FORM 10-K/A 21ST CENTURY INSURANCE GROUP
(Exact name of registrant as specified in its charter)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
CALIFORNIA 95-1935264
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
6301 OWENSMOUTH AVENUE
WOODLAND HILLS, CALIFORNIA 91367
(Address of principal executive offices) (Zip Code)
(818) 704-3700 WEB SITE: WWW.21ST.COM
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, WITHOUT PAR VALUE NEW YORK STOCK EXCHANGE
(Title of Class) (Name of each exchange on which
registered)
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements, incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the average high and
low prices for shares of the Company's Common Stock on March 31,
2003 as reported by the New York Stock Exchange, was
approximately $304,000,000.
On March 31, 2003, the registrant had 85,431,505 shares of common
stock outstanding, without par value, which is the Company's only
class of common stock.
TABLE OF CONTENTS
Page
Description Number
-------------------------------------------------------------------------------------
Explanatory Note 2
Part III 2
Item 10. Directors and Executive Officers of the Registrant 2
Item 11. Executive Compensation 6
Item 12. Beneficial Ownership of Securities 15
Item 13. Certain Relationships and Related Transactions 17
Signatures 18
Certification of President and Chief Executive Officer 19
Certification of Chief Financial Officer 20
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant To
Section 906 of the Sarbanes-Oxley Act of 2002 21
1
EXPLANATORY NOTE:
This Form 10-K/A of 21st Century Insurance Group (the "Company") amends the
Annual Report on Form 10-K of the registrant for the registrant's fiscal year
ended December 31, 2002. Specifically, this Form 10-K/A adds Item 10. Directors
and Executive Officers of Registrant, Item 11. Executive Compensation, Item 12.
Beneficial Ownership of Securities and Item 13. Certain Relationships and
Related Transactions.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
ROBERT M. SANDLER AGE 61
DIRECTOR SINCE 1994
Chairman of the Board of the Company, Executive Vice President, Senior Casualty
Actuary and Senior Claims Officer of AIG located in New York, NY.
JOHN B. DE NAULT, III* AGE 55
DIRECTOR SINCE 1988
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.
R. SCOTT FOSTER, M.D. AGE 62
DIRECTOR SINCE 1986
Ophthalmologist in Stockton, CA and Clinical Professor at Stanford University.
He is the son of the late Louis W. Foster, Founder of the Company.
ROXANI M. GILLESPIE AGE 62
DIRECTOR SINCE 1998
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.
JEFFREY L. HAYMAN AGE 40
DIRECTOR SINCE 2002
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.
BRUCE W. MARLOW AGE 54
DIRECTOR SINCE 2000
Vice Chairman of the Board, Chief Executive Officer and President of the
Company. 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.
2
FRED J. MARTIN, JR.* AGE 70
DIRECTOR SINCE 2002
Retired as Senior Vice President and Director of Governmental Relations of Bank
of America in 1993. Mr. Martin currently serves as a Visiting Scholar, Institute
of Governmental Studies, University of California, Berkeley.
JAMES P. MISCOLL AGE 68
DIRECTOR SINCE 1998
Retired as Vice Chairman of Bank of America in 1992. Mr. Miscoll currently
serves as Senior Advisor for AIG, and as director of Chela Financial, East West
Bank, Encore Productions, MK Gold Company and Westinghouse Air Brake Company.
KEITH W. RENKEN* AGE 68
DIRECTOR SINCE 2002
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.
GREGORY M. SHEPARD AGE 47
DIRECTOR SINCE 1995
Chairman of the Board and President of American Union Insurance Company ("AUIC")
since 1985. Previously, Mr. Shepard also served as Chairman of the Board of
Directors and President of Direct Auto Insurance Company, which changed its name
to AUIC in 1998, and American Union Financial Corporation, American Union Life
Insurance Company, and Direct Auto Indemnity Company, which merged into AUIC in
1998 and 1999. In addition, he was Chairman and President of Illinois Healthcare
Insurance Company until 2000.
HOWARD I. SMITH AGE 58
DIRECTOR SINCE 1994
Vice President, Chief Financial Officer and Chief Administrative 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.
* Indicates member of the Audit Committee.
3
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.
4
Has served
As an Officer
Officers of the Company Age Since Business Background
----------------------------------------------------------------------------------------------------
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.
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.
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
5
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.
ITEM 11. EXECUTIVE COMPENSATION
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 $5,000.
Ms. Gillespie is a partner in the law firm of Barger & Wolen who rendered
services to the Company currently not exceeding 5% of its gross revenues.
6
SUMMARY COMPENSATION TABLE
The following table sets forth the annual and long-term compensation and the
compensation paid during each of the Company's last three years to the Company's
Chief Executive Officer and the four highest paid executive officers (the "Named
Executives"), based on base salary and bonus earned during 2002.
ANNUAL COMPENSATION LONG-TERM COMPENSATION (2)
----------------------------------------- -------------------------------------------
AWARDS
----------------------------
RESTRICTED SECURITIES ALL OTHER
OTHER ANNUAL STOCK UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) AWARDS($)(3) OPTIONS(#)(4) ($)(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
* Resigned 2/27/2003 2000 - - - - -
-------------------------------------------------------------------------------------------------------------------------
(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, nor
were there any Long-Term Incentive Plan 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.
PRESENT VALUE
DATE SHARES AWARD SHARES BALANCE AS AS OF 12/31/02
AWARDED AWARDED VALUE VESTED OF 12/31/02 $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 -- -- -- -- -- --
----------------------------------------------------------------------------------------
(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
-------------------------------------------------------------
7
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 TOTAL OPTIONS
UNDERLYING GRANTED TO GRANT DATE
OPTIONS EMPLOYEES IN EXERCISE PRICE PRESENT VALUE
NAME GRANTED(1) 2002 ($/SH)(1) EXPIRATION 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 $6.33. Use of this model should not be viewed in any way as a
forecast of the future performance of the Company's Common Stock, which
will be determined by future events and unknown factors. The estimated
values under the Black-Scholes model are based upon certain assumptions as
to variables, including expected stock price volatility of .36, an annual
interest rate of 4.79%, a dividend yield of 2.50% for the options granted
on February 27, 2002, and an expected term of eight years.
DECEMBER 31, 2002 OPTION VALUES
The following table provides information as to the value of options held by each
of the Named Executives at December 31, 2002.
AGGREGATED OPTION EXERCISES DURING THE YEAR ENDED
DECEMBER 31, 2002 AND DECEMBER 31, 2002 OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS AT DEC. 31,
SHARES ACQUIRED VALUE OPTIONS AT DEC. 31, 2002 2002
ON EXERCISE REALIZED (#) ($)(1)
NAME (#) ($) 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:
8
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:
- base salary, perquisites and other personal benefits designed principally
to be competitive with relevant compensation levels in the industry;
- short-term cash compensation based upon performance levels achieved in
relation to pre-established target levels; and
- 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 11.
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 and GAAP
combined ratio.
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
9
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.
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.
10
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*
AMONG 21ST CENTURY INSURANCE GROUP THE S & P 500 INDEX
AND THE S & P PROPERTY & CASUALTY INSURANCE INDEX
[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
11
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.
12
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
COMPENSATION 5 10 15 OR MORE
-------------- -------- -------- -----------
$ 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.
13
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:
- pay to such officers a cash lump sum equal to 2.5 times his or her
annual base salary;
- vest all of such officer's stock options, waive the 90 day
post-termination provisions in such person's stock option agreements,
and allow such options to be exercisable for their full remaining
term, subject to a 5 year maximum; and
- 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.
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.
14
ITEM 12. 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
15
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
Amount and Nature of Amount and Nature of
Beneficial Ownership (1) PERCENT OF Beneficial Ownership PERCENT
TITLE OF CLASS NAME OF BENEFICIAL OWNER As of March 31, 2003 CLASS As of March 31, 2003, OF CLASS
---------------------------------------------------------------------------------------------------------------------------------
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
as a Group (21 individuals) 8,922,729 (10) 10.44% * *
---------------------------------------------------------------------------------------------------------------------------------
* 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 10-K/A.
(3) Includes 16,000 shares issuable upon exercise of stock options exercisable
within 60 days of the date of this 10-K/A.
(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 10-K/A.
(6) Includes116,415 shares issuable upon exercise of stock options exercisable
within 60 days of this 10-K/A
(7) Includes 119,349 shares issuable upon exercise of stock options exercisable
within 60 days of this 10-K/A.
(8) Includes 154,344 shares issuable upon exercise of stock options exercisable
within 60 days of this 10-K/A.
(9) Includes 21,100 shares issuable upon exercise of stock options exercisable
within 60 days of this 10-K/A.
(10) Includes 1,439,462 shares issuable upon exercise of stock options
exercisable within 60 days of this 10-K/A.
(11) Includes 134,106 shares issuable upon exercise of stock options exercisable
within 60 days of this 10-K/A.
(12) Includes 937 shares issuable upon exercise of stock options exercisable
within 60 days of this 10-K/A.
(13) Includes 231,406 shares issuable upon exercise of stock options exercisable
within 60 days of this 10-K/A.
(14) Includes 2,624 shares issuable upon exercise of stock options exercisable
within 60 days of this 10-K/A.
16
EQUITY COMPENSATION PLAN INFORMATION
As of December 31, 2002
----------------------------------------------------------------------------------------
(a) (b) (c)
--------------------------- ---------------------- -----------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES REFLECTED IN
WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (a)
--------------------------- ---------------------- -----------------------------------
Equity compensation plans approved
by security holders 5,141,900 $ 18.77 4,382,232
Equity compensation plans not
approved by security holders - - -
Total 5,141,900 $ 18.77 4,382,232
ITEM 13. 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.
In its ordinary course of business, the Company and its subsidiaries have
completed various transactions with AIG to meet its insurance and reinsurance
needs.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: April 22, 2003 21ST CENTURY INSURANCE GROUP
(Registrant)
By: /s/ Bruce W. Marlow
--------------------------------------
Bruce W. Marlow
President and Chief Executive Officer
18
CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER
------------------------------------------------------
I, Bruce W. Marlow, certify that:
1. I have reviewed this amendment to the annual report on Form 10-K/A of 21st
Century Insurance Group;
2. Based on my knowledge, this amendment to the annual report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this amendment to the annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this amendment to the annual report, fairly present
in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
amendment to the annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this amendment to
the annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this amendment to the annual report (the "Evaluation Date"); and
c) presented in this amendment to the annual report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
amendment to the annual report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: April 22, 2003 /s/ Bruce W. Marlow
----------------- --------------------------------------
Bruce W. Marlow
President and Chief Executive Officer
19
CERTIFICATION OF CHIEF FINANCIAL OFFICER
--------------------------------------------
I, John M. Lorentz, certify that:
1. I have reviewed this amendment to the annual report on Form 10-K/A of 21st
Century Insurance Group;
2. Based on my knowledge, this amendment to the annual report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this amendment to the annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this amendment to the annual report, fairly present
in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
amendment to the annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this amendment to
the annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this amendment to the annual report (the "Evaluation Date"); and
c) presented in this amendment to the annual report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
amendment to the annual report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: April 22, 2003 /s/ John M. Lorentz
------------------- ----------------------------------------------
John M. Lorentz
Controller and Acting Chief Financial Officer
(Principal Accounting Officer and Acting
Principal Financial Officer)
20