UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

(RULE 14a-101)

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

Filed by the Registrant x

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

o  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

x  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to §240.14a-12

 

The Navigators Group, Inc.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THE NAVIGATORS GROUP, INC.
One Penn Plaza
New York, New York 10119

 

 

ANNUAL MEETING — April 29, 2009

 

 

Dear Stockholder:

 

You are cordially invited to attend the Annual Meeting of Stockholders of the Company to be held at 10:00 a.m. on Wednesday, April 29, 2009 at the Company’s office at Reckson Executive Park, 6 International Drive, Rye Brook, New York 10573.

 

A report of the Company’s current affairs will be presented at the Annual Meeting and Stockholders will have an opportunity for questions and comments.

 

You are requested to sign, date and return your proxy card whether or not you plan to attend the Annual Meeting.

 

We are grateful for your assistance and express our appreciation in advance.

 

Sincerely yours,

 

 

Terence N. Deeks

Chairman

 

March 13, 2009

 

THE NAVIGATORS GROUP, INC.
One Penn Plaza
New York, New York 10119

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

April 29, 2009

 

 

To the Stockholders of The Navigators Group, Inc.:

 

Notice is hereby given that the Annual Meeting of Stockholders of The Navigators Group, Inc. (the “Company”), a Delaware corporation, will be held at the Company’s office at Reckson Executive Park, 6 International Drive, Rye Brook, New York 10573 on Wednesday, April 29, 2009, at 10:00 a.m. At the meeting, stockholders will be asked to:

 

(1) Elect nine (9) directors to serve until the 2010 Annual Meeting of Stockholders or until their respective successors have been duly elected and qualified.

 

(2) Approve an amendment to The Navigators Group, Inc. 2005 Stock Incentive Plan.

 

(3) Ratify the appointment by the Company’s Board of Directors of KPMG LLP as the independent auditors of the Company to examine and report on the December 31, 2009 financial statements.

 

(4) Transact such other business as may properly come before the Annual Meeting or any adjournment thereof.

 

The close of business on March 2, 2009 has been fixed by the Board of Directors as the date for the determination of stockholders entitled to notice of and to vote at the Annual Meeting, and only stockholders of record on such date will be entitled to vote. A list of stockholders will be open to examination by stockholders during ordinary business hours for a period of ten (10) days prior to the Annual Meeting at the office of the Company, Reckson Executive Park, 6 International Drive, Rye Brook, New York 10573.

 

By Order of the Board of Directors

 

 

Emily B. Miner
Secretary

New York, New York
March 13, 2009

 

 

 

 

THE NAVIGATORS GROUP, INC.
One Penn Plaza
New York, New York 10119

 

 

ANNUAL MEETING OF STOCKHOLDERS

 

PROXY STATEMENT

 

General Information

 

The accompanying form of proxy is solicited on behalf of the Board of Directors (the “Board”) of The Navigators Group, Inc. for use at the annual meeting (the “Annual Meeting”) of the Company’s stockholders or any adjournment thereof. When we use the terms “we,” “us,” “our” or “the Company,” we are referring to The Navigators Group, Inc. and its subsidiaries, unless the context otherwise requires. The persons named on the proxy card have been designated as proxies by the Company’s Board of Directors. Such persons are officers of the Company. Any stockholder desiring to appoint some other person to represent him or her at the Annual Meeting may do so by completing another form of proxy and delivering the completed proxy to the Secretary of the Company at the address indicated above, prior to the Annual Meeting. It is the responsibility of the stockholder appointing some other person to represent him or her to inform such person of the appointment. The Company has first mailed or electronically delivered these proxy materials to holders (“Stockholders”) of shares of the Company’s Common Stock, par value $.10 per share (the “Common Stock”), on or about March 17, 2009. The Company’s executive office is located at One Penn Plaza, New York, New York 10119. The Company’s administrative office is located at Reckson Executive Park, 6 International Drive, Rye Brook, New York 10573.

 

The proxy materials are available over the Internet at the web site address shown on your proxy card. Internet voting is available 24 hours a day. If you have access to the Internet, we encourage you to vote this way. If you vote over the Internet, please do not return your proxy card. Stockholders can elect to view future proxy statements and annual reports over the Internet instead of receiving paper copies in the mail. You can choose this option and save the Company the cost of producing and mailing the documents by following the instructions provided if you vote over the Internet. Should you choose to view future proxy statements and annual reports over the Internet, you will receive an e-mail next year with voting instructions and the Internet address of those materials.

 

The proxies that are properly executed and duly returned to the Company and not revoked will be voted as specified and, if no direction is made, will be voted for the election of each of management’s nine (9) nominees as directors and in favor of Proposals 2 and 3.   Stockholders may also be asked to consider and take action with respect to such other matters as may properly come before the Annual Meeting or any adjournment or adjournments thereof. Each proxy granted is revocable and may be revoked at any time prior to its exercise by giving notice of such revocation to the Secretary of the Company at The Navigators Group, Inc., Reckson Executive Park, 6 International Drive, Rye Brook, New York 10573. A Stockholder who attends the Annual Meeting in person may, if he or she wishes, vote by ballot at the Annual Meeting, thereby canceling any proxy previously given. The outstanding voting stock of the Company as of March 2, 2009, the record date, consisted of 16,860,902 shares of Common Stock, with each share of Common Stock entitled to one vote. Only Stockholders of record at the close of business on March 2, 2009, are entitled to vote at the Annual Meeting. The closing price of the Common Stock on March 2, 2009 was $51.20. A copy of the Company’s Annual Report for the year ended December 31, 2008 is being mailed simultaneously herewith and is electronically available to Stockholders on the Internet by logging on to www.proxyvote.com and following the instructions provided.

 

PROPOSAL 1

 

ELECTION OF DIRECTORS

 

The Board of Directors recommends that you vote FOR the director nominees described below. Proxies will be so voted unless Stockholders specify otherwise in their proxies.

 

The By-laws of the Company provide for the Company to have not less than three nor more than twenty-one directors. The Board of Directors proposes the election of the nine nominees named below to constitute the entire Board of Directors of the Company until the next Annual Meeting of Stockholders or until their successors shall be duly elected and shall qualify. Each of the nominees is currently a director of the Company and is standing for re-election. In the event any nominee named below is unable or declines to serve, which the Board of Directors does not anticipate, it is intended that the proxies will be voted for the balance of those named and for any substitute nominee that the Board of Directors may designate.

 

 

H. J. Mervyn Blakeney spent a 30-year career with Cadbury Schweppes Plc, the final 10 years as Managing Director of Schweppes International Ltd. and as a director of its holding company. After retiring as an executive in 1988, he has held non-executive directorships in various industries, principally insurance, within the United Kingdom. Mr. Blakeney is currently the non-executive Chairman of the Board of Directors of Navigators Underwriting Agency Ltd., a wholly-owned United Kingdom subsidiary of the Company.

 

Peter A. Cheney has been retired since 1996. Prior thereto, Mr. Cheney held various positions at National Re Corporation, including Executive Vice President, Chief Financial Officer and Director from 1994 to 1996.

 

Terence N. Deeks is our founder. He has been our Chairman since our formation in 1982, and was our President until May 2002 and Chief Executive Officer until December 2002. Mr. Deeks has been engaged in the property and casualty insurance business since 1957.

 

W. Thomas Forrester retired in March 2007 from Progressive Corporation, where he had been Chief Financial Officer since 1999. From 1984 to 1999, Mr. Forrester held a series of increasingly senior financial and operating positions at Progressive Corporation. Mr. Forrester began his career at the public accounting firm of Price Waterhouse in 1976 and worked in the audit and consulting areas. He is a director of Federal National Mortgage Association — Fannie Mae.

 

Stanley A. Galanski has been our President since May 2002 and our Chief Executive Officer since January 2003. Prior thereto, he had been Executive Vice President and Chief Operating Officer of the Company since March 2001. Mr. Galanski was President of XL Insurance Company of New York from 2000 to March 2001, President of XL Specialty Insurance Company from 1997 to March 2001, and President of New Hampshire Insurance Company from 1995 to 1997. From 1980 to 1995, Mr. Galanski held various underwriting and management positions with the Chubb Group of Insurance Companies. Mr. Galanski is a director of several of our wholly-owned subsidiaries, including as chairman of Navigators Insurance Company.

 

Leandro S. Galban, Jr. has been, since 2006, Chairman — Financial Services of DLJ Merchant Banking Partners, a private equity group that is part of Credit Suisse. Prior thereto, from 2001 to 2005, he had been Vice Chairman — Investment Banking and a Managing Director of Credit Suisse First Boston LLC. Prior thereto, from

1996 to 2000, he had been a Managing Director and Co-Head of the Financial Institutions Group of Donaldson, Lufkin & Jenrette, a company acquired by Credit Suisse First Boston LLC.

 

John F. Kirby has been retired from Chubb & Son since 2003 and prior thereto, from 1998 to 2003, he was a Managing Director with worldwide responsibility for ceded reinsurance. From 1995 to 1998, he served as Senior Vice President and Manager — Global Marine & Aviation Practice at Wilcox, Inc. Prior thereto, he held various senior positions at The Continental Corporation from 1987 to 1995. He began his career with the Chubb Group in 1964.

 

Marc M. Tract has been a partner of the law firm of Katten Muchin Rosenman LLP and a predecessor firm since 1994, which firms have been counsel to the Company for the same period. Mr. Tract specializes in the areas of corporate and regulatory matters for the insurance industry.

 

Robert F. Wright has been President and Chief Executive Officer of Robert F. Wright Associates, Inc. since 1988. Mr. Wright was a partner of the public accounting firm of Arthur Andersen & Co. from 1960 to 1988. He is a director of Delphi Financial Group, Inc. and Universal American Financial Corporation.

 

Non-Director Executive Officers

 

The current non-director executive officers of the Company are as follows:

 

 

Francis W. McDonnell has been our Senior Vice President and Chief Financial Officer since August 2008. Prior to joining the Company, Mr. McDonnell served as Chief Financial Officer of ACE USA from 2003 to 2008. From 1995 to 2002 he served as the Chief Financial Officer of PMA Capital Corporation and Chief Financial Officer of PMA Reinsurance from 1993 to 1995. Prior thereto, he held various financial management positions at Reliance Insurance Company. Mr. McDonnell is a director of Navigators Insurance Company.

 

H. Clay Bassett, Jr. has been our Senior Vice President and Chief Underwriting Officer since April 2008. Prior to joining the Company, Mr. Bassett served as the Chief Underwriting Officer of Folksamerica Re from 2005 to 2008. Mr. Bassett served in various management positions with Argonaut Group, Inc. from 2002 to 2005, Swiss Re from 1997 to 2002 and American Insurance Group, Inc. from 1990 to 1997. Mr. Bassett began his career at National Reinsurance Corp. in 1987.

 

R. Scott Eisdorfer has been our Senior Vice President and Chief Administrative Officer since October 2008, prior to which, since 2001, he was our Senior Vice President and Chief Information Officer and held the same titles with our insurance subsidiaries since 1999. From 1996 to 1999, Mr. Eisdorfer was a Vice President and Applications Manager of General Reinsurance Corporation, and prior thereto from 1985 held various information technology positions at National Reinsurance Corporation. Mr. Eisdorfer is a director of Navigators Insurance Company.

 

Jane E. Keller has been our Senior Vice President and Chief Claims Officer since June 2004. Prior to joining the Company, Ms. Keller served as the Senior Vice President and Chief Claims Officer of Liberty International Underwriters from 2002 to 2004 and the Vice President of Claims from 2000 to 2002. From 1994 to 2000, she was the Senior Vice President of Claims at a division of Great American Insurance Company. Prior thereto, Ms. Keller was with the Home Insurance Company and in private legal practice. Ms. Keller is a director of Navigators Insurance Company.

 

Bradley D. Wiley has been our Senior Vice President and Chief Risk and Compliance Officer since November 2008, prior to which he served as our Senior Vice President and Financial Compliance Officer since 2003 and Senior Vice President and Chief Risk Officer since 2007. Mr. Wiley served as our Chief Financial Officer from 1996 to 2003 and as Secretary from 1996 to 2006. From 1992 until 1996, Mr. Wiley was Senior Vice President and Chief

Financial Officer of Christiania Re Corp. and its wholly-owned subsidiary, Christiania General Insurance Corp. Mr. Wiley is a director of Navigators Insurance Company.

 

Ownership of Voting Securities By Certain Beneficial Owners and Management

 

The following table sets forth the beneficial ownership, reported to the Company as of March 2, 2009, of shares of Common Stock (i) by each person who holds of record or is known by us to own beneficially more than 5% of the outstanding Common Stock, (ii) by each of our current directors, (iii) by each of the named executive officers in the Summary Compensation Table under “Compensation Discussion and Analysis” below, and (iv) by all current directors and executive officers as a group. Except as otherwise indicated, to our knowledge all shares are beneficially owned by the persons named as owners.

 

 

 

 

 

Related Party Transactions

 

Our Corporate Code of Ethics and Conduct applies to all of our employees and directors and requires such individuals to discuss any possible conflicts of interest with our Chief Compliance Officer. Conflicts of interest are defined to include situations where officers and directors or their family members have interests in customers of or suppliers to the Company. In the case of transactions involving directors or officers, the Chief Compliance Officer reports the proposed transactions to the non-interested members of the Board of Directors for approval. Approval is based on whether the transaction is fair and equitable and on terms no less favorable than the Company could obtain in arm’s length transactions with unaffiliated third parties. In our experience, this process has been adequate for the review and approval of the few related party transactions that have arisen from time to time.

 

The Board of Directors has adopted a policy requiring a director to offer his or her resignation from the Board upon a change in employment. The Board of Directors has discretion to determine, based upon its evaluation of whether such change in employment would create a possible conflict of interest or affect a director’s independence, as well as any other factors that it may deem applicable, whether or not to accept such resignation.

 

In addition, the Board of Directors annually reviews related party transactions in connection with director independence and determines whether the director has any relationship with the Company that, in the Board’s opinion, would interfere with the exercise of his independent judgment in carrying out the responsibilities of a director. During 2008, the following relationships with two of our directors were reviewed and were found not to present a conflict of interest or affect such director’s independence:

 

Marc M. Tract is a partner of Katten Muchin Rosenman LLP, which law firm serves as counsel to the Company and received fees of approximately $264,470 in 2008. Mr. Tract, who does not have any direct or indirect material interest in the legal fees paid to Katten Muchin Rosenman LLP, is a member of the Finance Committee of the Board of Directors.

H.J. Mervyn Blakeney currently serves as a non-executive director and chairman of the board of the Company’s wholly-owned subsidiary, Navigators Underwriting Agency Ltd. (“NUAL”), and was paid £36,670 in 2008 for such NUAL board service, or $53,538 based on a conversion rate, as of December 31, 2008, of £1 = $1.46. Mr. Blakeney is a member of the Compensation and Finance Committees of the Board of Directors.

 

Board of Directors and Committees

 

The Board of Directors of the Company held four meetings in 2008 and met in executive session without management present at each of those meetings. During 2008 all incumbent directors attended or participated in at least 75% of the meetings of the Board of Directors and meetings of the committees of the Board of which the directors are members. Directors are encouraged to attend the Company’s Annual Meeting. All of the directors serving on the Board of Directors at the time of the 2008 Annual Meeting attended that meeting. The Board of Directors has determined that all of the directors of the Company who are listed in the table below, other than Messrs. Deeks and Galanski, are “independent directors” as such term is defined in Rule 4200(a)(15) of the NASDAQ listing standards. The members of the Audit Committee are also independent under the applicable SEC standards. The independent members of the Board of Directors meet at least two times per year in executive session without management present.

 

The following table shows each of the five standing committees established by the Board of Directors and the members and chairperson of each Committee:

 

MEMBERSHIP AND MEETINGS OF BOARD COMMITTEES

 

 

 

 

Below is a description of each committee of the Board of Directors. Each of the committees has authority to engage legal counsel or other experts or consultants as it deems appropriate to carry out its responsibilities.

 

The Audit Committee is responsible for providing independent, objective oversight of the quality and integrity of the Company’s financial reports and monitoring the reporting process and internal controls of the Company. The Audit Committee’s role includes discussing with management the Company’s processes for managing business and financial risk and for compliance with significant applicable legal, ethical and regulatory requirements. The Audit Committee is responsible for the appointment, replacement, compensation and oversight of the independent auditors engaged to prepare or issue audit reports on the financial statements of the Company. The Audit Committee relies on the expertise and knowledge of management and the independent auditors in carrying out its oversight

responsibilities. The Board of Directors has determined that each Audit Committee member has sufficient knowledge in financial and auditing matters to serve on the Audit Committee. Messrs. Forrester and Wright have been designated as the financial experts serving on the Audit Committee. Mr. Cheney also meets the financial expert criteria as defined. The Audit Committee operates under a charter which is reviewed annually and updated as necessary. The charter is available on our website at www.navg.com under the Corporate Governance link.

 

The Compensation Committee is responsible for: (i) setting the compensation of the Chief Executive Officer and Chairman of the Board, and reviewing and approving the compensation of other executive officers of the Company; (ii) reviewing executive bonus plan allocations; (iii) overseeing and advising the Board of Directors on the adoption of policies that govern the Company’s compensation programs; (iv) overseeing the Company’s administration of its equity-based compensation and other benefit plans; (v) approving grants of stock options and stock awards to officers and employees of the Company under its stock incentive plan; and (vi) periodic review and approval of the compensation paid to non-employee directors for annual retainers (including retainers paid to committee chairpersons) and meeting fees, and making recommendations to the Board of Directors for any adjustments. The Compensation Committee reviews and approves corporate goals and objectives relevant to the President and Chief Executive Officer’s compensation and the recommendations of the President and Chief Executive Officer with respect to the compensation of other executive officers. When requested by the Compensation Committee, management advises the Compensation Committee on the design and implementation of compensation plans and programs. The Compensation Committee may engage compensation consultants or other advisors at its discretion and may form and delegate to subcommittees when appropriate. It did not take any of these actions in 2008. The Compensation Committee regularly reports and consults with the independent members of the Board of Directors on executive compensation matters. The Compensation Committee’s role includes reviewing and approving the Compensation Discussion and Analysis and producing the Compensation Committee Report required by SEC rules and regulations. The specific responsibilities of the Compensation Committee are set forth in the Compensation Committee Charter which is available on our website at www.navg.com under the Corporate Governance link. The Compensation Committee Charter is reviewed annually and updated as necessary. All members of the Compensation Committee are independent as defined in the NASDAQ listing standards.

 

The Corporate Governance and Nominating Committee is responsible for overseeing the Board of Directors and its committees so that all are appropriately constituted to meet their legal obligations to our Stockholders and the Company. The specific responsibilities and functions of the Corporate Governance and Nominating Committee are set forth in the Corporate Governance and Nominating Committee Charter which is available on our website at www.navg.com under the Corporate Governance link. The Corporate Governance and Nominating Committee Charter is reviewed annually and updated as necessary.

 

In accordance with its charter, the Corporate Governance and Nominating Committee shall, from time to time, establish criteria or qualifications for Board membership based on the nature, size and complexity of the Company and the stage of its development. These criteria may include, among other things, an individual’s experience as a senior executive at a publicly traded corporation, management consultant, investment banker, partner at a law firm or registered public accounting firm, professor at an accredited law or business school, experience in the management or leadership of a substantial private business enterprise, educational or not-for-profit organization, or such other professional experience as the Committee shall determine. The Corporate Governance and Nominating Committee has not adopted specific minimum qualifications that nominees must meet to be recommended by the Committee. The Corporate Governance and Nominating Committee reviews its policy with respect to the identification and evaluation of candidates for director from time to time and may modify the policy in light of changes to applicable legal or listing standards, as well as changes in the Company’s development and needs.

 

The Corporate Governance and Nominating Committee’s policy is to consider recommendations for potential Board of Directors nominees received from Stockholders and to evaluate such nominees in the same manner that potential nominees recommended by Board members, management or other parties are evaluated. The name of any recommended candidate for director, together with a brief biographical resume, a document indicating the candidate’s willingness to serve, if elected, and evidence of the nominating person’s ownership of any of the Company’s stock, should be sent to the Secretary of the Company for referral to the Chairman of the Corporate Governance and Nominating Committee.

The Finance Committee monitors the performance of the Company’s investment portfolio and evaluates individual investment portfolio managers on a regular basis. It is responsible for the oversight of our investment strategy, guidelines, transactions and performance and for assessing the capital and financial resources of the Company. The specific responsibilities and functions of the Finance Committee are set forth in the Finance Committee Charter which is available on our website at www.navg.com under the Corporate Governance link. The Finance Committee Charter is reviewed annually and updated as necessary.

 

The Underwriting Advisory Committee is responsible for the oversight of our insurance underwriting strategy, guidelines and practices. The specific responsibilities and functions of the Underwriting Advisory Committee are set forth in the Underwriting Advisory Committee Charter which is available on our website at www.navg.com under the Corporate Governance link. The Underwriting Advisory Committee Charter is reviewed annually and updated as necessary.

 

Compensation Discussion and Analysis

 

This section provides information regarding the compensation of the Company’s Named Executive Officers in 2008.

 

The objectives of the Company’s compensation program are to (1) provide fair, adequate and competitive compensation to all employees, (2) attract qualified new individuals to enter into employment with the Company, (3) facilitate the retention of qualified employees and continuity of management, and (4) provide incentives and rewards for such employees to enhance the profitability and growth of the Company and align the interests of employees and Stockholders. The Company uses the various elements of its compensation program together to achieve these objectives.

 

The Company’s approach to employee compensation is grounded in a pay-for-performance philosophy that seeks to emphasize underwriting profitability over growth in premium revenues, while maintaining conservative investment and accounting practices. The Company’s compensation program is designed to reward employees based upon the annual performance of the Company and their individual roles in achieving that level of corporate performance. The Company’s Board of Directors and its senior management believe that compensation decisions for each Named Executive Officer listed in the Summary Compensation Table below should reflect the continued growth and financial performance of the Company, the underwriting performance of the business division, if any, for which such Named Executive Officer has responsibility, and the individual contribution of the Named Executive Officer to the overall financial success of the Company. Given the emphasis on underwriting profitability, rather than on growth in premium revenues, in measuring both corporate and individual performance, the Company does not feel that this incentive compensation structure encourages any unnecessary or excessive risk to be taken by employees.

 

The Company does not generally target any specific allocation among the various elements of total compensation for Named Executive Officers or other employees. Rather, compensation decisions for Named Executive Officers other than the Chairman and the President and Chief Executive Officer are based upon a reasoned, subjective evaluation by the President and Chief Executive Officer of the individual performance and future potential of such Named Executive Officers, subject to the review and approval of the Compensation Committee. Compensation decisions for the Chairman and the President and Chief Executive Officer are made by the Compensation Committee based upon the factors described below. Other than the President and Chief Executive Officer, no Named Executive Officer or other officer plays a role in determining compensation for the Named Executive Officers.

 

Among the factors considered by the Company in determining appropriate base salary, bonus and total compensation levels for the Named Executive Officers for 2008 was compensation information for corresponding executive officers in peer companies. The companies selected by the Company and the Compensation Committee as peer companies are considered comparable to the Company either because of revenue size or market capitalization, or because they are in lines of business similar to the Company’s lines of business, or because the Company competes with them for talent or business. These peer companies include Argo Group International Holdings, Ltd., W. R. Berkley Corp., Markel Corp. and RLI Corp.

Specifically in respect of Mr. Galanski’s 2008 compensation package, a number of factors were considered, including (i) the business and leadership skills and experience of Mr. Galanski and (ii) the importance of Mr. Galanski to the continued growth, success, and future of the Company, and the need to provide him with a significant incentive as well as to motivate him and retain his services as President and Chief Executive Officer. In addition to these factors, Mr. Galanski’s compensation package, including his participation in the Executive Performance Incentive Plan, described below, was designed to be consistent with the objectives of the Company’s compensation program described above and its pay-for-performance philosophy. Since Mr. Galanski joined the Company in 2001, the Company’s earnings per share have increased from $0.84 to $3.04, its book value per share has increased from $17.05 to $40.89, and its share price has increased from $13.31 to $54.91. (All figures are as of December 31, 2000 and December 31, 2008, respectively.)

 

The Company’s management compensation program currently consists of the following elements: base salary; an executive performance incentive plan (the “Executive Performance Incentive Plan” or “EPIP”), which provides for an annual cash bonus for designated individuals that is intended to qualify for tax deductibility under section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”); an annual incentive compensation plan (the “Annual Incentive Program” or “AIP”), which provides for annual bonuses to all employees other than participants in the EPIP, consisting of cash and, for employees at more senior levels, restricted common stock that vests in equal annual installments over four years; the Admirals’ Program (the “Admirals’ Program”), which provides for restricted stock grants to certain key underwriters and other employees that vest in three equal installments on the third, fourth and fifth anniversaries of the grant date; and retirement income plans including a money purchase plan (the “Money Purchase Plan” or “MPP”), a 401(k) plan with matching Company contribution (the “401(k) Plan”), and a U.K. pension scheme (the “U.K. Plan”), which together provide for contributions by the Company on behalf of each eligible employee based upon the employee’s base salary and, with respect to the 401(k) Plan, the employee’s own contribution to the 401(k) Plan. Changes, if any, to base salary, and awards under the Executive Performance Incentive Plan, the Annual Incentive Program and the Admirals’ Program are generally made once each year, in February or early March. Set forth below is a description of these various elements of the Company’s compensation program for the year ended December 31, 2008, why the Company pays each element of compensation, how the Company arrived at the amount of each element, and how each element fits into the Company’s overall compensation objectives.

 

Base Salaries.  The Company pays base salaries to each Named Executive Officer to compensate the officer for his ongoing performance throughout the year, to promote retention and in accordance with accepted industry market practice. Base salaries are determined after evaluating a number of factors, including local market conditions, individual job performance, amounts paid to executives with comparable experience at peer insurance companies, qualifications and responsibilities of executives at other insurance companies and underwriting management companies, and the overall financial results of the Company. For Named Executive Officers, base salary increases are not generally awarded annually, but are awarded only when the Compensation Committee deems such increases appropriate after evaluating the various factors described above. In 2008, Mr. Civisca’s base salary was increased from $275,000 to $300,000, Mr. Duca’s base salary was increased from $285,000 to $310,000 and Mr. Malvasio’s salary was increased from $335,000 to $375,000. Base salaries were not increased for any other Named Executive Officers in 2008. Effective March 1, 2009, Mr. Civisca’s base salary was increased to $325,000. The Company recognizes the need to pay competitive base salaries to support its recruitment and retention compensation objectives and its ability to provide fair, adequate and competitive compensation to the Named Executive Officers.

 

Executive Performance Incentive Plan.  The Company’s Executive Performance Incentive Plan currently provides for annual incentive payments to the Chairman and to the President and Chief Executive Officer of the Company based upon the Company’s results as described below. It is intended to promote the Company’s pay-for-performance compensation philosophy by providing a direct linkage between Company performance and employee compensation. The EPIP is administered by the Compensation Committee, which selects the key executives of the Company who are eligible to receive cash awards under this plan along with the target and maximum award levels and the performance targets each year. For 2008, the EPIP provided for bonus awards for Messrs. Deeks and Galanski of up to 100% and 150%, respectively, of their base salaries. The difference in the maximum percentage

award payments for which Messrs. Deeks and Galanski were eligible under the EPIP for 2008 reflects their relative time commitments to the management of the Company.

 

The Executive Performance Incentive Plan bonus award criteria are based upon the degree to which the Company meets its budget plan each year, with particular emphasis on achieving the revenue, net income, earnings per share after taxes and return on equity annual budget plan targets. The Compensation Committee reviews these various bonus award criteria components each year to determine what criteria to use in setting the annual bonus awards under the EPIP for such year. For 2008, the EPIP bonus award payable to each participating executive was determined by the degree to which the Company achieved corporate performance targets (the “Basic Bonus Target”) based on its budget plan with respect to earnings per share after taxes and return on equity. Under the EPIP, return on equity for purposes of the Basic Bonus Target is calculated based on operating results before catastrophic or other unusual losses, and bonus payments derived from operating results based on pre-catastrophic or pre-other unusual losses may be adjusted downwards at the discretion of the Compensation Committee. For 2008 EPIP awards, return on equity was calculated based on operating results before (i) the effects of Hurricanes Ike and Gustav, (ii) net realized investment losses and (iii) bonus accruals provided for under this plan. For 2008, the Basic Bonus Target consisted of earnings per share of $5.85 and a return on equity of 15.2%. Achievement of 100% of the Basic Bonus Target would entitle each executive participating in the EPIP to receive the full EPIP bonus award of 100% of his base salary. Achievement of 50% of the Basic Bonus Target (earnings per share of $2.93 and a return on equity of 7.6%) would entitle each participating executive to receive 30% of his base salary as his EPIP bonus award. Achievement of 115% or more of the Basic Bonus Target (earnings per share of $6.73 and a return on equity of 17.5%) would entitle each participating executive to receive the maximum of 150% of his base salary for his EPIP bonus award, subject to applicable maximum limits for each participating executive. Achievement of between 50% and 115% of the Basic Bonus Target would entitle each participating executive to receive a corresponding EPIP bonus award of between 30% and 150% of his base salary, subject to applicable maximum limits for each participating executive. For 2008, the Company achieved earnings per share of $5.63 and a return on equity of 14.5%, calculated as explained above, which resulted in the two participating executives in the EPIP achieving 86.2% of the Basic Bonus Target, entitling each of Messrs. Deeks and Galanski to an EPIP bonus payment of 86.2% of their respective base salaries. Accordingly, Messrs. Deeks and Galanski will receive cash bonus awards under the EPIP for 2008 in the amount of $280,150 and $517,200, respectively.

 

The Compensation Committee believes that performance targets for annual bonuses under the EPIP have been set at levels that can be achieved only with significant effort on the part of participants in the EPIP and that payment of the maximum award amounts under the EPIP would reflect results substantially in excess of expectations. The Compensation Committee has no discretion under the EPIP to increase individual awards above the amount determined by the applicable bonus award criteria. The Compensation Committee selects the applicable bonus award criteria, and the respective weights assigned to them, each year in the first quarter. The Executive Performance Incentive Plan supports the Company’s retention compensation objectives by enabling the Company to provide the Chairman and the President and Chief Executive Officer with fair, adequate and competitive compensation and appropriate incentives to enhance the profitability and growth of the Company. Messrs. Deeks and Galanski will again participate in the Executive Performance Incentive Plan for 2009.

 

In connection with the bonuses paid to Messrs. Deeks and Galanski for 2008 under the Executive Performance Incentive Plan, the Compensation Committee reviewed their overall 2008 compensation levels. The Committee considered Mr. Deeks’s role as Chairman of the Board and founder of the Company. The Committee also considered local market conditions and job performance.

 

Annual Incentive Program.  The Company’s Annual Incentive Program, in which all employees of the Company other than the Chairman and the President and Chief Executive Officer currently participate, provides for the payment of annual bonuses consisting of cash and, for employees at relatively senior levels, shares of restricted common stock that vests in equal installments over four years, with a greater proportion of an employee’s AIP award generally being paid in stock at the more senior levels.

 

The AIP divides employees into several groups, which are subject to various performance indicators and objectives based upon responsibilities, skills, experience and other relevant factors appropriate for each group. The performance of each employee is reviewed no less than once each year. Employees in each group are eligible to earn

an incentive compensation award based upon a target percentage of their base salary, which ranges from 5% to 85% among the different groups. Under the AIP, eligible employees may receive an annual award of up to 150% of the target percentage of their base salary. In 2008, the target percentage for Messrs. Civisca, Duca, Higgitt and Malvasio was 85% of their respective base salaries. As a condition for his employment, Mr. McDonnell was guaranteed an incentive compensation award for 2008 equal to 100% of his salary. For 2009, the target percentage for Mr. McDonnell is 85% of his base salary.

 

Awards under the AIP are based on corporate performance, divisional underwriting performance and individual performance within the overall guidelines of the AIP. At more senior employee levels, awards are weighted somewhat more heavily toward corporate performance and, where applicable, divisional underwriting performance, whereas at lower levels awards are weighted somewhat more heavily toward individual performance. For Messrs. Civisca and Duca, who have management responsibility for business divisions within the Company, 25% of their overall AIP bonus award is determined by the Company’s corporate performance, 50% by the underwriting performance of their business divisions, and 25% by their individual performance. For Mr. Higgitt, and for Mr. McDonnell starting in 2009, neither of whom have management responsibility for a business division, 50% of their overall AIP bonus award is determined by the Company’s corporate performance and 50% by their individual performance. Mr. Malvasio did not participate in the AIP for 2008, as he retired from the Company on August 15, 2008. The remaining Named Executive Officers, Messrs. Deeks and Galanski, participate in the Executive Performance Incentive Plan and so do not participate in the Annual Incentive Program. The corporate performance component of the AIP bonus award was based on the extent to which the Company achieved its 2008 budget plan with respect to gross written premium, combined ratio, and return on equity, with these three elements being weighted at 15%, 50% and 35%, respectively, of corporate performance. For 2008: (1) the target for gross written premium was a 3.2% increase relative to the Company’s gross written premium for 2007; (2) the target for the combined ratio was 89.8%; and (3) the target for return on equity was 15.2%. The divisional performance component of the AIP bonus award was based on the extent to which the applicable business division achieved its 2008 divisional budget plan with respect to gross written premium and combined ratio, with these two elements being weighted at 25% and 75%, respectively, of divisional performance. For 2008, (A) the target for gross written premium was no more than a 9.4% decrease for the business division run by Mr. Civisca relative to that division’s gross written premium for 2007 and a 9.7% increase for the business division run by Mr. Duca relative to that division’s gross written premium for 2007; and (B) the target for the combined ratio was 89% for the division run by Mr. Civisca and 97% for the division run by Mr. Duca. The individual performance component of the AIP bonus awards for Messrs. Civisca, Duca and Higgitt was determined by Mr. Galanski, based upon his reasoned, subjective evaluation of the individual performance of each such Named Executive Officer. For achievement of 100% of the corporate, individual and, where applicable, divisional performance targets, AIP participants are entitled to receive 100% of their target percentages under the AIP. For achievement of less than 100% of such corporate, individual and, where applicable, divisional targets, AIP participants receive correspondingly less than 100% of their target percentages. For achievement of more than 100% of such corporate, individual and, where applicable, divisional targets, AIP participants are entitled to receive correspondingly more than 100% of their target percentages under the AIP, up to a maximum of 150% of their target percentages. The AIP bonus award for each participating Named Executive Officer was reviewed and approved by the Compensation Committee. The AIP bonus awards paid to Messrs. Civisca, Duca and Higgitt for 2008 was in the amounts of $225,000, $250,000 and $275,000, respectively. Each of the Named Executive Officers receives bonus awards paid 60% in cash and 40% in shares of restricted common stock of the Company that vests in equal installments on the first, second, third and fourth anniversaries of the date of the awards. As a condition of his employment, Mr. McDonnell was paid an AIP bonus award for 2008 in the amount of $425,000, $275,000 of which was paid in cash and $150,000 of which was paid in restricted common stock of the Company that vests in equal installments on the first, second, third and fourth anniversaries of the date of the awards. Mr. Malvasio was not paid an AIP bonus award for 2008 as he retired from the Company during the year.

 

The Committee believes that performance targets for annual bonuses under the AIP, as under the EPIP, have been set at levels that can be achieved only with significant effort on the part of the Named Executive Officers who participate in the AIP, and that payment of the maximum award amounts under the AIP would reflect results substantially in excess of expectations. The Compensation Committee has discretion to amend individual awards upward or downward, subject to the maximum award amounts permitted under the AIP, to assure that such awards

reflect the contributions of participating executives. It did not exercise such discretion for the 2008 awards. The Compensation Committee determines the relative weights of the corporate, divisional and individual performance components of AIP bonus awards, as well as the various elements of corporate performance and divisional performance, each year. All common stock grants are made pursuant to the Company’s 2005 Stock Incentive Plan, and reflect the evolution of the Compensation Committee’s philosophy in favor of performance-based restricted stock grants over stock options and stock appreciation rights (“SARs”), which the Company believes to be in the long-term interests of its Stockholders. The Company did not issue any stock options or SARs in 2008, and has no current plans to do so in 2009.

 

The AIP supports the Company’s recruitment objectives by enabling the Company to attract qualified new employees. The AIP, like the EPIP, also supports the Company’s retention objectives, as well as its ability to provide participating Named Executive Officers with competitive compensation and appropriate incentives to enhance the profitability and growth of the Company. For a Named Executive Officer who has responsibility for one of the Company’s various business divisions, the divisional component of the AIP enables the Company to directly tailor the amount of his incentive compensation to the performance of his division. Finally, the long term vesting of the restricted stock component of the AIP award explicitly aligns the long term interests of the Named Executive Officers with those of the Stockholders.

 

Admirals’ Program.  In 2006, the Compensation Committee, working with senior management of the Company, established the Admirals’ Program, which provides for restricted stock grants for certain key underwriters and other employees of the Company that vest in equal installments on the third, fourth and fifth anniversaries of the grant date. These grants are generally made, subject to Compensation Committee discretion, only to employees who are highly significant contributors to the Company, have been employed by the Company for at least three years and participate at relatively high levels in the AIP or the EPIP. Typically, these grants are not awarded to employees who received a grant under the Admirals’ Program during the prior year. The number of shares included in an employee’s initial Admirals’ Program award is fixed at the time of grant. The number of shares included in an employee’s Admirals’ Program awards other than his or her initial award (“Subsequent Admirals Awards”) varies with the Company’s return on equity over the three-year period immediately preceding the vesting of each installment of each award. For achievement of the 13% return on equity target for any three-year period, recipients of Subsequent Admirals Awards are entitled to receive the target amount of 100% of the applicable installment of an award. For achievement of a 7% return on equity for any three-year period, recipients of Subsequent Admirals Awards are entitled to receive the threshold amount of 25% of the applicable installment of an award. For achievement of a 15% or higher return on equity for any three-year period, recipients of Subsequent Admirals Awards are entitled to receive the maximum amount of 150% of the applicable installment of an award. Achievement of between a 7% and 15% return on equity for any three-year period would entitle recipients of Subsequent Admirals Awards to receive a corresponding percentage, ranging from 25% to 150%, of the applicable installment of an award. Achievement of less than a 7% return on equity for any three-year period would not entitle recipients of Subsequent Admirals Awards to receive any portion of the applicable installment of an award. The Compensation Committee has discretion to amend the terms and conditions of the Admirals’ Program from time to time. Admirals’ Program grants are generally awarded annually in late February or early March of each year. In 2008, the Compensation Committee approved Subsequent Awards to Messrs. Civisca, Duca and Higgitt in the target amounts of 8,000, 8,000 and 4,000 shares, respectively, which will vary with the Company’s return on equity as described above. No Admirals’ Program grants were made to any other Named Executive Officer in 2008.

 

The Admirals’ Program is primarily designed to retain qualified employees and facilitate continuity of management by providing significant long term incentive stock awards to key employees. It is a wealth-creation device for employees of proven ability who are believed to have a long term commitment to the success of the Company. The Admirals’ Program also supports the Company’s recruitment objectives by enabling the Company to attract qualified new employees, and enhances the Company’s ability to provide Named Executive Officers and others with adequate and competitive compensation and appropriate incentives to enhance the profitability and growth of the Company. The size of the individual stock awards is determined by the Compensation Committee based upon the recommendation of senior management, and reflects the position of the award recipient within the organization, the importance of the Named Executive Officer or other individual to the continued growth and success of the Company, the need to retain his or her services and related factors. The President and Chief Executive

Officer recommends what size, if any, each of the other Named Executive Officer’s individual award under the Admirals’ Program should be, subject to the review and approval of the Compensation Committee. The Compensation Committee determines what size, if any, awards under the Admirals’ Program should be granted to the President and Chief Executive Officer. The Admirals’ Program fits into the Company’s overall compensation objectives by providing a unique long term retention mechanism targeted toward a small number of highly significant and valued contributors.

 

NavPro Plan.  In lieu of participating in the Company’s Annual Incentive Program, certain senior employees of Navigators Pro, a division of Navigators Management Company, Inc., a wholly-owned subsidiary of the Company, were eligible to receive awards under a Navigators Pro division bonus plan that covered the 2005 and prior underwriting years (the “NavPro Plan”). The NavPro Plan was terminated on December 31, 2005. The final distribution of underwriting profits for the years covered by the NavPro Plan will be made in 2010. Awards under the NavPro Plan are made in cash and increase or decrease depending upon the development of the underwriting results within the Navigators Pro division for the years covered by the NavPro Plan. The Company has accrued $254,242 that is not yet payable to the various NavPro Plan participants under the terminated NavPro Plan, which amount may increase or decrease as described above. For 2008, Mr. Duca received a $942,696 cash award pursuant to the NavPro Plan. No other Named Executive Officers are eligible for awards under the NavPro Plan.

 

Retirement Income Plans.  The Company’s retirement income plans include the Money Purchase Plan, the 401(k) Plan with matching Company contribution, and the U.K. Plan. The Company’s Money Purchase Plan is a defined contribution plan that, in 2008, provided for a mandatory annual contribution by the Company on behalf of each eligible employee of 7.5% of such employee’s base salary, subject to certain maximum contribution limits under applicable law, as well as for an additional 7.5% of such employee’s AIP award up to a maximum annual additional contribution of $2,500. All U.S. employees currently become eligible to participate in the Money Purchase Plan as of the January 1st immediately following their date of hire. The Company’s contributions to the MPP vest in annual installments of 20% on each of the second, third, fourth, fifth and sixth anniversaries of the date on which an employee joined the Company, and become fully vested after the employee has been employed by the Company for six years.

 

In addition to the Money Purchase Plan, all U.S. employees are eligible to participate in the Company’s 401(k) Plan. Effective January 1, 2008, the 401(k) Plan provides for the Company to match each participating U.S. employee’s annual contributions to the 401(k) Plan up to 4% of such employee’s base salary, subject to certain maximum contribution limits under applicable law. In addition, at the discretion of the Compensation Committee depending upon the yearly financial performance of the Company, the Company may contribute up to an additional 4% of each eligible employee’s base salary for such year. For 2008, the Compensation Committee elected to contribute an additional 2% of each eligible employee’s salary to the 401(k) Plan. The Company’s entire 401(k) Plan matching contribution and discretionary contribution vests immediately.

 

The Company’s U.K. employees participate in the U.K. Plan rather than in the Money Purchase Plan and the 401(k) Plan. The U.K. Plan, like the Money Purchase Plan, is a defined contribution plan. The U.K. Plan provides for a mandatory monthly contribution by the Company on behalf of each eligible employee of 15% of such employee’s base salary, subject to certain maximum contribution limits under applicable law, as well as for an additional 15% of such employee’s AIP award up to a maximum annual additional contribution of $2,500. All Company contributions to the U.K. Plan vest immediately. U.K. employees are also entitled to make a voluntary annual contribution to the U.K. Plan, which is deducted from their net base salary. All U.K. employees become eligible to participate in the U.K. Plan as of the date they become employees of the Company.

 

The Money Purchase Plan, the 401(k) Plan and the U.K. Plan are together considered important long term retirement benefits that support the Company’s overall compensation objectives by helping to provide fair, adequate and competitive compensation to all employees, by helping to attract qualified new employees, and by facilitating the long term retention of key existing employees. The Money Purchase Plan and the U.K. Plan facilitate recruiting and retention by distinguishing the Company from many of its peer companies that do not provide this element of compensation. The Money Purchase Plan, the 401(k) Plan and the U.K. Plan also facilitate retirement planning by Named Executive Officers and other employees.

 

The Company does not offer a defined benefit pension plan or a nonqualified deferred compensation plan.

Employee Stock Purchase Plan.  The Company’s Employee Stock Purchase Plan provides employees, including the Named Executive Officers, with the opportunity to acquire, subject to certain annual limits, shares of Navigators common stock at a 10% discount from the market price at the beginning or end of each six-month Plan period. Employees purchase these shares through regular payroll deductions. The Company generally encourages its employees to own its stock, and have their equity at risk, to better align the long term interests of its employees and Stockholders. As of December 31, 2008, 215 out of the Company’s 445 employees directly own stock that was either granted to them by the Company or was purchased by them through the Company’s Employee Stock Purchase Plan.

 

Benefits.  Executive officers also participate in those benefit arrangements which are available to our employees, including health and welfare benefit plans and, as applicable, the Money Purchase Plan, 401(k) Plan and U.K. Plan. For a discussion of the Company’s Money Purchase Plan, 401(k) Plan and U.K. Plan, please see “Compensation Discussion and Analysis — Retirement Income Plans” above.

 

Messrs. Galanski and Civisca receive an annual car allowance from the Company in the amount of $12,000 and $9,000, respectively, pursuant to the terms of their respective employment agreements. In addition, the Company pays for the cost of an annual physical examination for executive officers and members of the Board of Directors.

 

Employment Agreements.  The Company has entered into employment agreements with Messrs. Galanski, Civisca and Higgitt, which agreements are still in effect. None of the other Named Executive Officers has an employment agreement with the Company. The Company believes that employment agreements can be an effective tool to facilitate retention and the continuity of management and to protect both the Company and employees over the long-term. For a discussion of the employment agreements with Messrs. Galanski, Civisca and Higgitt, please see “Employment Agreements” below.

 

Stock Ownership Guidelines.  There are currently no stock ownership requirements for Named Executive Officers with respect to the common stock of the Company. For a description of the current ownership of common stock of the Company by the Named Executive Officers, please see “Ownership of Voting Securities By Certain Beneficial Owners and Management” above.

 

Tax Deductibility of Compensation.  Under section 162(m) of the Code, annual compensation in excess of $1.0 million paid to the chief executive officer or any of the other three most highly compensated officers, other than the chief financial officer, of any publicly held corporation will not be deductible in certain circumstances. Generally, “performance-based” compensation, as defined in section 162(m), is not subject to the limitation if certain requirements are satisfied. The Compensation Committee has structured the Executive Performance Incentive Plan so that such compensation is intended to qualify as performance-based compensation under section 162(m). However, the Compensation Committee may award compensation that is not fully deductible if it determines that such an award is consistent with the Company’s compensation philosophy and in the best interests of the Company and its Stockholders.

 

Conclusion.  Each element of the Company’s compensation program complements the other elements in that all elements together are designed to support the Company’s pay-for-performance philosophy. The various elements of each Named Executive Officer’s compensation package are designed collectively to assure that the package provides for fair and competitive compensation, facilitates the retention of the Named Executive Officer and therefore the continuity of the Company’s management, and provides incentives and rewards for the Named Executive Officer to enhance the profitability and growth of the Company. However, the amount of any individual element of a Named Executive Officer’s compensation does not generally affect the amount of the other elements of his compensation.

 

The Compensation Committee evaluates the Company’s management compensation program on an ongoing basis to assure that it is consistent with the objectives of the program and with the Company’s pay-for-performance compensation philosophy.

Compensation Committee Report

 

The Board’s Compensation Committee is charged, among other things, to make periodic reviews of the Company’s compensation arrangements with executive officers and to make recommendations to the Board of Directors with respect to such arrangements. The Compensation Committee’s function is more fully described in its charter, which the Board has adopted and is available on our website at www.navg.com under the Corporate Governance link.

 

The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis section of the Company’s 2009 Proxy Statement. Based on such review and discussion, the Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s 2009 Proxy Statement.

 

The Compensation Committee:

 

H. J. Mervyn Blakeney
Leandro S. Galban, Jr. (Chairman)
John F. Kirby

 

Summary Compensation Table

 

The following table sets forth a summary of the compensation paid by the Company to the Chief Executive Officer, Chief Financial Officer, Chairman of the Board and each of the three other most highly paid executive officers of the Company or its subsidiaries, as well as our former Chief Financial Officer who retired in 2008 (the “Named Executive Officers”).

 

SUMMARY COMPENSATION TABLE

 

 

 

 

Grants of Plan-Based Awards

 

The following table contains information concerning the grants of plan-based awards made to each of the Named Executive Officers in the year ended December 31, 2008.

 

 

 

 

Employment Agreements

 

On March 26, 2001, the Company entered into an employment agreement with Mr. Galanski providing for an initial three-year term of employment that continues for successive one-year periods unless either party elects to terminate the agreement upon 120 days’ notice to the other party prior to the expiration of the then-current one-year period. The agreement provided for the issuance to Mr. Galanski as of the date of the agreement of a stock grant of 100,000 shares of Common Stock subject to vesting provisions of 25% per year. All of such shares are now fully vested. In the event that a change of control of the Company had occurred during the initial three-year term resulting in the termination of Mr. Galanski’s employment or the resignation of Mr. Galanski following a material reduction in his responsibilities or a demotion from his current position, Mr. Galanski would have been entitled to receive his base salary for the remaining term of his employment agreement and all outstanding unvested stock grants made to Mr. Galanski during the initial term would have immediately vested. The agreement provides for a $12,000 annual car allowance for Mr. Galanski. Upon the termination of Mr. Galanski’s employment agreement, the Company may

elect to enforce against Mr. Galanski one-year restrictive covenants with respect to nonsolicitation of the Company’s employees and noncompetition with the Company’s business, provided that the Company continues to pay to Mr. Galanski his then-current base salary during such one-year period. In accordance with its terms, Mr. Galanski’s employment agreement was automatically renewed in December 2008 for a one-year period through March 2010.

 

On March 1, 1999, as amended on January 1, 2003, Somerset Marine, Inc., which was subsequently merged into Navigators Management Company, Inc., a wholly-owned subsidiary of the Company, entered into an employment agreement with Mr. Civisca providing for an initial two-year term of employment that continues for successive one-year periods unless either party elects to terminate the agreement upon 60 days’ notice to the other party prior to the expiration of the then-current one-year period. In the event of a change in control of the Company or Navigators Management Company, Inc. or a material reduction in Mr. Civisca’s duties, if Mr. Civisca shall elect within one year to terminate his employment, Mr. Civisca is entitled to receive his base salary for one year from the date of termination as well as continued health and major medical insurance coverage, at the expense of Navigators Management Company, Inc., for six months following such termination. If the Company should terminate Mr. Civisca’s employment without cause, Mr. Civisca is entitled to receive his base salary for one year from the date of termination as well as continued health and major medical insurance coverage, at the expense of Navigators Management Company, Inc., for six months following such termination. During the period of his employment, and for a period of one year from the termination of his employment agreement, Mr. Civisca is subject to restrictive covenants with respect to nonsolicitation of the Company’s employees and noncompetition with the Company’s business in the eastern United States.

 

On April 1, 2002, Navigators California Insurance Services, Inc., which was subsequently merged into Navigators Management Company, Inc., a wholly-owned subsidiary of the Company, entered into an employment agreement with Mr. Higgitt providing for an initial one-year term of employment that continues for successive one-year periods unless either party elects to terminate the agreement upon 90 days’ notice to the other party prior to the expiration of the then-current one-year period. In the event of a change in control of the Company or Navigators Management Company, Inc. or a material reduction in Mr. Higgitt’s duties, if Mr. Higgitt shall elect within one year to terminate his employment, Mr. Higgitt is entitled to receive his base salary for the remaining term of his employment agreement as well as continued health and major medical insurance coverage, at the expense of Navigators Management Company, Inc., for six months following such termination. If the Company should terminate Mr. Higgitt without cause, Mr. Higgitt is entitled to receive his base salary for the remaining term of his employment agreement as well as continued health and major medical insurance coverage, at the expense of Navigators Management Company, Inc., for six months following such termination.

 

None of the other Named Executive Officers is currently a party to an employment agreement with the Company or any of its subsidiaries.

 

2005 Stock Incentive Plan

 

The purposes of the 2005 Stock Incentive Plan are to facilitate fair, adequate and competitive compensation and to induce certain individuals to remain in the employ of, or to continue to serve as directors of or as independent consultants to the Company and its present and future subsidiaries, to attract new individuals to enter into such employment and service and to encourage such individuals to secure or increase on reasonable terms their stock ownership in the Company. The Board of Directors believe that the granting of incentive stock options, non-incentive stock options, restricted shares and stock appreciation rights for the Company’s Common Stock (collectively, the “Awards”) under the 2005 Stock Incentive Plan will promote continuity of management, increased incentive and personal interest in the welfare of the Company and aid in securing its continued growth and financial success.

 

The 2005 Stock Incentive Plan authorizes the issuance in the aggregate of 1,000,000 Awards. A proposed amendment to the 2005 Stock Incentive Plan increasing the available number of incentive stock options, non-incentive stock options, restricted shares and stock appreciation rights from 1,000,000 to 1,500,000 is included herein for the vote of Stockholders (the “Amendment”). The 2005 Stock Incentive Plan was originally approved by Stockholders at the May 20, 2005 Annual Meeting of Stockholders. The 2005 Stock Incentive Plan provides for

discretionary grants of Awards to all employees, non-employee directors and consultants to the Company or any of its subsidiaries, or any corporation acquired by the Company or any of its subsidiaries. The 2005 Stock Incentive Plan is the only plan under which the Compensation Committee currently makes equity awards. For a discussion of the equity awards made to employees under the 2005 Stock Incentive Plan in connection with the Company’s Annual Incentive Program and Admirals’ Program, please see “Compensation Discussion and Analysis — Annual Incentive Program” and “Compensation Discussion and Analysis — Admirals’ Program,” respectively. In August 2008, an Award of 22,000 restricted shares that vest in equal installments on the first, second, third and fourth anniversary of their granting date was made to Mr. McDonnell as a condition for his employment. No other Awards were made in 2008 to any Named Executive Officers under the 2005 Stock Incentive Plan other than pursuant to the Annual Incentive Program and the Admirals’ Program.

 

The 2005 Stock Incentive Plan will terminate ten years from its adoption. The Board of Directors may at any time terminate the 2005 Stock Incentive Plan or make such modifications to the 2005 Stock Incentive Plan as it may deem advisable. The Board of Directors, however, may not, without approval by the Stockholders of the Company, increase the number of shares of Common Stock as to which Awards may be granted under the 2005 Stock Incentive Plan, change the manner of determining stock option or SAR prices or change the class of persons eligible to participate in the 2005 Stock Incentive Plan.

 

The 2005 Stock Incentive Plan is administered by our Compensation Committee. The Compensation Committee has discretion to determine the participants under the 2005 Stock Incentive Plan, the types, terms and conditions of the Awards, including performance and other earnout and/or vesting contingencies, permit transferability of Awards to an immediate family member of a participant or a trust established on behalf of such immediate family member, interpret the 2005 Stock Incentive Plan’s provisions and administer the 2005 Stock Incentive Plan in a manner that is consistent with its purpose.

 

Under the 2005 Stock Incentive Plan, the Compensation Committee may grant Awards in the form of options to purchase shares of Common Stock. Each stock option issued under the 2005 Stock Incentive Plan is exercisable upon vesting for one share of the Company’s Common Stock. The initial per share exercise price for an incentive stock option may not be less than 100% of the fair market value of a share of Common Stock on the date of grant, or 110% of such fair market value with respect to a participant who, at such time, owns stock representing more than 10% of the total combined voting power of the Common Stock. The initial per share exercise price for a non-incentive stock option may not be less than 100% of the fair market value of a share of Common Stock on the date of grant.

 

No option granted pursuant to the 2005 Stock Incentive Plan may be exercised more than 10 years after the date of grant, except that incentive stock options granted to participants who own more than 10% of the total combined voting power of the Common Stock at the time the incentive stock option is granted may not be exercised more than five years after the date of grant. Any option granted to a non-employee director of the Company or any of its subsidiaries shall be 10 years in duration.

 

The 2005 Stock Incentive Plan also permits the grant of restricted shares of Common Stock, herein referred to as “Stock Awards”. A Stock Award is a grant of shares or of a right to receive shares of Common Stock (or their cash equivalent or a combination of both) in the future. Each Stock Award will be subject to conditions, restrictions and contingencies established by the Compensation Committee. In making a determination regarding the allocation of such shares, the Compensation Committee may take into account the nature of the services rendered by the respective individuals, their present and potential contributions to the success of the Company and its subsidiaries and such other factors as the Compensation Committee in its discretion shall deem relevant.

 

The 2005 Stock Incentive Plan also permits the grant of stock appreciation rights (“SARs”), which is a grant of the right to receive cash equal to the value of the SAR. The value of a SAR with respect to one share of Common Stock on any date is the excess of the fair market value of a share on such date over the base value of such SAR. The base value of any SAR with respect to one share of Common Stock shall equal the fair market value of a share of Common Stock as of the date the SAR is granted.

 

Participants do not have any interest or voting rights in shares covered by their Awards until the Awards shall have been exercised in the case of options and SARs and the shares shall have vested in the case of Stock Awards.

The 2005 Stock Incentive Plan also has provisions related to both the payment by the Company of a stock dividend and the effect of an occurrence of a change of control.

 

2002 Stock Incentive Plan

 

At the May 30, 2002 Annual Meeting, the Stockholders approved the 2002 Stock Incentive Plan (the “2002 Stock Plan”). Pursuant to the 2002 Stock Plan, the Company may grant to eligible persons awards including, but not limited to, incentive stock options, non-incentive stock options and restricted shares of Common Stock. The 2002 Stock Plan authorized awards relating to an aggregate of up to 1,000,000 shares of Common Stock, of which no more than 100,000 awards may be in the form of restricted stock grants.

 

The 2002 Stock Plan is administered by our Compensation Committee, which shall consist of two or more members of the Board. The members of the Compensation Committee are appointed annually by, and serve at the pleasure of, the Board. In the event that no Compensation Committee is appointed, the 2002 Stock Plan shall be administered by the Board of Directors.

 

No option granted pursuant to the 2002 Stock Plan may be exercised more than 10 years after the date of grant, except that incentive stock options granted to participants who own more than 10% of the total combined voting power of the Common Stock at the time the incentive stock option is granted may not be exercised more than five years after the date of grant.

 

As a result of the approval of the 2005 Stock Plan at the May 20, 2005 Annual Meeting of Stockholders, no further stock or option awards have been granted since such date or will be granted under the 2002 Stock Plan.

 

Stock Option Plans and Stock Appreciation Rights Plan

 

In 1986 and 1987, the Company adopted two stock option plans (the “Stock Option Plans”) which allowed for the grant to key employees of the Company, its subsidiaries and affiliates, of options to purchase an aggregate of 900,000 shares of Common Stock. The stock options vest at a rate of 25% per year. The Stock Option Plans are administered by the Compensation Committee of the Board. As a result of the approval of the 2002 Stock Plan at the May 30, 2002 Annual Meeting of Stockholders, since such date no further options have been granted since such date and no additional grants will be made under the Stock Option Plans.

 

In 1996, the Company adopted a phantom stock appreciation rights plan (the “SARs Plan”) which allows for the grant to key employees of the Company and its affiliates of up to 300,000 SARs. The Compensation Committee administers the SARs Plan and approves the employees who will receive grants of the rights. The SARs vest at a rate of 25% per year. Upon exercise of a stock appreciation right, the key employee is entitled to receive cash in an amount equal to the difference between the fair market value of the Common Stock at the exercise date and the exercise price (which shall not be less than 90% of the fair market value of the Common Stock at the date of grant). As a result of the approval of the 2005 Stock Plan at the May 20, 2005 Annual Meeting of Stockholders, since such date no further SARs have been granted since such date and no additional grants will be made under the SARs Plan.

Outstanding Equity Awards at Fiscal Year-End

 

The following table sets forth information for each of the Named Executive Officers with respect to his outstanding equity awards as of December 31, 2008.

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

 

 

 

Options Exercised and Stock Vested

 

The following table sets forth information for each of the Named Executive Officers with respect to options exercised and stock grants vested, and the value realized on such exercise or vesting, during the year ended December 31, 2008.

 

OPTIONS EXERCISED AND STOCK VESTED

 

 

 

 

 

The following table sets forth the payments that would be received by each Named Executive Officer if his employment with the Company were terminated as of December 31, 2008.

 

POTENTIAL PAYMENTS UPON TERMINATION OF EMPLOYMENT

 

 

 

 

 

Compensation of Directors

 

Commencing in 2008, each director who is not an officer or employee of the Company receives an annual payment consisting of $30,000 in immediately vested restricted shares of the Company’s Common Stock, payable in the first quarter of each year for service during the preceding year (based on the closing price of the Company’s Common Stock on the last business day of such preceding year), and $30,000 in cash, payable in quarterly installments, as well as a fee of $2,000 for each Board meeting attended and $1,000 for each telephonic Board meeting attended. In addition, members of the Audit Committee of the Board are paid $2,000 for each Audit Committee meeting attended in person and $1,000 for each Audit Committee meeting attended by telephone, and members of all other Board committees are paid $1,000 for each committee meeting attended in person and $500 for each committee meeting attended by telephone. The chairmen of the Audit Committee and the Compensation Committee are paid annual retainers of $20,000 and $10,000, respectively. Chairmen of other Board committees do not currently receive annual retainers for their services as chairmen. Prior to 2008, each director who is not an officer or employee of the Company received an annual payment consisting of $25,000 in immediately vested restricted shares of the Company’s Common Stock, which was paid to the directors in 2008 in respect of 2007 service, and $20,000 in cash, payable in quarterly installments. All other fees remained the same.

 

The Compensation Committee of the Board recognizes the importance of ownership of the Common Stock of the Company by its independent directors in aligning the interests of the Board with those of our Stockholders. Accordingly, as described above, each director receives payment of $30,000 in restricted shares of the Company’s Common Stock as part of his annual compensation for Board service, and is required to hold such shares for a minimum of one year. Our directors have generally retained ownership of their Common Stock after such restrictions have lapsed.

Shown below is a table that sets forth the total compensation paid to each independent Board member in 2008.

 

DIRECTOR COMPENSATION

 

 

 

 

Equity Compensation Plan Information

 

The following chart includes information as of December 31, 2008 with respect to equity compensation plans where equity securities of the Company may be issued: