, Mr. Fitch and Mr. Yano on October 28, 2011 and the employment agreement and executive agreement entered into between the Company and Mr. Restrepo on December 22, 2011 include
a clawback provision that authorizes the Board to require the NEO to repay all or any portion of the severance benefits paid to the NEO thereunder upon the occurrence of the events described below in Change of Control Agreements
with Named Executive Officers on page 65 of this Proxy Statement and Restrepo Employment Agreement on page 65 of this Proxy Statement. If the Board determines that the NEO engaged in fraudulent conduct, the Board must seek
repayment of such severance benefits.
|
|
|
|
Limited Perquisites.
We provide our NEOs minimal perquisites not tied to individual or Company performance, which we believe are well below
the typical practices of companies of comparable size and have limited cost.
|
|
|
|
Limited Committee Discretion to Increase Awards.
Except for the individual performance component of the LBP, the Committee may not increase
awards under our short-term or long-term incentive plans. The individual performance component of the LBP only represented 25% of the total target compensation of our NEO for 2011. The Committee retains the discretion to decrease awards under our
short-term or long-term incentive plans.
|
|
|
|
No Repricing of Underwater Stock Options.
The Company will not reprice or replace underwater stock options without prior shareholder
approval.
|
Pay for Performance
The Committee conducted a pay for performance analysis comparing (i) the total realizable pay earned by our CEO over
the five-year period ended December 31, 2010 to the total realizable pay earned by the CEOs of each member of the NEO Peer Group over that period and (ii) the total shareholder return (TSR) of the Company over the five-year
period ended December 31, 2010 to the TSR of the members of the NEO Peer Group over that period.
The
total realizable pay used in our pay for performance analysis includes:
|
|
|
base salary earned during the five-year period;
|
|
|
|
actual annual cash bonuses earned during the period;
|
|
|
|
value of cash incentives, or the vesting date value of stock incentives, earned for multi-year performance plans that began and ended during the
period;
|
|
|
|
the vesting date value of service-based restricted stock awards granted during period; and
|
|
|
|
any exercise gains of options granted during the period and paper value of any gains on any unexercised options received during the period and of
unvested service-based restricted stock grants made during the period based on the Companys stock price as of December 31, 2010.
|
Based on input from its compensation consultant, Pay Governance, LLC, the Committee concluded total realizable pay provides a more accurate basis for comparing pay and performance than information
reported in the Summary Compensation Table. Unlike the amounts reported in the Summary Compensation Table, total realizable pay reflects the Companys performance compared to goals because it changes due to annual and long-term results and
increases or decreases in stock price.
The Committee uses a five-year period to provide a long-term analysis
and include multiple complete PAU performance periods in the analysis. The Committee uses the NEO Peer Group (which includes insurance
31
companies comparable to the State Auto Group in terms of both size and type of business) in its analysis because the Committee (i) takes into account the services our CEO performs on behalf
of the Company and the services he performs on behalf of State Auto Mutual and the other members of the State Auto Group when determining the amount of his compensation and (ii) targets the total amount of each element of compensation payable
to our CEO at or close to the median compensation level in our competitive market, which we define as insurance companies similar in size to the State Auto Group (See Benchmarking of Executive Compensation Program Elements on page
34 of this Proxy Statement for a more detailed description of the NEO Peer Group).
As
shown in the chart below, (i) the total realizable pay earned by our CEO during the five-year period ended December 31, 2010 placed the Company in the 19
th
percentile when compared to the NEO Peer Group (the individual members of which are identified as diamonds in the
chart below) and (ii) the TSR of the Company over the five-year period ended December 31, 2010 placed the Company in the lowest percentile when compared to the NEO Peer Group. Based on the percentile rankings of the Company yielded by our
pay for performance analysis, both the Committee and Pay Governance, LLC concluded that the compensation we paid to our CEO for the five-year period ended December 31, 2010 was reasonably aligned with our performance for the period.
32
Executive Compensation Philosophy
Executive Compensation Program Objectives
We structure our executive compensation program to attract, retain, motivate and reward top caliber executives who deliver
on the following key elements of our business strategy:
|
|
|
Top-Quartile Performance
as measured against peers
|
|
|
|
Enterprise Risk Management
|
|
|
|
Capital Management
as measured by return on equity
|
We continue to believe that achieving success in these areas will increase the price of our Common Shares over the long
term and should be rewarded by our executive compensation program. In addition to incenting our executives to achieve these pillars of success, our executive compensation program is also designed to:
|
|
|
Align the individual compensation of our executives with the long-term value delivered to our shareholders.
|
|
|
|
Offer compensation that reflects Company performance and is competitive individually and in the aggregate.
|
|
|
|
Encourage appropriate levels of share ownership among our executives while balancing short- and long-term perspectives.
|
Executive Compensation Program Components
Each component of our executive compensation program serves a unique role in establishing an appropriate balance between
the rewards for short-term and long-term performance that we believe will support our efforts to increase the price of our Common Shares over the long-term:
|
|
|
Base salary
is primarily intended to attract and retain top-caliber executives.
|
|
|
|
Short-term incentive compensation
is intended to focus our NEOs on achieving our strategic objectives as well as key individual performance
objectives and balance the focus of the long-term incentive compensation we award.
|
|
|
|
Long-term incentive compensation
is intended to encourage business behaviors that drive appreciation in the price of our Common Shares over
the long term, build appropriate levels of Common Share ownership among our executive team and balance the focus of our annual operating plan.
|
|
|
|
Perquisites
are very limited in value and participation.
|
How the Amount of Executive Compensation is Determined
Role of Committee, Senior Management, Compensation Consultants and Other Advisors
In carrying out its responsibilities, the Committee requests and receives regular input and recommendations from the Board, management, an executive compensation consultant and other advisors. The
Committee also regularly engages in discussions and continuing education to better understand compensation trends, regulatory developments relating to compensation events and the Companys compensation issues and objectives. Management informs
and assists the Committee in establishing and monitoring performance goals, and in refining our overall executive compensation program.
As a result of the sharing of services and compensation expenses among the Company and the other members of the State Auto Group (See Impact of State Auto Group on Compensation of NEOs
on page 29 of this Proxy Statement), the Nominating and Governance Committee of State Auto Mutual is involved in the performance evaluation process of our CEO. In addition, a director of State Auto Mutual who is a member of
33
State Auto Mutuals Nominating and Governance Committee attends the meetings of the Committee as a non-voting member (See Board of Directors and Board CommitteesBoard Committees
and Committee Meetings on page 18 of this Proxy Statement).
In making compensation decisions related to
both the form and the amount of compensation, the Committee has consistently relied upon competitive information obtained from its compensation consultant. In 2011, the Committee engaged and utilized the services of Pay Governance, LLC, a
compensation consultant. Pay Governance, LLC performs services solely on behalf of the Committee. During 2011, Pay Governance, LLC advised the Committee regarding (i) the effectiveness and competitiveness of our overall executive compensation
program and of specific compensation packages for our NEOs and other executives and (ii) the competitiveness of compensation to our outside directors in comparison to their peers at similar public companies.
Benchmarking of Executive Compensation Program Elements
We believe that in order to accomplish the objectives of our executive compensation program, including retaining our
executive talent, the Company must pay competitive compensation. To determine competitive compensation for our NEOs, we consider data from:
|
|
|
proxy statements filed by other publicly-held insurance companies comparable to the State Auto Group in terms of both size and type of business (the
NEO Peer Group); and
|
|
|
|
published pay surveys of the insurance and financial services industry relating to public, private and mutually-owned insurance companies (the
Survey Data).
|
The proxy statements of the companies within the NEO Peer Group
disclose detailed information regarding the compensation of their NEOs, which we compare to the compensation that we provide to our NEOs when the positions are similar. We also use the compensation data provided in these proxy statements to conduct
pay for performance comparisons that help us (i) understand the expectations of companies within the NEO Peer Group with respect to incentive payouts and (ii) evaluate the Companys executive compensation program. The Survey Data
complements the NEO Peer Group information by providing broader comparisons. While the NEO Peer Group compensation data relates only to public companies and their NEOs, the Survey Data relates to publicly-traded, mutual and privately-held insurers
and includes compensation data for employees beyond the NEOs. The broader scope of the information provides a more comprehensive assessment of competitive practices and pay levels for insurers of the Companys size.
When setting base salaries, short-term and long-term incentive compensation, we use NEO Peer Group data when it relates
to a comparable position at the Company and Survey Data that relates to individuals in similar positions at insurers similar in size to the State Auto Group (which we refer to as our competitive market). We use NEO Peer Group data to
benchmark the compensation of some NEOs and Survey Data to benchmark the compensation of our NEOs and other executives. If relevant data is available from both the NEO Peer Group and the Survey Data with respect to a position, we average the results
to determine the benchmark. For example, if the median level of base salary for chief executive officers reported by the NEO Peer Group and the Survey Data was $735,000 and $800,000, respectively, we would average the two results to establish a
median base salary target of $767,500.
The Committee targets the total amount of compensation payable to our
NEOs at or close to the median compensation level in the competitive market by setting the target amount of each element of compensation at or near the median level of compensation in the competitive market. Because it believes superior performance
should be rewarded, the Committee provides our NEOs with the opportunity to earn total compensation in the 75th percentile (or higher) of the competitive market if performance significantly exceeds target results. Conversely, if Company or
individual performance is substantially below target or planned results, the Committee believes NEOs should receive substantially less than the median level of total compensation in the
34
competitive market (i.e., in the bottom quartile). The total amount of compensation that the Committee targeted as payable to each of our NEOs for 2011 was competitive with (i.e., within
approximately 10% of) the median level of compensation in the NEO Peer Group and the Survey Data, except for Mr. Fitch who is paid above this range due to his substantial experience and the importance of his skill set to our strategic
objectives.
Determinations with respect to certain elements of compensation for Mr. Restrepo, such as
base salary, retirement benefits, employee benefits and executive perquisites, are subject to the terms of his employment agreement (See Employment Agreements with Named Executive OfficersRestrepo Employment Agreement).
NEO Peer Group
The Committee, with input from its compensation consultant and management, approves property and casualty insurance companies to be part of the NEO Peer Group based on (i) their status as public
companies and (ii) whether their size and business overlap with the State Auto Group, which, as noted above, is larger than that of the Company. Public companies are selected because they are required to disclose detailed information regarding
the compensation of their NEOs and their executive compensation programs in their SEC filings, which allows us to compare the competitiveness of the compensation of our NEOs and executive compensation program with those of our public company
competitors. In considering business overlap, companies are selected that have a significant portion of their business in personal and commercial automobile, homeowners, specialty, workers compensation and commercial property and casualty insurance.
The Committee considers premium volume, total assets, market capitalization and number of employees when determining whether a companys size overlaps with the State Auto Group. Companies similar in size to the State Auto Group are selected
because our NEOs are also officers of State Auto Mutual and provide services to our Company, State Auto Mutual and the other members of the State Auto Group. Some of the companies in the NEO Peer Group, however, are substantially larger than the
State Auto Group while others are smaller. Normally, companies included in the NEO Peer Group are within one-half to two times the size of State Auto Group. The size of the median company within the NEO Peer Group is comparable to the State Auto
Group. The members of the NEO Peer Group change periodically because of mergers, acquisitions, start-ups, spinoffs and similar transactions.
The NEO Peer Group used for 2011 compensation decisions was comprised of the following 23 companies:
|
|
|
|
|
Affirmative Insurance
|
|
American Financial Group, Inc.
|
|
Argo Group International
|
Cincinnati Financial Corporation
|
|
EMC Insurance Group
|
|
Erie Indemnity Company
|
Hanover Insurance Group
|
|
Harleysville Group, Inc.
|
|
Horace Mann Educators Corporation
|
Infinity Property & Casualty Corporation
|
|
Kingsway Financial Services
|
|
Mercury General Corporation
|
Montpelier Re Holdings
|
|
Old Republic International Corporation
|
|
OneBeacon Insurance
|
Safety Insurance Group, Inc.
|
|
Selective Insurance Group, Inc.
|
|
Tower Group
|
United Fire & Casualty Company
|
|
Unitrin, Inc.
|
|
White Mountains Insurance Group
|
W. R. Berkley Corporation
|
|
Amtrust Financial Services
|
|
|
Survey Data
Pay Governance, LLC reviews and analyzes compensation surveys covering executive officers at both public and private
insurance and financial services companies. The published pay survey information contained in the Survey Data allows us to assess the compensation we pay to our executive officers relative to the compensation paid in the insurance and financial
services industry to similar positions. This information is also used, in combination with information for the NEO Peer Group, to provide a more complete and thorough assessment of competitive pay levels and practices with regard to our NEOs.
Use of Tally Sheets
The Committee uses tally sheets in its annual review of NEO compensation to review total compensation and each element of compensation provided to our NEOs. The tally sheets used by the Committee in its
review of
35
NEO compensation for 2011: (i) listed each individual element of compensation along with the amount earned in each category for 2008, 2009 and 2010; (ii) listed the target and maximum
amounts of incentive compensation payable for 2010; and (iii) summarized the current value of employee benefits and perquisites. The tally sheets provide a useful perspective on the total value of NEO compensation and show how potential changes
in one element of compensation may influence the other elements. The Committee also used tally sheets to evaluate each NEOs total compensation in 2012.
Executive Compensation Program Elements
We believe that the mix of elements in our executive compensation program supports its objectives and provides appropriate reward opportunities. Each of these elements is discussed separately below, other
than employee benefits which we offer to our NEOs on the same basis as all of our other employees, except for certain additional long-term disability benefits provided to Mr. Restrepo pursuant to his employment agreement in the event he is
terminated by reason of disability (See Employment Agreements with Named Executive OfficersRestrepo Employment AgreementDisability).
The Company applies the following principles in designing our executive compensation program to achieve the objectives of our executive compensation program:
|
|
|
The Company does not have a prescribed mix between cash and non-cash compensation and short- and long-term compensation;
|
|
|
|
The Company positions each element of executive compensation to approximate the median level of our competitive market so that total compensation is
also positioned at median levels;
|
|
|
|
Neither the Committee nor the CEO considers the other elements of compensation available to NEOs, such as salary increases, annual bonuses, option
gains and equity ownership, when setting any one element; and
|
|
|
|
Awards made in prior years or in other parts of our compensation program have not influenced the opportunities or payments made available in the
current year.
|
Some of our NEOs compensation is governed by the terms of specific
agreements between the NEO and the Company. (See Contractual Arrangements with Named Executive Officers beginning on page 51 of this Proxy Statement.)
36
The following chart sets forth the elements of our executive compensation
program for 2011 (except for perquisites, which are minimal in nature). We discuss each of these elements in detail after the chart.
*
|
In 2011, Mr. Restrepo was granted 28.3% of his total long-term incentive opportunity in the form of restricted common shares, 28.3% in the form
of stock options and 43.3% in the form of target PAUs. In 2011, the other NEOs were granted 42.5% of their total long-term incentive compensation opportunity in the form of stock options and 57.5% in the form of target PAUs. In 2012,
Mr. Restrepo was granted one-third of his total long-term incentive opportunity in the form of restricted common shares, one-third in the form of stock options and one-third in the form of target PAUs. In 2012, the other NEOs were granted 20%
of their total long-term incentive compensation opportunity in the form of stock options and 80% in the form of target PAUs.
|
**
|
These Company performance measures applied to each of the NEOs participating in the LBP in 2011 other than Ms. Buss for whom these performance
measures were replaced by net statutory combined ratio for our specialty insurance segment and rate change.
|
37
Base Salary
Base Salary Adjustment Process
The Committee believes that in order for the Company to attract and retain the caliber of executives it needs to achieve both short- and long-term success it is critical for the Company to provide the
NEOs with base salaries competitive with those provided to executives in our competitive market with similar skills, competencies, experience and levels of responsibility. Accordingly, the Committee may adjust the amount of an NEOs base salary
based on the median level of base salary for the NEO in our competitive market or to reflect a change in the NEOs scope of responsibility or unique skills or expertise. These adjustments are subject to an aggregate base salary merit increase
budget established by the Company based on our anticipated cost structure.
2011 Base Salaries of NEOs
The Committee set the 2011 base salaries of the NEOs in March 2011 as follows. The adjustments were based on increases in
the median salaries of peer companies for each position, as well as additional responsibilities for Mr. English due to a recent expansion of his role.
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|
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|
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|
|
|
|
Named Executive Officer
|
|
2010 Base Salary
($)
|
|
|
2011 Base Salary
($)
|
|
|
Increase
(Decrease) (%)
|
|
Robert P. Restrepo, Jr.
|
|
|
755,000
|
|
|
|
780,000
|
|
|
|
3.3
|
|
Steven E. English
|
|
|
360,000
|
|
|
|
400,000
|
|
|
|
11.1
|
|
Clyde H. Fitch
|
|
|
330,000
|
|
|
|
340,000
|
|
|
|
3.0
|
|
James A. Yano
|
|
|
310,000
|
|
|
|
320,000
|
|
|
|
3.2
|
|
Mark A. Blackburn(1)
|
|
|
475,000
|
|
|
|
475,000
|
|
|
|
0
|
|
(1)
|
Mr. Blackburns base salary was not adjusted in March 2011 because he resigned from all of his officer positions with the Company and the
State Auto Group on January 14, 2011. Mr. Blackburn retired from his remaining positions with the Company and the State Auto Group effective on November 1, 2011.
|
2012 Base Salaries of NEOs
The Committee set the 2012 base salaries of the NEOs in March 2012 as follows. In light of the Companys recent financial performance, management recommended and the Committee agreed to freeze the
base salaries of all of our NEOs, except for Mr. English, at their 2011 levels for 2012. The Committee increased Mr. Englishs base salary for 2012 to move his base salary closer to median level of base salary for similar executives
in our competitive market as his base salary was below the range the Company and the Committee considers acceptable for executive base salaries.
|
|
|
|
|
|
|
|
|
|
|
|
|
Named Executive Officer
|
|
2011 Base Salary
($)
|
|
|
2012 Base Salary
($)
|
|
|
Increase
(Decrease) (%)
|
|
Robert P. Restrepo, Jr.
|
|
|
780,000
|
|
|
|
780,000
|
|
|
|
0
|
|
Steven E. English
|
|
|
400,000
|
|
|
|
425,000
|
|
|
|
6.25
|
|
Jessica E. Buss
|
|
|
353,736
|
|
|
|
353,736
|
|
|
|
0
|
|
Clyde H. Fitch
|
|
|
340,000
|
|
|
|
340,000
|
|
|
|
0
|
|
James A. Yano
|
|
|
320,000
|
|
|
|
320,000
|
|
|
|
0
|
|
Short-Term Incentive Compensation
The two short-term incentive plans in which our NEOs participated in 2011the QPB and the LBPare intended to
provide personal liquidity to our NEOs, focus our NEOs on achieving our short-term strategic objectives and balance the focus of our long-term incentive plans. For our NEOs, the total amount of quarterly QPB bonuses paid during any year first
reduces the NEOs individual performance LBP bonus, with any difference reducing the NEOs Company performance LBP bonus. In March 2012, the Committee revised the
38
QPB to provide that participants in the LBP are no longer eligible to participate in the QPB. Accordingly, our NEOs will not participate in the QPB in 2012.
The following table shows the amount of short-term cash incentive compensation paid to each NEO for 2011 under both the
QPB and LBP. Total bonuses for NEOs were generally well below target and below those paid in 2010, except for the bonus of Ms. Buss which reflects in large portion the performance of her business unit. The total amount of 2011 short-term cash
incentive compensation paid to each NEO in the fourth column equals the sum of the amounts shown in the first three columns. The following sections describe the bases for these awards in more detail.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Named Executive Officer
|
|
Company
Performance
LBP Bonus
($)
|
|
|
Individual
Performance
LBP
Bonus ($)(1)
|
|
|
QPB Bonus
($)
|
|
|
Total
Short-
Term
Bonus ($)
|
|
|
Total
Short-Term
Bonus (%)
(2)
|
|
Robert P. Restrepo, Jr.
|
|
|
85,800
|
|
|
|
127,776
|
|
|
|
28,224
|
|
|
|
241,800
|
|
|
|
38.75
|
%
|
Steven E. English
|
|
|
41,250
|
|
|
|
113,026
|
|
|
|
14,474
|
|
|
|
168,750
|
|
|
|
56.25
|
%
|
Jessica E. Buss
|
|
|
176,868
|
|
|
|
62,369
|
|
|
|
12,800
|
|
|
|
252,037
|
|
|
|
142.50
|
%
|
Clyde H. Fitch
|
|
|
35,063
|
|
|
|
83,322
|
|
|
|
12,303
|
|
|
|
130,688
|
|
|
|
51.25
|
%
|
James A. Yano
|
|
|
22,000
|
|
|
|
52,421
|
|
|
|
11,579
|
|
|
|
86,000
|
|
|
|
53.75
|
%
|
Mark A Blackburn(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The amount of the individual performance bonus shown in this column is net of the amount of the QPB bonuses (shown in the third column) paid for
2011.
|
(2)
|
Expressed as a percentage of target where target is set at 100%.
|
(3)
|
Mr. Blackburn did not participate in the LBP in 2011 because he resigned from all of his officer positions with the Company and the State Auto
Group on January 14, 2011.
|
Quality Performance Bonus Plan Bonuses
Basis for QPB Bonuses
The QPB is a quarterly profit-sharing program intended to motivate our employees who are eligible to participate in the plan to focus on the factors (underwriting, pricing discipline and expense
management) we consider critical in profitably underwriting our insurance business by rewarding them for our achievement of underwriting profit. Motivating our employees to focus on these factors supports our strategic objective to achieve
consistent underwriting profits. Bonuses under the QPB are payable for a fiscal quarter only to the extent that our QPB Combined Ratio for that quarter is better (i.e., less) than the Combined Ratio Trigger for that quarter.
Prior to 2012, all of our employees, including our NEOs, were eligible to participate in the QPB. However, as discussed above, in March 2012, the Committee revised the QPB to provide that participants in the LBP (which includes our NEOs) are no
longer eligible to participate in the QPB.
QPB Award Process
Every employee eligible to participate in the QPB is paid the same percentage of their quarterly salary for any fiscal
quarter in which a QPB bonus is earned. This approach reinforces the importance of the team effort required across the State Auto Group to achieve our strategic goals. The quarterly payout feature of the QPB also provides prompt feedback regarding
the Companys performance and profitability to our employees. The QPB combined ratio performance hurdles are reviewed and established annually based on our underwriting performance goals in our Company plan.
|
|
|
The QPB Combined Ratio is the direct (i.e., without considering the impact of reinsurance) statutory combined ratio for all of our
affiliated insurance companies. The QPB Combined Ratio is the sum of our allocated loss adjustment expense ratio, plus an expense ratio including unallocated loss adjustment expenses based upon the previous rolling four quarters. We use the
unallocated loss adjustment
|
39
|
expenses for the immediately preceding four quarters, plus internal claims handling costs, to approximate the expense ratio for the current quarter. The QPB Combined Ratio includes
positive or negative development related to catastrophes or non-catastrophes.
|
|
|
|
The Combined Ratio Trigger may vary for each quarter based on how historical results have differed from one quarter to the next during
the course of a year.
|
To the extent that the QPB Combined Ratio for a quarter is less than
the Combined Ratio Trigger for any quarter, the difference is multiplied by the direct earned premium (in essence, the amount of our underwriting profit in excess of the Combined Ratio Trigger) for that quarter. An amount equal to fifteen percent of
the product is placed in the QPB bonus pool, and the QPB bonus pool is divided by the total salaries of all eligible participants to determine the QPB bonus for that quarter. The QPB bonus is expressed as a percentage of each participants
quarterly salary. Each participant in the QPB, including the NEOs, receives the same percentage of their quarterly salary as a QPB bonus for that quarter, which may not exceed 25%. The Committee employs no discretion in determining the payouts made
under the QPB.
QPB Bonuses2011
A QPB bonus was earned only in the fourth quarter of 2011, as shown in the table below illustrating the Combined Ratio
Trigger and the actual QPB Combined Ratio for each quarter in 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
2011
|
|
|
Second Quarter
2011
|
|
|
Third Quarter
2011
|
|
|
Fourth Quarter
2011
|
|
Combined Ratio Trigger
|
|
|
96.0
|
%
|
|
|
102.0
|
%
|
|
|
102.0
|
%
|
|
|
96.0
|
%
|
QPB Combined Ratio
|
|
|
97.8
|
%
|
|
|
144.5
|
%
|
|
|
124.8
|
%
|
|
|
86.7
|
%
|
Under the QPB, eligible employees received the following QPB bonuses, expressed as a
percentage of their quarterly salary, for each quarter in fiscal year 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
2011
|
|
|
Second Quarter
2011
|
|
|
Third Quarter
2011
|
|
|
Fourth Quarter
2011
|
|
QPB Payout as % of Participants Quarterly Base Salary
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
13.44
|
%
|
For the full year 2011, the total QPB bonus payout was approximately 3.36% of all
eligible salaries.
Leadership Bonus Plan Bonuses
Basis for LBP Bonuses
The LBP is an annual cash incentive program for our executives. For our NEOs, the LBP consists of two components: (i) a Company performance component and (ii) an individual performance
component. For 2011, 75% of an NEOs LBP target bonus opportunity was based on Company performance relative to annual plan targets and 25% was based on individual performance. The Committee believes that this allocation appropriately focuses
our NEOs on attaining objective, quantitative financial results based on the Companys consolidated results and business plan, while also providing for the recognition of individual achievements and strategically important non-financial
outcomes.
LBP Award Process
The Committee establishes individual performance goals at the beginning of each year and confirms the achievement of those results at the end of the year. The Committee normally establishes threshold,
target and maximum performance goals that determine the amount of the Company performance bonus that is earned. At
40
the end of the year, management provides the Committee with the audited financial results achieved by the Company with respect to each performance measure selected by the Committee. Based on this
information, the Committee certifies the extent to which the performance goals were achieved before payment of the Company performance bonus, if any, is made. The Committee retains the power to reduce, but not increase, the amount of any Company
performance bonus payable to an NEO subject to Section 162(m) of the Internal Revenue Code of 1986, as amended (the Code) (See Tax Deductibility of Executive Compensation on page 52 of this Proxy Statement).
Each year, the Committee, with input from the Board of Directors of State Auto Mutual, establishes, and
evaluates the satisfaction of, the individual performance goals applicable to the CEO, and the CEO establishes, and evaluates the satisfaction of, the individual performance goals applicable to the other NEOs, for the individual performance
component of the LBP. The Committee and CEO allocate a specific weight for each of the individual performance goals that they establish. The individual performance goals established for each NEO relate to specific strategic and business objectives
relevant to that NEOs area of responsibility and, as a result, the individual performance goals applicable to the individual performance LBP bonuses are unique for each NEO. The Committee, with respect to the CEO, and the CEO, with respect to
the other NEOs, evaluate the satisfaction of the individual performance goals by designating the NEOs performance for each individual performance goal into one of the following categories: (i) does not meet; (ii) somewhat meets;
(iii) meets; (iv) somewhat exceeds; and (v) exceeds. The Committee and the CEO then determine, based on their evaluation of the satisfaction of the individual performance goals, whether the NEOs overall performance met the
threshold, target or maximum performance levels applicable to the individual performance component of the LBP and, therefore, merits the award of an individual performance LBP bonus.
LBP Bonus2011 Company Performance Component
The Committee selected LBP Combined Ratio, return on equity and premium growth as the performance measures for the Company
performance component of the LBP for each of the NEOs participating in the LBP in 2011 other than Ms. Buss. For Ms. Buss, the Committee selected return on equity, rate change (the counterpart to premium growth in our specialty insurance
segment) and net statutory combined ratio for our specialty insurance segment. The Committee selected these performance measures for our NEOs because it believes (i) they align the individual compensation of our executives with the achievement
of the strategic objectives of the State Auto Group and (ii) they are among the most important drivers of a long-term increase in the price of our Common Shares. The Committee believes the performance measures it selected for Ms. Buss also
serve to focus her on the performance of the operating segment for which she is responsible.
|
|
|
LBP Combined Ratio is a measure of our profitability and is equal to the sum of (i) our loss and loss adjustment expense ratio
(i.e., losses and loss expenses as a percentage of net earned premium) and (ii) our expense ratio (i.e., underwriting expenses and miscellaneous expenses offset by miscellaneous income). The LBP Combined Ratio includes positive or negative
catastrophe development from the prior year. LBP Combined Ratio is expressed as a percentage and a LBP Combined Ratio of less than 100% indicates profitability.
|
|
|
|
Return on equity is a measure of our return to shareholders on their capital investment in the Company.
|
|
|
|
Premium growth is a measure of the growth in our total premium volume from existing sources and merger and acquisitions. In 2011, we
included the impact of any reinsurance arrangements in our measurement of premium growth for purposes of the LBP.
|
|
|
|
Rate change is a measure of growth calculated by dividing total premium by total exposure (or value insured).
|
|
|
|
Net statutory combined ratio for our specialty insurance segment is a measure of the profitability of our specialty insurance segment
and is equal to the sum of (i) the loss and loss adjustment expense ratio (i.e., losses and loss expenses as a percentage of net earned premium) of the segment and (ii) the expense ratio (i.e., underwriting expenses and miscellaneous expenses offset
by miscellaneous income) of the segment. Net statutory combined ratio is expressed as a percentage and a ratio of less than 100% indicates profitability.
|
41
The Committee assigned each of the performance measures applicable to an NEO
an equal weight in determining the amount of any Company performance LBP bonus to balance profitability, shareholder return and growth.
The following table shows the threshold, target and maximum payout percentages and performance goals established for each performance measure applicable to Messrs. Restrepo, English, Fitch and Yano for
the Company performance component of the LBP for 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LBP Combined Ratio
|
|
|
Return on Equity
|
|
|
Premium Growth
|
|
|
Payout
as (%)
of Target
|
|
|
Performance
Goal
(%)
|
|
|
Payout
as (%)
of Target
|
|
|
Performance
Goal
(%)
|
|
|
Payout
as (%)
of Target
|
|
|
Performance
Goal
(%)
|
|
Threshold
|
|
|
10
|
|
|
|
104
|
|
|
|
10
|
|
|
|
0.833
|
|
|
|
10
|
|
|
|
2.6
|
|
Target
|
|
|
100
|
|
|
|
100.5
|
|
|
|
100
|
|
|
|
5
|
|
|
|
100
|
|
|
|
6.6
|
|
Maximum
|
|
|
200
|
|
|
|
96
|
|
|
|
200
|
|
|
|
10
|
|
|
|
200
|
|
|
|
10.6
|
|
The following table shows the threshold, target and maximum payout percentages and
performance goals established for each performance measure applicable to Ms. Buss for the Company performance component of the LBP for 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Statutory Combined Ratio
|
|
|
Return on Equity
|
|
|
Rate Change
|
|
|
Payout
as (%)
of Target
|
|
Performance
Goal
(%)
|
|
|
Payout
as (%)
of Target
|
|
|
Performance
Goal
(%)
|
|
|
Payout
as (%)
of Target
|
|
|
Performance
Goal
(%)
|
|
Threshold
|
|
10
|
|
|
105.22
|
|
|
|
10
|
|
|
|
.83
|
|
|
|
10
|
|
|
|
1.82
|
|
Target
|
|
100
|
|
|
101.72
|
|
|
|
100
|
|
|
|
5.0
|
|
|
|
100
|
|
|
|
4.61
|
|
Maximum
|
|
200
|
|
|
97.22
|
|
|
|
200
|
|
|
|
10
|
|
|
|
200
|
|
|
|
7.40
|
|
Target performance is equal to the goal for the financial measure set forth in the 2011
business plan presented by management and approved by the Board in March 2011 following review and discussion of the business plan with the Board of Directors of State Auto Mutual. The Committee believes that target performance is reasonable to
attain but includes an element of stretch performance. Maximum performance goals are intended to reflect superior performance and, although possible, may be extremely difficult to attain. Threshold performance, which the Committee views
as an acceptable level of performance, is the lowest level of performance meriting any form of financial reward. The Committee recognizes that target performance may not be attained and believes that providing for payments to be made for threshold
performance mitigates the incentive for NEOs and others to take excessive risks to achieve the target level of performance.
The following table shows (i) the result achieved for each Company performance measure applicable to Messrs. Restrepo, English, Fitch and Yano in 2011, (ii) the percentage payout for that result
relative to the target payout for that performance measure, (iii) the weight of each such performance measure within the Company performance component of LBP and (iv) the value of the actual payout for the result achieved as a percentage
of the NEOs target bonus for the Company performance component of the LBP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Measure
|
|
2011 Result
|
|
|
% of Target
Payout
for Result
|
|
|
Weight
|
|
|
Payout Value
(% of Target)
|
|
LBP Combined Ratio
|
|
|
116.0
|
|
|
|
0.0
|
%
|
|
|
.3334
|
|
|
|
0.0
|
%
|
Return on Equity
|
|
|
(18.23
|
)
|
|
|
0.0
|
%
|
|
|
.3334
|
|
|
|
0.0
|
%
|
Premium Growth
|
|
|
4.8
|
|
|
|
55
|
|
|
|
.3334
|
|
|
|
18.34
|
%
|
42
The following table shows (i) the result achieved for each Company
performance measure applicable to Ms. Buss in 2011, (ii) the percentage payout for that result relative to the target payout for that performance measure, (iii) the weight of each such performance measure within the Company
performance component of LBP and (iv) the value of the actual payout for the result achieved as a percentage of her target bonus for the Company performance component of the LBP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Measure
|
|
2011
Result
|
|
|
% of Target
Payout
for Result
|
|
|
Weight
|
|
|
Payout Value
(% of Target)
|
|
Net Statutory Combined Ratio
|
|
|
86.69
|
|
|
|
200
|
|
|
|
.3334
|
|
|
|
66.68
|
|
Return on Equity
|
|
|
(18.23
|
)
|
|
|
0
|
|
|
|
.3334
|
|
|
|
0
|
|
Rate Change
|
|
|
9.32
|
|
|
|
200
|
|
|
|
.3334
|
|
|
|
66.68
|
|
The following table shows the threshold, target and maximum amounts of 2011 Company
performance LBP bonuses, both as a percentage of the NEOs annual base salary and as a dollar amount, for each of the NEOs based on the potential achievement of the Companys performance goals.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Performance
Threshold
|
|
|
Company Performance
Target
|
|
|
Company Performance
Maximum
|
|
Named Executive Officer
|
|
% of
Salary
|
|
|
Dollar
Amount
|
|
|
% of
Salary
|
|
|
Dollar
Amount
|
|
|
% of
Salary
|
|
|
Dollar
Amount
|
|
Robert P. Restrepo, Jr.
|
|
|
6
|
|
|
|
46,800
|
|
|
|
60
|
|
|
|
468,000
|
|
|
|
120
|
|
|
|
936,000
|
|
Steven E. English
|
|
|
5.625
|
|
|
|
22,500
|
|
|
|
56.25
|
|
|
|
225,000
|
|
|
|
112.5
|
|
|
|
450,000
|
|
Jessica E. Buss
|
|
|
3.75
|
|
|
|
13,265
|
|
|
|
37.5
|
|
|
|
132,651
|
|
|
|
75
|
|
|
|
265,302
|
|
Clyde H. Fitch
|
|
|
5.625
|
|
|
|
19,125
|
|
|
|
56.25
|
|
|
|
191,250
|
|
|
|
112.5
|
|
|
|
382,500
|
|
James A. Yano
|
|
|
3.75
|
|
|
|
12,000
|
|
|
|
37.5
|
|
|
|
120,000
|
|
|
|
75
|
|
|
|
240,000
|
|
Mark A Blackburn(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Mr. Blackburn did not participate in the LBP in 2011 because he resigned from all of his officer positions with the Company and the State Auto
Group on January 14, 2011.
|
LBP Bonus2011 Individual Performance Component
The Committee, with the input of the Board of Directors of State Auto Mutual, established the individual performance goals
applicable to the CEOs individual performance LBP bonus for 2011. The CEO established the individual performance goals applicable to each of the other NEOs individual performance LBP bonus for 2011. The following table shows the 2011
threshold, target and maximum payouts, both as a percentage of salary and as a dollar amount, for each of the NEOs assuming attainment of each respective level of these individual performance goals. The Committee retains full discretion to adjust
awards made pursuant to the individual performance component of the LBP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Named Executive Officer
|
|
Individual Performance
Bonus Threshold
|
|
|
Individual Performance
Bonus Target
|
|
|
Individual Performance
Bonus Maximum
|
|
|
% of
Salary
|
|
|
Dollar
Amount
|
|
|
% of
Salary
|
|
|
Dollar
Amount
|
|
|
% of
Salary
|
|
|
Dollar
Amount
|
|
Robert P. Restrepo, Jr.
|
|
|
2
|
|
|
|
15,600
|
|
|
|
20
|
|
|
|
156,000
|
|
|
|
40
|
|
|
|
312,000
|
|
Steven E. English
|
|
|
1.875
|
|
|
|
7,500
|
|
|
|
18.75
|
|
|
|
75,000
|
|
|
|
37.5
|
|
|
|
150,000
|
|
Jessica E. Buss
|
|
|
1.25
|
|
|
|
4,422
|
|
|
|
12.5
|
|
|
|
44,217
|
|
|
|
25
|
|
|
|
88,434
|
|
Clyde H. Fitch
|
|
|
1.875
|
|
|
|
6,375
|
|
|
|
18.75
|
|
|
|
63,750
|
|
|
|
37.5
|
|
|
|
127,500
|
|
James A. Yano
|
|
|
1.25
|
|
|
|
4,000
|
|
|
|
12.5
|
|
|
|
40,000
|
|
|
|
25
|
|
|
|
80,000
|
|
Mark A Blackburn(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Mr. Blackburn did not participate in the LBP in 2011 because he resigned from all of his officer positions with the Company and the State Auto
Group on January 14, 2011.
|
43
The following table shows (i) the amount earned by each NEO for the
individual performance component of the LBP for 2011 (other than Mr. Blackburn who did not participate in the LBP in 2011), (ii) the value of the amount earned as a percentage of the NEOs 2011 target bonus for the individual performance
component of the LBP, (iii) a description of each individual performance goal established for each NEO for 2011; and (iv) the weight of each performance goal within the individual performance component of LBP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Named
Executive
Officer
|
|
2011
Individual
Performance
LBP Bonus
($)
|
|
|
Payout
Value (%
of Target)
|
|
|
Performance Goal
|
|
Weight
(%)
|
|
|
|
|
|
|
Robert P. Restrepo, Jr.
|
|
|
156,000
|
|
|
|
100
|
|
|
1. Homeowners Insurance Strategy (1)
|
|
|
15
|
|
|
|
|
2. Claims Strategy (1)
|
|
|
15
|
|
|
|
|
3. Specialty Insurance Strategy (1)
|
|
|
15
|
|
|
|
|
4. Strategic Plan (1)
|
|
|
10
|
|
|
|
|
5. Employee Engagement (1)
|
|
|
10
|
|
|
|
|
6. Risk Management: Continue to develop and implement risk mitigation plans.
|
|
|
10
|
|
|
|
|
7. Business Insurance Strategy (1)
|
|
|
10
|
|
|
|
|
8. Broadstreet Capital Strategy (1)
|
|
|
5
|
|
|
|
|
9 Mergers and Acquisitions (1)
|
|
|
5
|
|
|
|
|
10.Reinsurance Strategy (1)
|
|
|
5
|
|
|
|
|
|
|
Steven E. English
|
|
|
127,500
|
|
|
|
170
|
|
|
1. Specialty Business Strategy (1)
|
|
|
30
|
|
|
|
|
2. Risk Management (1)
|
|
|
20
|
|
|
|
|
3. Reinsurance Strategy: Develop and implement a reinsurance capital strategy.
|
|
|
30
|
|
|
|
|
4. International Financial Reporting Standards: Develop strategy for future adoption.
|
|
|
20
|
|
|
|
|
|
|
Jessica E. Buss
|
|
|
75,169
|
|
|
|
170
|
|
|
1. Profitable Growth Rockhill: Achieve scale through new programs and strategy.
|
|
|
20
|
|
|
|
|
2. Business Development: Implement new sales plan.
|
|
|
10
|
|
|
|
|
3. Profitable Growth Workers Compensation: Execution of strategy to gain scale and improve financial
results.
|
|
|
30
|
|
|
|
|
4. Employee Engagement: Enhance associate engagement.
|
|
|
20
|
|
|
|
|
5. Information Technology: Establish requirements for new systems.
|
|
|
20
|
|
|
|
|
|
|
Clyde H. Fitch
|
|
|
95,625
|
|
|
|
150
|
|
|
1. Field Management of Sales, Underwriting and Distribution: Design and implement sustainable model for
achievement of annual Company goals.
|
|
|
35
|
|
|
|
|
2. Operational Effectiveness: Enhance associate engagement
|
|
|
35
|
|
|
|
|
3. New Business Development (1)
|
|
|
20
|
|
|
|
|
4. Information Management: Enhance management information tools and coach staff to effectively utilize
tools.
|
|
|
10
|
|
|
|
|
|
|
James A. Yano
|
|
|
64,000
|
|
|
|
160
|
|
|
1. Legal Advice: Provide sound legal advice.
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. Board Relations: Continue with organization and innovation in the conduct of Board and committee
meetings. Support and promote positive relationships with all Board members.
|
|
|
40
|
|
|
|
|
3. Innovate State Auto: Provide legal support for Innovate State Auto initiatives and fully implement all
legal, government affairs and internal audit ideas.
|
|
|
10
|
|
|
|
|
4. Risk Management: Develop and implement risk mitigation plans.
|
|
|
10
|
|
(1)
|
We are not disclosing a more specific description of this performance goal because doing so would reveal confidential information that we do not
disclose to the public, and we believe that disclosure of this information would cause us competitive harm.
|
44
For 2011, the Committee awarded Mr. Restrepo an individual performance
bonus for, among other things, continuing to make progress with respect to addressing the Companys capital issues, strategic planning, and specialty insurance premium growth. The size of such bonus, however, was impacted by the
Committees disappointment with the Companys financial performance.
Mr. Restrepo recommended,
and the Committee approved, individual performance bonuses for the other NEOs based primarily on the following accomplishments during 2011:
|
|
|
Mr. English somewhat exceeded target performance by leading the efforts to strengthen the Companys capital base, negotiating a new
homeowners quota share reinsurance arrangement, moving to other new reinsurance arrangements, changing our corporate pooling agreement, communicating with rating agency and regulatory agencies, and addressing profit and operational issues in the
Companys managing general underwriting unit, RED.
|
|
|
|
Ms. Buss exceeded target performance by substantially exceeding expectations for specialty underwriting profitability and premium growth,
implementing a highly effective sales and marketing plan, improving associate engagement within the specialty sector, and defining requirements for a new technology platform.
|
|
|
|
Mr. Fitch somewhat exceeded target performance by transitioning two new regional presidents, integrating and building out a stronger commercial
middle market presence, improving field productivity and service levels, operationalizing the Companys standard lines risk management plans regarding geographic concentration, and enhancing the Companys business insurance sales,
underwriting and marketing capabilities.
|
|
|
|
Mr. Yano exceeded target performance by delivering sound counsel to the Board, CEO and other senior executives, participating in the
development and implementation of a wide variety of risk management initiatives, supporting the majority sale of the Companys equity interest in BroadStreet Capital Partners, reconciling several lawsuits, and improving engagement and
leadership development within the legal department.
|
LBP Bonus Opportunities2012 Company and
Individual Performance Bonuses
On March 1, 2012, the Committee established the total 2012 LBP bonus
opportunities for our NEOs, including the Company performance and individual performance components of the LBP, except for the Company performance components applicable to Ms. Buss. The Committee used the same performance measures for the 2012
Company performance component of the LBP and assigned each such performance measure the same weight as in 2011, except that the Committee replaced the premium growth Company performance component with non-cat loss ratio to better reflect the
Companys 2012 business strategy. The Committee also established the threshold, target and maximum payout percentages for the Company performance and individual performance components of the LBP for 2012, including a range of payout levels
between threshold and maximum. We believe that the disclosure of the specific performance measures for the Company performance and individual performance components of the LBP and the range of awards related to the achievement of such measures are
reflective of our 2012 business plan, and as such constitute confidential information. We believe that the disclosure of this information in this Compensation Discussion and Analysis would cause us competitive harm. The Committee believes that the
target performance goals are difficult but attainable. For 2010 and 2011, the payout on the Company performance goals was 81.1% and 18.3%, respectively, of the target LBP bonus (where the target percentage equals 100%) for all of our NEOs except for
Ms. Buss whose payout on the Company performance goals under the LBP for 2011 was 133% of her target LBP bonus. . The low payout percentage on the Company performance goals for 2011 reflects our performance in 2011 with respect to the LBP
Company performance metrics. For 2012, the payment of an individual performance LBP bonus for our NEOs, if any, will be determined by the Committee and the CEO at the end of the Companys 2012 fiscal year on the same basis as in 2011.
45
Long-Term Equity and Cash Incentive Compensation
The Committee awards long-term incentive compensation to our NEOs in the form of stock options pursuant to the State Auto
Financial Corporation 2009 Equity Incentive Compensation Plan, as amended (2009 Equity Plan), and PAUs pursuant to the LTIP. The Committee also occasionally makes special grants of restricted common shares. For example, in 2011 and 2012,
the Company granted restricted common shares to Mr. Restrepo (see Stock Options on page 46 of this Proxy Statement). The Committee targets the long-term incentive compensation awards to the NEOs at the median of long-term
incentive compensation awards in our competitive market. In 2011, except for Mr. Restrepos long-term incentive opportunity (as discussed below), the Committee provided 42.5% of each NEOs total long-term incentive compensation
opportunity in the form of stock options and 57.5% in the form of target PAUs. The Committee reduced the number of stock options awarded to the NEOs in their respective long-term incentive opportunities as a result of a provision in the 2009 Equity
Plan that limited the maximum number of shares which may be granted to all participants for a calendar year in the form of stock options, restricted shares and performance shares to a number not exceeding 1.5% of the total number of shares
outstanding as of December 31 of the prior year. Our shareholders approved an amendment to the 2009 Equity Plan at our 2011 Annual Meeting of Shareholders that eliminates this limitation. However, as a result of the limited number of shares
remaining available for issuance under the 2009 Equity Plan, for 2012, except for Mr. Restrepos long-term incentive opportunity, the Committee provided 20% of an NEOs total long-term incentive compensation opportunity in the form of
stock options and 80% in the form of target PAUs.
Stock Options
Basis for Stock Option Awards
We believe that issuing stock options to our executives (i) encourages business behaviors that drive appreciation in the price of our Common Shares over the long-term because options have no value to
the holder unless the price of the underlying Common Shares increases from the date of grant and (ii) helps align the interests of our executives who hold options, including our NEOs, with the interests of our shareholders. Stock options also
represent a significant element of the total direct compensation paid to executives at peer companies with which we compete for executive talent and build appropriate levels of Common Share ownership among our executive team. The committee considers
stock options to represent performance-based compensation because they have no value to the holder unless the price of the underlying Common Shares increases from the date of grant. This position is underscored by the fact that as of
December 31, 2011, all of the outstanding annual stock option grants made by the Committee to our NEOs are underwater, and, therefore, have produced no realized or unrealized gains for the NEOs. The Company has not and will not
reprice or replace underwater stock options without prior shareholder approval.
46
Stock Option Award Process
In 2011 and 2012, the Committee granted stock options to our NEOs representing the number of Common Shares set forth in
the table below. Each grant of options consisted of non-qualified stock options with a ten-year exercise period, a three-year graduated vesting schedule (i.e., one third of the total options granted vests on each anniversary of the grant date for
three years) and an option exercise price equal to the closing price of our Common Shares on the grant date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Named Executive Officer
|
|
2011
Stock
Option
Awards
(# of
Common
Shares)
|
|
|
Exercise
Price ($)
|
|
|
2012
Stock
Option
Awards
(# of
Common
Shares)
|
|
|
Exercise
Price ($)
|
|
Robert P. Restrepo, Jr.(1)
|
|
|
52,890
|
|
|
|
17.03
|
|
|
|
94,057
|
|
|
|
13.53
|
|
Steven E. English
|
|
|
21,796
|
|
|
|
17.03
|
|
|
|
16,473
|
|
|
|
13.53
|
|
Jessica E. Buss
|
|
|
12,850
|
|
|
|
17.03
|
|
|
|
9,141
|
|
|
|
13.53
|
|
Clyde H. Fitch
|
|
|
16,056
|
|
|
|
17.03
|
|
|
|
11,422
|
|
|
|
13.53
|
|
James A. Yano
|
|
|
11,625
|
|
|
|
17.03
|
|
|
|
8,269
|
|
|
|
13.53
|
|
Mark A Blackburn(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Committee also granted to Mr. Restrepo 16,707 restricted common shares as part of his 2011 long-term incentive opportunity and 21,526
restricted common shares as part of his 2012 long-term incentive opportunity.
|
(2)
|
Mr. Blackburn did not receive a stock option award for 2011 or 2012 because he resigned from all of his officer positions with the Company and
the State Auto Group on January 14, 2011.
|
The Committee grants stock options each year
at the same time as other annual awards are determined, based on the CEOs recommendations to the Committee, which the CEO determines using competitive market data. Although the Committee retains the discretion to set the terms of any options
granted, including the number of options granted to any optionee, the Committee did not exercise such discretion with respect to the 2011 and 2012 stock option grants and instead implemented the CEOs recommendations.
The Committee determined the number of stock options granted by multiplying (i) the average daily closing price of
our Common Shares for the prior fiscal year (ii) by a Black-Scholes factor. The Black-Scholes factor is a financial model used to determine the current value of stock options and was provided to the Company by Pay
Governance, LLC. Pay Governance, LLC advised the Committee that this method, which is consistent with the practice the Committee used in prior years, provides stability in option grants, is similar to the practices of other companies and prevents
significant fluctuation in the number of options granted that may be caused by short-term swings in stock price associated with focusing on the closing stock price for a particular day.
For 2011, based on competitive market data provided by Pay Governance, LLC and the limitation on stock grants that was
imposed by the 2009 Equity Plan prior to our 2011 Annual Meeting of Shareholders, Mr. Restrepo was granted 28.3% of his long-term incentive opportunity in the form of restricted common shares, 28.3% in the form of stock options and 43.3% in the
form of target PAUs. For 2012, based on competitive data provided by Pay Governance, LLC, Mr. Restrepo was granted one-third of his long-term incentive opportunity in the form of restricted common shares, one-third in the form of stock options
and one-third in the form of target PAUs. The restricted common shares vest on the third anniversary of the grant date. The Committee granted Mr. Restrepo this modified mix of long-term incentive compensation primarily as a result of the
limited number of shares available under the 2009 Equity Plan and to support Mr. Restrepos compliance with our Ownership Guidelines. The Committee also believes that this mix will more effectively balance the elements of long-term
compensation. The number of restricted common shares granted to Mr. Restrepo was determined by dividing the portion of his target long-term incentive opportunity awarded in restricted common shares by the sum of (i) the average daily
trading price of our Common Shares during the immediately preceding year and (ii) the estimated value of three years of anticipated cash dividends.
47
Performance Award Units
Basis for PAU Awards
PAUs reward participants for achieving sustained financial results that we believe should increase the price of our Common Shares over the long term and balance the focus of our annual operating plan by
rewarding participants for our financial results relative to those of other property and casualty insurers. This is consistent with our executive compensation program objective to provide compensation relative to our performance as compared to the
performance of our peers. In addition, because PAUs are paid in cash, they minimize shareholder dilution.
PAU Award
Process
PAUs are awarded annually by the Committee to the NEOs and are paid in cash at the end of a
three-year performance period. The amount payable at the end of the performance period is determined by multiplying the number of PAUs by the value of the PAU at the end of the performance period. PAUs are granted with a target value of
$1.00, although the final value of each PAU can range from $0.00 to $2.00 depending on our performance. The final value of a PAU depends on the State Auto Groups performance relative to a peer group of other property and casualty insurers
during the performance period (the LTIP Peer Group). For 2011 grants of PAUs, the LTIP Peer Group consisted of approximately 600 companies included in the A.M. Best Total U.S. P&C Agency Companies Composite. The peer-comparison
approach reduces the subjectivity involved in setting performance goals for a three-year period, which can be difficult, particularly in the current economic environment.
PAUs are valued based on the State Auto Groups achievement of performance goals selected by the
Committee compared against the results of the LTIP Peer Group during the three-year period. Each goal has threshold, target and maximum levels of performance. The target level for each performance measure is achieved if the State Auto Groups
performance equals the median level of performance of the companies in the LTIP Peer Group for such performance measure. The maximum level for each performance measure is achieved if the State Auto Group performs at or above the 80
th
percentile of the LTIP Peer Group. The threshold level of
performance is achieved if the State Auto Group performs at the 20
th
percentile. No amount is payable with respect to a performance measure if the State Auto Group performs below the 20
th
percentile.
For example, if at the end of the 20112013 performance period there are 600 insurance companies
in the LTIP Peer Group, and if such companies are ranked 1 600 (best to worst) in average statutory combined ratio, each NEO will receive a target award if the State Auto Groups three-year average statutory combined ratio is between the
300/301
st
ranked companies. A maximum award is earned if
our three-year average statutory combined ratio equals or exceeds the 120
th
ranked company (equal to the groups 80
th
percentile). Finally, a threshold award is received if our three-year statutory combined ratio equals the 480
th
ranked company (or the groups 20
th
percentile). The same comparison is performed for total premium growth and surplus growth, with the results equally
weighted to determine the final PAU value awarded to each NEO.
PAU Awards2009-2011 Performance Period
PAUs awarded for the 2009-2011 performance period are valued based on the achievement of three
equally-weighted performance measures: (i) direct, statutory combined ratio for the State Auto Group, (ii) the State Auto Groups direct written premium growth and (iii) the State Auto Groups surplus growth.
We have not determined the value of the PAUs awarded for the 2009-2011 performance period because the final 2009 LTIP
Peer Group data for the 2009-2011 performance period has not been released as of the date of this Proxy Statement. However, based on preliminary performance information for the 2009-2011 performance period, we currently expect that the PAUs awarded
for the 2009-2011 performance period will be valued substantially below target. We will determine the value of the PAUs awarded to our NEOs for the 2009-2011 performance period (and pay such amount to our NEOs) in May 2012 after the final 2009 LTIP
Peer Group data for the 2009-2011 performance period is released.
48
PAU Awards2011
PAUs awarded for the 2011-2013 performance period are valued based on the achievement of target results for three
equally-weighted performance measures: (i) direct, statutory combined ratio for the State Auto Group, (ii) the State Auto Groups direct written premium growth and (iii) the State Auto Groups surplus growth. The performance
measures selected by the Committee focus on our ability to appropriately price and underwrite business, control expenses, develop new products and services, invest in assets that best balance risks and rewards and enter new markets. They also assess
long-term profitability and the capital we need to underwrite future business. We believe sustained, high levels of performance in each of these areas should create value for our shareholders.
For the 2011-2013 performance period, our NEOs received PAUs in the number and with the target, threshold and maximum
values described below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Named Executive Officer
|
|
2011 Target
Units(#)
|
|
|
Target Award
Value($)*
|
|
|
Threshold Award
Value($)(1)
|
|
|
Maximum Award
Value($)*
|
|
Robert P. Restrepo Jr.
|
|
|
473,200
|
|
|
|
473,200
|
|
|
|
189,280
|
|
|
|
946,400
|
|
Steven E. English
|
|
|
172,500
|
|
|
|
172,500
|
|
|
|
69,000
|
|
|
|
345,000
|
|
Jessica E. Buss
|
|
|
101,699
|
|
|
|
101,699
|
|
|
|
40,680
|
|
|
|
203,398
|
|
Clyde H. Fitch
|
|
|
127,075
|
|
|
|
127,075
|
|
|
|
50,830
|
|
|
|
254,150
|
|
James A. Yano
|
|
|
92,000
|
|
|
|
92,000
|
|
|
|
36,800
|
|
|
|
184,000
|
|
Mark A Blackburn(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Units have a target value equal to $1.00, a threshold value of $0.40 and a maximum value of $2.00.
|
(2)
|
PAUs were not granted to Mr. Blackburn for the 2011-2013 performance period because he resigned from all of his officer positions with the
Company and the State Auto Group on January 14, 2011.
|
PAU Awards2012
PAUs awarded for the 2012-2014 performance period are valued based on the achievement of three equally-weighted
performance measures. The Committee selected the same performance measures for the 2012-2014 performance period as it did for the 2011-2013 performance period for the reasons discussed above in PAU Awards2011.
For the 2012-2014 performance period, our NEOs received PAUs in the number and with the target, threshold and maximum
values described below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Named Executive Officer
|
|
2012 Target
Units(#)
|
|
|
Target Award
Value($)(1)
|
|
|
Threshold Award
Value($)(1)
|
|
|
Maximum Award
Value($)(1)
|
|
Robert P. Restrepo Jr.
|
|
|
364,000
|
|
|
|
364,000
|
|
|
|
145,600
|
|
|
|
728,000
|
|
Steven E. English
|
|
|
255,000
|
|
|
|
255,000
|
|
|
|
102,000
|
|
|
|
510,000
|
|
Jessica E. Buss
|
|
|
141,494
|
|
|
|
141,494
|
|
|
|
56,598
|
|
|
|
282,988
|
|
Clyde H. Fitch
|
|
|
176,800
|
|
|
|
176,800
|
|
|
|
70,720
|
|
|
|
353,600
|
|
James A. Yano
|
|
|
128,000
|
|
|
|
128,000
|
|
|
|
51,200
|
|
|
|
256,000
|
|
(1)
|
Units have a target value equal to $1.00, a threshold value of $0.40 and a maximum value of $2.00.
|
Retirement and Deferred Compensation
Retirement Plans
We maintain a defined benefit pension
plan, referred to as our Retirement Plan, to recognize career contributions and service of our employees, assist in the retention of employees and provide them income continuity into retirement. We also maintain a non-qualified
Supplemental Executive Retirement Plan, referred to
49
as our SERP, to offset the impact of limitations imposed by tax laws on the amount of income or wages that can be considered in calculating benefits under traditional defined benefit
pension plans, such as our Retirement Plan. All of our current NEOs are eligible to participate in the Retirement Plan and SERP except for Ms. Buss. The SERP enables highly compensated officers to achieve the same percentage of salary
replacement as other employees upon retirement. An NEO is automatically enrolled in the SERP when his or her annual base salary exceeds the limit that can be considered in calculating benefits under the Retirement Plan. In addition to the standard
SERP, we have entered into an individual SERP agreement with Mr. Restrepo to offset the impact of the relatively shorter duration of employment available to him at our Company. Under the Retirement Plan, an employees period of service has
a significant impact on the amount of retirement benefits they would be eligible to receive. Under the standard SERP, the amount of retirement benefits that an employee would be eligible to receive is determined solely by the employees actual
period of service. The emphasis of our Retirement Plan and SERP on period of service may negatively affect our ability to attract a CEO who would not have the same opportunity to earn benefits under the Retirement Plan and SERP comparable to other
employees with longer service periods. For this reason, the Committee approved the individual SERP agreement for Mr. Restrepo. (See Contractual Arrangements with Named Executive OfficersEmployment Agreements on page 51
of this Proxy Statement and Retirement Plans on page 61 of this Proxy Statement for more information regarding our retirement plans.) Mr. Restrepos individual SERP agreement does not provide him with any additional age or
service credits upon his entry into the plan.
Defined Contribution Plan/401(k) Plan
We maintain a defined contribution plan intended to be a qualified plan under Sections 401(a) and 401(k) of the Code that
we refer to as our Retirement Savings Plan or RSP. The RSP is intended to help ensure the long-term financial stability of our employees. Participation in the RSP is available on the same terms to all of our employees,
including our NEOs. Each participant can elect to contribute from 1% to 50% of his or her base salary to the RSP. The Company may make a discretionary matching contribution of 100% of each participants RSP contributions for the first 1% of
base salary, plus 50% of each participants RSP contribution between 2% and 6% of base salary, subject to an annual maximum of $16,500. In 2010, all of our employees hired before January 1, 2010, including our NEOs, made an election to
either (i) continue participating in the Retirement Plan and RSP or (ii) cease participating in the Retirement Plan as of June 30, 2010 in favor of participating in an expanded benefit under the RSP beginning on July 1, 2010,
pursuant to which the Company would annually contribute to the RSP an amount equal to 5% of their annual base salary until the termination of their employment with the Company. If an employee elected to participate in the expanded RSP benefit, they
would continue to be eligible to receive upon retirement their accrued benefit under the Retirement Plan as of June 30, 2010. (See Deferred Compensation PlansDefined Contribution Plan/401(k) Plan on page 62 of this Proxy
Statement for more information regarding the RSP.)
Non-Qualified Deferred Compensation Plan/Supplemental 401(k) Plan
We maintain a non-qualified, unfunded deferred compensation plan for eligible key employees, which we
refer to as our Shadow Plan. Non-qualified plans provide highly compensated employees with the same retirement savings opportunities, on a relative basis, as other employees. Participants in non-qualified plans become unsecured creditors
and incur the credit risk associated with that status. Employees eligible to participate in the Shadow Plan include those who are precluded by regulatory limitations from contributing a full 6% of salary to the RSP or who may choose to defer a
portion of their salary beyond the amount matched by the RSP. Each employee who is eligible to participate in the Shadow Plan is credited annually with his or her allocable share of Company matching contributions on the same basis that contributions
are matched under the RSP, provided that no more than 6% of any employees base salary is subject to being matched in the aggregate under the RSP and the Shadow Plan. (See Deferred Compensation PlansNon-Qualified Deferred
Compensation Plan/Supplemental 401(k) Plan on page 63 of this Proxy Statement for more information regarding the Shadow Plan.)
50
Executive Perquisites
We provide our executive officers certain minimal perquisites not tied to individual or Company performance. We believe
these benefits are well below the typical practices of companies of comparable size, are highly valued by recipients, have limited cost and are part of a competitive reward program that aids in attracting and retaining the best executives.
Tax Advisory Services
We provide up to $500 each fiscal year to each optionee, including NEOs, for tax advice if the optionee exercises qualified stock options in the fiscal year. This benefit provides optionees with access to
professional advice in addressing the tax and financial consequences associated with exercising qualified incentive stock options which helps optionees accurately determine their tax liabilities and the number of shares they may need to sell to
cover those costs. The application of this benefit is limited because the Company has not granted qualified stock options in many years. None of the NEOs used this perquisite in 2011.
Travel Expenses
We regularly sponsor incentive travel programs for our independent agents. The NEOs attend these programs to develop our relationships with our independent agents, who represent the only distribution
force used by the Company. We also pay the cost incurred by the NEOs spouse or guest to attend these programs, subject to applicable tax laws. The cost is determined by dividing the total cost of the agent incentive travel program by the
number of travelers. The cost of each NEOs spouse or guest to attend the program(s) as a host in 2011 is included in the total reflected in the All Other Compensation column in the Summary Compensation Table on page 54 of this
Proxy Statement for any NEO whose spouse or guest acted as a host.
Club Memberships
During 2011, we also had a corporate membership in one social club in central Ohio. The corporate membership in this club
was used for business entertainment and meetings, and we paid the dues. The designated user was Mr. Restrepo. The dues we paid for this membership are included in the All Other Compensation column of the Summary Compensation Table
on page 54 of this Proxy Statement.
Contractual Arrangements with Named Executive Officers
Employment Agreements
The Company enters into employment agreements to provide appropriate protection to the employee and the Company and clarity to the employee and the Company about the Companys expectations. The
Company currently limits our use of employment agreements to the Chief Executive Officer. The Company believes that having an employment agreement in place for this position ensures leadership stability and focus and assists in long-term retention.
The Company also believes that continuity has a cumulative effect on the achievement of our long-term strategic and operational objectives and, therefore, also furthers the objectives of our executive compensation program.
We entered into a new employment agreement with Robert P. Restrepo, Jr., our Chairman, President and Chief Executive
Officer, on December 22, 2011. The terms of Mr. Restrepos employment agreement were the result of arms length negotiations between the Committee and Mr. Restrepo. As is the case with most executive employment agreements,
our employment agreement with Mr. Restrepo addresses separation and severance benefits in connection with the termination of his respective employment with us, either prior to or at the end of the employment term. These provisions benefit both
us and the executive in that they provide a clear understanding of the rights and obligations of the parties on events resulting in the termination of the
51
employment relationship. The terms of the employment agreement with Mr. Restrepo are described in detail below under Employment Agreement with Mr. Restrepo. The severance
and separation benefits provided to Mr. Restrepo under his employment agreement upon the occurrence of certain termination events are described below under Potential Payments Upon Termination or Change in ControlRestrepo Employment
Agreement.
Change of Control Agreements
Change of control agreements are part of our corporate strategy to retain our well-qualified senior executive officers,
notwithstanding a potential or actual change of control of our Company. Change of control agreements also serve our shareholders interests by ensuring that senior executives will view any potential transaction objectively since an adverse
change in their employment situation will not have adverse personal financial consequences. We entered into new change in control agreements, which we refer to as executive agreements, with each of our NEOs in 2011. The terms of the executive
agreements with our NEOs are described in detail below under Change of Control Agreements with Named Executive Officers. The severance and separation benefits provided to the NEOs under their respective executive agreements are described
below under Potential Payments Upon Termination or Change in ControlRestrepo Executive Agreement and English, Buss, Fitch and Yano Executive Agreements.
Tax Deductibility of Executive Compensation
Section 162(m) of the Code imposes a limit on the amount of compensation that we may deduct in any one year for our NEOs unless certain specific criteria are satisfied. Qualified
performance-based compensation, as defined in Section 162(m) of the Code, is fully deductible if the programs are approved by shareholders and meet other requirements. Our shareholders have approved the material terms of the LBP, the 2009
Equity Plan and the LTIP as required by Section 162(m) of the Code. Accordingly, compensation paid for the attainment of Company performance-based awards under the LBP, stock options awarded under the 2009 Equity Plan and compensation paid for
the attainment of the PAUs under the LTIP are intended to be deductible for federal income tax purposes in accordance with Section 162(m) of the Code. As discussed above in Proposal Two and Proposal Three, we are asking our shareholders to
reaffirm the material terms of the LBP and LTIP at the Annual Meeting. While we generally attempt to tax qualify our compensation programs, we also seek to maintain flexibility in compensating our executives. As a result, our Committee has not
adopted a policy requiring all compensation to be deductible. For example, compensation paid for the attainment of individual performance-based awards under the LBP are not intended to constitute qualified performance-based compensation
for purposes of Section 162(m) of the Code.
Stock Ownership Guidelines
We have adopted stock ownership guidelines (Ownership Guidelines) for our Section 16 officers, including
our NEOs. These Ownership Guidelines reinforce one of the objectives of our executive compensation program and primary reasons for awarding stock optionsto build appropriate levels of Common Share ownership among our executive team. Each
person subject to the Ownership Guidelines is required to acquire and maintain ownership of a designated number of Common Shares based on the persons position with us (the Ownership Target Amounts). We revised our Stock Ownership
Guidelines to also require our Section 16 officers to hold the net amount of Common Shares they obtain through the exercise of stock options or vesting of restricted stock until the later of (i) the first anniversary of the date the
officer exercised the stock options or (ii) the date on which the officer satisfies the Ownership Target Amounts.
Option grants vary based on an individuals level in the Company, the information in our competitive market data and the scope of the NEOs responsibility. As a result, it makes sense to also
vary the level of ownership we require of these individuals based on their level in the Company and the number of option grants they receive. The following Ownership Target Amount categories will remain in place until changed by the Committee:
|
|
|
|
|
Chairman/CEO
|
|
|
100,000 Common Shares
|
|
Senior Vice President
|
|
|
30,000 Common Shares
|
|
Vice President
|
|
|
7,000 Common Shares
|
|
52
Executives are in compliance with the Ownership Guidelines if they meet the
Ownership Target Amounts within five years of assuming the designated category of management or if they invest a minimum of 6% of their annual base salary in Company stock through a payroll deduction plan. All Common Shares directly owned by
officers count toward meeting their respective Ownership Target Amounts, including unvested restricted stock. In addition, for purposes of the Ownership Target Amounts we count as owned by officers one-third of their vested in-the-money
stock options. The following table shows the Ownership Target Amounts for the NEOs and the number of Common Shares currently owned by the NEOs as of March 1, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Named Executive Officer
|
|
Ownership Target
Amount for
Common Shares
|
|
|
Eligible Options
Owned by NEO(1)
|
|
|
Common Shares
Owned Directly
by NEO
|
|
|
Total Common
Share Ownership
Toward Target
|
|
Robert P. Restrepo, Jr.
|
|
|
100,000
|
|
|
|
0
|
|
|
|
59,585
|
|
|
|
59,585
|
|
Steven E. English
|
|
|
7,000
|
|
|
|
0
|
|
|
|
5,722
|
|
|
|
5,722
|
|
Jessica E. Buss
|
|
|
7,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Clyde H. Fitch
|
|
|
30,000
|
|
|
|
0
|
|
|
|
9,752
|
|
|
|
9,752
|
|
James A. Yano
|
|
|
7,000
|
|
|
|
0
|
|
|
|
4,080
|
|
|
|
4,080
|
|
(1)
|
One-third of vested in the money stock options count toward the ownership level requirement. Vested options with an exercise price that
is higher than the fair market value of the Companys Common Shares (i.e., underwater stock options) do not count towards the Ownership Guidelines. The stock options included in this table are one-third of those exercisable within 60 days of
March 1, 2012 and in the money based on a price of $13.53, which represents the closing price for the Companys Common Shares on this date.
|
Anti-Hedging Policy
The Board
adopted a policy earlier this year that prohibits all Company employees, including our NEOs, and members of the Board from engaging in certain hedging transactions with respect to Company securities held by them, including short sales and other
transactions that shift the economic consequences of ownership of Company securities to a third party (e.g., the purchase or sale of puts, calls or listed options and hedging transactions such as prepaid variable forwards, equity swaps, caps,
collars and exchange funds). The Board has also adopted a policy prohibiting our executive officers and members of the Board from holding Company securities in a margin account or otherwise pledging Company securities as collateral for a loan.
53
Summary Compensation Table for 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Principal
Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)(1)
|
|
|
Option
Awards
($)(2)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)(3)
|
|
|
Change in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
($)(4)
|
|
|
All Other
Compensation
($)(5)
|
|
|
Total
($)
|
|
Robert P. Restrepo, Jr.
|
|
|
2011
|
|
|
|
775,192
|
|
|
|
0
|
|
|
|
284,734
|
(6)
|
|
|
258,632
|
|
|
|
241,800
|
|
|
|
884,172
|
|
|
|
111,943
|
|
|
|
2,556,473
|
|
Chairman, President and Chief Executive Officer
|
|
|
2010
|
|
|
|
750,192
|
|
|
|
0
|
|
|
|
322,727
|
(6)
|
|
|
311,126
|
|
|
|
929,986
|
|
|
|
460,459
|
|
|
|
83,292
|
|
|
|
2,857,782
|
|
|
|
2009
|
|
|
|
753,462
|
|
|
|
0
|
|
|
|
88
|
|
|
|
194,809
|
|
|
|
797,240
|
|
|
|
322,638
|
|
|
|
35,969
|
|
|
|
2,104,206
|
|
|
|
|
|
|
|
|
|
|
|
Steven E. English
|
|
|
2011
|
|
|
|
392,308
|
|
|
|
0
|
|
|
|
64
|
|
|
|
106,582
|
|
|
|
168,750
|
|
|
|
133,774
|
|
|
|
19,448
|
|
|
|
820,926
|
|
Vice President and Chief Financial Officer
|
|
|
2010
|
|
|
|
358,077
|
|
|
|
0
|
|
|
|
87
|
|
|
|
107,142
|
|
|
|
353,144
|
|
|
|
86,706
|
|
|
|
14,452
|
|
|
|
919,608
|
|
|
|
2009
|
|
|
|
354,231
|
|
|
|
0
|
|
|
|
88
|
|
|
|
44,974
|
|
|
|
334,292
|
|
|
|
36,000
|
|
|
|
15,261
|
|
|
|
784,846
|
|
|
|
|
|
|
|
|
|
|
|
Jessica E. Buss (7)
|
|
|
2011
|
|
|
|
353,736
|
|
|
|
0
|
|
|
|
214
|
|
|
|
62,837
|
|
|
|
252,037
|
|
|
|
0
|
|
|
|
15,061
|
|
|
|
683,885
|
|
Vice President, Specialty Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clyde H. Fitch
|
|
|
2011
|
|
|
|
338,077
|
|
|
|
0
|
|
|
|
64
|
|
|
|
78,514
|
|
|
|
130,688
|
|
|
|
106,833
|
|
|
|
15,061
|
|
|
|
669,287
|
|
Senior Vice President and Chief Sales Officer
|
|
|
2010
|
|
|
|
328,077
|
|
|
|
0
|
|
|
|
87
|
|
|
|
98,214
|
|
|
|
331,040
|
|
|
|
73,041
|
|
|
|
15,563
|
|
|
|
846,002
|
|
|
|
2009
|
|
|
|
330,000
|
|
|
|
0
|
|
|
|
88
|
|
|
|
41,118
|
|
|
|
270,040
|
|
|
|
53,226
|
|
|
|
18,267
|
|
|
|
712,739
|
|
|
|
|
|
|
|
|
|
|
|
James A. Yano
|
|
|
2011
|
|
|
|
318,077
|
|
|
|
0
|
|
|
|
64
|
|
|
|
56,846
|
|
|
|
86,000
|
|
|
|
101,460
|
|
|
|
12,940
|
|
|
|
575,387
|
|
Vice President, Secretary and General Counsel
|
|
|
2010
|
|
|
|
308,077
|
|
|
|
0
|
|
|
|
87
|
|
|
|
70,975
|
|
|
|
217,703
|
|
|
|
68,607
|
|
|
|
9,959
|
|
|
|
671,017
|
|
|
|
2009
|
|
|
|
306,923
|
|
|
|
0
|
|
|
|
88
|
|
|
|
29,654
|
|
|
|
217,703
|
|
|
|
45,879
|
|
|
|
8,575
|
|
|
|
608,822
|
|
|
|
|
|
|
|
|
|
|
|
Mark A. Blackburn (8)
|
|
|
2011
|
|
|
|
359,904
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
518,479
|
|
|
|
1,475,444
|
|
|
|
2,354,327
|
|
Executive Vice President and
Chief Operating Officer
|
|
|
2010
|
|
|
|
473,077
|
|
|
|
0
|
|
|
|
87
|
|
|
|
239,242
|
|
|
|
521,095
|
|
|
|
627,641
|
|
|
|
36,139
|
|
|
|
1,755,154
|
|
|
|
2009
|
|
|
|
479,423
|
|
|
|
0
|
|
|
|
338
|
|
|
|
101,111
|
|
|
|
505,596
|
|
|
|
412,367
|
|
|
|
40,994
|
|
|
|
1,539,829
|
|
(1)
|
Except as described in other footnotes, the dollar amounts shown in this column represent the grant date fair value of Common Shares awarded to
the NEOs on holidays and certain service anniversary milestones. These awards are made to all employees of the company on the same basis and in the same amounts.
|
(2)
|
The dollar amounts shown in this column represent the aggregate grant date fair value of the stock options awarded in the fiscal year indicated. The
grant date fair value of each stock option granted was calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, CompensationStock Options (ASC Topic 718). For a discussion of
the assumptions used in the calculations, see Note 12 to our Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K for our fiscal year ended December 31, 2011.
|
(3)
|
The amounts earned in 2011 by the NEOs with respect to the PAUs awarded in 2009 under our LTIP for the 2009-2011 performance period are not included
in this column as the results for the 2009-2011 performance period applicable to such PAUs were not available as of the date of this Proxy Statement. We expect to determine the amounts payable to the NEOs with respect to such PAUs in May 2012.
|
54
For 2011 non-equity incentive plan compensation, the dollar amounts shown in
this column reflect the aggregate total of the following awards earned in 2010 by each NEO under the Company performance component of the LBP, the individual performance component of the LBP and the QPB:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LBP
Company
Performance
Award ($)
|
|
|
LBP
Individual
Performance
Award ($)
|
|
|
QPB
Award ($)
|
|
|
Total
Non-Equity
Incentive Plan
Compensation
Awards ($)
|
|
Robert P. Restrepo, Jr.
|
|
|
85,800
|
|
|
|
127,776
|
|
|
|
28,224
|
|
|
|
241,800
|
|
Steven E. English
|
|
|
41,250
|
|
|
|
113,026
|
|
|
|
14,474
|
|
|
|
168,750
|
|
Jessica E. Buss
|
|
|
176,868
|
|
|
|
62,369
|
|
|
|
12,800
|
|
|
|
252,037
|
|
Clyde H. Fitch
|
|
|
35,063
|
|
|
|
83,322
|
|
|
|
12,303
|
|
|
|
130,688
|
|
James A. Yano
|
|
|
22,000
|
|
|
|
52,421
|
|
|
|
11,579
|
|
|
|
86,000
|
|
Mark A. Blackburn
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For 2010 non-equity incentive plan compensation, the dollar amounts shown in this column
reflect the aggregate total of the following awards earned in 2010 by each NEO under the Company performance component of the LBP, the individual performance component of the LBP, the QPB and the PAUs relating to the 2008-2010 performance period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LBP
Company
Performance
Award ($)
|
|
|
LBP
Individual
Performance
Award ($)
|
|
|
QPB
Award ($)
|
|
|
PAU
Award
($)
|
|
|
Total
Non-Equity
Incentive Plan
Compensation
Awards ($)
|
|
Robert P. Restrepo, Jr.
|
|
|
344,450
|
|
|
|
173,113
|
|
|
|
10,918
|
|
|
|
401,505
|
|
|
|
929,986
|
|
Steven E. English
|
|
|
164,241
|
|
|
|
96,044
|
|
|
|
5,206
|
|
|
|
87,653
|
|
|
|
353,144
|
|
Clyde H. Fitch
|
|
|
94,287
|
|
|
|
53,642
|
|
|
|
4,483
|
|
|
|
87,653
|
|
|
|
331,020
|
|
James A. Yano
|
|
|
216,707
|
|
|
|
82,194
|
|
|
|
6,869
|
|
|
|
60,900
|
|
|
|
213,312
|
|
Mark A. Blackburn
|
|
|
150,554
|
|
|
|
88,041
|
|
|
|
4,772
|
|
|
|
215,325
|
|
|
|
521,095
|
|
For 2009 non-equity incentive plan compensation, the dollar amounts shown in this column
reflect the aggregate total of the following awards earned in 2009 by each NEO under the Company performance component of the LBP, the individual performance component of the LBP, the QPB and the PAUs relating to the 2007-2009 performance period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LBP
Company
Performance
Award ($)
|
|
|
LBP
Individual
Performance
Award ($)
|
|
|
QPB
Award ($)
|
|
|
PAU
Award
($)
|
|
|
Total
Non-Equity
Incentive Plan
Compensation
Awards ($)
|
|
Robert P. Restrepo, Jr.
|
|
|
288,177
|
|
|
|
196,390
|
|
|
|
8,923
|
|
|
|
303,750
|
|
|
|
797,240
|
|
Steven E. English
|
|
|
138,167
|
|
|
|
113,847
|
|
|
|
4,278
|
|
|
|
78,000
|
|
|
|
334,292
|
|
Clyde H. Fitch
|
|
|
126,324
|
|
|
|
116,089
|
|
|
|
3,911
|
|
|
|
23,716
|
|
|
|
270,040
|
|
James A. Yano
|
|
|
78,953
|
|
|
|
60,083
|
|
|
|
3,667
|
|
|
|
75,000
|
|
|
|
217,703
|
|
Mark A. Blackburn
|
|
|
183,565
|
|
|
|
125,097
|
|
|
|
5,684
|
|
|
|
191,250
|
|
|
|
505,596
|
|
(4)
|
The dollar amounts shown in this column reflect the change in the pension values for each of our NEOs, including amounts accruing under our
Retirement Plan and SERPs in which certain of our NEOs participate. None of our NEOs who participate in our non-qualified deferred compensation plan receive preferential or above-market earnings.
|
55
(5)
|
The table below shows the components of the All Other Compensation column for 2009 through 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Company
Matches
($)(a)
|
|
|
Spousal Travel
Expenses
($)(b)
|
|
|
Restricted
Stock
Dividends
($)
|
|
|
Club
Membership
Dues
($)(c)
|
|
|
Legal
Expenses
($)(d)
|
|
|
Insurance
Premiums
($)
|
|
|
Total
($)
|
|
Robert P. Restrepo, Jr.
|
|
|
2011
|
|
|
|
27,132
|
|
|
|
6,486
|
|
|
|
17,826
|
|
|
|
2,790
|
|
|
|
12,015
|
|
|
|
45,694
|
(e)
|
|
|
111,943
|
|
|
|
|
2010
|
|
|
|
24,224
|
|
|
|
4,082
|
|
|
|
9,277
|
|
|
|
2,790
|
|
|
|
0
|
|
|
|
42,919
|
(e)
|
|
|
83,292
|
|
|
|
|
2009
|
|
|
|
26,371
|
|
|
|
6,808
|
|
|
|
0
|
|
|
|
2,790
|
|
|
|
0
|
|
|
|
0
|
|
|
|
35,969
|
|
|
|
|
|
|
|
|
|
|
Steven E. English
|
|
|
2011
|
|
|
|
12,962
|
|
|
|
6,486
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
19,448
|
|
|
|
|
2010
|
|
|
|
10,652
|
|
|
|
3,800
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
14,452
|
|
|
|
|
2009
|
|
|
|
9,383
|
|
|
|
5,878
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
15,261
|
|
|
|
|
|
|
|
|
|
|
Jessica E. Buss
|
|
|
2011
|
|
|
|
8,575
|
|
|
|
6,486
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
15,061
|
|
|
|
|
|
|
|
|
|
|
Clyde H. Fitch
|
|
|
2011
|
|
|
|
8,575
|
|
|
|
6,486
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
15,061
|
|
|
|
|
2010
|
|
|
|
8,575
|
|
|
|
3,838
|
|
|
|
3,150
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
15,563
|
|
|
|
|
2009
|
|
|
|
8,575
|
|
|
|
6,542
|
|
|
|
3,150
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
18,267
|
|
|
|
|
|
|
|
|
|
|
James A. Yano
|
|
|
2011
|
|
|
|
8,575
|
|
|
|
4,365
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
12,940
|
|
|
|
|
2010
|
|
|
|
8,575
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
8,575
|
|
|
|
|
2009
|
|
|
|
8,575
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
8,575
|
|
|
|
|
|
|
|
|
|
|
Mark A. Blackburn
|
|
|
2011
|
|
|
|
12,597
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,475,944
|
(g)
|
|
|
|
2010
|
|
|
|
15,461
|
|
|
|
3,832
|
|
|
|
11,250
|
|
|
|
5,596
|
|
|
|
0
|
|
|
|
0
|
|
|
|
36,139
|
|
|
|
|
2009
|
|
|
|
16,780
|
|
|
|
6,602
|
|
|
|
11,250
|
|
|
|
5,596
|
|
|
|
0
|
|
|
|
766
|
(f)
|
|
|
40,994
|
|
|
(a)
|
The dollar amounts in this column reflect Company-paid matches under our 401(k) and/or non-qualified deferred compensation plans. None of the
amounts paid as matched contributions received preferential earnings or interest.
|
|
(b)
|
The dollar amounts in this column reflect spousal travel hosting on agent incentive trips.
|
|
(c)
|
All of the dollar amounts in this column reflect non-golf club membership dues, except for $5,226 of Mr. Blackburns 2009 amount which
reflects golf club membership dues.
|
|
(d)
|
The dollar amount in this column reflects certain legal expenses paid by the Company on behalf of Mr. Restrepo.
|
|
(e)
|
These dollar amounts reflect the income attributed to Mr. Restrepo as a result of the long term disability policy obtained by the Company to
address its disability obligation under his Employment Agreement ($28,992 in 2011 and 2010), and an amount to reimburse Mr. Restrepo for the income tax liability that he incurred as a result of such policy ($16,702 and $13,927 in 2011 and 2010,
respectively).
|
|
(f)
|
The dollar amount in this column reflects the life insurance policy premiums paid by the Company on behalf of Mr. Blackburn.
|
|
(g)
|
Mr. Blackburn retired from the Company and the State Auto Group effective as of November 1, 2011. Under the terms of his employment agreement, Mr.
Blackburns retirement constituted a non-renewal of his employment agreement and entitled him to receive the compensation and benefits payable under his employment agreement in the event of a termination without cause. Upon his retirement, Mr.
Blackburn became entitled to receive the following severance payments: (i) an amount equal to two times his annual base salary as of the retirement date ($950,000); (ii) an amount equal to the average payment he received under the LBP for 2009
and 2010 ($303,782); (iii) an amount equal to the average payment he received under the QPB for 2009 and 2010 ($6,277); (iv) an amount equal to the average payment he received under the LTIP for 2009 and 2010 ($203,288); (v) a prorated amount (based
on Mr. Blackburns retirement date) equal to (A) the value of the PAUs awarded to Mr. Blackburn for the 2009-2011 performance period (based on the actual achievement of the performance measures during the performance period), less (B) the
amount paid to Mr. Blackburn under item (iv); and (vi) a prorated
|
56
|
amount (based on Mr. Blackburns retirement date) equal to (A) the value of the PAUs awarded to Mr. Blackburn for the 2010-2012 performance period based on the actual achievement of the
performance measures during the performance period, less (B) the sum of the amounts paid to Mr. Blackburn under items (iv) and (v). The amounts payable to Mr. Blackburn pursuant to items (v) and (vi), if any, cannot be determined until May 2012 and
May 2013, respectively, when the achievement of the applicable performance measures during the performance period is known.
|
(6)
|
These dollar amounts include the grant date fair value of the restricted common shares awarded to Mr. Restrepo under our 2009 Equity Plan. The
grant date fair value of these restricted common shares was determined by multiplying the closing price of our Common Shares on the date of grant ($17.03 and $18.78 for 2011 and 2010, respectively) by the number of restricted common shares granted.
|
(7)
|
Ms. Buss was not a NEO in 2010 or 2009.
|
(8)
|
Mr. Blackburn resigned from all of his officer positions with the Company and the State Auto Group on January 14, 2011. Mr. Blackburn
retired from his remaining positions with the Company and the State Auto Group effective on November 1, 2011.
|
57
Grants of Plan-Based Awards in 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Grant
Date
|
|
|
Non-Equity
Incentive
Plan
Number of
Units
(#)
|
|
|
Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards
($)
|
|
|
All Other
Stock
Awards:
Number of
Shares of
Stock
or Units
(#)
|
|
|
All
Other
Option Awards:
Number of
Securities
Underlying
Options
(#)
|
|
|
Exercise or
Base Price
of Option
Awards
($/Sh)
|
|
|
Grant Date
Fair
Value
of Stock
and
Option
Awards
($)
|
|
|
|
|
Threshold
($)
|
|
|
Target
($)
|
|
|
Maximum
($)
|
|
|
|
|
|
Robert P. Restrepo, Jr.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock award (1)
|
|
|
3-3-11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,707
|
|
|
|
|
|
|
|
|
|
|
|
284,520
|
|
Stock option award (2)
|
|
|
3-3-11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,890
|
|
|
|
17.03
|
|
|
|
258,632
|
|
LBP Company performance award (3)
|
|
|
3-3-11
|
|
|
|
|
|
|
|
46,800
|
|
|
|
468,000
|
|
|
|
936,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LBP individual performance award (4)
|
|
|
3-3-11
|
|
|
|
|
|
|
|
15,600
|
|
|
|
75,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QPB award (5)
|
|
|
1-1-11
|
|
|
|
|
|
|
|
|
|
|
|
28,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAU award (6)
|
|
|
3-3-11
|
|
|
|
473,200
|
|
|
|
189,280
|
|
|
|
473,200
|
|
|
|
946,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven E. English:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option award (2)
|
|
|
3-3-11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,796
|
|
|
|
17.03
|
|
|
|
106,582
|
|
LBP Company performance award (3)
|
|
|
3-3-11
|
|
|
|
|
|
|
|
22,500
|
|
|
|
225,000
|
|
|
|
450,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LBP individual performance award (4)
|
|
|
3-3-11
|
|
|
|
|
|
|
|
7,500
|
|
|
|
75,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QPB award (5)
|
|
|
1-1-11
|
|
|
|
|
|
|
|
|
|
|
|
14,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAU award (6)
|
|
|
3-3-11
|
|
|
|
172,500
|
|
|
|
69,000
|
|
|
|
172,500
|
|
|
|
345,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jessica E. Buss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option award (2)
|
|
|
3-3-11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,850
|
|
|
|
17.03
|
|
|
|
62,837
|
|
LBP Company performance award (3)
|
|
|
3-3-11
|
|
|
|
|
|
|
|
13,265
|
|
|
|
132,651
|
|
|
|
265,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LBP individual performance award (4)
|
|
|
3-3-11
|
|
|
|
|
|
|
|
4,422
|
|
|
|
44,217
|
|
|
|
88,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QPB award (5)
|
|
|
1-1-11
|
|
|
|
|
|
|
|
|
|
|
|
12,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAU award (6)
|
|
|
3-3-11
|
|
|
|
|
|
|
|
40,680
|
|
|
|
101,699
|
|
|
|
203,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clyde H. Fitch:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option award (2)
|
|
|
3-3-11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,056
|
|
|
|
17.03
|
|
|
|
78,514
|
|
LBP Company performance award (3)
|
|
|
3-3-11
|
|
|
|
|
|
|
|
19,125
|
|
|
|
191,250
|
|
|
|
382,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LBP individual performance award (4)
|
|
|
3-3-11
|
|
|
|
|
|
|
|
6,375
|
|
|
|
63,750
|
|
|
|
127,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QPB award (5)
|
|
|
1-1-11
|
|
|
|
|
|
|
|
|
|
|
|
12,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAU award (6)
|
|
|
3-3-11
|
|
|
|
127,075
|
|
|
|
50,830
|
|
|
|
127,075
|
|
|
|
254,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James A. Yano:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option award (2)
|
|
|
3-3-11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,625
|
|
|
|
17.03
|
|
|
|
56,846
|
|
LBP Company performance award (3)
|
|
|
3-3-11
|
|
|
|
|
|
|
|
12,000
|
|
|
|
120,000
|
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LBP individual performance award (4)
|
|
|
3-3-11
|
|
|
|
|
|
|
|
4,000
|
|
|
|
40,000
|
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QPB award (5)
|
|
|
1-1-11
|
|
|
|
|
|
|
|
|
|
|
|
11,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAU award (6)
|
|
|
3-3-11
|
|
|
|
92,000
|
|
|
|
36,800
|
|
|
|
92,000
|
|
|
|
184,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In 2011, Mr. Restrepo received restricted common shares under our 2009 Equity Plan. The restricted common shares shown in this column were
granted on the date indicated pursuant to action of the Compensation Committee at a meeting held on that day. These restricted common shares vest on the third anniversary of the grant date. The grant date fair value of these restricted common shares
was determined by multiplying the closing price of Common Shares on the date of grant ($17.03) by the number of restricted common shares granted. For a further discussion of the 2009 Equity Plan, see Executive Compensation Program
ElementsLong-Term Equity and Cash Incentive Compensation.
|
(2)
|
In 2011, all of our NEOs received options under our 2009 Equity Plan. The options shown in this column were granted on the date indicated, at the
closing price on that date, pursuant to action of the Compensation Committee at a meeting held on that day. These options vest in equal annual installments over a three-year period and are exercisable for a ten-year term. All of these options are
non-qualified stock options. The grant date fair value of these
|
58
|
options was determined in accordance with ASC Topic 718. These options have not been re-priced or otherwise materially amended. For a further discussion of the 2009 Equity Plan, see
Executive Compensation Program ElementsLong-Term Equity and Cash Incentive Compensation.
|
(3)
|
In 2011, all of our NEOs participated in the LBP, an annual cash incentive bonus plan that has a Company performance component and an individual
performance component. For our NEOs, awards for the Company performance component of the LBP are based solely upon the achievement of certain Company performance measures established by the Compensation Committee at the beginning of a performance
year. For 2011, the Company performance measures were LBP Combined Ratio, return on equity and premium growth for all of the NEOs participating in the LBP other than Ms. Buss. The Company performance measures for 2011 applicable to Ms. Buss were
return on equity, rate change and net statutory combined ratio for our specialty insurance segment. The actual payments made to each NEO for the Company performance component of the LBP for 2011 are reported in the Summary Compensation Table in the
Non-Equity Incentive Plan Compensation column and the footnotes thereto. For a further discussion of the Company performance component of the LBP, see Executive Compensation Program ElementsShort-Term Incentive
CompensationLeadership Bonus Plan Bonuses.
|
(4)
|
For our NEOs, awards for the individual performance component of the LBP are based on the attainment of individual performance goals for a
performance year. Our Compensation Committee, with input from the Board of Directors and the State Auto Mutual Board, establishes the individual performance goals for the CEO. The CEO establishes the individual performance goals for the other NEOs.
The actual payments made to each NEO for the individual performance component of the LBP for 2011 are reported in the Summary Compensation Table in the Non-Equity Incentive Plan Compensation column and the footnotes thereto. For a further discussion
of the individual performance component of the LBP, see Executive Compensation Program ElementsShort-Term Incentive CompensationLeadership Bonus Plan Bonuses.
|
(5)
|
In 2011, all of our NEOs participated in the QPB, a quarterly cash profit-sharing plan in which all of our employees were eligible to participate
after meeting minimum service requirements. The QPB pays a quarterly bonus if the QPB Combined Ratio is better than the Combined Ratio Trigger for that quarter, which is set annually. To the extent that the QPB Combined Ratio for a quarter is less
than the Combined Ratio Trigger for that quarter, the difference is multiplied by the direct earned premium (in essence, the amount of our underwriting profit in excess of the Combined Ratio Trigger) for that quarter. An amount equal to fifteen
percent of the product is placed in the QPB bonus pool, and the QPB bonus pool is divided by the total salaries of all eligible participants to determine the QPB bonus for that quarter. Since the 2011 QPB target amounts are not determinable, the
amounts shown are the actual QPB awards paid to the NEOs in 2011 as shown in the Summary Compensation Table in the Non-Equity Incentive Plan Compensation column and the footnotes thereto. The total amount of quarterly QPB bonuses paid during any
year reduces the NEOs individual performance LBP bonus, with any difference reducing the NEOs Company performance LBP bonus. For a further discussion of the QPB, see Executive Compensation Program ElementsShort-Term
Incentive CompensationQuality Performance Bonus Plan Bonuses.
|
(6)
|
In 2011, all of our NEOs were selected to participate in the LTIP, a cash incentive bonus plan, for the performance period beginning January 1,
2011 and ending December 31, 2013. Under the LTIP, the NEOs receive performance award units, or PAUs, the value of which is determined by our Companys performance in three equally weighted measuresdirect, statutory
combined ratio for the State Auto Group, the State Auto Groups direct written premium growth and the State Auto Groups surplus growthin comparison to the LTIP Peer Group over the three-year performance period. PAUs are granted with
a target value of $1.00, although the final value of each PAU can range from $0.00 to $2.00. For a further discussion of the LTIP, see Executive Compensation Program ElementsLong-Term Equity and Cash Incentive Compensation.
|
59
Outstanding Equity Awards at Fiscal 2011 Year-End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
|
Number of
Securities
Underlying
Unexercised
Options (#)(1)
Unexercisable
|
|
|
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
|
|
Option
Exercise
Price
($)
|
|
|
Option
Expiration
Date
|
|
|
Number
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
(#)
(2)
|
|
|
Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
($)*
|
|
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units
or
Other
Rights
That
Have Not
Vested
(#)
|
|
Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares,
Units
or
Other
Rights
That
Have Not
Vested
($)
|
Robert P. Restrepo, Jr.
|
|
|
30,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
31.94
|
|
|
|
3-01-16
|
|
|
|
33,887
|
|
|
|
460,524
|
|
|
|
|
|
|
|
|
23,012
|
|
|
|
0
|
|
|
|
0
|
|
|
|
29.53
|
|
|
|
5-02-17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,624
|
|
|
|
0
|
|
|
|
0
|
|
|
|
25.81
|
|
|
|
3-05-18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,899
|
|
|
|
17,189
|
|
|
|
0
|
|
|
|
14.49
|
|
|
|
3-04-19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,366
|
|
|
|
35,649
|
|
|
|
0
|
|
|
|
18.78
|
|
|
|
3-03-20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
52,890
|
|
|
|
0
|
|
|
|
17.03
|
|
|
|
3-02-21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven E. English
|
|
|
2,334
|
|
|
|
0
|
|
|
|
0
|
|
|
|
16.00
|
|
|
|
5/22/12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,500
|
|
|
|
0
|
|
|
|
0
|
|
|
|
18.74
|
|
|
|
5/21/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,500
|
|
|
|
0
|
|
|
|
0
|
|
|
|
30.86
|
|
|
|
5/26/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,252
|
|
|
|
0
|
|
|
|
0
|
|
|
|
30.75
|
|
|
|
5/31/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,500
|
|
|
|
0
|
|
|
|
0
|
|
|
|
26.45
|
|
|
|
5/9/15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,300
|
|
|
|
0
|
|
|
|
0
|
|
|
|
33.50
|
|
|
|
5/16/16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,910
|
|
|
|
0
|
|
|
|
0
|
|
|
|
29.53
|
|
|
|
5/2/17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,834
|
|
|
|
0
|
|
|
|
0
|
|
|
|
25.81
|
|
|
|
3/5/18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,057
|
|
|
|
3,968
|
|
|
|
0
|
|
|
|
14.49
|
|
|
|
3/4/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,325
|
|
|
|
12,276
|
|
|
|
0
|
|
|
|
18.78
|
|
|
|
3/3/20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
21,796
|
|
|
|
0
|
|
|
|
17.03
|
|
|
|
3/2/21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jessica E. Buss
|
|
|
0
|
|
|
|
12,850
|
|
|
|
0
|
|
|
|
17.03
|
|
|
|
3-02-21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clyde H. Fitch
|
|
|
18,850
|
|
|
|
0
|
|
|
|
0
|
|
|
|
25.72
|
|
|
|
11/4/17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,834
|
|
|
|
0
|
|
|
|
0
|
|
|
|
25.81
|
|
|
|
3/5/18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,366
|
|
|
|
3,628
|
|
|
|
0
|
|
|
|
14.49
|
|
|
|
3/4/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,798
|
|
|
|
11,253
|
|
|
|
0
|
|
|
|
18.78
|
|
|
|
3/3/20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
16,056
|
|
|
|
0
|
|
|
|
17.03
|
|
|
|
3/2/21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James A. Yano
|
|
|
5,682
|
|
|
|
0
|
|
|
|
0
|
|
|
|
29.53
|
|
|
|
5/2/17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,527
|
|
|
|
0
|
|
|
|
0
|
|
|
|
25.81
|
|
|
|
3/5/18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,286
|
|
|
|
2,643
|
|
|
|
0
|
|
|
|
14.49
|
|
|
|
3/4/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,190
|
|
|
|
8,132
|
|
|
|
0
|
|
|
|
18.78
|
|
|
|
3/3/20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
11,625
|
|
|
|
0
|
|
|
|
17.03
|
|
|
|
3/2/21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark A. Blackburn(3)
|
|
|
14,500
|
|
|
|
0
|
|
|
|
0
|
|
|
|
16.00
|
|
|
|
5-22-12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,500
|
|
|
|
0
|
|
|
|
0
|
|
|
|
18.74
|
|
|
|
5-21-13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,500
|
|
|
|
0
|
|
|
|
0
|
|
|
|
30.86
|
|
|
|
5-26-14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
26.45
|
|
|
|
5-09-15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,489
|
|
|
|
0
|
|
|
|
0
|
|
|
|
33.50
|
|
|
|
5-16-16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,613
|
|
|
|
0
|
|
|
|
0
|
|
|
|
29.53
|
|
|
|
5-02-17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,035
|
|
|
|
0
|
|
|
|
0
|
|
|
|
25.81
|
|
|
|
3-05-18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,535
|
|
|
|
0
|
|
|
|
0
|
|
|
|
14.49
|
|
|
|
3-04-19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,400
|
|
|
|
0
|
|
|
|
0
|
|
|
|
18.78
|
|
|
|
3-03-20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
The closing price of our Common Shares on December 30, 2011 was $13.59.
|
(1)
|
All options listed in this table are exercisable for a ten-year period from their respective date of grant. The following schedule describes the
vesting dates for the options listed as unexercisable by date of grant:
|
|
|
|
Options expiring March 4, 2019 were granted on March 5, 2009. These options vest in equal annual installments over a three-year period.
All of these options will fully vest as of March 5, 2012.
|
|
|
|
Options expiring March 3, 2020 were granted on March 4, 2010. These options vest in equal annual installments over a three-year period.
All of these options will fully vest as of March 4, 2013.
|
60
|
|
|
Options expiring March 2, 2021 were granted on March 3, 2011. These options vest in equal annual installments over a three-year period.
All of these options will fully vest as of March 3, 2014.
|
(2)
|
All restricted common shares listed in this table vest on the third anniversary of the date of grant. Accordingly 17,180 of such shares vest on
March 4, 2013 and 16,707 of such shares vest on March 3, 2014.
|
(3)
|
Mr. Blackburn retired from the Company and the State Auto Group on November 1, 2011. All unexercisable stock options held by Mr. Blackburn on such
date vested upon his retirement.
|
Option Exercises and Stock Vested in Fiscal 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
Number of Shares
Acquired on Exercise
(#)
|
|
|
Value Realized
on Exercise
($)
|
|
|
Number of Shares
Acquired on Vesting
(#)
|
|
|
Value Realized
on Exercise
($)
|
|
Robert P. Restrepo, Jr.
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
Steven E. English
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
Jessica E. Buss
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
Clyde H. Fitch
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
James A. Yano
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
Mark A. Blackburn
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
Retirement Plans
Retirement Plan
We maintain a defined benefit pension plan, referred to as our Retirement Plan. The Retirement Plan is intended to be a qualified plan under Section 401(a) of the Code and is subject to
the minimum funding standards of Section 412 of the Code. All of our employees and current NEOs hired before January 1, 2010 are eligible to participate in the Retirement Plan. Benefits payable under the Retirement Plan are funded entirely
through Company contributions to a trust fund. Only base salary, not incentive compensation, is taken into consideration in the calculation of benefits under our Retirement Plan.
Supplemental Executive Retirement Plans
Our SERP, which mirrors the Retirement Plan, provides a lump sum or deferred cash payments in actuarially determined
amounts upon retirement for certain officers. Like the Retirement Plan, the SERP considers only base salary, not incentive compensation, in calculating the benefit due each participant. The Committee previously approved participation in this SERP
for all NEOs. Executives are now automatically enrolled in the SERP when his or her annual base salary exceeds the limit that can be considered in calculating benefits under the Retirement Plan.
In addition to the standard SERP discussed above, we have entered into an individual SERP agreement with
Mr. Restrepo to offset the impact of the relatively shorter duration of employment available to him at our Company. We have a mandatory retirement age of 65 for certain officers. Mr. Restrepo is currently 60 and has been an employee for
five years. The Retirement Plan and the standard SERP, discussed above, both use a career average plan formula for benefit determinations. Under those plans, an employees period of service has a significant impact on the amount of retirement
benefits they would be eligible to receive. As a result, our regular plans may inhibit our ability to attract mid-career executives who would not have the same opportunity to earn benefits comparable to other employees. For this reason, the
Committee approved the individual SERP agreements for Mr. Restrepo (See Employment Agreements with Named Executive Officers on page 64 of this Proxy Statement).
61
Pension Benefits in Fiscal 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Plan Name
|
|
Number of Years
Credited Service
(#)
|
|
|
Present Value
of Accumulated
Benefit ($) (1)
|
|
|
Payments During Last
Fiscal Year
($)
|
|
Robert P. Restrepo, Jr.
|
|
Retirement Plan
|
|
|
6
|
|
|
|
308,553
|
|
|
|
0
|
|
|
|
SERP
|
|
|
6
|
|
|
|
666,707
|
|
|
|
0
|
|
|
|
Individual SERP
|
|
|
6
|
|
|
|
1,290,425
|
|
|
|
0
|
|
|
|
|
|
|
Steven E. English
|
|
Retirement Plan
|
|
|
11
|
(2)
|
|
|
243,457
|
|
|
|
0
|
|
|
|
SERP
|
|
|
11
|
(2)
|
|
|
80,932
|
|
|
|
0
|
|
|
|
|
|
|
Jessica E. Buss (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clyde H. Fitch
|
|
Retirement Plan
|
|
|
4
|
|
|
|
209,070
|
|
|
|
0
|
|
|
|
SERP
|
|
|
4
|
|
|
|
72,247
|
|
|
|
0
|
|
|
|
|
|
|
James A. Yano
|
|
Retirement Plan
|
|
|
3
|
|
|
|
226,754
|
|
|
|
0
|
|
|
|
SERP
|
|
|
3
|
|
|
|
44,960
|
|
|
|
0
|
|
|
|
|
|
|
Mark A. Blackburn.
|
|
Retirement Plan
|
|
|
12
|
|
|
|
516,182
|
|
|
|
0
|
|
|
|
SERP
|
|
|
12
|
|
|
|
281,603
|
|
|
|
0
|
|
|
|
Individual SERP
|
|
|
12
|
|
|
|
1,587,113
|
|
|
|
0
|
|
(1)
|
The amounts shown in this column represent the present value of the normal retirement benefit each NEO would receive under the Retirement Plan, SERP
and individual supplemental executive retirement plans if the NEO were to retire at his normal retirement age. Normal retirement age under the plans is defined as attaining age 65. The normal retirement benefit is equal to the sum of (i) 1.75%
of a participants covered compensation multiplied by the participants years of service, plus (ii) 0.65% of a participants covered compensation multiplied by the participants years of service. The normal form
of benefit is a single life annuity; however, participants may elect a joint and survivor annuity with a survivor benefit of up to 100% of the participants benefit. A participant who elects a joint and survivor annuity receives a reduced
annual benefit, with a joint and 100% survivor annuity providing the smallest annual benefit. Participants who have attained age 55 with 15 years of service may receive an early retirement benefit under the plans. The early retirement benefit for a
participant is reduced by 5% for each year prior to age 65 for a participant who terminates between ages 55 and 59, and 4% for each year prior to age 65 for a participant who terminates between ages 60 and 65. If a participant were to retire at age
55, their normal retirement benefit would be reduced by 45%. As of December 31, 2011, no NEOs were eligible for early retirement benefits under the plans. Participants may elect to receive up to 50% of their benefits in a lump-sum upon their
retirement.
|
(2)
|
Includes Mr. Englishs one year of service with Meridian Insurance Group, Inc. (MIGI). Mr. English was previously an
executive officer with MIGI, which was acquired by State Auto Mutual in 2001. Following this acquisition, Mr. English became our employee, and for purposes of the Retirement Plan, he was given credit for his one year of eligible service with
MIGI.
|
(3)
|
Ms. Buss is not eligible to participate in the Retirement Plan or SERP and is not a party to an individual supplemental executive retirement
plan.
|
Deferred Compensation Plans
Defined Contribution Plan/401(k) Plan
Our defined contribution plan, which we refer to as the Retirement Savings Plan or RSP, is
intended to be a qualified plan under Sections 401(a) and 401(k) of the Code. We changed the name of the RSP from The State Auto Insurance Companies Capital Accumulation Plan to The State Auto Insurance Companies Retirement
62
Savings Plan effective on January 1, 2010. Participation in the RSP is available on the same terms to all of our employees, including our NEOs. Each participant can elect to contribute from
1% to 50% of his or her base salary to the RSP. The deferred amount is contributed to the RSP trust fund and invested in accordance with the election of the participant from among investment funds established under the trust agreement. Investment
options include Common Shares, but only up to 20% of new contributions and the total account balance may be invested in Common Shares.
The Company may make a discretionary matching contribution of 100% of each participants RSP contributions for the first 1% of base salary, plus 50% of each participants RSP contribution
between 2% and 6% of base salary, subject to an annual maximum of $16,500. This equates to a Company contribution in the RSP of 58 cents for each salary dollar contributed by an employee who contributed a full 6% of salary to RSP. While a
participant is always vested in his or her own salary reduction contributions, the right of a participant to amounts credited to his or her account as matching contributions is subject to vesting as provided by the 401(k) Plan. With respect to Ms.
Buss, the Company makes an annual contribution to the RSP equal to 5% of her annual base salary.
In 2010, all
of our employees hired before January 1, 2010, including our NEOs hired before January 1, 2010, made an election to either (i) continue participating in the Retirement Plan and RSP on the terms discussed above or (ii) cease
participating in the Retirement Plan as of June 30, 2010 in favor of participating in an expanded benefit under the RSP beginning on July 1, 2010, pursuant to which the Company would annually contribute to the RSP an amount equal to 5% of
their annual base salary until the termination of their employment with the Company. If an employee elected to participate in the expanded RSP benefit, they would continue to be eligible to receive upon retirement their accrued benefit under the
Retirement Plan as of June 30, 2010.
Non-Qualified Deferred Compensation Plan/Supplemental 401(k) Plan
Our Non-Qualified Deferred Compensation Plan, which we refer to as our Shadow Plan, is a
non-qualified, unfunded deferred compensation plan for eligible key employees. Eligible employees include those who are precluded by regulatory limitations from contributing a full 6% of salary to the RSP or who choose to defer a portion of their
salary beyond the amount matched by the RSP. Under the Shadow Plan, eligible employees who wish to participate enter into a salary reduction agreement to defer payment of an additional portion of the employees salary. Each employee who is
eligible to participate in the Shadow Plan is credited annually with his or her allocable share of Company matching contributions on the same basis that contributions are matched under the RSP, provided that no more than 6% of any employees
base salary is subject to being matched in the aggregate under the RSP and the Shadow Plan.
The total amount
of salary deferred under the RSP and the Shadow Plan cannot exceed in the aggregate 50% of a participants base salary. The Shadow Plan also allows participants to defer up to 100% of short-term and long-term incentive compensation, although
bonuses remain ineligible for a Company match. Amounts deferred under the Shadow Plan, along with the Company match on any portion of salary deferral eligible for the match, are invested by State Auto P&C in a variety of mutual fund-type
investment options in accordance with the election of the participants, which the participants may modify on a daily basis. Participants may choose from a variety of mutual fund-type investment options, and elect a five or ten-year payout option or
a date-certain distribution option for withdrawal of funds from the Plan. Neither the Shadow Plan nor the RSP provides for above market or preferential earnings opportunities for any participant.
63
Nonqualified Deferred Compensation for Fiscal 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Executive
Contributions
in Last Fiscal
Year
($)(1)(2)
|
|
|
Registrant
Contributions in
Last Fiscal Year
($)(1)(3)
|
|
|
Aggregate Earnings
in Last Fiscal Year
($)(4)
|
|
|
Aggregate
Withdrawals/
Distributions
($)
|
|
|
Aggregate
Balance at
Last
Fiscal
Year-End
($)
|
|
Robert P. Restrepo, Jr.
|
|
|
24,512
|
|
|
|
18,557
|
|
|
|
(10,972
|
)
|
|
|
0
|
|
|
|
279,859
|
|
Steven E. English
|
|
|
195,552
|
|
|
|
4,387
|
|
|
|
8,785
|
|
|
|
0
|
|
|
|
457,581
|
|
Jessica E. Buss
|
|
|
0
|
|
|
|
5,437
|
|
|
|
19
|
|
|
|
0
|
|
|
|
5,455
|
|
Clyde H. Fitch
|
|
|
0
|
|
|
|
0
|
|
|
|
(69
|
)
|
|
|
0
|
|
|
|
20,327
|
|
James A. Yano
|
|
|
0
|
|
|
|
0
|
|
|
|
312
|
|
|
|
0
|
|
|
|
15,913
|
|
Mark A. Blackburn
|
|
|
21,594
|
|
|
|
12,597
|
|
|
|
8
|
|
|
|
3,973
|
|
|
|
75,493
|
|
(1)
|
Contributions by the NEO or by us, as the case may be, were made pursuant to the State Auto Property & Casualty Insurance Companys
Amended and Restated Incentive Deferred Compensation Plan, referred to as our Shadow Plan.
|
(2)
|
The dollar amounts shown in this column are included in the Salary column in the Summary Compensation Table.
|
(3)
|
The dollar amounts shown in this column are included in the All Other Compensation column in the Summary Compensation Table and are
discussed in the footnotes thereto.
|
(4)
|
The dollar amounts shown in this column reflect the total earnings on dollars deposited into the NEOs account in 2011 and all prior years for
which the NEO deferred compensation on a non-qualified basis. Earnings are not preferential, in any sense. The dollars in these accounts are invested in investment funds that mirror the investment funds offered to participants in our RSP.
|
Employment Agreements with Named Executive Officers
Restrepo Employment Agreement
We entered into a new employment agreement with Robert P. Restrepo, Jr., our Chairman, President and Chief Executive Officer, on December 22, 2011. The employment agreement has a four-year term
ending on December 31, 2015, unless terminated earlier due to Mr. Restrepos disability, death, voluntary termination of employment, or involuntary termination of employment by the Company for cause or without cause.
Mr. Restrepos retirement from the Company, whether initiated by Mr. Restrepo or mandatory, will be treated as his voluntary termination of employment.
Under his employment agreement, Mr. Restrepo receives an annual base salary and is entitled to participate in the
LBP, the QPB (for so long as the Company continues to offer the QPB to its executives), the LTIP, any Company employee stock purchase plan, the Retirement Plan, the RSP, the SERP, the Restrepo SERP (as defined below) and the 2009 Equity Plan, and is
eligible to participate in all other incentive compensation plans, stock purchase plans, retirement plans, equity-based compensation plans and fringe benefits generally made available to executives of the Company. The employment agreement further
provides that unless Mr. Restrepo otherwise agrees (i) his annual base salary shall not be less than $780,000, (ii) his target bonus under the LBP shall not be less than 75% of his then-current annual base salary and (iii) his
potential bonus compensation under the LBP shall not be less than his potential bonus compensation under the LBP as of December 22, 2011. The compensation paid to Mr. Restrepo in 2009, 2010 and 2011 is set forth in the Summary
Compensation Table on page 54 of this Proxy Statement.
Mr. Restrepos employment agreement
also imposes post-employment covenants that prohibit Mr. Restrepo from disclosing or using our confidential information, engaging in activities which compete with our businesses and soliciting our employees to work for another company. The
obligations imposed by the non-competition and
64
non-solicitation covenants will continue for a period of two years following Mr. Restrepos separation of service with the Company, provided, that the non-competition obligations will
only continue for a period of one year if Mr. Restrepos separation from service with the Company is voluntary.
The severance and separation benefits provided to Mr. Restrepo under his employment agreement upon the occurrence of certain termination events are described below under Potential Payments Upon
Termination or Change in ControlRestrepo Employment Agreement. Mr. Restrepo may be required to repay all or any part of such severance and separation benefits if:
|
|
|
Mr. Restrepo violates any of the non-competition, non-solicitation or confidentiality covenants applicable to Mr. Restrepo;
|
|
|
|
(i) the amount of such benefits are calculated based upon the achievement of certain financial results that are subsequently the subject of a
financial statement restatement by the Company; (ii) Mr. Restrepo engages in conduct detrimental to the Company that causes or substantially contributes to the need for the financial statement restatement; and (iii) the amount of his
severance and separation benefits would have been lower than the amount actually awarded to him had the financial results been properly reported; or
|
|
|
|
Mr. Restrepo engages in (i) any conduct detrimental to the Company during the employment term which has a material adverse effect on the
Company or (ii) any fraudulent conduct.
|
Mr. Restrepo is also eligible to
participate in an individual Supplemental Executive Retirement Plan established for him by the Company (the Restrepo SERP). The Restrepo SERP generally provides Mr. Restrepo with supplemental retirement benefits to the extent
necessary to cause his aggregate retirement benefits to equal 50% of his average total cash compensation during his final three years of employment by the Company; provided, however, that the benefits payable pursuant to the Restrepo SERP will be
proportionately reduced if Mr. Restrepo has less than 20 years of service with the Company at retirement. The Company has a mandatory retirement age of 65 for executive officers, and Mr. Restrepo was age 55 when he began his employment
with the Company. As a result, Mr. Restrepo will have no more than 10 years of service with the Company when he reaches mandatory retirement age, which will reduce the benefits payable pursuant to the Restrepo SERP accordingly.
Change of Control Agreements with Named Executive Officers
We entered into a new change in control agreement, which we refer to as executive agreements, with each of our
NEOs (other than Mr. Blackburn, who is no longer employed by the Company) in 2011. The terms of each executive agreement were the result of arms length negotiations between the Committee and the executive. Each of the executive agreements
define a Change of Control to include the following:
|
|
|
any person becomes the direct or indirect owner of 30% or more of the combined voting power of the Companys then outstanding securities,
except for acquisitions by the Company or certain of its affiliates or by any employee benefit plan maintained by the Company or certain of its affiliates;
|
|
|
|
a majority of the Board is comprised of other than continuing directors;
|
|
|
|
any event or transaction occurs that the Company would be required to report as a change in control under Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Exchange Act;
|
|
|
|
a merger or consolidation of the Company, other than a merger or consolidation in which the voting securities of the Company immediately prior to
the merger or consolidation continue to represent more than 50% of the combined voting power of the Company or surviving entity immediately after the merger or consolidation with another entity;
|
|
|
|
a sale, exchange, lease, mortgage, pledge, transfer or other disposition of all or substantially all of the assets of the Company (including the
sale of assets or earning power aggregating more than 50% of the assets or earning power of the Company on a consolidated basis);
|
65
|
|
|
a reorganization, reverse stock split, or recapitalization of the Company which would result in any of the foregoing; and
|
|
|
|
State Auto Mutual affiliates with or is merged into or consolidated with a third party or completes a conversion to a stock insurance company and,
as a result, a majority of the Board of Directors of State Auto Mutual or its successor is comprised of other than continuing directors.
|
Restrepo Executive Agreement
We entered into a new
executive agreement with Mr. Restrepo on December 22, 2011 contemporaneously with our entry into his new employment agreement. The term of Mr. Restrepos executive agreement coincides with the term of his employment agreement,
subject to an extension for 36 months after any month in which a Change of Control occurs. Mr. Restrepos executive agreement will terminate if his employment terminates prior to a Change of Control unless the termination occurs in the
event of a pending Change of Control event.
We will provide certain severance benefits to Mr. Restrepo
under his executive agreement if Mr. Restrepo incurs a separation of service (as defined by Section 409A of the Code) during the term of his executive agreement:
|
|
|
by us at any time within 24 months after a Change of Control;
|
|
|
|
by Mr. Restrepo for good reason (as defined in the executive agreement) at any time within 24 months after a Change of Control; or
|
|
|
|
by us at any time after an agreement has been reached with an unaffiliated third party, the performance of which would result in a Change of Control
involving that party, if such Change of Control is consummated within 12 months after the date of Mr. Restrepos termination.
|
The severance and separation benefits provided to Mr. Restrepo under his executive agreement are described below under Potential Payments Upon Termination or Change in ControlRestrepo
Executive Agreement.
Mr. Restrepos executive agreement also provides that, for a period of
five years after the earlier to occur of a Change in Control or a separation of service, we would provide Mr. Restrepo with coverage under a standard directors and officers liability insurance policy at our expense. Furthermore, we
will indemnify and hold harmless Mr. Restrepo to the fullest extent permitted under Ohio law if he is made a party to any proceeding by reason of having served as our director, officer or employee.
English, Buss, Fitch and Yano Executive Agreements
We also entered into new executive change of control agreements in 2011 with certain of our other executive officers,
including Mr. English, Ms. Buss, Mr. Fitch and Mr. Yano. The executive agreements of Mr. English, Ms. Buss, Mr. Fitch and Mr. Yano were effective October 28, 2011 for a three-year term. If a Change of
Control occurs during the three-year period, the term of the executive agreement will automatically extend until the earlier to occur of the 36-month anniversary of the date of the Change of Control or the date on which the executive reaches age 65.
The executive agreement will terminate if the executives employment terminates prior to a Change of Control.
We will provide certain severance benefits to the executive under the executive agreement if during the term of his or her executive agreement the executives employment is terminated:
|
|
|
by us at any time within 24 months after a Change of Control (for any reason other than for cause, the death or disability of the executive or his
mandatory retirement at age 65);
|
|
|
|
by the executive for good reason (as defined in the executive agreement) at any time within 24 months after a Change of Control; or
|
66
|
|
|
by us at any time after an agreement has been reached with an unaffiliated third party, the performance of which would result in a Change of Control
involving that party, if such Change of Control is actually consummated within 12 months after the date of the executives termination.
|
The severance and separation benefits provided to each of our other executives under his executive agreement are described below under Potential Payments Upon Termination or Change in
ControlEnglish, Buss, Fitch and Yano Executive Agreements.
These executive agreements prohibit
the executive from disclosing or using our confidential information. The Board may require the executive to repay all or any portion of the severance benefits if:
|
|
|
the executive violates any of the non-competition, non-solicitation or confidentiality covenants applicable to the executive;
|
|
|
|
(i) the amount of such benefits are calculated based upon the achievement of certain financial results that are subsequently the subject of a
financial statement restatement by the Company; (ii) the executive engages in conduct detrimental to the Company that causes or substantially contributes to the need for the financial statement restatement; and (iii) the amount of his or
her severance and separation benefits would have been lower than the amount actually awarded to him had the financial results been properly reported; or
|
|
|
|
the executive engages in (i) any conduct detrimental to the Company during the employment term which has a material adverse effect on the
Company or (ii) any fraudulent conduct.
|
These executive agreements also provide that,
for a period of five years after a Change of Control, we will provide the executive with coverage under a standard directors and officers liability insurance policy at our expense. Furthermore, we will indemnify and hold harmless the
executive to the fullest extent permitted under Ohio law if he or she is made a party to any proceeding by reason of having served as our director, officer or employee.
Potential Payments Upon Termination or Change in Control
Restrepo Employment Agreement
Mr. Restrepos employment agreement provides him with the following severance and separation benefits under the
following termination events:
Termination for Cause
. If Mr. Restrepo is terminated for cause, he
would be entitled to receive his base salary through the date of termination plus any compensation to which he would have been entitled under the LBP, QPB and LTIP as then in effect. Mr. Restrepos employment agreement defines cause
as:
|
|
|
the willful and continued failure of the executive to perform the executives duties (other than any such failure resulting from incapacity due
to a disability), after a written demand for performance is delivered to the executive which specifically identifies the manner in which the executive has not performed the executives duties;
|
|
|
|
the willful engaging by the executive in illegal conduct or gross misconduct which has a material adverse effect on the Company;
|
|
|
|
the breach of any of the confidentiality, non-competition or non-solicitation covenants imposed by the employment agreement; or
|
|
|
|
the willful failure by the executive to comply with any code of conduct or code of ethics applicable to the executive.
|
For purposes of the definition of cause, no act or failure to act, on the part of the executive, will be considered
willful unless it is done, or omitted to be done, by the executive in bad faith or without reasonable belief that the executives action or omission was in the best interests of the Company.
67
Termination Without Cause
. If Mr. Restrepo is terminated without
cause (other than in the event of his death, disability or retirement), he would be entitled to receive:
|
|
|
his then-current base salary for the lesser of 24 months or until December 31, 2015;
|
|
|
|
a one-year bonus payment equal to the average of the aggregate bonuses Mr. Restrepo earned under the QPB, LBP and LTIP for the two years
immediately preceding the year in which the employment agreement is terminated; and
|
|
|
|
an amount equal to the then current monthly per employee cost of providing State Autos health insurance benefit multiplied by the lesser of 24
or the number of months from the date of termination until December 31, 2015.
|
In
addition, if Mr. Restrepo is terminated without cause, any stock options granted to Mr. Restrepo shall vest on the termination date.
Death
. In the event Mr. Restrepo dies while employed by State Auto, his beneficiaries will receive his then-current base salary for the lesser of 12 months or until December 31, 2015 plus
a pro rata share of the compensation he earned under the QPB, LBP and LTIP as of the date of death.
Disability
. If Mr. Restrepo becomes disabled for more than six consecutive months in any 12-month period, the
Company may terminate Mr. Restrepos employment. In the event of a termination for disability, Mr. Restrepo would be entitled to receive his base salary and payments under our incentive compensation plans to the date of termination.
After the date of termination, he would be entitled to receive 80% of his then-current base salary, less any disability benefits received from any of State Autos long-term disability benefit plans, until the earlier to occur of the end of the
period of his disability or December 31, 2015. In addition, Mr. Restrepo shall continue to receive such health insurance benefits as he and his spouse receive on the date of the disability and such group life insurance as Mr. Restrepo
has in place on his life as of the date of the disability.
Voluntary Termination
. If Mr. Restrepo
voluntarily terminates his employment, including retirement initiated solely by Mr. Restrepo and mandatory retirement on December 31, 2015, he shall cease to receive compensation as of the date of his separation from service, except for
any compensation to which he is entitled under the QPB, LBP or LTIP as then in effect, provided, that he is employed by State Auto on the date such compensation is paid under the QPB, LBP or LTIP.
Restrepo Executive Agreement
We will provide the following severance benefits (in addition to accrued compensation, bonuses and vested benefits and stock options) to Mr. Restrepo under his executive agreement if his employment
with State Auto is terminated during the term of his executive agreement under the circumstances set forth above under Change of Control Agreements with Named Executive OfficersRestrepo Executive Agreement:
|
|
|
a lump sum cash payment equal to 2.99 times Mr. Restrepos then-current annual base salary (subject to reduction if Mr. Restrepo is
within two years of mandatory retirement on December 31, 2015);
|
|
|
|
a lump sum cash payment equal to 2.99 times the sum of (i) the average of the annual aggregate bonuses Mr. Restrepo earned under the LBP
for the two years immediately preceding the year in which the Change of Control occurs and (ii) the total bonus payable to Mr. Restrepo under the QPB during the year immediately preceding the year in which the Change of Control occurs
(subject to reduction if Mr. Restrepo is within two years of mandatory retirement on December 31, 2015);
|
|
|
|
an amount equal to the then current monthly per employee cost of providing the Companys health insurance benefit multiplied by the lesser of
24 or the number of months from the date of termination until December 31, 2015;
|
68
|
|
|
life and accidental death and dismemberment insurance coverage and disability insurance coverage (other than payment of income replacement benefits)
for a two-year period commencing on the date of termination or until December 31, 2015, whichever is earlier;
|
|
|
|
retirement benefits in an amount equal to
the excess of
(i) the retirement benefits that would be payable to Mr. Restrepo or his
beneficiaries, under the defined benefit retirement plans in which Mr. Restrepo participates (including the SERP and the Restrepo SERP) if (A) the terms of such plans were those most favorable to Mr. Restrepo and
(B) Mr. Restrepos highest average annual compensation as defined under such defined benefit retirement plans
over
(ii) the retirement benefits that are payable to Mr. Restrepo or Mr. Restrepos
beneficiaries under such defined benefit retirement plans in which Mr. Restrepo participates;
|
|
|
|
outplacement benefits up to a maximum amount equal to 15% of Mr. Restrepos annual base salary plus up to $5,000 to reimburse
Mr. Restrepo for travel expenses he incurs in connection with seeking new employment; and
|
|
|
|
stock options or other equity-based awards held by Mr. Restrepo become exercisable in accordance with the applicable terms of the equity
compensation plans and award agreements.
|
Mr. Restrepos executive agreement also
provides that if Mr. Restrepos severance payments and benefits would not be subject to excise tax if the total of such payments and benefits were reduced by 10% or less, then such payments and benefits would be reduced by the minimum
amount necessary (not to exceed 10% of such payments and benefits) so that we would not have to pay an excess severance payment and Mr. Restrepo would not be subject to an excise tax.
English, Buss, Fitch and Yano Executive Agreements
We will provide the following severance benefits (in addition to accrued compensation and bonuses) to the Executive under
his executive agreement if his employment with the Company is terminated during the term of his executive agreement under the circumstances set forth above under Change of Control Agreements with Named Executive OfficersEnglish, Buss,
Fitch and Yano Executive Agreements.
|
|
|
a lump sum cash payment equal to two times the executives annual base salary (subject to reduction if the executive is within two years of age
65);
|
|
|
|
a lump sum cash payment equal to two times the average of the annual aggregate bonus earned by the executive under each of the LBP and QPB during
the two fiscal years immediately preceding the year in which the Change of Control occurs (subject to reduction if the executive is within two years of age 65);
|
|
|
|
outplacement benefits up to a maximum amount equal to 15% of the executives annual base salary plus up to $5,000 to reimburse the executive
for travel expenses he incurs in connection with seeking new employment;
|
|
|
|
stock options held by the executive become exercisable; and
|
|
|
|
an amount equal to the then current monthly per employee cost of providing the Companys health insurance benefit multiplied by 24.
|
These executive agreements also provide that if the executives severance payments and
benefits would not be subject to excise tax if the total of such payments and benefits were reduced by 10% or less, then such
69
payments and benefits would be reduced by the minimum amount necessary (not to exceed 10% of such payments and benefits) so that we would not have to pay an excess severance payment and the
executive would not be subject to an excise tax.
The following table summarizes the potential payments to
NEOs upon a termination of employment and/or a change in control of the Company (assuming that the triggering event occurred on December 31, 2011):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Benefit(1)
|
|
|
Termination
Without
Cause(2)
|
|
|
Termination
For Cause or
Voluntary
Termination
|
|
|
Death
|
|
|
Disability
|
|
|
After
Change
in Control
|
|
Robert P. Restrepo, Jr.
|
|
|
Salary
|
|
|
$
|
1,560,000
|
(3)
|
|
$
|
-0-
|
|
|
$
|
780,000
|
(4)
|
|
$
|
679,500
|
(5)
|
|
$
|
2,332,200
|
(6)
|
|
|
|
Cash Bonus (7)
|
|
|
$
|
2,392,770
|
(8)
|
|
$
|
1,529,157
|
(9)
|
|
$
|
1,529,157
|
(9)
|
|
$
|
1,529,157
|
(9)
|
|
$
|
2,625,480
|
(10)
|
|
|
|
Stock Options
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
|
|
Restricted Stock
|
|
|
$
|
460,524
|
(11)
|
|
$
|
-0-
|
|
|
$
|
460,524
|
(11)
|
|
$
|
460,524
|
(11)
|
|
$
|
460,524
|
(11)
|
|
|
|
Health Benefits
|
|
|
$
|
11,904
|
(12)
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
53,232
|
(13)
|
|
$
|
11,904
|
(12)
|
|
|
|
Group Life; Disability
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
2,496,000
|
(14)
|
|
$
|
3,438
|
(15)
|
|
|
|
Outplacement Assistance
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
122,000
|
(16)
|
|
|
|
Retirement
|
|
|
$
|
2,265,685
|
(17)
|
|
$
|
2,265,685
|
(17)
|
|
$
|
2,265,685
|
(17)
|
|
$
|
2,265,685
|
(17)
|
|
$
|
3,414,482
|
(17)
|
|
|
|
TOTAL:
|
|
|
$
|
6,690,883
|
|
|
$
|
3,794,842
|
|
|
$
|
5,035,366
|
|
|
$
|
7,484,098
|
|
|
$
|
8,970,028
|
|
|
|
|
|
|
|
|
Steven E. English
|
|
|
Salary
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
800,000
|
(18)
|
|
|
|
Cash Bonus (19)
|
|
|
$
|
563,724
|
(9)
|
|
$
|
563,724
|
(9)
|
|
$
|
563,724
|
(9)
|
|
$
|
563,724
|
(9)
|
|
$
|
521,784
|
(20)
|
|
|
|
Stock Options
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
|
|
Health Benefits
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
11,904
|
(12)
|
|
|
|
Outplacement assistance
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
65,000
|
(16)
|
|
|
|
Retirement
|
|
|
$
|
324,389
|
(17)
|
|
$
|
324,389
|
(17)
|
|
$
|
324,389
|
(17)
|
|
$
|
324,389
|
(17)
|
|
$
|
324,389
|
(17)
|
|
|
|
TOTAL:
|
|
|
$
|
888,113
|
|
|
$
|
888,113
|
|
|
$
|
888,113
|
|
|
$
|
888,113
|
|
|
$
|
1,723,077
|
|
|
|
|
|
|
|
|
Jessica E. Buss
|
|
|
Salary
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
707,472
|
(18)
|
|
|
|
Cash Bonus (19)
|
|
|
$
|
223,568
|
(9)
|
|
$
|
223,568
|
(9)
|
|
$
|
223,568
|
(9)
|
|
$
|
223,568
|
(9)
|
|
$
|
78,737
|
(20)
|
|
|
|
Stock Options
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
|
|
Health Benefits
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
11,904
|
(12)
|
|
|
|
Outplacement assistance
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
58,060
|
(16)
|
|
|
|
TOTAL:
|
|
|
$
|
223,568
|
|
|
$
|
223,568
|
|
|
$
|
223,568
|
|
|
$
|
223,568
|
|
|
$
|
85
6,
173
|
|
|
|
|
|
|
|
|
Clyde H. Fitch
|
|
|
Salary
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
680,000
|
(18)
|
|
|
|
Cash Bonus (19)
|
|
|
$
|
485,161
|
(9)
|
|
$
|
485,161
|
(9)
|
|
$
|
485,161
|
(9)
|
|
$
|
485,161
|
(9)
|
|
$
|
398,736
|
(20)
|
|
|
|
Stock Options
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
|
|
Health Benefits
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
11,904
|
(12)
|
|
|
|
Outplacement assistance
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
56,000
|
(16)
|
|
|
|
Retirement
|
|
|
$
|
281,317
|
(17)
|
|
$
|
281,317
|
(17)
|
|
$
|
281,317
|
(17)
|
|
$
|
281,317
|
(17)
|
|
$
|
281,317
|
(17)
|
|
|
|
TOTAL:
|
|
|
$
|
7
66
,
478
|
|
|
$
|
7
66
,
478
|
|
|
$
|
7
66
,
478
|
|
|
$
|
7
66
,
478
|
|
|
$
|
1,427,957
|
|
|
|
|
|
|
|
|
James A. Yano
|
|
|
Salary
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
640,000
|
(18)
|
|
|
|
Cash Bonus (19)
|
|
|
$
|
328,913
|
(9)
|
|
$
|
328,913
|
(9)
|
|
$
|
328,913
|
(9)
|
|
$
|
328,913
|
(9)
|
|
$
|
448,474
|
(20)
|
|
|
|
Stock Options
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
|
|
Health Benefits
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
11,904
|
(12)
|
|
|
|
Outplacement assistance
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
53,000
|
(16)
|
|
|
|
Retirement
|
|
|
$
|
271,714
|
(17)
|
|
$
|
271,714
|
(17)
|
|
$
|
271,714
|
(17)
|
|
$
|
271,714
|
(17)
|
|
$
|
271,714
|
(17)
|
|
|
|
TOTAL:
|
|
|
$
|
600
,
627
|
|
|
$
|
600
,
627
|
|
|
$
|
600
,
627
|
|
|
$
|
600
,
627
|
|
|
$
|
1,425,092
|
|
|
|
|
|
|
|
|
Mark A. Blackburn(21)
|
|
|
Salary
|
|
|
$
|
950,000
|
(22)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Bonus
|
|
|
$
|
513,347
|
(23)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
$
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health benefits
|
|
|
$
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group Life; Disability
|
|
|
$
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outplacement assistance
|
|
|
$
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
|
|
|
$
|
2,384,898
|
(24)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL:
|
|
|
$
|
3,848,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The potential post-employment payments and benefits shown in this table are payable to Messrs. Restrepo, English, Fitch and Yano and Ms. Buss
pursuant to their respective employment and/or executive agreements with us and the applicable terms of the LBP, QPB, LTIP, 2009 Equity Plan and associated award agreements. The NEOs have no other agreement or plan which provides them with potential
post-
|
70
|
employment payments or benefits, except in the case of disability, where we provide long-term disability benefits to all of our employees subject to certain terms and conditions. Unless otherwise
indicated, all payments would be made in one-lump amount. For narrative disclosure of the material terms of our agreements with Messrs. Restrepo, English, Fitch and Yano and Ms. Buss see Employment Agreements with Named Executive
Officers on page 64 of this Proxy Statement, Change of Control Agreements with Named Executive Officers on page 65 of this Proxy Statement and the narrative disclosure that immediately precedes this table.
|
(2)
|
Under the applicable agreements, there are no provisions permitting the NEOs to terminate their employment for good reason prior to a change in
control of our Company or State Auto Mutual.
|
(3)
|
This dollar amount represents two times Mr. Restrepos annual base salary on December 31, 2011.
|
(4)
|
This dollar amount represents Mr. Restrepos annual base salary on December 31, 2011.
|
(5)
|
If terminated for disability, Mr. Restrepo would be entitled to receive 80% of his base salary as of December 31, 2011 of $780,000 until
he reaches age 65 or his disability terminates, less any disability benefits received from any of State Autos long-term disability plans, which equates to 60% of his salary. This dollar amount assumes that Mr. Restrepo will reach age 65
and his disability will not terminate before then.
|
(6)
|
This dollar amount represents 2.99 times Mr. Restrepos current annual base salary.
|
(7)
|
In the event of the termination of Mr. Restrepos employment without cause or by reason of his death or voluntary termination,
Mr. Restrepo would be entitled to a prorated award under the LTIP for each performance period in effect as of the date of termination based upon the length of time that Mr. Restrepo was employed by the Company during the performance
period. The Company cannot develop a reasonable estimate of any future payments under the LTIP because it does not have final performance data for any performance period under the LTIP and cannot predict the performance of the members of the LTIP
Peer Group. Accordingly, the Company has assumed, solely for the purpose of providing a quantification of the amounts that would be payable to Mr. Restrepo upon a hypothetical termination of his employment without cause or by reason of his
death or voluntary termination, that each of the performance measures applicable to each performance period in effect under the LTIP as of the date of termination would be satisfied at the target level. Mr. Restrepo would not be entitled to any
award under the LTIP in the event his employment is terminated for cause. In the event of the termination of Mr. Restrepos employment by reason of his disability, Mr. Restrepo would be entitled to an award under the LTIP for each
performance period in effect as of the date of termination equal to the target award for each such performance period multiplied by a fraction, the numerator of which would be the number of days of employment in the performance period through the
date of termination, and the denominator of which would be the number of days in the performance period.
|
(8)
|
This dollar amount represents the sum of (i) the average of the aggregate bonuses Mr. Restrepo earned under the QPB, LBP and LTIP for 2009
and 2010 ($863,613) and (ii) the amount of compensation to which he is entitled pursuant to the QPB, LBP and LTIP as of December 31, 2011 ($1,529,157).
|
(9)
|
This dollar amount represents the amount of compensation to which the NEO is entitled pursuant to the QPB, LBP and LTIP as of December 31,
2011.
|
(10)
|
This dollar amount represents 2.99 times the sum of (i) the average of the annual aggregate bonuses Mr. Restrepo earned under the LBP for
the two years immediately preceding the year in which the Change of Control occurs ($863,613) and (ii) the total bonus payable to Mr. Restrepo under the QPB during the year immediately preceding the year in which the Change of Control
occurs ($14,474).
|
(11)
|
This dollar amount represents the number of Common Shares underlying the restricted common shares held by the NEO on December 31, 2011
(33,887) multiplied by the closing market price of our Common Shares on December 31, 2011 ($13.59).
|
71
(12)
|
This dollar amount represents the monthly per employee cost of providing State Autos health insurance benefit as of December 31, 2011
($496) multiplied by 24.
|
(13)
|
This dollar amount represents our estimate of the present value of the health benefits Mr. Restrepo would be entitled to if he was terminated
on December 31, 2011 by reason of his disability.
|
(14)
|
This dollar amount represents our estimate of the present value of the disability benefits Mr. Restrepo would be entitled to if he was
terminated on December 31, 2011 by reason of his disability.
|
(15)
|
This dollar amount represents the estimated cost to provide the NEO with 24 of continued life and accidental death and dismemberment insurance
coverage and 24 months of continued disability insurance coverage.
|
(16)
|
This dollar amount represents 15% of the value of the NEOs annual base salary as of December 31, 2011 plus a travel expense account of up
to $5,000 to reimburse the NEO for travel expenses he incurs in connection with seeking new employment.
|
(17)
|
This dollar amount represents the value of the retirement benefits payable to the NEO or his beneficiaries under the retirement plans of the Company
in which the NEO participates assuming the termination event was effective on December 31, 2011.
|
(18)
|
This dollar amount represents two times the NEOs annual base salary as of December 31, 2011.
|
(19)
|
In the event of the termination of the NEOs employment without cause or by reason of his voluntary termination, the NEO would be entitled to a
prorated award under the LTIP for each performance period in effect as of the date of termination based upon the length of time that the NEO was employed by the Company during the performance period. The Company cannot develop a reasonable estimate
of any future payments under the LTIP because it does not have final performance data for any performance period under the LTIP and cannot predict the performance of the members of the LTIP Peer Group. Accordingly, the Company has assumed, solely
for the purpose of providing a quantification of the amounts that would be payable to the NEO upon a hypothetical termination of his employment without cause or by reason of his voluntary termination, that each of the performance measures applicable
to each performance period in effect under the LTIP as of the date of termination would be satisfied at the target level. The NEO would not be entitled to any award under the LTIP in the event his employment is terminated for cause. In the event of
termination of the NEOs employment by reason of his death or disability, the NEO would be entitled to an award under the LTIP for each performance period in effect as of the date of termination equal to his target award for each such
performance period multiplied by a fraction, the numerator of which would be the number of days of employment in the performance period through the date of termination, and the denominator of which would be the number of days in the performance
period.
|
(20)
|
This dollar amount represents two times the average of the annual aggregate bonus earned by the executive under each of the LBP and QPB for 2009 and
2010.
|
(21)
|
Mr. Blackburn retired from his remaining positions with the Company and the State Auto Group effective on November 1, 2011. Under the
terms of his employment agreement, Mr. Blackburns retirement constituted a non-renewal of his employment agreement and entitled him to receive the compensation and benefits payable under his employment agreement in the event of a termination
without cause. Accordingly, with respect to Mr. Blackburn, this table only discloses those amounts payable to Mr. Blackburn in connection with that triggering event.
|
(22)
|
This dollar amount represents an amount equal to two times Mr. Blackburns annual base salary as of the retirement date ($950,000).
|
(23)
|
This dollar amount represents the sum of the following amounts which Mr. Blackburn became entitled to receive upon his retirement: (i) an amount
equal to the average payment he received under the LBP for 2009 and 2010 ($303,782); (ii) an amount equal to the average payment he received under the QPB for 2009 and 2010 ($6,277); and (iii) an amount equal to the average payment he received under
the LTIP for 2009 and 2010 ($203,288). Upon his retirement, Mr. Blackburn also became entitled to receive (x) a prorated amount (based on Mr. Blackburns retirement date) equal to (A) the value of the PAUs awarded to Mr. Blackburn for the
2009-2011 performance period (based on the actual achievement of the performance measures during the performance period), less (B) the amount paid to Mr. Blackburn under item (iii); and (y) a prorated amount (based on Mr. Blackburns retirement
date) equal to (A) the value of the PAUs awarded to Mr. Blackburn for the 2010-2012 performance period based on the actual achievement of the performance measures during the performance period, less (B) the sum of the amounts paid to Mr. Blackburn
under items (iii) and (x). The amounts payable to Mr. Blackburn pursuant to items (x) and (y), if any, cannot be determined until May 2012 and May 2013, respectively, when the achievement of the applicable performance measures during the performance
period is known.
|
(24)
|
This dollar amount represents the value as of December 31, 2011 of the retirement benefits payable to Mr. Blackburn or his beneficiaries under
the retirement plans of the Company.
|
72
COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of the following five members of our Board of Directors: Chairperson Paul S. Williams; Robert E. Baker; David J. DAntoni; David R. Meuse; and S. Elaine
Roberts. None of the members of the Compensation Committee is, or was, an officer or employee of our Company or any of our subsidiaries or of State Auto Mutual. Also, none of our executive officers served during 2011 as a member of a compensation
committee or as a director of any entity for which any of our directors served as an executive officer.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of our Board of Directors oversees our
compensation programs on behalf of our Board. In fulfilling its oversight responsibilities, the Compensation Committee reviewed and discussed with management the Compensation Discussion and Analysis set forth in this Proxy Statement. Based upon the
review and discussions referred to above, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in our Companys Annual Report on Form 10-K for the 2011 fiscal year and in this Proxy
Statement.
Compensation Committee
Paul S. Williams, Chairperson
Robert E. Baker
David J. DAntoni
David R. Meuse
S. Elaine Roberts
73
REPORT OF THE AUDIT COMMITTEE
The Audit Committee provides assistance to our directors in fulfilling their responsibility to our shareholders relating
to corporate accounting, reporting practices, internal controls relating to financial reporting, and the quality and integrity of our financial reports. In so doing, the Audit Committee maintains free and open communication between our directors,
independent registered public accounting firm, internal auditors, and senior management. Notwithstanding the foregoing, it is not the duty of the Audit Committee to plan or conduct audits or to determine that our financial statements and disclosures
are complete, accurate, and in accordance with generally accepted accounting principles and applicable rules and regulations. These are the responsibilities of management and our independent registered public accounting firm.
In the course of fulfilling its responsibilities, the Audit Committee reviewed the audited financial statements in our
Companys Annual Report on Form 10-K for the 2011 fiscal year with our management, including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of
disclosures in the financial statements. The Audit Committee also reviewed with our independent registered public accounting firm, who are responsible for expressing an opinion on the conformity of those audited financial statements with United
States generally accepted accounting principles (US GAAP), their judgments as to the quality, not just the acceptability, of our accounting principles and such other matters as are required to be discussed with the Audit Committee
under auditing standards generally accepted in the United States, including those matters required to be discussed by SAS 61 as amended and as adopted by the Public Company Accounting Oversight Board in Rule 3200T, SAS 89 and SAS 90 (Codification of
Statements on Auditing Standards, AU Section 380). In addition, the Audit Committee discussed with our independent registered public accounting firm its independence from our management and considered the compatibility of any permitted and
pre-approved non-audit services with the independent registered public accounting firms independence. The Audit Committee also received written disclosures regarding the independent auditors independence from management and the Company,
and received a letter confirming that fact from the independent auditors, which included applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountants communications with the Audit Committee
concerning independence.
The Audit Committee discussed with our internal auditor and independent registered
public accounting firm the overall scope and plans for their respective audits. The Audit Committee regularly monitors our compliance with Section 404 of the Sarbanes-Oxley Act. The Audit Committee meets with our internal auditor and
independent registered public accounting firm, with and without management present, to discuss the results of their examinations, their evaluations of our internal controls, and the overall quality of our financial reporting. The Audit Committee
also meets with our Chief Financial Officer and our General Counsel without the rest of management present to discuss any matters of interest to the Audit Committee. The Audit Committee receives a quarterly report from the director of enterprise
risk management on selected risk areas. In reliance on the reviews and discussions referred to above, the Audit Committee recommended to our Board of Directors (and our Board has approved) that the audited financial statements be included in our
Annual Report on Form 10-K for the 2011 fiscal year for filing with the SEC.
The Audit Committee held a total
of nine meetings in 2011, four in person and five by conference calls. Ms. Mallesch, Mr. Meuse and Mr. Williams participated in 100% of the meetings, and Messrs. Markert and Trevor participated in all but one of the meetings. All
of the members of the Audit Committee are independent directors as defined by the Nasdaq listing rules and the applicable regulations of the SEC.
The full responsibilities of the Audit Committee are set forth in its charter. The charter is reviewed annually by the Audit Committee and our Board and, if deemed necessary following such review,
amended. In addition to the foregoing, these responsibilities include sole authority for selecting our independent registered public accounting firm, reviewing with management the adequacy of loss reserves, pre-approving expenditures for services of
our independent registered public accounting firm, sole authority to retain independent advisors, receipt and disposition of matters relating to allegations of accounting or other improprieties, reviewing matters
74
relating to our Code of Business Conduct and participating in disclosure control procedures and functioning as our qualified legal compliance committee. The Audit Committee also consults with our
General Counsel with respect to legal matters affecting the Company.
As discussed above, the Audit Committee
is responsible to monitor and review our financial reporting process on behalf of our Board of Directors. However, it is not the duty or responsibility of the Audit Committee to conduct auditing or accounting reviews or procedures. Members of the
Audit Committee are not our employees, and some members are not accountants or auditors by profession or experts in the fields of accounting or auditing. Therefore, the Audit Committee has relied, without independent verification, on
managements representation that the financial statements have been prepared with integrity and objectivity and in conformity with US GAAP and on the representations of our independent registered public accounting firm included in its
report on our financial statements. The Audit Committees review does not provide the Audit Committee with an independent basis to determine that management has maintained appropriate accounting and financial reporting principles or policies,
or appropriate internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Furthermore, the Audit Committees considerations and discussions with management and our independent
registered public accounting firm do not assure that our financial statements are presented in accordance with US GAAP, that the audit of our financial statements has been carried out in accordance with the standards of the Public Company
Accounting Oversight Board (United States), or that our independent auditors are in fact independent.
The Audit Committee receives regular reports from our Director of Internal Audit with respect to matters coming within the scope of our Employee Code of Business Conduct. Our Chief Executive Officer and
principal financial officers have each agreed to be bound by our Employee Code of Business Conduct and the Sarbanes-Oxley Act mandated Code of Ethics for Senior Financial Officers as a Special Supplement to our Employee Code of Business Conduct. We
have also implemented and applied our Employee Code of Business Conduct throughout our Company. We have also implemented procedures for the receipt of complaints concerning our accounting, internal accounting controls, or auditing practices,
including the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing practices.
Audit Committee
Eileen A. Mallesch, Chairperson
Thomas E. Markert
David R. Meuse
Alexander B. Trevor
Paul S. Williams
75
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth certain information, as of March 9, 2012, with respect to the only shareholders known
to us to be the beneficial owners of more than 5% of our outstanding Common Shares:
|
|
|
|
|
|
|
|
|
Name and Address of Beneficial Owner
|
|
Amount and Nature
of Beneficial
Ownership
|
|
|
Percent
of Class
|
|
State Automobile Mutual Insurance Company(1)
|
|
|
25,269,798
|
|
|
|
62.6
|
%
|
518 East Broad Street
|
|
|
|
|
|
|
|
|
Columbus, OH 43215
|
|
|
|
|
|
|
|
|
|
|
|
Dimensional Fund Advisors LP
|
|
|
2,248,790
|
(2)
|
|
|
5.58
|
%
|
Palisades West, Building One, 6300 Bee Cave Road
|
|
|
|
|
|
|
|
|
Austin, Texas, 78746
|
|
|
|
|
|
|
|
|
(1)
|
State Auto Mutual exercises sole voting and investment power with respect to such Common Shares.
|
(2)
|
Based solely on a Schedule 13G filed with the SEC on February 14, 2012. On that date, Dimensional Fund Advisors LP (Dimensional)
reported that, in its role as investment advisor, sub-advisor and/or manager, neither it nor its subsidiaries possessed investment and/or voting power, and may be deemed to be the beneficial owner, with respect to 2,248,790 of our Common Shares
owned by certain investment companies, trusts and accounts for which Dimensional furnished investment advice or served as investment manager. Dimensional disclaimed beneficial ownership of such Common Shares.
|
EQUITY COMPENSATION PLAN INFORMATION
(At December 31, 2011)
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Category
|
|
Number of
Securities
to be Issued
upon Exercise
of Outstanding
Options
|
|
|
Weighted-
Average
Exercise Price
of Outstanding
Options
|
|
|
Number of
Securities
Remaining Available
for Future Issuance
under Equity
Compensation
Plans
|
|
Equity Compensation Plans Approved by Security Holders(1)
|
|
|
3,638,397
|
|
|
$
|
22.80
|
|
|
|
1,353,698
|
|
Equity Compensation Plans not Approved by Security Holders(2)
|
|
|
78,701
|
|
|
$
|
26.20
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,717,098
|
|
|
|
|
|
|
|
1,353,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes 854,054 Common Shares available for issuance under our 2009 Equity Plan and 499,644 Common Shares available for issuance under our Employee
Stock Purchase Plan. Does not include RSUs which have been or may be awarded to our outside directors under our Directors RSU Plan. Because RSUs are settled only upon the conclusion of an outside directors board service, and then in cash
or Common Shares, as elected by the outside director, the number of Common Shares to be issued or remaining available for future issuance under our Directors RSU Plan cannot be determined at this time.
|
(2)
|
Our only equity compensation plan that has not been approved by our shareholders is the 1998 State Auto Agents Stock Option Plan, which plan
terminated by its terms in May 2008 and was not renewed. A description of this plan follows these footnotes.
|
76
1998 State Auto Agents Stock Option Plan
Our Board of Directors adopted the 1998 State Auto Agents Stock Option Plan (the Agents Option
Plan) to encourage selected independent insurance agencies that represent us and our affiliates (the State Auto Agents) to acquire or increase and retain a financial interest in our Company in order to strengthen the mutuality of
interests between the State Auto Agents and our Companys shareholders. The Agents Option Plan is administered by a plan administration committee consisting of at least three members appointed by our Board of Directors. The Agents
Option Plan terminated by its terms in May 2008, and we did not renew it.
Under the Agents Option Plan,
State Auto Agents who became participants were offered nonqualified stock options to purchase Common Shares. The number of options granted to a participant was based on the formula set forth in the Agents Option Plan and in each
participants participation agreement. The exercise price of options granted under the Agents Option Plan was equal to the last reported sale price of the Common Shares on the Nasdaq Stock Market on the day of the grant. The options
granted became exercisable on the first day of the calendar year following the participants achievement of specific production and profitability requirements over a period not greater than two calendar years from date of grant or a portion
thereof in the first calendar year in which a participant commenced participation in the Agents Option Plan. Subject to certain restrictions, participants may exercise options that become vested. Each option has a term of ten years. If an
option is not fully exercised by its expiration date, it will terminate to the extent not previously exercised.
If a participants agency agreement terminates, or if the participant fails to meet its performance criteria as set
forth in its participation agreement and in the Agents Option Plan, or the participant fails to pay on time any amounts due under its agency agreement, the option granted to such participant, to the extent not vested, will terminate.
The Common Shares subject to the Agents Option Plan have been registered under the Securities Act of
1933, as amended. Therefore, these Common Shares are freely tradeable once acquired upon the exercise of the options, unless such Common Shares are acquired by a participant who is considered an affiliate of the Company.
77
RELATED PERSON TRANSACTIONS
Policies and Procedures for Review and Approval of Related Person Transactions
We review all relationships and transactions in which our Company and our directors and executive officers or their
immediate family members are participants to determine whether such persons have a direct or indirect material interest. Our Companys legal staff is primarily responsible for the development and implementation of processes and controls to
obtain information from the directors and executive officers with respect to related person transactions and for then determining, based on the facts and circumstances, whether we or a related person has a direct or indirect material interest in the
transaction. As required under SEC rules, transactions that are determined to be directly or indirectly material to us or a related person are disclosed in our proxy statement.
We also have a standing Independent Committee which principally serves to review related person transactions between or
among us and our subsidiaries, on the one hand, and State Auto Mutual and its subsidiaries and affiliates, on the other. In the context of transactional opportunities, the Independent Committee helps determine which entity, our Company or State Auto
Mutual, is best suited to take advantage of the transactional opportunity presented by a third party. As specified in its charter, the Independent Committee assists our Board in monitoring all related person transactions, not just those involving
State Auto Mutual and its subsidiaries and affiliates.
Transactions Involving State Auto
Mutual
(1)
(2)
(3)
Management and Cost Sharing Agreements
Through various management and cost sharing agreements, State Auto P&C generally provides the employees to perform all organizational, operational and management functions for insurers in the State
Auto Group while State Auto Mutual generally provides certain operating facilities, including our corporate headquarters. These management and cost sharing agreements are described below.
We operate and manage our businesses in conjunction with State Auto Mutual and certain of its subsidiaries and affiliates
under a Management and Operations Agreement that we call the 2005 Management Agreement. The 2005 Management Agreement is strictly a cost sharing agreement. Accordingly, no management fees are paid under the 2005 Management Agreement.
Under the 2005 Management Agreement, every executive, managerial, technical, professional, supervisory, and clerical function for the companies named below was performed by an employee of State Auto P&C.
We have a Management and Operations Agreement that we call the 2000 Midwest Management Agreement among State
Auto P&C, State Auto Mutual and SAWI. During 2011, SAWI paid management fees in the amount of $0.27 million to State Auto P&C under the 2000 Midwest Management Agreement.
(1)
|
Our subsidiaries are State Auto P&C, Milbank, State Auto Insurance Company of Ohio (SAOH), Farmers Casualty, Stateco Financial
Services, Inc. (Stateco), and 518 Property Management and Leasing LLC (518 PML).
|
(2)
|
State Auto Mutuals subsidiaries and affiliates that are parties to the 2005 Management Agreement are Meridian Security Insurance Company
(Meridian Security), Meridian Citizens Mutual Insurance Company (Meridian Citizens Mutual) (Meridian Security and Meridian Citizens Mutual are collectively referred to as the MIGI Insurers), MIGI, State Auto
Florida Insurance Company (SAFL), Beacon National Insurance Company (Beacon National), Beacon Lloyds Insurance Company (Beacon Lloyds) (Beacon National and Beacon Lloyds are collectively referred to as the
Beacon Companies), Patrons Mutual Insurance Company of Connecticut (Patrons CT) and Litchfield Mutual Fire Insurance Company (Litchfield) (Patrons CT and Litchfield are collectively referred to as the
Patrons Group). During 2011, additional subsidiaries of State Auto Mutual included State Auto Insurance Company of Wisconsin (SAWI), BroadStreet Capital Partners, Inc. (BCP), and the Rockhill Companies
which consist of Rockhill Insurance Company (RIC), Plaza Insurance Company (Plaza), American Compensation Insurance Company (American Compensation), Bloomington Compensation Insurance Company (Bloomington
Compensation) (RIC, Plaza, American Compensation and Bloomington Compensation are collectively referred to as the Rockhill Insurers), National Environmental Coverage Corporation of the South, LLC, National Environmental Coverage
Corporation, RTW, Inc. (RTW), Rockhill Insurance Services, LLC, Rockhill Underwriting Management, LLC and Risk Evaluation and Design, LLC (RED). State Auto Mutual currently holds a minority interest in BCP, having
sold the majority of its BCP shares to two unaffiliated parties in March 2012.
|
(3)
|
The State Auto Group refers to State Auto P&C, Milbank, SAOH, Farmers Casualty, State Auto Mutual, SAWI, SAFL, the MIGI Insurers, the Beacon
Companies, the Patrons Group and the Rockhill Insurers.
|
78
During 2011, we had a Cost Sharing Agreement among State Auto P&C, State
Auto Mutual and BCP. During 2011, BCP paid total management fees of $0.61 million to State Auto P&C and State Auto Mutual under this agreement. The Cost Sharing Agreement was terminated as of March 1, 2012, the effective date of State Auto
Mutuals sale of the majority of its share ownership in BCP to two unaffiliated parties.
We have a
Management and Operations Agreement that we call the Rockhill Management Agreement among State Auto P&C, State Auto Mutual and the Rockhill Companies (except RED). During 2011, the Rockhill Companies (except RED) paid total
management fees of $0.3 million to State Auto P&C and State Auto Mutual under this agreement.
The 2005
Management Agreement addresses procedures for potential conflicts of interest. Generally, business opportunities presented to the common officers of the companies, other than business opportunities that meet certain criteria, must be presented to
Independent Committees of State Auto Mutuals and our boards of directors. These committees review and evaluate the business opportunity using such factors as each considers relevant. Based upon such review and evaluation, these committees then
make recommendations to each respective board of directors as to whether or not such business opportunities should be pursued and, if so, by which company. The boards of directors of State Auto Mutual or its insurance subsidiaries and our Company or
any of our subsidiaries must then act on the recommendation of their committees after considering all other factors deemed relevant to them.
Each of the 2005 Management Agreement and the 2000 Midwest Management Agreement has a ten-year term and automatically renews for an additional ten-year term, provided that any party to the agreement could
terminate its own participation at the end of the term then in effect by giving at least two years advance written notice of non-renewal to the other parties, with the exception that the Beacon Companies and the Patrons Group may terminate
their participation on 90 days notice. Any party could also terminate its participation upon events constituting a change of control or potential change of control (as defined in the 2005 Management Agreement and the 2000 Midwest Management
Agreement) of the Company, or upon agreement of the parties. The applicable management agreement automatically terminates with respect to a party (and only that party) if such party is subject to insolvency proceedings. The Rockhill Management
Agreement has a ten-year term and automatically renews for successive ten-year periods, provided that any party may terminate its own participation at the end of the term then in effect by giving the other parties at least 60 days advance
written notice.
Other Agreements
State Auto P&C, Milbank, Farmers Casualty, State Auto Mutual and various insurance subsidiaries and affiliates of State Auto Mutual have entered into a Consulting Services Agreement with RTW whereby
RTW provides claims and case management services for these insurers workers compensation programs. RTW investigates potential high risk workers compensation claims and assigns RTW nurses for ongoing case management for
those claims that meet certain criteria. RTW is compensated for its services on either a per case, per file or per hour basis, depending upon the type of service it renders. This agreement has a one-year term and automatically renews for additional
one-year terms unless 60 days advance written notice of non-renewal is given. In addition, a party may terminate the agreement as to itself upon 30 days advance written notice. During 2011, RTW was paid $0.2 million under this agreement.
State Auto P&C, Milbank, Farmers Casualty, State Auto Mutual and various insurance subsidiaries and
affiliates of State Auto Mutual have entered into an Underwriting Management Agreement with RED. Under this agreement, the State Auto insurers have delegated to RED the authority to act as their underwriting manager in the performance of certain
underwriting and marketing functions associated with insurance coverages for the alternative risk and program market. The State Auto insurers pay RED an underwriting management fee equal to 7% of the collected gross written premium on each contract
or policy paid for under the Underwriting Management Agreement. The initial term of the Underwriting Management Agreement expires December 31, 2014 and will automatically renew for additional one-year periods, unless a party terminates the
Underwriting Management Agreement as to itself as of the end of the initial or any subsequent period by giving three months prior written notice thereof to the other parties. During 2011, RED was paid $11.3 million under this agreement.
79
Since January 1987, State Auto P&C and State Auto Mutual have
participated in an intercompany pooling arrangement (the State Auto Pool or the Pooling Arrangement) which has been amended from time to time, including amendments adding participants to the Pooling Arrangement and adjusting
pooling percentages. The Pooling Arrangement generally covers all of the property and casualty insurance written by the pooled companies. Under the terms of the Pooling Arrangement, State Auto P&C and the other pooling participants cede all of
their direct insurance business to State Auto Mutual, and State Auto Mutual then cedes a percentage of the pooled business to State Auto P&C and the other pooling participants and retains the balance. During 2011, parties to the Pooling
Arrangement and their allocated pooling percentages were as follows: State Auto Mutual19.0%; State Auto P&C59.0%; Milbank17.0%; Farmers Casualty3.0%; SAWI0.0%; SAOH1.0%; SAFL0.0%; Meridian
Security0.0%; Meridian Citizens Mutual0.5%; Patrons CT0.4%; Litchfield0.1%; Beacon National0.0%; RIC0.0%; Plaza0.0%; American Compensation0.0%; and Bloomington Compensation0.0%. Effective after
the close of business on December 31, 2011, parties to the Pooling Arrangement and their allocated pooling percentages are as follows: State Auto Mutual34.0%; State Auto P&C51.0%; Milbank14.0%; Farmers Casualty0.0%;
SAWI0.0%; SAOH0.0%; SAFL0.0%; Meridian Security0.0%; Meridian Citizens Mutual0.5%; Patrons CT0.4%; Litchfield0.1%; Beacon National0.0%; RIC0.0%; Plaza0.0%; American Compensation0.0%;
and Bloomington Compensation0.0%. During 2011, our aggregate participation percentage in the Pooling Arrangement was 80.0%. Effective after the close of business on December 31, 2011, our aggregate participation percentage in the Pooling
Arrangement was decreased to 65%.
Stateco undertook on behalf of State Auto Mutual, State Auto P&C,
Milbank, SAWI, Farmers Casualty, SAOH, SAFL, the MIGI Insurers, the Beacon Companies, the Patrons Group, RIC, Plaza, American Compensation and Bloomington Compensation the responsibility of managing those companies investable assets. In
consideration of this service, Stateco charged such companies an annual fee, paid quarterly, based on a percentage of the average investable assets of each company. The percentage currently set is 0.4% for bonds and 0.5% for equities, with a 0.1%
bonus available if the stock portfolio return exceeds that of the S&P 500 Index for the same period. During 2011, the following companies incurred the following fees to Stateco: State Auto Mutual$1.1 million; State Auto P&C$7.0
million; Milbank$1.9 million; SAWI$48,275; Farmers Casualty$0.4 million; SAOH$0.1 million; Meridian Security$0.1 million; Meridian Citizens Mutual$0.1 million; SAFL$44,813; Beacon National$55,471;
Beacon Lloyds$8,739; Patrons CT$0.l million; Litchfield$22,110; RIC$0.3 million; Plaza$59,712; American Compensation$0.1 million; and Bloomington Compensation$42,571. We believe the fees charged by Stateco
are comparable to those charged by independent investment managers under similar circumstances.
In May 2009,
State Auto P&C and Milbank entered into separate Credit Agreements with State Auto Mutual. Under these Credit Agreements, State Auto Mutual borrowed $50.0 million from State Auto P&C and $20.0 from Milbank, or a total of $70.0 million, on an
unsecured basis. Interest is payable semi-annually at a fixed annual interest rate of 7.00%. Principal is payable in May 2019. During 2011, State Auto Mutual made interest payments to State Auto P&C and Milbank in the amount of $3.5 million and
$1.4 million, respectively.
State Auto Mutual has guaranteed the adequacy of State Auto P&Cs loss
and loss expense reserves as of December 31, 1990. Pursuant to the guarantee, State Auto Mutual has agreed to reimburse State Auto P&C for any losses and loss expenses in excess of State Auto P&Cs December 31, 1990 reserves
($65.5 million) that may develop from claims that have occurred on or prior to that date. This guarantee ensures that any deficiency in the reserves of State Auto P&C as of December 31, 1990, under the pooling arrangement percentages
effective on December 31, 1990, will be reimbursed by State Auto Mutual. As of December 31, 2011, there had been no adverse development of this liability. As of December 31, 2011, the potential liability remaining under this guaranty
was estimated to be $0.6 million.
518 PML leases office buildings it owns in West Des Moines, Iowa, and near
Nashville, Tennessee, to State Auto Mutual for its Des Moines Center Office and Southern Regional Office, respectively. 518 PML received $0.2 million in rent from State Auto Mutual for the Iowa location and $0.4 million from State Auto Mutual in
80
rent for the Nashville office in 2011. In addition, 518 PML leases an office building it owns in Greer, South Carolina, to State Auto Mutual and received $0.7 million in rent from State Auto
Mutual for the South Carolina location in 2011. We believe these rents reflect market rates.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
General
Ernst & Young
LLP served as our independent registered public accounting firm for 2011. It is anticipated that representatives of Ernst & Young LLP will be present at the Annual Meeting and will have an opportunity to make a statement if they desire to
do so. Such representatives will be available to respond to appropriate questions. The Audit Committee has selected Ernst & Young LLP as our independent registered public accounting firm for 2012. See Proposal Four: Ratification of
Selection of Independent Registered Public Accounting Firm.
Audit and Other Services Fees
All services to be provided by Ernst & Young LLP are pre-approved by the Audit Committee, including audit
services, audit-related services, tax services and certain other services. See Audit Committees Pre-Approval Policies and Procedures. Aggregate fees billed to or incurred by the Company for services performed for the years
ending December 31, 2011 and 2010, respectively, by Ernst & Young LLP were as follows:
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
Audit fees(1)
|
|
$
|
1,577,472
|
|
|
$
|
1,478,332
|
|
Audit related fees(4)
|
|
|
17,400
|
|
|
|
|
|
Tax fees(2)(4)
|
|
|
43,262
|
|
|
|
55,224
|
|
All other fees(3)(4)
|
|
|
51,500
|
|
|
|
21,265
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,689,834
|
|
|
$
|
1,554,821
|
|
|
|
|
|
|
|
|
|
|
(
1)
|
Includes services rendered for the audit of our annual financial statements, review of financial statements included in our quarterly reports on
Form 10-Q and other audit services normally provided by Ernst & Young LLP in connection with statutory and regulatory filings or engagements.
|
(2)
|
Includes services for tax research and compliance.
|
(3)
|
For 2011, represents services provided for International Financial Reporting Standards assessment. For 2010, represents services provided for IT
advisory, Form S-8 registration statements, and SEC comment letter.
|
(4)
|
The Audit Committee has considered whether the provision of these services is compatible with maintaining the independence of our registered public
accounting firm. The Audit Committee must pre-approve any non-audit services performed by our independent registered public accounting firm to the extent such services are not prohibited by law from being performed by such independent registered
public accounting firm. See Audit Committees Pre-Approval Policies and Procedures.
|
Audit Committees Pre-Approval Policies and Procedures
The Audit Committee has adopted a policy
under which audit and non-audit services to be rendered by our independent registered public accounting firm are pre-approved. The Audit Committees policy is to pre-approve all auditing services and our use of the independent public
accountants to perform any non-audit or tax services which are not prohibited by Section 10A(g) of the Securities Exchange Act of 1934, subject to the de minimus exception for non-audit services described in Section 10A(i)(1)(B) of such
Act. No services were provided by Ernst & Young LLP in 2011 or 2010 that were approved by the Audit Committee under SEC Regulation S-X Section 2-01(c)(7)(i)(C) (which addresses certain services considered de minimus approved by the
Audit Committee after such services have been performed).
81
FUTURE SHAREHOLDER PROPOSALS
In order to bring business, including a proposal, before the 2013 Annual Meeting of Shareholders, expected to be held in
May 2013, a shareholder must comply with the notice procedures set forth in Section 1.15 of the Companys code of regulations. To be considered timely, a shareholders notice must be given to the Companys secretary and delivered
either in person or by United States certified mail, postage prepaid, and received at the principal executive offices of the Company not less than 60 days nor more than 90 days prior to the meeting. However, in the event that notice or public
disclosure of the date of the meeting is given or made by the Company at least 75 days prior to the meeting, to be timely a shareholders notice must be received by the Company no later than the close of business on the 10th day following the
day on which such notice or public disclosure of the date of the meeting was given or made by the Company.
A
shareholders notice to the Companys secretary must set forth (i) a description in reasonable detail of the business desired to be brought before the meeting and reasons for conducting such business at the meeting, including the
complete text of any resolutions to be presented at the meeting, (ii) the name and address, as they appear on the Companys books, of the shareholder proposing such business, (iii) the class and number of shares of the Company
beneficially owned and of record by such shareholder, (iv) the name in which such shares are registered on the books of the Company, (v) a representation that the shareholder intends to appear at the meeting in person or by proxy to submit
the business specified in such notice, and (vi) any material interest of the shareholder in the business to be submitted. In addition, the shareholder making such proposal must promptly provide any other information reasonably requested by the
Company.
In addition to the information required above to be given by a shareholder who intends to submit
business at a meeting of shareholders, if the business to be submitted is the nomination of a person or persons for election to the board of directors, then such shareholders notice to the Companys secretary must also set forth, as to
each person whom the shareholder proposes to nominate for election as a director, (A) the name, age, business address and, if known, residence address of such person, (B) the principal occupation or employment of such person, (C) the
class and number of shares of the Company which are beneficially owned by such person, (D) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors or is otherwise
required by the rules and regulations of the Securities and Exchange Commission promulgated under the Securities Exchange Act of 1934, as amended, (E) the written consent of such person to be named in the proxy statement as a nominee and to
serve as a director if elected and (F) a description of all arrangements or understandings between such shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations
are to be made by such shareholder.
Notwithstanding the foregoing notice requirements, a shareholder who
seeks to have any proposal included in the Companys proxy statement must comply with the requirements of Rule 14a-8 under the Securities Exchange Act of 1934, as amended. One of these requirements is the proposal must be received by us at our
principal executive offices on or prior to 120 days in advance of the first anniversary date of this Proxy Statement.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities
Exchange Act of 1934, as amended, requires our officers, directors and persons who own more than 10% of the Common Shares to file statements of beneficial ownership of our Common Shares. Based solely on a review of copies of the forms filed under
Section 16(a) and furnished to us, we believe that all applicable Section 16(a) filing requirements were complied with during 2011.
82
OTHER MATTERS
Management does not know of any other matters which may come before the Annual Meeting. However, if any other matters
properly come before the Annual Meeting, it is the intention of the persons named in the accompanying form of proxy to vote the proxy in accordance with their judgment on such matters.
We will bear the cost of solicitation of proxies. In addition to the use of the mails, proxies may be solicited
personally or by telephone or electronic mail. Proxies may be solicited by our directors, officers, and regular employees, who will not receive any additional compensation for their solicitation services. We will reimburse banks, brokers, and
nominees for their out-of-pocket expenses incurred in sending proxy material to the beneficial owners of shares held by them. If there are follow-up requests for proxies, we may employ other persons for such purpose.
JAMES A. YANO
Secretary
83
Exhibit A
[Proposed changes are underlined for reference purposes.]
S
TATE
A
UTO
F
INANCIAL
C
ORPORATION
L
EADERSHIP
B
ONUS
P
LAN
Article 1
.
|
Establishment and Purpose
|
1.1.
Establishment of Plan
. State Auto Financial Corporation desires to establish and provide a bonus program for its executive officers and other key management employees, managers and
professionals. This document reflects the material terms and design for such plan, known as the State Auto Financial Corporation Leadership Bonus Plan (the Plan). The Plan is intended to provide for performance-based compensation which
is not subject to the deduction limitation rules under Code Section 162(m) as in effect from time to time and as applicable to Covered Employees, and shall remain in effect until terminated by the Board or the Committee.
1.2.
Purpose
. The primary purposes of the Plan are to:
(a) Advance the interests of the Company and its shareholders by providing Employees in leadership
positions with an annual bonus incentive to achieve the strategic objectives of the Company;
(b) Focus management on key measures that drive superior financial and business performance and that build
shareholder value over the long term;
(c) Provide compensation opportunities that are
externally competitive and internally consistent with the Companys strategic objectives and total reward strategies; and
(d) Provide bonus opportunities that reward executives, managers and key professionals who are in positions to make significant contributions to the overall success of the Company.
Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the defined meaning is intended, the term is capitalized:
2.1. Administrator means the Committee or such other authorized officers or officer of the Company to whom
the power to administer the Plan has been delegated by the Committee.
2.2. Applicable Law means
the requirements of Code Section 162(m) applicable to performance-based compensation.
2.3.
Award means the cash bonus a Participant may earn under the Plan as established by the Administrator for a Performance Period.
2.4. Board or Board of Directors means the Board of Directors of State Auto Financial Corporation.
2.5.
Change of Control means the happening of any of the following:
(a) when any person as defined in Section 3(a)(9) of the Exchange Act and as used in
Sections 13(d) and 14(d) thereof, including a group as defined in Section 13(d) of the Exchange Act, but excluding the Company and any employee benefit plan sponsored or maintained by the Company (including any trustee of such plan
acting as trustee) and excluding State Automobile Mutual Insurance Company, directly or indirectly, becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of securities of the
Company representing 30% or more of the combined voting power of the Companys then outstanding securities; or
A-1
(b) when, during any period of 24 consecutive months
during the existence of the Plan, the individuals who, at the beginning of such period, constitute the Board (the
Incumbent Directors
) cease for any reason other than death to constitute at least a majority of the Board; provided,
however, that a director who was not a director at the beginning of such 24-month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of, or with
the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 24-month period) or by prior operation of this Section 2.5(b); or
(c) the occurrence of a transaction requiring shareholder approval for the acquisition of
the Company by an entity other than the Company through purchase of assets, by merger or otherwise; or
(d) the occurrence of a Rule 13e-3 transaction (as defined in Rule 13e-3 under the Exchange Act) requiring approval by the shareholders of the Company.
A Potential Change in Control means the happening of any one of the following:
(a)
the approval by shareholders of an agreement by the Company, the consummation of which would result
in a Change in Control of the Company as defined in Section 2.5 above; or
(b) the
acquisition of beneficial ownership, directly or indirectly, by any entity, person or group (other than the Company or any Company employee benefit plan (including any trustee of such plan acting as such trustee) and other than State Automobile
Mutual Insurance Company) of securities of the Company representing 30% or more of the combined voting power of the Companys outstanding securities and the adoption by the Board of a resolution to the effect that a Potential Change in Control
of the Company has occurred for purposes of this Plan.
2.6 Code means the Internal Revenue
Code of 1986, as amended, and the regulations and rulings of general applicability issued thereunder, as in effect from time to time.
2.7. Committee means the Compensation Committee of the Board.
2.8. Company means State Auto Financial Corporation and its related entities, subsidiaries and affiliates, including State Auto Mutual Insurance Company (State Auto Mutual), or any
successors thereto (the State Auto Group). Notwithstanding the foregoing, whenever the terms of this Plan authorize the Company to take any action, such action shall be considered properly authorized if taken by the Board, the Committee,
or the Administrator as defined herein.
2.9. Covered Employee means any Employee who is, or who
is determined by the Committee to be likely to become, a covered employee within the meaning of Code Section 162(m).
2.10. Disability shall have the meaning ascribed to such term in the long term disability plan maintained by the Participants employer at the time that the determination regarding
Disability is made hereunder. Notwithstanding the foregoing, if a payment under this Plan is subject to Code Section 409A, Disability has the meaning ascribed to such term under that Code section.
2.11. Effective Date of this document is January 1, 2007.
2.12. Employee means a regular, active employee of the Company. Directors who are not employed by the Company
shall not be considered Employees under the Plan, nor shall independent contractors, leased employees, consultants or anyone else designated as not eligible to participate in the Plan by the Administrator.
2.13. Final Bonus means the actual bonus earned during a Performance Period by a Participant, as determined
by the Administrator.
2.14. Participant means an Employee who meets the eligibility requirements
of Article 3 with respect to one or more Performance Periods.
A-2
2.15. Performance Criteria shall have the meaning set forth in
Article 4.
2.16. Performance Period means the twelve month period beginning
on each January 1
st
and ending on
December 31
st
during the term of the Plan, or such
other time period established by the Administrator from time to time with respect to which the attainment of Performance Criteria will be determined.
2.17. Plan means this State Auto Financial Corporation Leadership Bonus Plan, as may be amended from time to time.
Article 3
.
|
Eligibility and Participation
|
3.1.
Eligibility and Participation
. The Administrator shall designate, or determine the methodology and criteria for the designation of, the key Employees who are eligible to receive an Award under
the Plan. In general, an Employee may be designated as a key Employee if such Employee holds an executive, management or selected professional position and is responsible for or contributes to the management, growth, and/or profitability of the
business of the Company, one of its subsidiaries or affiliates, or business segments in a material way. Only the Committee may determine the eligibility of Employees who are Covered Employees.
3.2.
Partial Performance Period Participation
. An Employee who becomes eligible after the beginning of a
Performance Period may participate in the Plan for that Performance Period on a ratable basis. Such situations may include, but are not limited to (a) new hires; or (b) when an Employee is promoted from a position which did not previously
meet the eligibility criteria. The Administrator, in its sole discretion, retains the right to prohibit or allow participation in the initial Performance Period of eligibility for any of the aforementioned Employees. If an Employee participates for
only a portion of a Performance Period for any reason, the Performance Criteria previously established under the Plan for that Performance Period shall apply to any Employees who become eligible after the beginning of the Performance Period, but his
or her Award will be prorated. Such proration shall be based on the number of days the Employee performed services during the Performance Period while a Participant in the Plan over the total days in the Performance Period, or some similar method
adopted by the Committee that results in a ratable reduction of the Award based on the partial Performance Period applicable to the Employee. In addition, in the event a Participant changes job levels during a Performance Period, the
Participants Award may be adjusted to reflect the amount of time at each job level during the Performance Period. Notwithstanding anything in this Section 3.2 or in the Plan to the contrary, the participation in the Plan for a Covered
Employee who becomes eligible after the beginning of the Performance Period shall comply with the provisions of Code Section 162(m), as set forth in Article 4.
3.3.
No Right to Participate
. No Participant or other Employee shall at any time have a right to be selected for
participation in the Plan for any Performance Period, whether or not he or she previously participated in the Plan.
Article 4
.
|
Award Determination
|
4.1 Performance Criteria. As to each Performance Period, the Administrator will establish in writing Performance Criteria based on one or more of the following performance measures of the State Auto
Group over the Performance Period: (i) earnings; (ii) return on capital; (iii) return on equity; (iv) return on assets; (v) rate change; (vi) revenue; (vii) premiums; (viii) net income; (ix) earnings per
share; (x) combined ratio; (xi) loss ratio; (xii) expense ratio; (xiii) assets; (xiv) equity; (xv) cash flow; (xvi) stock price; (xvii) total shareholders return; (xviii) premium growth;
(xix) corporate surplus growth (defined as growth in State Auto Mutuals surplus less the impact of the value of its holdings of the Company); (xx) economic profit and (xxi) individual performance related to personal goals. The
Administrator may, in its discretion, measure any of such Performance Criteria on an absolute or relative basis. Performance Criteria applicable to Covered Employees will not include item (xxi) above (individual performance related to personal
goals), unless a separate Award is issued specific to such goals. Any Award issued to a Covered Employee that includes item (xxi) as a Performance Criteria will not be performance-based compensation governed by Code Section 162(m). Except
as otherwise
A-3
provided herein, the extent to which the Performance Criteria are satisfied will determine the amount, if any, of the Award that will be earned by each Participant. The Performance Criteria
may vary for different Performance Periods and need not be the same for each Participant eligible for an Award for a Performance Period.
4.2.
Adjustment of Performance Criteria
. Once established, the Performance Criteria shall not be changed during the Performance Period. Subject to the requirements of Code Section 162(m) with
respect to Covered Employees, at the time the Award is made and Performance Criteria are established, the Administrator is authorized to determine the manner in which the Performance Criteria will be calculated or measured to take into account
certain factors over which Participants have no or limited control, including, but not limited to, changes in debt levels, changes in accounting principles, and extraordinary charges or credits to income.
4.3.
Awards
. For each Performance Period established by the Administrator, the Administrator shall establish an
Award for each Covered Employee and for all other Participants. Awards shall be earned based upon the financial performance of the Company or one or more operating groups of the Company and the attainment of established Performance Criteria during a
Performance Period; provided, however, the maximum Award that may be paid to any single Participant for any Performance Period is $2,500,000.00, such maximum Award amount to be pro-rated if the Performance Period is less than a full fiscal year.
Performance Criteria and Awards shall be established prior to the beginning of each Performance Period or as soon as practicable thereafter. If a Participant commences participation after the beginning of a Performance Period, Performance Criteria
in effect for the Participants position shall apply for the remaining balance of the Performance Period, unless otherwise determined by the Administrator within 90 days of the date the Employee became a Participant. In all cases where the
Participant is a Covered Employee, the Performance Criteria and Award shall be established in no event later than 90 days following the first day of the Performance Period or after 25% of the Performance Period has elapsed, if earlier, and the
outcome relative to the attainment of the Performance Criteria shall not be substantially certain at the time the Performance Criteria and Award are established. This Section 4.3 is intended to ensure compliance with the exception from Code
Section 162(m) for performance-based compensation, and shall be construed, applied and administered accordingly with respect to any Participant who is a Covered Employee.
4.4.
Final Bonus Determinations
. At the end of each Performance Period, the Administrator shall certify in writing
the extent to which the Performance Criteria were met during the Performance Period for any Awards for Covered Employees. If the Performance Criteria for the Performance Period are met, Covered Employees shall be entitled to the payment of the
Awards, subject to the Committees exercise of negative discretion to reduce any Final Bonus payable to a Covered Employee based on business objectives established for that Covered Employee or other factors as determined by the Committee in its
sole discretion. With respect to Participants who are not Covered Employees, the Administrator will determine the Final Bonus based on the Performance Criteria and other business objectives. The Administrator may adjust (up or down) any Final Bonus
for Participants who are not Covered Employees on the basis of such further considerations as the Administrator shall determine in its sole discretion.
4.5 Change of Control or Potential Change of Control. If a Change of Control or Potential Change of Control, as defined in Section 2.5 of the Plan, occurs prior to the end of a specified
Performance Period, the Administrator shall determine the Final Bonus in accordance with Section 4.4 of the Plan; provided, however, that such Final Bonus shall be determined based on the achievement of the Performance Criteria up to the date
of the Change of Control or Potential Change of Control and then prorated based upon the length of time that the Participant was employed by the Company during the applicable Performance Period. The Final Bonus, thus determined, shall be paid per
the terms of the Plan.
Article 5
.
|
Payment of Final Bonuses
|
5.1.
Form and Timing of Payment
. Each Participants Final Bonus shall be paid in cash, in one lump sum, subject to applicable tax and other authorized withholdings, on or before the 15
th
day of the third month after the end of each Performance Period. If
payment is delayed due to an unforeseeable event or other administrative
A-4
delays, payment shall in no event be made later than
December 31
st
of the taxable year following the year
in which the Final Bonus was earned. The Administrator may provide for deferred payment of any Final Bonus in accordance with the terms and conditions for making such a deferred compensation election contained in the State Auto Property &
Casualty Insurance Company Amended and Restated Incentive Deferred Compensation Plan, as the same may be amended from time to time.
5.2.
Unsecured Interest
. No Participant or any other party claiming an interest in amounts earned under the Plan shall have any interest whatsoever in any specific asset of the Company. The Plan is
intended to constitute an unfunded plan for incentive compensation. To the extent that any party acquires a right to receive a cash payment under the Plan, such right shall be equivalent to that of an unsecured general creditor of the Company.
Article 6.
|
Termination of Employment
|
6.1 Termination of Employment Due to Death, Disability or Retirement. In the event a Participants employment is terminated during the applicable Performance Period by reason of death, Disability
or retirement upon the attainment of early or normal retirement age as defined in the State Auto Insurance Companies Employee Retirement Plan (the Retirement Plan) (regardless of whether such Participant is eligible to retire from the
Retirement Plan), the Final Bonus determined in accordance with Section 4.4 herein shall be reduced to reflect participation prior to termination only.
(a) Death or Disability. If the Participants employment is terminated due to death or Disability,
the Final Bonus, if any, shall be equal to 100% of the Participants target bonus, prorated by multiplying the Final Bonus by a fraction, the numerator of which is the number of days of employment in the Performance Period through the date of
employment termination, and the denominator of which is the number of days in the Performance Period. In the case of a Participants Disability, the employment termination shall be deemed to have occurred as of the date that the Administrator
determines was the date on which the definition of Disability was satisfied. Notwithstanding the foregoing, if the Participant is a Covered Employee, the Final Bonus, if any, shall be based upon the achievement of the Performance Criteria during the
applicable portion of the Performance Period and then prorated as described above.
(b)
Retirement. If the Participants employment is terminated due to retirement (as defined above), the Final Bonus, if any, shall be based upon the achievement of the Performance Criteria during the applicable Performance Period and then prorated
based upon the length of time that the Participant was employed by the Company during the Performance Period.
The
Final Bonus thus determined shall be paid as soon as practicable and reasonable following the Participants death, Disability or retirement unless otherwise elected by the Participant as provided by the State Auto Property & Casualty
Insurance Company Amended and Restated Incentive Deferred Compensation Plan (the Deferred Compensation Plan), as the same may be amended from time to time. The Administrator may establish such procedures as it deems appropriate for a
Participant to designate a beneficiary to whom any amounts payable in the event of the Participants death are to be paid. If no beneficiary is designated, the right of the Participant to receive any payment under this Plan will pass to the
Participants estate.
6.2.
Involuntary Termination of Employment
. If the employment of a
Participant is terminated by the Company other than for Cause during the fourth quarter of the applicable Performance Period, the Final Bonus determined in accordance with Section 4.4 herein shall be reduced to reflect participation
prior to termination only. The Final Bonus, if any, shall be based upon the actual performance results at the end of the Performance Period and then prorated based upon the length of time that the Participant was employed by the Company during the
Performance Period.
The Final Bonus thus determined shall be paid as soon as practicable and reasonable following the end of the Performance Period in which employment termination occurs, and shall be made at the same time payments are made to
Participants who did not terminate employment during the applicable
Performance Period unless otherwise elected by the Participant as provided in the Deferred Compensation Plan,
A-5
as the same may be amended from time to time.
Whether an involuntary termination is for Cause shall be determined in the absolute discretion of the Administrator, whose
decision shall be final and binding on all parties.
6.3.
Termination of Employment for Other Reasons
.
In the event a Participants employment is terminated before the end of the Performance Period due to involuntary termination, all of the Participants rights to any Final Bonus for that Performance Period shall be forfeited unless
otherwise determined by the Administrator, in its sole discretion, due to the business circumstances of the termination, including, but not limited to, a termination in connection with the divestiture of a business segment, subsidiary or affiliate.
Any such Final Bonus, as determined by the Administrator, shall be paid at the same time payments are made to Participants who did not terminate employment during the applicable Performance Period. If a Participant terminates employment for any
other reason prior to the date the Final Bonus, if any, is paid, all of the Participants rights to any Final Bonus for that Performance Period shall be forfeited. Except as provided in Sections 6.1 and 6.2 and otherwise provided in this
Section 6.3, only Participants who are, as of the date the Final Bonus, if any, is paid, either current, active Employees or current Employees who are on a leave of absence authorized by the Company shall be entitled to any Final Bonus earned
for the Performance Period; provided, however, that a Final Bonus shall not be paid to any Employee on performance probation on the last day of the Performance Period in which such Final Bonus, if any, would otherwise have been earned by such
Employee.
6.4.
Other Forfeiture Events
. The Administrator may, in its discretion, require that all or
any portion of a Final Bonus is subject to an obligation of repayment to the Company upon the violation of a non-competition and confidentiality covenant applicable to the Participant. The Administrator may, in its discretion, also require a
Participant to repay the Company all or any portion of a Final Bonus if (i) the amount of such Participants Final Bonus was calculated based upon the achievement of certain financial results that were subsequently the subject of a
financial statement restatement; (ii) such Participant engaged in fraudulent misconduct that caused or substantially contributed to the need for the financial statement restatement; and (iii) the amount of such Participants Final
Bonus would have been lower than the amount actually awarded to such Participant had the financial results been properly reported. This Section 6.4 shall not be the Companys exclusive remedy with respect to such matters. This
Section 6.4 shall not apply after a change of control or potential change in control of the Company as defined in the Amended and Restated Equity Incentive Compensation Plan or any successor plan thereto.
Article 7
.
|
Rights of Participants
|
7.1.
Employment
. No person shall have any claim or right to be granted an Award under this Plan and the grant of an Award shall not confer upon any Participant any right to be retained as an
employee of the Company, nor shall it limit or interfere in any way with the right of the Company to terminate the employment of any Participant at any time or to increase or decrease the compensation of any Participant. There is no obligation for
uniformity of treatment of Participants under this Plan or otherwise.
7.2.
Nontransferability
. No
right or interest of any Participant in the Plan shall be assignable or transferable, other than by will or pursuant to the laws of descent and distribution, or subject to any lien, directly, by operation of law or otherwise, including, but not
limited to, by execution, levy, garnishment, attachment, pledge, or bankruptcy, and any attempt to take any such action shall be null and void.
Article 8
.
|
Administration
|
8.1.
Authority of the Administrator
.
(a)
General
. The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee will have full authority to interpret the Plan and the terms of Awards made hereunder, to establish, amend and rescind rules and
regulations relating to the Plan, to determine the terms and provisions for making or modifying Awards, to correct administrative errors, and to make all other determinations necessary or advisable for the administration of the Plan. All decisions
made by the Committee pursuant to
A-6
the provisions hereof shall be made in the Committees sole discretion and shall be final and binding on all persons. Notwithstanding any other provision of the Plan, the Committee shall not
have any discretion or authority to make changes to any Award that is intended to quality as performance-based compensation under Code Section 162(m) to the extent that the existence of such discretion or authority would cause such
Award not to so qualify.
(b)
Delegation of Authority for the Day-to-Day Administration of
the Plan
.
Except to the extent prohibited by Applicable Law, the Committee may delegate to one or more individuals the day-to-day administration of the Plan and any of the functions assigned to it in this Plan, including the power to
approve Awards to Employees who are not Covered Employees. Such delegation may be revoked at any time. All determinations and decisions of any delegate as to any disputed question arising under the Plan, including questions of construction and
interpretation, shall be final, binding and conclusive upon all parties.
8.2.
Facility of Payment
. If
the Administrator deems any person entitled to receive any amount under the provisions of the Plan to be incapable of receiving or disbursing the same by reason of minority, illness or infirmity, mental incompetence, or incapacity of any kind, the
Administrator may, in its sole discretion, (i) apply such amount directly for the comfort, support and maintenance of such person; (ii) reimburse any person for any such support theretofore supplied to the person entitled to receive any
such payment; (iii) pay such amount to any person selected by the Administrator to disburse it for such comfort, support and maintenance, including without limitation, any relative who has undertaken, wholly or partially, the expense of such
persons comfort, care and maintenance, or any institution in whose care or custody the person entitled to the amount may be; or (iv) with respect to any amount due to a minor, deposit such amount to his or her credit in any savings or
commercial bank of the Administrators choice, direct that such distribution be paid to the legal guardian, or if none, to a parent of such person or a responsible adult with whom the minor maintains his or her residence, or to the custodian
for such person under the Uniform Gift to Minors Act or Gift to Minors Act, if such payment is permitted by the laws of the state in which the minor resides. Payment pursuant to this Section 8.2 shall fully discharge the Company, the Board, the
Committee, the Administrator, and the Plan from further liability on account thereof.
The Committee, without notice, at any time and from time to time, may modify or amend, in whole or in part, any or all of the provisions of the Plan, or suspend or terminate it entirely; provided,
however, that no such modification, amendment, suspension, or termination may, without the consent of a Participant, materially reduce the right of a Participant to a payment or distribution hereunder to which he or she has already become entitled,
as determined under Articles 4 and 6 hereof. Shareholder approval of any amendment will be required only as required by Applicable Law. No new Award may be granted during any period of suspension of the Plan or after termination of the Plan.
Article 10
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Miscellaneous
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10.1.
Choice of Law
. The Plan and all agreements hereunder shall be governed by and construed in accordance with the laws of the State of Ohio, except as to matters pre-empted or governed by
federal law.
10.2.
Withholding Taxes
. The Company shall have the right to deduct from all cash
payments under the Plan any federal, state, or local taxes required by law to be withheld with respect to any Final Bonus.
10.3.
Additional Arrangements
. Nothing contained in this Plan shall prevent the Company from adopting other or additional compensation arrangements for any Participant.
10.4.
Gender and Number
. Except where otherwise indicated by the context, any masculine term used herein also
shall include the feminine; the plural shall include the singular, and the singular shall include the plural.
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10.5.
Severability
. In the event any provision of the Plan shall be
held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.
10.6.
Successors
. All obligations of the Company under the Plan shall be binding upon and inure to the benefit of
any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.
10.7.
Titles; Construction
. Titles are provided herein for convenience only and are not to serve as a basis for
interpretation or construction of the Plan. Any reference to a section (other than to a section of the Plan) shall also include a successor to such section.
A-8
Exhibit B
[Proposed changes are underlined for reference purposes.]
S
TATE
A
UTO
F
INANCIAL
C
ORPORATION
L
ONG
-T
ERM
I
NCENTIVE
P
LAN
Article 1
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Establishment and Purpose
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1.1.
Establishment of Plan
. State Auto Financial Corporation desires to establish and provide a long-term incentive bonus program for its executive officers and other key management employees,
managers and professionals. This document reflects the material terms and design for such plan, known as the State Auto Financial Corporation Long-Term Incentive Plan (the Plan). The Plan is intended to provide for performance-based
compensation which is not subject to the deduction limitation rules under Code Section 162(m) as in effect from time to time and as applicable to Covered Employees, and shall remain in effect until terminated by the Board or the Committee.
1.2.
Purpose
. The primary purposes of the Plan are to:
(a) Align performance and results with the expectations of shareholders and the Companys goals;
(b) Recognize and reward long-term operating performance as compared with the Companys
peer group of property and casualty companies as designated by the Committee;
(c) Provide
compensation opportunities that are externally competitive and internally consistent with the Companys growth objectives and total compensation strategies; and
(d) Provide award opportunities that reward executives with financial and operating responsibilities that
can impact achievement of the Companys growth goals.
Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the defined meaning is intended, the term is capitalized:
2.1. Administrator means the Committee or such other authorized officers or officer of the Company to whom
the power to administer the Plan has been delegated by the Committee.
2.2. Applicable Law means
the requirements of Code Section 162(m) applicable to performance-based compensation.
2.3.
Award means the Performance Award Units issued to a Participant under the Plan.
2.4.
Board or Board of Directors means the Board of Directors of State Auto Financial Corporation.
2.5. Code means the Internal Revenue Code of 1986, as amended, and the regulations and rulings of general applicability issued thereunder, as in effect from time to time.
2.6. Committee means the Compensation Committee of the Board.
2.7. Company means State Auto Financial Corporation and its related entities, subsidiaries and affiliates,
including State Automobile Mutual Insurance Company, or any successor thereto (the State Auto Group). Notwithstanding the foregoing, whenever the terms of this Plan authorize the Company to take any action, such action shall be
considered properly authorized if taken by the Board, the Committee or the Administrator as defined herein.
2.8. Covered Employee means any Participant who is, or who is determined by the Committee to be likely to
become, a covered employee within the meaning of Code Section 162(m).
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2.9. Disability shall have the meaning ascribed to such term in
the long term disability plan maintained by the Participants employer at the time that the determination regarding Disability is made hereunder. Notwithstanding the foregoing, if a payment under this Plan is subject to Code Section 409A,
Disability has the meaning ascribed to such term under that Code section.
2.10. Effective
Date means January 1, 2007.
2.11. Employee means a regular, active employee of the
Company. Directors who are not employed by the Company shall not be considered Employees under the Plan, nor shall independent contractors, leased employees, consultants or anyone else designated as not eligible to participate in the Plan by the
Administrator.
2.12. Final Award means the actual incentive compensation earned during a
Performance Period by a Participant, as determined by the Administrator following the end of the Performance Period.
2.13. Participant means an Employee who meets the eligibility requirements of Article 3 with respect to one or more Performance Periods.
2.14. Performance Award Units means the units issued to a Participant which represent the right of the
Participant to receive an amount in cash equal to the value related to the Performance Award Units issued, such value to be determined in the manner established by the Administrator at the time of the Award.
2.15. Performance Period means the three-year rolling period beginning on the date an Award is granted and
ending on December 31 of the third calendar year following the grant, calculated by including the year of grant as the first year in the three-year rolling period.
2.16. Plan means this State Auto Financial Corporation Long-Term Incentive Plan.
2.17. Qualifying Performance Criteria means any of the performance goals set forth in Article 4 as determined
by the Administrator.
Article 3
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Eligibility and Participation
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3.1.
Eligibility
. The Administrator shall designate, or determine the methodology and criteria for the designation of, the Employees who are eligible to receive Awards under the Plan. In general,
an Employee may be designated as a Participant if such Employee holds a strategic position and is responsible for or contributes to the management, growth, and/or profitability of the business of the Company in a material way. Only the Committee may
determine if an Employee is a Covered Employee.
3.2.
Participation
. Employees who are chosen to
participate in the Plan shall be apprised of the performance criteria and related Awards determined for them for the Performance Period, as soon as is practicable after such Awards are established.
3.3.
Partial Performance Period Participation
. An Employee who becomes eligible to participate in the Plan after
the beginning of the Performance Period may participate in the Plan for that Performance Period on a ratable basis. Such situations may include, but are not limited to (a) new hires; or (b) when an Employee is promoted from a position
which did not previously meet the eligibility criteria. The Administrator, in its sole discretion, retains the right to prohibit or allow participation for any of the aforementioned Employees. The performance criteria previously established under
the Plan shall apply to any Employees who become eligible after the beginning of the Performance Period. If an Employee participates for only a portion of the Performance Period for any reason, his or her Award will be pro-rated based on the number
of days he or she performed services during the Performance Period over the total days in the Performance Period, or some similar method adopted by the Committee that results in a ratable reduction of the Award based on the partial Performance
Period applicable to the Employee. In addition, in the event a Participant changes job levels during a Performance Period, the Participants Award may be adjusted to reflect the amount of time at each job level
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during the Performance Period. Notwithstanding anything in this Section 3.3 or in the Plan to the contrary, the participation in the Plan for a Covered Employee who becomes eligible after
the beginning of the Performance Period shall comply with the provisions of Code Section 162(m), as set forth in Article 4.
3.4.
No Right to Participate
. No Participant or other Employee shall at any time have a right to be selected for participation in the Plan for any Performance Period, whether or not he or she
previously participated in this Plan or any similar program.
Article 4
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Award Determination
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4.1. Qualifying Performance Criteria. As to each Performance Period, the Administrator shall select and establish in writing Qualifying Performance Criteria for the Performance Period, which, if met,
may entitle Participants to the payment of a Final Award. Such Qualifying Performance Criteria shall be based on one or more of the following performance measures of the State Auto Group over the Performance Period: (i) earnings;
(ii) return on capital; (iii) return on equity; (iv) return on assets; (v) revenue; (vi) premiums; (vii) net income; (viii) earnings per share; (ix) combined ratio; (x) loss ratio; (xi) expense
ratio; (xii) assets; (xiii) equity; (xiv) cash flow; (xv) stock price; (xvi) total shareholders return; (xvii) economic profit; (xviii) Company performance relative to the designated peer group determined by
the groups statutory combined ratio, the Companys book value per share and total group revenue growth, or any other performance goal approved by the shareholders of the Company in accordance with Code Section 162(m). The
Administrator may, in its discretion, measure any of such Qualifying Performance Criteria on an absolute or relative basis.
To ensure compliance with the exception from Code Section 162(m) for qualified performance-based compensation for Participants who are Covered Employees, the performance criteria established will be
based on one or more Qualifying Performance Criteria selected by the Administrator in writing within 90 days following the first day of the period of service of such Covered Employee as a Participant under the Plan (or, if earlier, before 25% of
that period has elapsed), and at a time when the outcome relative to the attainment of the performance criteria is not substantially certain. Subject to the requirements of Code Section 162(m) with respect to Covered Employees, if a Participant
commences participation after the beginning of a Performance Period, the performance criteria established for the Performance Period shall apply to that Participant, with the Final Award amount adjusted or pro-rated over the remaining balance of the
Performance Period to reflect the partial period of participation in the Plan. Once established, the Qualifying Performance Criteria shall not be changed during the Performance Period. Subject to the requirements of Code Section 162(m) with
respect to Covered Employees, at the time the Performance Award Units are issued and Qualifying Performance Criteria are established, the Administrator is authorized to determine the manner in which the performance criteria will be calculated or
measured to take into account certain factors over which Participants have no or limited control, including, but not limited to, changes in debt levels, changes in accounting principles, and extraordinary charges or credits to income. This
Section 4.1 is intended to ensure compliance with the exception from Code Section 162(m) for performance-based compensation, and shall be construed, applied and administered accordingly with respect to any Participant who is a
Covered Employee.
4.2.
Awards
. For each Performance Period established by the Administrator, the
Administrator will establish in writing an Award for each Covered Employee and for all other Participants for the Performance Period. Awards shall be earned based upon the financial performance of the Company and the attainment of established
Qualifying Performance Criteria during the Performance Period. Participants who are Covered Employees may receive an Award solely if the Qualifying Performance Criteria are met.
4.3.
Final Award Determinations
. At the end of each Performance Period, the Administrator shall certify in writing
the extent to which the Qualifying Performance Criteria were met during the Performance Period for any Awards for Covered Employees. If the Qualifying Performance Criteria for the Performance Period are met, Covered Employees shall be entitled to
the payment of the Final Awards, subject to the Committees exercise of negative discretion to reduce any Final Award payable to a Covered Employee based on business objectives established for that Covered Employee or other factors as
determined by the Committee in its sole discretion.
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With respect to Participants who are not Covered Employees, the Administrator will determine the Final Awards based on the performance criteria and other business objectives. The Administrator
may adjust (either up or down) any Final Award for Participants who are not Covered Employees on the basis of such further considerations as the Administrator shall determine in its sole discretion.
Notwithstanding anything in the Plan to the contrary, the maximum amount payable to any single Participant pursuant to
any Final Award earned with respect to any single Performance Period shall not exceed $2,500,000.00, such maximum Final Award amount to be pro-rated if the Performance Period is less than three years.
Article 5
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Payment of Final Awards
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5.1.
Form and Timing of Payment
. The value of each Participants Final Award shall be paid in cash, in one lump sum, subject to applicable tax withholding, on or before the 15
th
day of the third month after the end of each Performance Period. If
payment is delayed due to an unforeseeable event or other administrative delays, payment shall in no event be made later than the December 31
st
of the taxable year following the year in which the Final Award was earned. The Administrator may provide for deferred
payment of any Final Award in accordance with the terms and conditions for making such a deferred compensation election contained in the State Auto Property & Casualty Insurance Company Amended and Restated Incentive Deferred Compensation
Plan, as the same may be amended from time to time.
5.2.
Unsecured Interest
. No Participant or any
other party claiming an interest in amounts earned under the Plan shall have any interest whatsoever in any specific asset of the Company. The Plan is intended to constitute an unfunded plan for incentive compensation. To the extent that any party
acquires a right to receive a cash payment under the Plan, such right shall be equivalent to that of an unsecured general creditor of the Company.
Article 6
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Termination of Employment; Other Forfeiture Events
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6.1.
Termination of Employment Due to Death or Disability
. In the event a Participants employment is terminated during the applicable Performance Period by reason of death or Disability, the
Final Award determined in accordance with Section 4.3 herein shall be reduced to reflect participation prior to termination of employment only. The Final Award, if any, shall be equal to 100% of the Participants target bonus, prorated by
multiplying the Final Award by a fraction, the numerator of which is the number of days of employment in the Performance Period through the date of employment termination, and the denominator of which is the number of days in the Performance Period.
In the case of a Participants Disability, the employment termination shall be deemed to have occurred as of the date that the Administrator determines was the date on which the definition of Disability was satisfied.
The Final Award thus
determined shall be paid as soon as practicable and reasonable following the Participants death or Disability unless otherwise elected by the Participant as provided by the State Auto Property & Casualty Insurance Company Amended and
Restated Incentive Deferred Compensation Plan (the Deferred Compensation Plan), as the same may be amended from time to time.
The Administrator may establish such procedures as it deems appropriate for a Participant to designate a
beneficiary to whom any amounts payable in the event of the Participants death are to be paid. If no beneficiary is designated, the right of the Participant to receive any payment under this Plan will pass to the Participants estate.
Notwithstanding the foregoing, if the Participant is a Covered Employee, the Final Award, if any, shall be based upon the achievement of the Qualifying Performance Criteria during the applicable portion of the Performance Period and then prorated
as described above.
6.2
Termination of Employment due to Retirement
.
In the event a
Participants employment is terminated due to retirement upon the attainment of early or normal retirement age as defined in the State Auto Insurance Companies Employee Retirement Plan (the Retirement Plan) (regardless of whether
such Participant is eligible to retire from the Retirement Plan), at any time during the applicable Performance Period, the Final Award determined in accordance with Section 4.3 herein shall be reduced to reflect participation prior to
termination
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only.
The Final Award, if any, shall be based upon the actual performance results at the end of the Performance Period and then prorated based upon the length of time that the Participant
was employed by the Company during the Performance Period.
The Final Award thus determined shall be paid as soon as practicable and reasonable following the end of the Performance Period in which employment termination occurs, and shall be made
at the same time payments are made to Participants who did not terminate employment during the applicable Performance period unless otherwise elected by the Participant as provided in the Deferred Compensation Plan, as the same may be amended from
time to time.
6.3.
Involuntary Termination of Employment
. If the employment of a Participant is
terminated by the Company other than for Cause during an applicable Performance Period, the Final Award determined in accordance with Section 4.3 herein shall be reduced to reflect participation prior to termination only. The Final
Award, if any, shall be based upon the actual performance results at the end of the Performance Period and then prorated based upon the length of time that the Participant was employed by the Company during the Performance Period. The Final Award
thus determined shall be paid as soon as practicable and reasonable following the end of the Performance Period in which employment termination occurs, and shall be made at the same time payments are made to Participants who did not terminate
employment during the applicable Performance Period. Whether an involuntary termination is for Cause shall be determined in the absolute discretion of the Administrator, whose decision shall be final and binding on all parties.
6.4.
Termination of Employment for Other Reasons
. In the event of a Participants termination of
employment before the last date of a Performance Period for any reason other than death, Disability, retirement or involuntary termination by the Company (other than for Cause), all of the Participants rights to any Final Award for that
Performance Period shall be forfeited. If a Participant terminates employment for any other reason prior to the date the Final Award, if any, is paid, all of the Participants rights to any Final Award for that Performance Period shall be
forfeited. Except as provided in Sections 6.1, 6.2 and 6.3, only Participants who are, as of the date the Final Award, if any, is paid, either current, active Employees or current Employees who are on a leave of absence authorized by the Company
shall be entitled to any Final Award earned for the Performance Period.
6.5.
Other Forfeiture Events
.
The Administrator may, in its discretion, require that all or any portion of a Final Award is subject to an obligation of repayment to the Company upon the violation of a non-competition and confidentiality covenant applicable to the Participant.
The Administrator may, in its discretion, also require a Participant to repay the Company all or any portion of a Final Award if (i) the amount of such Participants Final Award was calculated based upon the achievement of certain
financial results that were subsequently the subject of a financial statement restatement; (ii) such Participant engaged in fraudulent misconduct that caused or substantially contributed to the need for the financial statement restatement; and
(iii) the amount of such Participants Final Award would have been lower than the amount actually awarded to the Participant had the financial results been properly reported. This Section 6.5 shall not be the Companys exclusive
remedy with respect to such matters. This Section 6.5 shall not apply after a Change in Control or Potential Change in Control.
Article 7.
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Rights of Participants
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7.1.
Employment
. No person shall have any claim or right to be granted an Award under this Plan and the grant of an Award shall not confer upon any Participant any right to be retained as an
Employee of the Company, nor shall it limit or interfere in any way with the right of the Company to terminate the employment of any Participant at any time or to increase or decrease the compensation of any Participant. There is no obligation for
uniformity of treatment of Participants under this Plan or otherwise.
7.2.
Nontransferability
. No
right or interest of any Participant in the Plan shall be assignable or transferable, other than by will or pursuant to the laws of descent and distribution, or subject to any lien, directly, by operation of law or otherwise, including, but not
limited to, by execution, levy, garnishment, attachment, pledge, or bankruptcy, and any attempt to take any such action shall be null and void.
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7.3.
Change in Control
. In the event of a Change in Control, all
Participants shall become vested in and entitled to their Awards calculated based on their individual awards times a fraction, the numerator of which is the number of days from the beginning of the Performance Period to the date of the Change in
Control and the denominator of which is the total number of days in the Performance Period. The amount so calculated shall be the minimum amount payable as a Final Award for the Performance Period in which the Change in Control occurs. For purposes
of this Plan, a Change in Control or Potential Change in Control shall be defined as stated in the Amended and Restated Equity Incentive Compensation Plan or any successor plan thereto.
Article 8.
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Administration
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8.1.
Authority of the Administrator
.
(a)
General
. The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee will have full authority to interpret the Plan and the terms of Awards made hereunder, to establish, amend and rescind rules and
regulations relating to the Plan, to determine the terms and provisions for making or modifying Awards, to correct administrative errors, and to make all other determinations necessary or advisable for the administration of the Plan. All decisions
made by the Committee pursuant to the provisions hereof shall be made in the Committees sole discretion and shall be final and binding on all persons. Notwithstanding any other provision of the Plan, the Committee shall not have any discretion
or authority to make changes to any Award that is intended to quality as performance-based compensation under Code Section 162(m) to the extent that the existence of such discretion or authority would cause such Award not to so
qualify.
(b)
Delegation of Authority for the Day-to-Day Administration of the Plan
.
Except to the extent prohibited by Applicable Law, the Committee may delegate to one or more individuals the day-to-day administration of the Plan and any of the functions assigned to it in this Plan, including the power to approve Awards to
Employees who are not Covered Employees. Such delegation may be revoked at any time. All determinations and decisions of any delegate as to any disputed question arising under the Plan, including questions of construction and interpretation, shall
be final, binding and conclusive upon all parties.
8.2.
Facility of Payment
. If the Administrator
deems any person entitled to receive any amount under the provisions of the Plan to be incapable of receiving or disbursing the same by reason of minority, illness or infirmity, mental incompetence, or incapacity of any kind, the Administrator may,
in its sole discretion, (i) apply such amount directly for the comfort, support and maintenance of such person; (ii) reimburse any person for any such support theretofore supplied to the person entitled to receive any such payment;
(iii) pay such amount to any person selected by the Administrator to disburse it for such comfort, support and maintenance, including without limitation, any relative who has undertaken, wholly or partially, the expense of such persons
comfort, care and maintenance, or any institution in whose care or custody the person entitled to the amount may be; or (iv) with respect to any amount due to a minor, deposit such amount to his or her credit in any savings or commercial bank
of the Administrators choice, direct that such distribution be paid to the legal guardian, or if none, to a parent of such person or a responsible adult with whom the minor maintains his or her residence, or to the custodian for such person
under the Uniform Gift to Minors Act or Gift to Minors Act, if such payment is permitted by the laws of the state in which the minor resides. Payment pursuant to this Section 8.2 shall fully discharge the Company, the Board, the Committee, the
Administrator, and the Plan from further liability on account thereof.
Article 9
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Amendment or Termination
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The Committee, without notice, at any time and from time to time, may modify or amend, in whole or in part, any or all of the provisions of the Plan, or suspend or terminate it entirely; provided,
however, that no such modification, amendment, suspension or termination may, without the consent of a Participant, materially reduce the right of a Participant to a payment or distribution hereunder to which he or she has already become entitled,
B-6
as determined under Articles 4 and 6 hereof. Shareholder approval of any amendment will be required only as required by Applicable Law. No Award may be granted during any period of suspension of
the Plan or after termination of the Plan.
Article 10.
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Miscellaneous
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10.1.
Choice of Law
. The Plan and all agreements hereunder shall be governed by and construed in accordance with the laws of the State of Ohio, except as to matters pre-empted or governed by
federal law.
10.2.
Withholding Taxes
. The Company shall have the right to deduct from all cash
payments under the Plan any federal, state, or local taxes required by law to be withheld with respect to any Final Award.
10.3.
Additional Arrangements
. Nothing contained in this Plan shall prevent the Company from adopting other or additional compensation arrangements for any Participant.
10.4.
Gender and Number
. Except where otherwise indicated by the context, any masculine term used herein also
shall include the feminine; the plural shall include the singular, and the singular shall include the plural.
10.5.
Severability
. In the event any provision of the Plan shall be held illegal or invalid for any reason, the
illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.
10.6.
Successors
. All obligations of the Company under the Plan shall be binding upon and inure to the benefit of
any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.
10.7.
Titles; Construction
. Titles are provided herein for convenience only and are not to serve as a basis for
interpretation or construction of the Plan. Any reference to a section (other than to a section of the Plan) shall also include a successor to such section.
B-7
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STATE AUTO FINANCIAL CORPORATION
518 E. BROAD ST.
COLUMBUS, OH 43215
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VOTE BY INTERNET -
www.proxyvote.com
Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern Time the day
before the cut-off date or meeting date. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form.
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ELECTRONIC DELIVERY OF FUTURE PROXY
MATERIALS
If you would like to reduce the costs incurred by our company in mailing proxy materials, you can consent to
receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that
you agree to receive or access proxy materials electronically in future years.
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VOTE BY PHONE - 1-800-690-6903
Use any touch-tone telephone to transmit your voting instructions up until 11:59 P.M. Eastern Time the day before the cut-off date or
meeting date. Have your proxy card in hand when you call and then follow the instructions.
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VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Vote Processing, c/o
Broadridge, 51 Mercedes Way, Edgewood, NY 11717.
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TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
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M43933-P20046 KEEP
THIS PORTION FOR YOUR RECORDS
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DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
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STATE AUTO FINANCIAL CORPORATION
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For
All
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Withhold
All
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For All
Except
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To withhold authority to vote for any individual nominee(s), mark For All Except and write the
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The Board of Directors recommends that you vote FOR the following:
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¨
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number(s) of the nominee(s) on the line below.
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1.
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Election of Directors
Nominees:
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01)
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Eileen A. Mallesch
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02)
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Robert P. Restrepo Jr.
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03)
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Paul S. Williams
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The Board of Directors recommends you vote FOR
proposals 2, 3, 4 and 5:
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For
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Against
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Abstain
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2.
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Proposal to modify a material term of
the Companys Leadership Bonus Plan and reaffirm the material terms of such Plan.
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¨
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¨
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¨
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3.
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Proposal to modify a material term of
the Companys Long-Term Incentive Plan and reaffirm the material terms of such Plan.
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¨
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¨
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¨
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4.
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Ratification of selection of Ernst
& Young LLP as the Companys registered public accounting firm for 2012.
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¨
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¨
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¨
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5.
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Advisory Vote-Approval of the
compensation of the Companys named executive officers as disclosed in the Proxy Statement for the 2012 Annual Meeting of Shareholders.
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¨
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¨
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¨
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NOTE:
In addition, the
named proxies are authorized to vote, in their discretion, upon such other matters as may properly come before the Annual Meeting or any adjournment thereof.
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Yes
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No
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Please indicate if you plan to attend this meeting.
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¨
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¨
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Please sign exactly as your name(s)
appear(s) hereon. When signing as attorney, executor, administrator, or other fiduciary, please give full title as such. Joint owners should each sign personally. All holders must sign. If a corporation or partnership, please sign in full corporate
or partnership name by authorized officer.
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Signature [PLEASE SIGN WITHIN BOX]
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Date
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Signature (Joint Owners)
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Date
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Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting:
The Annual Report, Notice and Proxy Statement are
available at
www.proxyvote.com
.
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M4394-P20046
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STATE AUTO FINANCIAL CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
This Proxy is Solicited on Behalf of the Board of Directors of
State Auto Financial Corporation
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The undersigned hereby appoints Robert P. Restrepo, Jr., and in the event he is unable to so act, any one or both of Steven E. English and James A. Yano, proxies, with full power of substitution, to
represent and vote all common shares, without par value (the Shares), of State Auto Financial Corporation (the Company) which the undersigned would be entitled to vote if personally present at the Annual Meeting of
Shareholders to be held at the Companys principal executive offices located at 518 East Broad Street, Columbus, Ohio, on May 4, 2012, at 10:00 a.m., local time, and at any and all adjournments thereof, as specified in this Proxy.
The Shares represented by this
Proxy will be voted upon the proposals listed on the reverse side in accordance with the instructions given by the undersigned, but if this Proxy is signed and returned and no instructions are given, this Proxy will be voted FOR the election of all
nominees set forth in Proposal 1, FOR Proposals 2, 3, 4 and 5 and, in the discretion of the proxies, on any other matter which properly comes before the Annual Meeting or any adjournment thereof.
(Continued and to be signed on the reverse side)
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