NOTICE OF 2003 ANNUAL MEETING OF SHAREHOLDERS
AND PROXY STATEMENT
21ST CENTURY INSURANCE GROUP
Woodland Hills, California 91367
Dear Shareholder,
You are cordially invited to attend the Annual Meeting of Shareholders of 21st
Century Insurance Group on Wednesday, June 25, 2003 at 10:00 a.m., at the
Sheraton Universal Hotel, 333 Universal Hollywood Drive, Universal City,
California 91608.
Details of the business to be conducted at the annual meeting are given in the
attached Notice of Annual Meeting and Proxy Statement.
Whether or not you plan to attend, it is important that your shares be
represented and voted at the meeting. I therefore urge you to sign, date and
promptly return your proxy card in the enclosed self-addressed envelope or to
use one of the other available methods (by telephone or the Internet) so your
shares can be voted in accordance with your instructions. You may attend the
annual meeting and vote in person, if you so decide.
Tickets for the meeting are not required, though we ask that attendees sign the
attendance register prior to the commencement of the meeting.
On behalf of the Board of Directors, I would like to express our appreciation
for your continued interest in the affairs of the Company.
Sincerely,
/s/ROBERT M. SANDLER
ROBERT M. SANDLER
Chairman of the Board
--------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT
--------------------------------------------------------------------------------
We encourage you to sign and return your proxy card or use the telephone or the
Internet for voting your shares prior to the meeting.
21ST CENTURY INSURANCE GROUP
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
JUNE 25,2003
The Annual Meeting of Shareholders of 21st Century Insurance Group ("21st
Century" or "Company") will be held at the Sheraton Universal Hotel, 333
Universal Hollywood Drive, Universal City, California 91608 on June 25, 2003 at
10:00 a.m. for the following purposes:
1. To elect eleven directors.
2. To ratify the appointment of PricewaterhouseCoopers LLP as
independent auditors for 2003.
3. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on April 28, 2003 as the
record date for the determination of those shareholders entitled to notice of,
and to vote at the meeting.
By Order of the Board of Directors,
MICHAEL J. CASSANEGO
Secretary
Woodland Hills, California
DATED: May 19, 2003
--------------------------------------------------------------------------------
IMPORTANT
--------------------------------------------------------------------------------
Whether or not you expect to attend in person, we urge you to sign, date and
return the enclosed Proxy, by mail, telephone or the Internet at your
earliest convenience. This will ensure the presence of a quorum at the
meeting. PROMPTLY SUBMITTING THE PROXY WILL SAVE THE COMPANY THE EXPENSE AND
EXTRA WORK OF ADDITIONAL SOLICITATION. You can also vote your stock at the
meeting if you desire to do so, as your Proxy is revocable at your option.
- 2 -
21ST CENTURY INSURANCE GROUP
6301 OWENSMOUTH AVENUE
WOODLAND HILLS, CALIFORNIA 91367
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 25, 2003
GENERAL INFORMATION
This Proxy Statement and the accompanying Notice of Annual Meeting and Proxy
Card are solicited by the Board of Directors of 21st Century Insurance Group for
use at the Annual Meeting of Shareholders to be held on Wednesday, June 25, 2003
at 10:00 a.m., at the Sheraton Universal Hotel, 333 Universal Hollywood Drive,
Universal City, California 91608. These proxy materials will be sent on or about
May 19, 2003 to all shareholders of the Company's common stock of record as of
April 28, 2003. The Company's principal executive office is located at 6301
Owensmouth Avenue, Woodland Hills, California 91367.
All proxies, properly executed and returned, will be voted at the annual meeting
as directed by the shareholder. Any shareholder may revoke a proxy by giving
written notice to the Company, by submitting a duly executed proxy bearing a
later date, or by voting in person at the meeting. If no directions are
indicated, the shares represented by the signed proxy will be voted FOR the
election of the nominees and FOR ratifying the appointment of
PricewaterhouseCoopers LLP as the independent auditors for 2003. Your Board
recommends a vote FOR each of these proposals. The cost of the solicitation of
these proxies is to be borne by the Company.
Only shareholders of the Company's common stock at the close of business on
April 28, 2003 will be entitled to notice of and to vote at the meeting. As of
that date, 85,431,505 shares of common stock without par value of 21st Century
Insurance Group (the "Common Stock") were outstanding. A quorum represented by a
majority of the outstanding shares of common stock, present in person or by
proxy, is necessary to conduct the meeting. In the election of directors,
nominees receiving the highest number of affirmative votes cast, up to the
number of the directors to be elected, are elected. Each share is entitled to
one vote on all matters except for the election of directors. In electing
directors, provided at least one shareholder has given notice of his or her
intent to cumulate votes for the election of directors, each shareholder is
entitled to that number of votes which is equal to the number of shares held
multiplied by the number of directors to be elected. If notice of intention to
cumulate votes is given by any shareholder, all shareholders may cumulate their
votes and give one nominee all of those votes, or they may distribute the votes
among as many nominees as the shareholder deems fit. Votes withheld from any
director are counted for purposes of determining the presence or absence of a
quorum for the transaction of business. The Company believes that abstentions
should be counted for purposes of determining whether a quorum is present at the
Annual Meeting for the transaction of business. In the absence of controlling
precedent to the contrary, the Company intends to count broker non-votes as
present or represented for purposes of determining the presence of a quorum for
the transaction of business.
If there are nominees other than those designated by the Board of Directors, the
proxyholders have discretionary authority to cumulate votes, which they will do
through instructions from the Board, with the objective of electing as many of
the nominees of the Board of Directors as possible. The effect of the decision
of the proxyholders to exercise their discretionary authority to cumulate votes
will be to make it more difficult for nominees, other than those designated by
the Board of Directors, to be elected.
- 3 -
BENEFICIAL OWNERSHIP OF SECURITIES
PRINCIPAL SHAREHOLDERS
The following table lists the beneficial ownership of each person or group who
owned as of March 31, 2003, to the Company's knowledge, more than five percent
of any class of its outstanding voting securities.
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS
Common AMERICAN INTERNATIONAL GROUP, INC. ("AIG") 53,445,620 62.6%
Through its subsidiaries:
American Home Assurance Company,
Commerce & Industry Insurance Company,
National Union Fire Insurance Company of Pittsburgh, Pa. and
New Hampshire Insurance Company
70 Pine Street
New York, NY 10270
Common AMERICAN UNION INSURANCE COMPANY 6,100,000 7.1%
2205 East Empire Street, Suite A
Bloomington, IL 61704
Common CAPITAL RESEARCH AND MANAGEMENT COMPANY 5,000,000 5.9%
333 South Hope Street
Los Angeles, CA 90071
- 4 -
MANAGEMENT OWNERSHIP
The following table summarizes the ownership of equity securities of 21st
Century Insurance Group and an affiliated company, AIG, by the directors, the
Company's Chief Executive Officer and the four other highest paid executive
officers, and the directors and officers as a group.
EQUITY SECURITIES OF 21ST CENTURY INSURANCE GROUP AND AIG
AS OF MARCH 31, 2003
---------------------------------------------------------------------------
21ST CENTURY AIG
------------------------- -----------------------
TITLE OF NAME OF Amount and Nature of PERCENT Amount and Nature of PERCENT
eneficial Ownership (1) Beneficial Ownership F CLASS
CLASS BENEFICIAL OWNER B As of March 31, 2003 OF CLASS As of March 31, 2003 O
----------------------------------------------------------------------------------------------------------------------
Common Robert M. Sandler 24,000 (2) * 437,085 *
(11)
Common John B. De Nault, III 1,254,500 (2) 1.4% 0 *
Common R. Scott Foster 64,606 (2) * 0 *
Common Roxani M. Gillespie 18,500 (3) * 0 *
Common Jeffrey L. Hayman 0 * 2,820(14) *
Common Fred J. Martin, Jr. 0 * 0 *
Common James P. Miscoll 18,195 (3) * 22,195(12) *
Common Keith W. Renken 0 * 0 *
Common Gregory M. Shepard 6,124,100(2)(4) 7.1% 0 *
Common Howard I. Smith 24,000 (2) * 421,701 *
(13)
Common Bruce W. Marlow 529,415 (5) * 0 *
Common G. Edward Combs 131,415 (6) * 0 *
Common Michael J. Cassanego 135,084 (7) * 166 *
Common Dean E. Stark 164,871 (8) * 115 *
Common Douglas K. Howell 21,100 (9) * 0 *
Common All Directors and Officers 8,922,729 (10) 10.44% * *
as a Group (21 individuals)
----------------------------------------------------------------------------------------------------------------------
* Less than 1%
(1) Under the rules of the Securities and Exchange Commission (the "SEC"), a
person is deemed to be a beneficial owner of a security if he or she has
or shares the power to vote or to direct the voting of such security, or
the power to dispose or to direct the disposition of such security. A
person is also deemed to be a beneficial owner of any securities of which
that person has the right to acquire beneficial ownership within 60 days,
as well as any securities owned by such person's spouse, children or
relatives living in the same household. Accordingly, more than one person
may be deemed to be a beneficial owner of the same securities.
(2) Includes 24,000 shares issuable upon exercise of stock options exercisable
within 60 days of the date of this Proxy Statement.
(3) Includes 16,000 shares issuable upon exercise of stock options exercisable
within 60 days of the date of this Proxy Statement.
(4) Mr. Shepard is Chairman of the Board and President of American Union
Insurance Company, which owns 6,100,000 shares.
(5) Includes 493,908 shares issuable upon exercise of stock options
exercisable within 60 days of the date of this Proxy Statement.
(6) Includes 116,415 shares issuable upon exercise of stock options
exercisable within 60 days of this Proxy Statement
(7) Includes 119,349 shares issuable upon exercise of stock options
exercisable within 60 days of this Proxy Statement.
(8) Includes 154,344 shares issuable upon exercise of stock options
exercisable within 60 days of this Proxy Statement.
(9) Includes 21,100 shares issuable upon exercise of stock options exercisable
within 60 days of this Proxy Statement.
(10) Includes 1,439,462 shares issuable upon exercise of stock options
exercisable within 60 days of this Proxy Statement.
(11) Includes 134,106 shares issuable upon exercise of stock options
exercisable within 60 days of this Proxy Statement.
(12) Includes 937 shares issuable upon exercise of stock options exercisable
within 60 days of this Proxy Statement.
(13) Includes 231,406 shares issuable upon exercise of stock options
exercisable within 60 days of this Proxy Statement.
(14) Includes 2,624 shares issuable upon exercise of stock options exercisable
within 60 days of this Proxy Statement.
- 5 -
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective January 1, 2002, the Company acquired AIG's 51% interest in 21st
Century Insurance Company of Arizona for a purchase price of $4.4 million, which
approximated 51% of the subsidiary's GAAP book value. No research and
development assets were acquired, and no goodwill was recorded. Please refer to
Note 19, in the Company's 10-K for additional information. The Company is now
the sole shareholder of 21st Century Insurance Company of Arizona.
In its ordinary course of business, the Company and its subsidiaries have
completed various transactions with AIG to meet its insurance and reinsurance
needs.
- 6 -
ELECTION OF DIRECTORS
(PROPOSAL 1)
The Board of Directors recommends the election of the eleven nominees named in
this Proxy Statement to hold office until the next annual meeting or until their
successors are elected and qualified. It is intended that the accompanying proxy
will be voted in favor of the following persons, all of whom are members of the
present Board, to serve as directors unless the shareholder indicates to the
contrary on the proxy. Management expects that each of the nominees will be
available for election, but if any of them is not a candidate at the time the
election occurs, it is intended that such proxy will be voted for the election
of another nominee to be designated by the Board of Directors to fill any such
vacancy. A proxy may not be voted for more than eleven nominees.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
NOMINEES FOR BOARD OF DIRECTORS
[OBJECT OMITTED] DIRECTOR SINCE 1994 AGE 61
ROBERT M. SANDLER Chairman of the Board of the Company. Executive Vice President, Senior
Casualty Actuary and Senior Claims Officer of AIG located in New York, NY.
[OBJECT OMITTED] DIRECTOR SINCE 1988 AGE 55
JOHN B. DE NAULT, III Chairman of the Board of Omnithruster, Inc. in Orange, CA and private
investor with offices in Orange County, CA. He currently serves as Vice
Chairman of the Board of Liberty Bank. He is the son of John B. De Nault,
former Chairman and Director of the Company.
[OBJECT OMITTED] DIRECTOR SINCE 1986 AGE 62
R. SCOTT FOSTER, M.D. Ophthalmologist in Stockton, CA and Clinical Professor at Stanford
University. He is the son of the late Louis W. Foster, Founder of the Company.
- 7 -
[OBJECT OMITTED]
ROXANI M. GILLESPIE DIRECTOR SINCE 1998 AGE 62 Partner in the law firm of Barger &
Wolen located in San Francisco, CA since 1997. Previously, Ms. Gillespie
was a member of the law firm of Buchalter, Nemer, Fields & Younger for
7 years. She was the California Insurance Commissioner from 1986 to 1991.
DIRECTOR SINCE 2002 AGE 40
JEFFREY L. HAYMAN Mr. Hayman joined AIG in 1998 and is currently Senior Vice President Direct
Marketing - Asia. From 1983 to 1998, Mr. Hayman served in various positions
with Travelers Property & Casualty Company. Mr. Hayman is a Chartered
Financial Consultant and Chartered Life Underwriter.
DIRECTOR SINCE 2000 AGE 54
[OBJECT OMITTED] Vice Chairman of the Board, Chief Executive Officer and President of the
Company. Prior to joining the Company in February 2000, Mr. Marlow was
BRUCE W. MARLOW employed by Allstate Corporation, since 1999, as Senior Vice President and
President of its Independent Agency Markets subsidiary. Before retiring for
three years, he served Progressive Corporation from 1978-96, holding various
positions including Chief Operating Officer from 1988-1996.
DIRECTOR SINCE 2002 AGE 70
FRED J. MARTIN, JR. Retired as Senior Vice President and Director of Government Relations of Bank
of America in 1993. Mr. Martin currently serves as a Visiting Scholar,
Institute of Governmental Studies, University of California Berkeley.
- 8 -
[GRAPHIC OMITTED] DIRECTOR SINCE 1998 AGE 68
JAMES P. MISCOLL Retired as Vice Chairman of Bank of America in 1992. Mr. Miscoll currently
serves as consultant for AIG, and as Director of Chela Financial, East
West Bank, Encore Productions, MK Gold Company and Westinghouse Air Brake
Company.
KEITH W. RENKEN DIRECTOR SINCE 2002 AGE 68
[GRAPHIC OMITTED] Retired as Senior Partner and Chairman, Executive Committee of Southern
California, of the public accounting firm Deloitte & Touche in 1992, Mr.
Renken currently serves as an Adjunct Professor at the University of
Southern California and as a director of East West Bank.
[OBJECT OMITTED] DIRECTOR SINCE 1995 AGE 47
GREGORY M. SHEPARD Chairman of the Board and President of American
Union Insurance Company CAUIC) since 1985.
Previously, Mr. Shepard also served as Chairman of
the (oard of Directors and President of Direct Auto
Insurance Company, which Bhanged its name to AUIC in
1998, and American Union Financial corporation,
American Union Life Insurance Company, and Direct
Auto Cndemnity Company, which merged into AUIC in
1998 and 1999. In addition, Ie was Chairman and
President of Illinois HealthCare Insurance Company
until 2000.
[GRAPHIC OMITTED] DIRECTOR SINCE 1994 AGE 58
HOWARD I. SMITH Vice Chairman, Chief Administrative Officer and Chief Financial Officer of
AIG located in New York, NY. Mr. Smith currently serves as a director of
Transatlantic Holdings, Inc., a majority-owned subsidiary of AIG; and
International Lease Finance Corporation, a wholly-owned subsidiary of AIG.
- 10 -
EXECUTIVE OFFICERS
The following is information concerning the executive officers of the Company.
Has served
As an Officer
Officers of the Company Age Since Business Background
---------------------------------------------------------------------------------------------------------------
BRUCE W. MARLOW 54 2000 Chief Executive Officer and President. Prior to joining the
Company in February 2000, Mr. Marlow was employed by
Allstate Corporation, since 1999, as Senior Vice President
and President of its Independent Agency Markets subsidiary.
Before retiring for three years, he served Progressive
Corporation from 1978-96, holding various positions
including Chief Operating Officer from 1988-1996.
RICHARD A. ANDRE 53 1988 Senior Vice President, Human Resources. Before joining the
Company in 1988, Mr. Andre was with Fidelity National Title
Insurance Company. Prior to that time, he was with Safeco
Corporation where he held a variety of positions including
Vice President of Personnel for Safeco Title Insurance
Company.
MICHAEL J. CASSANEGO 52 1999 Senior Vice President, General Counsel and Secretary.
Mr. Cassanego joined the Company in March 1999. He
previously was Vice President and Deputy General Counsel for
Fremont Compensation Insurance Group, which he joined upon
Fremont's acquisition of Industrial Indemnity Company in
1997. Mr. Cassanego was employed for 21 years with
Industrial Indemnity Company, serving in several positions
including Senior Vice President, Secretary and General
Counsel.
G. EDWARD COMBS 50 2000 Senior Vice President, New Business. Mr. Combs joined the
Company in 2000. Previously, he was employed by Progressive
Corporation for 22 years, serving in various management
positions.
MICHAEL A. GOGGIO 37 2001 Vice President, Consumer Marketing. Mr. Goggio joined the
Company in June 2001. He was previously employed as Vice
President and Corporate Auditor by GuideOne Insurance Group
from 1998 to 2001 and as Assistant Vice President and
Assistant Controller at United Insurance Company from 1993
to 1998.
JOHN L. INGERSOLL 37 2001 Vice President, New Customer Marketing. Prior to joining the
Company in February 2001, Mr. Ingersoll served as President
of Netcubator, LLC from September 2000 to February 2001;
Senior Vice President of InsWeb Corporation from 1999 to
2000; and Senior Vice President, Business Development of
Countrywide Financial from 1996 to 1999.
- 11 -
Has served
As an Officer
Officers of the Company Age Since Business Background
---------------------------------------------------------------------------------------------------------------
ALLEN LEW 39 2003 Vice President and Chief Actuary. Mr. Lew joined the
Company in April 2003. He was previously employed by
Allstate Insurance Company as Director of Pricing from 2001
to 2003; New England Fidelity Insurance Company as Senior
Vice President, Chief Financial Officer and Treasurer from
1999 to 2001; and Trust Insurance Company in various
positions, including Senior Vice President and Chief
Financial Officer, from 1994 to 1999.
JOHN M. LORENTZ 50 1996 Controller and Acting Chief Financial Officer. Mr. Lorentz
joined the Company in 1996. He was previously employed by
Transamerica Financial Services in various capacities,
including Vice President and Controller.
ERIC SAUDI 56 2001 Vice President, Customer Care. Mr. Saudi joined the Company
in July 1978, serving in various claim positions, including
Assistant Vice President. He was promoted to Vice President
in October 2001. He has over 26 years in the insurance
industry.
CAREN L. SILVESTRI 49 2000 Vice President and Product Manager. Ms. Silvestri joined the
Company in 1982, serving in various positions in Marketing,
Operations and Underwriting. She has over 20 years
experience in the insurance industry.
DEAN E. STARK 49 1993 Senior Vice President Claims. Mr. Stark joined the Company
in 1979, serving in numerous claim positions including Vice
President. He has over 25 years of experience in the
insurance industry.
Each executive officer serves at the pleasure of the Board of Directors. Every
person chosen by the Board of Directors to be an executive officer is listed
above.
- 12 -
BOARD OF DIRECTORS AND COMMITTEE MEETINGS
The business of the Company is managed under the direction of the Board of
Directors. The Board meets on a regularly scheduled basis during the year to
review significant developments affecting the Company and to act on matters
requiring Board approval. It also holds special meetings when an important
matter requires Board action between scheduled meetings. The Board of Directors
met five times during 2002. Each Board member participated in at least 75% of
the meetings of the Board and Committees of the Board on which he or she served.
The Board of Directors has standing audit and compensation committees,
identified below. The Company does not have a standing nominating committee. The
functions of a nominating committee are performed by the Board as a whole.
COMPENSATION COMMITTEE. The Compensation Committee met once last year. The
Compensation Committee reviews and approves compensation policies and makes
recommendations regarding executive compensation to the Board of Directors. The
Committee also reviews and approves equity-based compensation policies and makes
recommendations regarding equity-based compensation to the Board of Directors.
No member of the Committee is a former or current officer or employee of the
Company or any of its subsidiaries. Current members of the Committee are Robert
M. Sandler, John B. De Nault, III, R. Scott Foster, Jeffrey L. Hayman, James P.
Miscoll and Gregory M. Shepard.
AUDIT COMMITTEE. The Audit Committee met four times during 2002. This committee
is governed by a charter, approved by the Board of Directors, and attached as
Appendix A, and is primarily concerned with the accuracy and effectiveness of
the audits of our financial statements by our internal audit staff and by our
independent auditors. Its duties include:
(1) select independent auditors;
(2) review of the scope and results of the audits conducted by them;
(3) approve non-audit services provided to the Company by the
independent auditor;
(4) review the organization and scope of our internal system of audit,
financial and disclosure controls;
(5) appraise the Company's financial reporting activities, including
annual and quarterly reports, and the accounting standards and
principles followed; and
(6) conduct other reviews relating to compliance by employees with
Company policies and applicable laws.
Current members of the Committee, who the Board believes meet the financial and
independency standards of the New York Stock Exchange, are John B. De Nault,
III, Fred J. Martin, Jr. and Keith W. Renken. Mr. Renken, as a former senior
partner of the accounting firm of Deloitte & Touche and a current adjunct
professor at the University of Southern California, was determined by the Board,
at its April 2003 meeting, to be an audit committee financial expert, as defined
in the SEC rules.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee oversees the Company's financial reporting process on behalf
of the Board of Directors and is comprised of the three directors listed below.
Each committee member is an independent director as defined by the rules of the
New York Stock Exchange. In addition, the Board of Directors has determined that
Mr. Renken also qualifies as an audit committee financial expert as defined in
Item 401(h)(2) of regulation S-K. In fulfilling its oversight responsibilities,
the Committee reviewed the audited consolidated financial statements in the
Annual Report with 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 consolidated
financial statements.
The Committee reviewed with the independent auditors, who are responsible for
expressing an opinion on the conformity of those audited consolidated financial
statements with generally accepted accounting principles, their judgments as to
the quality, not just the acceptability, of the Company's accounting
- 13 -
principles and such other matters as are required to be discussed with the
Committee under generally accepted auditing standards. In addition, the
Committee has discussed with the independent auditors the auditors' independence
from the Company and its management including the matters in the written
disclosures required by the Independence Standards Board Standard No. 1 and has
considered the compatibility of non-audit services with the auditors'
independence. The independent auditors also represented that their presentations
included the matters required to be discussed with the independent auditors by
Statement on Auditing Standards No. 61, as amended, "Communication with Audit
Committees". The consulting services provided by the independent auditors in
2002 were limited to certain technical tax matters and consolidated financial
reporting developments, which the Committee believes do not impair the auditors'
independence.
The Committee discussed with the Company's internal and independent auditors the
overall scope and plans for their respective audits. The Committee met with the
internal and independent auditors, with and without management present, to
discuss the results of their examinations, their evaluations of the Company's
internal controls, and the overall quality of the Company's consolidated
financial reporting.
In reliance on the reviews and discussions referred to above, this Committee
recommended to the Board of Directors that the audited consolidated financial
statements be included in the Annual Report on Form 10-K for the year ended
December 31, 2002 for filing with the Securities and Exchange Commission.
The Audit Committee's recommendations as outlined in this report have been
submitted to, reviewed and approved by the Board of Directors.
Submitted by the Audit Committee
John B. De Nault, III
Keith W. Renken
Fred J. Martin, Jr.
COMPENSATION OF DIRECTORS
For 2002, each outside director of the Company received an annual remuneration
of $15,000. All directors received $1,250 for each attended meeting of the Board
of Directors. In addition, each committee member received $1,250 for each
attended meeting of a committee, if otherwise entitled. No director is entitled
to more than $1,250 for any calendar day, regardless of the number of meetings
attended on that day. Under the Company's 1995 Stock Option Plan, nonemployee
directors each receive an option to purchase 4,000 shares of the Company's
Common Stock on the day of each Annual Meeting of Shareholders or the date on
which the individual initially becomes a director. The options have an exercise
price equal to the fair market value of the underlying shares subject to the
option on the date of grant and become exercisable one year after the date of
grant.
Effective January 1, 2003, the Board of Directors increased the annual retainer
for each outside director to $25,000 and the stipend for each attended meeting
to $1,500, subject to the limitation of one payment per calendar day. In
addition, each member of the Audit Committee receives an additional annual
retainer of $5,000.
Ms. Gillespie is a partner in the law firm of Barger & Wolen who rendered
services to the Company currently not exceeding 5% of its gross revenues.
- 14 -
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the annual and long-term compensation and the
compensation paid during each of the Company's last three years to the Company's
Chief Executive Officer and the four highest-paid executive officers (the "Named
Executives"), based on base salary and bonus earned during 2002.
ANNUAL COMPENSATION LONG TERM COMPENSATION (2)
------------------------------------- --------------------------------------
AWARDS
------------------------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION AWARDS OPTIONS OMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) ($)(3) (#)(4) ($)(5)
--------------------------------------------------------------------------------------------------------------------
Bruce W. Marlow 2002 700,000 200,000 -- 348,837 10,320
CEO, President, 2001 704,327 150,000 -- 610,571 9,720
Vice Chairman and Director 2000 550,000 250,000 600,000 100,000 24,919
G. Edward Combs 2002 311,400 80,000 -- 77,591 16,853
Senior Vice President, 2001 311,181 35,000 77,462 20,083
Marketing 2000 200,000 75,000 300,000 87,094 58,678
Michael J. Cassanego 2002 284,005 90,000 -- 71,262 16,504
Senior Vice President, 2001 274,423 41,250 -- 68,408 17,479
General Counsel & Secretary 2000 245,000 50,000 -- 69,188 15,656
Dean E. Stark 2002 268,513 80,000 -- 67,375 14.947
Senior Vice President, 2001 249,230 37,500 -- 64,676 15,512
Claims 2000 210,000 50,000 -- 58,988 12,349
Douglas K. Howell * 2002 307,368 -- -- 76,993 19,178
Senior Vice President, 2001 213,462 33,750 -- 63,300 20,607
Chief Financial Officer 2000 -- -- -- -- --
* Resigned 2/27/2003
(1) For each Named Executive, his Other Annual Compensation was less
than $50,000 and 10% of his combined total salary and bonus.
(2) During 2002, there were no awards of Stock Appreciation Rights
("SARs"), nor were there any Long-Term Incentive Plan ("LTIP")
payouts.
(3) Restricted Stock awards are for a five-year period, vesting at 20%
per year. During the restriction period, participants are entitled
to receive dividends on and may vote for the shares. The following
table sets forth the restricted stock award information and the
vesting schedule for the named executives.
ALANCE AS PRESENT VALUE
DATE SHARES AWARD SHARES BF AS OF 12/31/02
AWARDED AWARDED VALUE VESTED O12/31/02 $12.52 PER SHARE
------- ------- ----- ------ --------- ----------------
Bruce W. Marlow 2/09/00 32,990 $600,000 13,196 19,794 $247,821
G. Edward Combs 5/01/00 15,000 $300,000 6,000 9,000 $112,680
Michael J. Cassanego 5/25/99 12,735 $230,000 7,641 5,094 $ 63,777
Dean E. Stark 5/25/99 9,465 $171,000 5,679 3,789 $ 47,438
Douglas K. Howell -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------
- 15 -
(4) Represents the number of shares of the Company's Common Stock for which
options were granted under the Company's 1995 Stock Option Plan.
(5) Includes the following other compensation for each Named Executive for
2002. (a) Imputed income of group term life in excess of $50,000. (b)
Deferred employer's contribution to the Company's qualified 401(k) Plan
and supplemental 401(k) Plan. (c) Moving expenses.
(A) (B) (c) 2002 Total
($) ($) ($) ($)
----------------------------- ---------------------- ----------------------- ---------------------- -----------------------
Bruce W. Marlow 2,070 8,250 -- 10,320
G. Edward Combs 1,292 15,561 -- 16,853
Michael J. Cassanego 1,867 14,637 -- 16,504
Dean E. Stark 1,176 13,771 -- 14,947
Douglas K. Howell 854 15,350 2,974 19,178
----------------------------- ---------------------- ----------------------- ---------------------- -----------------------
Total 7,259 67,569 2,974 77,802
----------------------------- ---------------------- ----------------------- ---------------------- -----------------------
OPTION GRANTS AND EXERCISES IN 2002
The following table sets forth as to each of the Named Executives information
with respect to options granted for the year ended December 31, 2002 and the
present value of the options on the date of grant.
NUMBER OF PERCENT OF
SECURITIES PERCENT OF
UNDERLYING TOTAL OPTIONS
OPTIONS GRANTED TO EXERCISE GRANT DATE
GRANTED EMPLOYEES PRICE EXPIRATION PRESENT VALUE
NAME (1) IN 2002 ($/SH)(1) DATE $(2)
---------------------------------------------------------------------------------------------------------------
Bruce W. Marlow 348,837 23.37% $16.03 02/27/12 2,208,138
G. Edward Combs 77,591 5.24 % $16.03 02/27/12 491,151
Michael J. Cassanego 71,262 4.82 % $16.03 02/27/12 451,088
Dean E. Stark 67,375 4.55 % $16.03 02/27/12 426,484
Douglas K. Howell 76,993 5.20 % $16.03 02/27/12 487,366
---------------------------------------------------------------------------------------------------------------
(1) Options were granted to the Named Executives on February 27, 2002. The
respective exercise price is equal to the closing price of $16.03 of the
Company's Common Stock on the business day immediately preceding the date
of grant, as reported in the Wall Street Journal, Western Edition. These
options vest in three equal annual installments beginning February 27,
2003.
(2) Present value was calculated using the Black-Scholes option pricing model
valued at $6.33. Use of this model should not be viewed in any way as a
forecast of the future performance of the Company's Common Stock, which
will be determined by future events and unknown factors. The estimated
values under the Black-Scholes model are based upon certain assumptions as
to variables, including expected stock price volatility of .36, an annual
interest rate of 4.79%, a dividend yield of 2.50% for the options granted
on February 27, 2002, and an expected term of eight (8) years.
- 16 -
DECEMBER 31, 2002 OPTION VALUES
The following table provides information as to the value of options held by each
of the Named Executives at December 31, 2002.
AGGREGATED OPTION EXERCISES DURING THE YEAR ENDED
DECEMBER 31, 2002 AND DECEMBER 31, 2002 OPTION VALUES
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS AT DECEMBER 31, 2002
SHARES ACQUIRED VALUE AT DECEMBER 31, 2002 (#) ($)(1)
NAME ON EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------------------------------------------------------------------------------------------------------------
Bruce W. Marlow -- -- 357,629 701,779 -- --
G. Edward Combs -- -- 83,884 158,263 -- --
Michael J. Cassanego -- -- 88,929 139,929 -- --
Dean E. Stark -- -- 125,885 130,154 -- --
Douglas K. Howell -- -- 21,000 119,193 -- --
---------------------------------------------------------------------------------------------------------------------
(1) In accordance with SEC reporting requirements, values of both exercisable
and unexercisable options are based on the difference between the exercise
price of each option and $12.52, the closing price of the Company's Common
Stock on December 31, 2002 as reported in The Wall Street Journal, Western
Edition.
COMPENSATION COMMITTEE REPORT ON
EXECUTIVE MANAGEMENT COMPENSATION
The Compensation Committee, consisting of nonemployee directors Robert M.
Sandler, John B. De Nault, III, Jeffrey L. Hayman, R. Scott Foster, James P.
Miscoll and Gregory M. Shepard, has furnished the following report on executive
compensation:
GENERAL COMPENSATION POLICY
The Board of Directors' fundamental policy has been to offer the Company's
executive officers competitive compensation opportunities based in large part
upon their contributions to the success of the Company, and upon their personal
performance. The Company believes in compensating its executives for
demonstrated and sustained levels of performance in their individual jobs. The
achievement of higher levels of performance and contribution is rewarded by
higher levels of compensation. In November 2000, the Board of Directors,
pursuant to the recommendations of the Equity Based Compensation and
Compensation Committees, revised the criteria for short-term compensation and
long-term incentives for its officers.
The compensation package is comprised of these three elements:
o base salary, perquisites and other personal benefits designed
principally to be competitive with relevant compensation levels in
the industry;
- 17 -
o short-term cash compensation based upon performance levels achieved
in relation to pre-established target levels; and
o long-term incentive plan providing only stock option grants to its
officers also based upon their performance levels.
Some of the more important factors, which the Board considered in establishing
the components of each executive officer's compensation package for the 2002
fiscal year, are summarized below.
BASE SALARY. Base salary for each officer is set subjectively, after reviewing
personal performance, internal comparability considerations and salary levels in
effect for comparable positions in the market place. The Company uses salary
survey information to assign a salary grade range to each position, including
executive officers. Salary range midpoints are targeted at the 50th percentile
of like business enterprises in the same geographic area, if possible.
Salary recommendations for the year were based in part upon advice provided by
outside consultants and salary survey information published by the National
Association of Independent Insurers, SNL Executive Compensation Review for
Insurance Companies, and Sibson & Company. The Committee believes that
information provided by these groups presents a broadly based cross-section of
insurance company compensation practices. Individual salary adjustments for
executive officers were based upon analysis of base salary levels, effectiveness
of performance, changes in job responsibilities and a subjective assessment of
their personal contributions to the effectiveness of the organization as a
whole. All of the factors enumerated were applied in a subjective,
non-quantitative manner to establish an executive officer's base salary. The
peer group examined when establishing these compensation levels is different
from the industry group utilized in the Shareholder Return Performance Graph
shown on page 19.
SHORT-TERM COMPENSATION. Variable payments for the officers are based upon the
enhancement of value to the shareholders and customers as measured by
pre-established targets relative to the Company's revenue growth rate, GAAP
combined ratio and net income.
LONG-TERM INCENTIVE COMPENSATION. In 1995, the Compensation Committee concluded
that a stock option plan would improve the linkage between shareholder value and
executive compensation. Upon this Committee's recommendation, the Board of
Directors adopted the 1995 Stock Option Plan. Shareholders approved the plan and
amendments thereto at the 1995, 1997 and 2000 Annual Meetings. Executives and
key employees are eligible to receive stock options from time to time, giving
them the right to purchase shares of the Company's Common Stock at a specified
price in the future. The Plan is currently administered by the Compensation
Committee, which has authority to select optionees and to determine the number
of shares granted to them.
RETENTION AGREEMENTS. In order to retain certain members of management, the
Company entered into retention agreements with four senior officers. The Board
of Directors has approved these agreements to minimize the distractions or
concerns executives may have regarding substantial or adverse changes at the
Company. Effective April 1, 2003, retention agreements were entered into with
Richard A. Andre, Michael J. Cassanego, G. Edward Combs and Dean E. Stark.
CEO COMPENSATION. Bruce W. Marlow's annual salary of $700,000 was established by
the Board of Directors upon recommendation of the Compensation Committee and
took into account the fact that he would hold the offices of Chief Executive
Officer and President. For year 2002, Mr. Marlow was awarded 348,837 stock
options under the 1995 Stock Option Plan and a cash bonus of $200,000 for
services rendered in 2002, based upon an evaluation by the Compensation
Committee of his year 2002 performance. In addition to subjective factors, the
factors considered for both salary and bonus consideration included the
Company's overall underwriting performance as measured by its GAAP combined
ratio.
- 18 -
The Compensation Committee's recommendations as outlined in this report have
been submitted to, reviewed and approved by the Board of Directors.
The Company has reviewed Section 162(m) of the Internal Revenue Code which
generally limits the deduction of compensation paid to a company's chief
executive officer and each of the other four highest compensated executive
officers to $1,000,000 for each individual, with certain exceptions. The
Company's deductions for compensation paid during 2002 were not limited by
Section 162(m). None of the compensation deduction attributable to stock options
granted by the Company is limited by this section, but compensation deductions
attributable to restricted stock grants, generally equaling the fair market
value of the underlying stock on the date of vesting, do not qualify as an
exception. The deductibility of compensation attributable to restricted stock
grants or other forms of compensation paid by the Company may be limited in the
future. While the Compensation Committee considers Section 162(m) in evaluating
compensation of executive officers, it is only one of several factors considered
in arriving at a compensation package.
Submitted by the Compensation Committee.
Robert M. Sandler
John B. De Nault III
Jeffrey L. Hayman
R. Scott Foster
James P. Miscoll
Gregory M. Shepard
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
As indicated above, the Company's Compensation Committee consists of Robert M.
Sandler, John B. De Nault III, Jeffrey L. Hayman, R. Scott Foster, James P.
Miscoll and Gregory M. Shepard. No Committee member is or was an officer or
employee of the Company or any of its subsidiaries.
Bruce W. Marlow, Director and Chief Executive Officer also participated in
deliberations concerning executive officers' compensation during 2002, other
than his own. Mr. Marlow has been Chief Executive Officer and a director since
February 9, 2000.
- 19 -
SHAREHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total shareholder
return on the Company's Common Stock against the cumulative total return of the
Standard & Poor's 500 Stock Index and the Standard & Poor's Property & Casualty
Insurance Index for the period of five years commencing December 31, 1997 and
ending December 31, 2002. The graph and table assume the $100 was invested on
December 31, 1997 in each of the Company's Common Stock, the Standard & Poor's
500 Stock Index and the Standard & Poor's Property & Casualty Insurance Index,
and that all dividends were reinvested. This data was furnished by Research Data
Group, Inc.
[COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURNS LINE CHART GRAPHIC OMITTED]
------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002
------------------------------------------------------------------------------------------
21st Century (TW) 100.00 91.18 78.60 59.61 82.83 54.31
S&P 500 100.00 128.58 155.64 141.46 124.65 97.10
S&P P&C 100.00 93.37 69.57 108.42 99.72 88.73
------------------------------------------------------------------------------------------
- 20 -
RETIREMENT PLANS
PENSION PLAN
The Company's Pension Plan is a noncontributory defined benefit plan for all
regular employees under which normal retirement is at age 65 and early
retirement can be elected by any participant who has reached age 55 and has at
least 10 years of service. The plan, subject to certain maximum and minimum
provisions, bases pension benefits on an employee's career average compensation
and length of service. The annual pension benefit payable upon normal retirement
is equal to the sum of the accruals for each year a participant was in the plan.
At retirement, the participant has various life and contingent annuity payment
elections. For purposes of this plan, compensation includes base annual salary
plus overtime and bonuses. These pension benefits serve as an offset in
calculating benefits for participants under the Supplemental Executive
Retirement Plan.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Employees nominated by the Chief Executive Officer and approved by the Board of
Directors are eligible to participate in the Supplemental Executive Retirement
Plan. The plan is a nonqualified defined benefit plan under which normal
retirement is age 65 with at least 5 years of service, and early retirement can
be elected by any participant who has reached age 55 with at least 10 years of
service. The annual retirement benefit payable for 15 years is equal to 60% of
the average of the three highest consecutive years of compensation during the
ten year period preceding retirement, reduced by the participant's benefit under
the Pension Plan and 50% of the participant's social security benefit.
PENSION SUPPLEMENTAL PLAN AND 401(K) SUPPLEMENTAL PLAN
Effective January 1, 1996, the Company adopted the Pension Supplemental Plan and
the 401(k) Supplemental Plan. Each is a non-qualified deferred compensation plan
designed for certain executives and key employees of the Company whose benefits
under the Company's qualified Pension and 401(k) Plans have been limited by
certain provisions of the Internal Revenue Code (the "Code").
The Pension Supplemental Plan provides a benefit equal to the difference between
the pension that would be payable under the Pension Plan, absent the Code's
limitations upon compensation considered in calculating pension benefits, and
the actual benefits payable subject to those limitations. If a participant in
this plan is also entitled to receive benefits under the Supplemental Executive
Retirement Plan, the Pension Supplemental Plan benefits will be reduced
accordingly.
The 401(k) Supplemental Plan permits certain executives and key employees to
defer an amount of current compensation which, in addition to amounts actually
contributed to the 401(k) Plan, allows the participant to defer the full amount
of contributions that could have been deferred under the 401(k) Plan without
regard to limitations which the Code places on contributions and eligible
compensation. To the extent that such limitations preclude a participant's
account from receiving matching contributions under the 401(k) Plan, the
participant will receive a like amount of matching contributions under the
401(k) Supplemental Plan.
- 21 -
The table below sets forth the benefit payable for 15 years after retirement
from the Pension Plan, Supplemental Executive Retirement Plan, the Pension
Supplemental Plan, and one half of the Social Security benefit (assuming the
recipient is entitled to the age 65 Social Security benefit).
NUMBER OF YEARS OF SERVICE
---------------------------------------------
FINAL AVERAGE 5 10 15 OR MORE
COMPENSATION
--------------------------------------------------------------------
$150,000 $ 45,000 $ 67,500 $ 90,000
200,000 60,000 90,000 120,000
250,000 75,000 112,500 150,000
300,000 90,000 135,000 180,000
350,000 105,000 157,500 210,000
400,000 120,000 180,000 240,000
450,000 135,000 202,500 270,000
500,000 150,000 225,000 300,000
550,000 165,000 247,500 330,000
600,000 180,000 270,000 360,000
650,000 195,000 292,500 390,000
As set forth above, compensation used in calculating the Pension, Supplemental
Executive Retirement Plan and Pension Supplemental retirement benefit includes
annual base salary, overtime and bonuses and will approximate and fall within
10% of the total of 2000 through 2002 salary and bonus amounts shown in the
Summary Compensation Table for the listed individuals.
The credited years for the Named Executives in the Summary Compensation Table
are Bruce W. Marlow -- 2 years; G. Edward Combs -- 2 years; Michael J. Cassanego
-- 3 years; Dean E. Stark -- 23 years; and Douglas K. Howell -- 1 year.
RESTRICTED SHARES PLAN
The shareholders at their meeting held on May 23, 1982 approved the 21st Century
Insurance Group Restricted Shares Plan. Pursuant to the Plan, the Board of
Directors established a committee of its members entitled the Equity Based
Compensation Committee (the "Committee") to designate the participants in the
Plan, the amount of benefits thereunder, and to otherwise administer the Plan.
Members of the Committee are not eligible for benefits under the Plan.
Designation of an employee for benefits under the Restricted Shares Plan does
not necessarily entitle the employee to benefits under any other Company benefit
plan.
In general, the shares granted are restricted for a period of five years,
vesting at the rate of 20% per year. If the employment of the participant is
terminated within the five-year period, all shares not then vested are
forfeited. Any shares forfeited may be regranted to an existing participant or
any other employee eligible to be designated as a participant. During the
restricted period, a participant has the right to receive dividends and the
right to vote the shares.
The Plan does not create any right of any employee or class of employees to
receive a grant, nor does it create in any employee or class of employees any
right with respect to continuation of employment by the Company.
Presently, officers are not granted shares under this Plan.
- 22 -
STOCK OPTION PLAN
In 1995, the Company's shareholders approved the Company's 1995 Stock Option
Plan in order to enable the Company to attract, retain and motivate key
employees and nonemployee directors and to further align their interests with
those of the Company's shareholders by providing for or increasing their
proprietary interest in the Company. The Stock Option Plan is administered by a
committee comprised of disinterested members of the Board of Directors. The
committee has the authority to select persons to be granted options and to
determine exercise prices, vesting schedules and other provisions not
inconsistent with the provisions of the Stock Option Plan.
Each option gives a grantee the right to purchase shares of the Company's Common
Stock at a specified price in the future. Shares vest at fixed numbers of shares
per year over varying future periods. The Stock Option Plan provides that on the
day of an annual meeting of shareholders of the Company each nonemployee
director will be granted an option to purchase 4,000 shares of the Company's
Common Stock. Nonemployee director options have an exercise price equal to the
fair market value of the underlying shares subject to the option on the date of
grant and become exercisable one year after the date of grant.
EXECUTIVE SEVERANCE PLAN
The Company has enacted an Executive Severance Plan covering each of its
executive officers. If an officer is terminated for reasons other than death,
long-term disability, or good cause within a three-year period following a
change of control of the Company, or if the officer resigns after significant
adverse changes in his authority, duties, compensation, benefits or geographical
location, then the officer is entitled to a lump sum severance payment of one to
three times his or her current annual salary and most recent cash bonus. Junior
officers are eligible to receive one year of severance payments; senior
officers, two years; and the Chief Executive Officer, three years; with all
severance payments limited to the amount deductible to the Company under the
provisions of Internal Revenue Code Section 280G.
RETENTION AGREEMENTS
The agreements, with certain exceptions and limitations, require the Company to
do the following in the event that an officer party to a Retention Agreement is
terminated without Cause or resigns with Good Reason (as defined in the
Retention Agreement) or in the event that a successor to the Company or an
affiliate of the Company to which the officer is transferred fails to assume the
Retention Agreement:
o pay to such officer a cash lump sum equal to 2.5 times his or her
annual base salary;
o vest all of such officer's stock options, waive the 90 day
post-termination provisions in such officer's stock option
agreements, and allow such options to be exercisable for their full
remaining term, subject to a 5 year maximum; and
o provide to the officer and his or her spouse and dependents for 30
months all life, disability, accident and health benefits at
substantially similar benefit levels.cident and health benefits at
substantially similar benefit levels.
If the officer is entitled to and actually receives severance benefits payable
under the Executive Severance Plan, he or she is not entitled to benefits under
the Retention Agreement.
- 23 -
SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers and persons who own more than ten percent of a
registered class of the Company's equity securities to file with the Securities
and Exchange Commission (the "SEC") initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Executive officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on a review of reports furnished to the
Company and written representations that no other reports were required during
the 2002 fiscal year, all Section 16(a) filing requirements were complied with
except as described below:
Directors De Nault, III, Foster, Gillespie, Miscoll, Sandler, Shepard and Smith
each failed to file a timely report after receipt of options to purchase 4,000
shares of the Company's stock in 2001 and 2002. Director Gillespie failed to
file a timely report after purchase of 2,500 shares of Company stock. Officer
Stark failed to file a timely report after sale of 1,200 shares of Company
stock. Such untimely filings were inadvertent and the required reports have
since been filed.
- 24 -
INDEPENDENT AUDITORS
(PROPOSAL 2)
The Board of Directors has approved a resolution retaining Pricewaterhouse
Coopers LLP as its independent auditors for 2003. The appointment was
recommended by the Audit Committee. It is intended that unless otherwise
directed by the shareholders, proxies will be voted for the ratification of this
appointment.
On April 23, 2001, the Board of Directors, on the recommendation of the Audit
Committee and management, dismissed Ernst & Young LLP as the Company's
independent auditors and approved the appointment of PricewaterhouseCoopers LLP
as the Company's independent auditors to audit its consolidated financial
statements for 2001. Ernst & Young LLP had audited the Company's financial
statements since 1991.
During the two most recent fiscal years and the subsequent interim period
preceding this change in independent auditors, there were no reportable events
within the meaning of Item 304(a)(v) of Regulation S-K. There were no
disagreements between the Company and Ernst & Young LLP on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
either independent auditing firm, would have caused such firm to make a
reference to the subject matter of the disagreements in connection with its
reports. Also, during the last two fiscal years, reports from Ernst & Young LLP
on the financial statements contained no adverse opinions or disclaimers of
opinion and have not been qualified or modified as to uncertainty, audit scope,
or accounting principles.
The Company provided PricewaterhouseCoopers LLP and Ernst & Young LLP with a
copy of this disclosure. Ernst & Young LLP furnished a letter addressed to the
Securities and Exchange Commission stating that Ernst & Young LLP agrees with
the above statements.
Fees paid to PricewaterhouseCoopers LLP for 2002 were as follows:
Audit Fees $308,575
Financial Information Systems Design
and Implementation Fees 0
All Other Fees $634,548
--------
$943,123
The All Other Fees category includes $470,948 for Tax Advisory Services.
Representatives of PricewaterhouseCoopers LLP are expected to be present at the
annual meeting to make a statement, if they desire, and to be available to
respond to appropriate questions.
- 25 -
SHAREHOLDERS PROPOSALS
AT 2004 ANNUAL MEETING OF SHAREHOLDERS
If a shareholder desires to present a proposal at the Annual Meeting of
Shareholders of the Company for the year 2004 (currently scheduled to be held on
May 25, 2004, such proposal must conform with all of the requirements of Rule
14a-8, paragraphs (a), (b), and (c) under the Securities Exchange Act of 1934,
and must be received at the principal executive offices of the Company at 6301
Owensmouth Avenue, Woodland Hills, California 91367 no later than December 30,
2003. In addition, if shareholders wish to present other matters for action at
the 2004 annual meeting of shareholders (other than matters included in the
Company's proxy materials in accordance with Rule 14a-8 under the Securities
Exchange Act of 1934), the Company must receive such notice at the address noted
above no earlier than February 25, 2004 and no later than March 25, 2004.
ADDITIONAL INFORMATION
The Annual Report to Shareholders for the year ended December 31, 2002 is being
mailed to the shareholders separately from this Proxy Statement.
THE COMPANY WILL PROVIDE WITHOUT CHARGE ON REQUEST A COPY OF 21ST CENTURY
INSURANCE GROUP'S ANNUAL REPORT ON FORM 10-K AND 10-K/A FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THE REQUEST MAY BE DIRECTED TO THE PRINCIPAL
EXECUTIVE OFFICES OF THE COMPANY AT 6301 OWENSMOUTH AVENUE, WOODLAND HILLS,
CALIFORNIA 91367.
OTHER BUSINESS
The Company is unaware of any matter to be acted upon at the meeting by
shareholder vote except the election of directors and the ratification of the
appointment of independent accountants. In the case of any matter properly
coming before the meeting for shareholder vote, the proxyholders named in the
proxy accompanying this statement shall vote shares held by them in accordance
with their best judgment.
- 26 -
APPENDIX A
AUDIT COMMITTEE CHARTER
1. Members. The Board of Directors shall appoint an Audit Committee of at
-------
least three members, consisting entirely of independent directors of the Board,
and shall designate one member as chairperson or delegate the authority to
designate a chairperson to the Audit Committee. Members of the Audit Committee
shall be appointed by the Board of Directors upon the recommendation of the
Nominating and Corporate Governance Committee. For purposes hereof, the term
"independent" shall mean a director who meets the independence requirements of
the New York Stock Exchange ("NYSE"), as determined by the Board.
Each member of the Audit Committee must be financially literate and at
least one member must have accounting or related financial management expertise,
as determined by the Board. In addition, at least one member of the Audit
Committee shall be an "audit committee financial expert," as determined by the
Board in accordance with Securities and Exchange Commission rules.
2. Purposes, Duties, and Responsibilities.
The purposes of the Audit Committee shall be to:
o represent and assist the Board of Directors in discharging its
oversight responsibility relating to: (i) the accounting,
reporting, and financial practices of the Company and its
subsidiaries, including the integrity of the Company's
financial statements; (ii) the surveillance of administration
and financial controls and the Company's compliance with legal
and regulatory requirements; (iii) the outside auditor's
qualifications and independence; and (iv) the performance of
the Company's internal audit function and the Company's
outside auditor; and
o prepare the report required by the rules of the Securities and
Exchange Commission ("SEC") to be included in the Company's
annual proxy statement.
Among its specific duties and responsibilities, the Audit Committee
shall:
(i) Be directly responsible, in its capacity as a committee of the
Board, for the appointment, compensation and oversight of the work
of the outside auditor. In this regard, the Audit Committee shall
appoint and retain, [subject to ratification by the Company's
stockholders], and terminate, when appropriate, the outside auditor,
which shall report directly to the Audit Committee.
(ii) Obtain and review, at least annually, a report by the outside
auditor describing: the outside auditor's internal quality-control
procedures; and any material issues raised by the most recent
internal quality-control review, or peer review, or by any inquiry
or investigation by governmental or professional authorities, within
the preceding five years, respecting one or more independent audits
carried out by the outside auditing firm, and any steps taken to
deal with any such issues.
(iii) Approve in advance all audit services to be provided by the
outside auditor. (By approving the audit engagement, an audit
service within the scope of the engagement shall be deemed to have
been pre-approved.)
(iv) Establish policies and procedures for the engagement of the
outside auditor to provide permissible non-audit services, which
shall include pre-
A - 1
approval of all permissible non-audit services to be provided by the
outside auditor.
(v) Consider, at least annually, the independence of the outside
auditor, including whether the outside auditor's performance of
permissible non-audit services is compatible with the auditor's
independence, and obtain and review a report by the outside auditor
describing any relationships between the outside auditor and the
Company or any other relationships that may adversely affect the
independence of the auditor.
(vi) Review and discuss with the outside auditor: (A) the scope of
the audit, the results of the annual audit examination by the
auditor, and any difficulties the auditor encountered in the course
of their audit work, including any restrictions on the scope of the
outside auditor's activities or on access to requested information,
and any significant disagreements with management; and (B) any
reports of the outside auditor with respect to interim periods.
(vii) Review and discuss with management and the outside auditor the
annual audited and quarterly financial statements of the Company,
including: (A) an analysis of the auditor's judgment as to the
quality of the Company's accounting principles, setting forth
significant financial reporting issues and judgments made in
connection with the preparation of the financial statements; (B) the
Company's disclosures under "Management's Discussion and Analysis of
Financial Condition and Results of Operations," including accounting
policies that may be regarded as critical; and (C) major issues
regarding the Company's accounting principles and financial
statement presentations, including any significant changes in the
Company's selection or application of accounting principles and
financial statement presentations; and receive reports from the
outside auditor as required by SEC rules.
(viii)Recommend to the Board based on the review and discussion
described in paragraphs (v) - (vii) above, whether the financial
statements should be included in the Annual Report on Form 10-K.
(ix) Review and discuss the adequacy and effectiveness of the
Company's internal controls, including any significant deficiencies
in internal controls and significant changes in such controls
reported to the Audit Committee by the outside auditor or
management.
(x) Review and discuss the adequacy and effectiveness of the
Company's disclosure controls and procedures and management reports
thereon.
(xi) Review and discuss with the principal internal auditor of the
Company the scope and results of the internal audit program.
(xii) Review and discuss corporate policies with respect to earnings
press releases, as well as financial information and earnings
guidance provided to analysts and ratings agencies.
(xiii)Review and discuss the Company's policies with respect to
risk assessment and risk management.
(xiv) Oversee the Company's compliance systems with respect to legal
and regulatory requirements and review the Company's codes of
conduct and programs to monitor compliance with such codes.
A - 2
(xv) Establish procedures for handling complaints regarding
accounting, internal accounting controls and auditing matters,
including procedures for confidential, anonymous submission of
concerns by employees regarding accounting and auditing matters.
(xvi) Establish policies for the hiring of employees and former
employees of the outside auditor.
(xvii)Annually evaluate the performance of the Audit Committee and
assess the adequacy of the Audit Committee charter.
3. Outside Advisors. The Audit Committee shall have the authority to
-----------------
retain such outside counsel, accountants, experts and other advisors as it
determines appropriate to assist the Audit Committee in the performance of its
functions.
4. Meetings. The Audit Committee shall meet at least four times per year,
--------
either in person or telephonically, and at such times and places as the Audit
Committee shall determine. The Audit Committee shall meet separately in
executive session, periodically, with each of management, the principal internal
auditor of the Company and the outside auditor. The Audit Committee shall report
regularly to the full Board of Directors with respect to its activities. The
majority of the members of the Audit Committee shall constitute a quorum.
A - 3