OMB APPROVAL
--------------------------
OMB Number: 3235-0059
Expires: February 28, 2006
Estimated average burden
hours per response...12.75
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-12
CNA Surety Corporation
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
[COMPANY NAME]
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
--------------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
--------------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
--------------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
--------------------------------------------------------------------------------
5) Total fee paid:
--------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
--------------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
--------------------------------------------------------------------------------
3) Filing Party:
--------------------------------------------------------------------------------
4) Date Filed:
--------------------------------------------------------------------------------
PERSONS WHO POTENTIALLY ARE TO RESPOND TO THE COLLECTION OF INFORMATION
CONTAINED IN THIS FORM ARE NOT REQUIRED TO RESPOND UNLESS THE FORM DISPLAYS A
CURRENTLY VALID OMB CONTROL NUMBER.
SEC 1913 (02-02)
CNA SURETY CORPORATION
CNA CENTER
333 S. WABASH
CHICAGO, ILLINOIS 60685
(312) 822-5000
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
ON APRIL 25, 2006
To: The Shareholders of CNA Surety Corporation
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of CNA
Surety Corporation (the "Company") will be held at the Company's business
offices located at CNA Center, 41-South, 333 S. Wabash, Chicago, IL 60685, on
Tuesday, April 25, 2006 , at 9:00 A.M. CDT, for the following purposes:
1. To elect seven directors to serve one-year terms, commencing immediately
upon their election, or to serve until their respective successors are
duly elected and qualified;
2. To approve the Company's proposed 2006 Long-Term Equity Compensation
Plan.
3. To ratify the Audit Committee's appointment of the Company's independent
registered public accounting firm, Deloitte & Touche , for fiscal year
2006; and
4. To transact such other business as may properly come before the meeting
or any adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on March 1, 2006, as
the record date for the determination of shareholders entitled to notice of, and
to vote at, the Annual Meeting. You are cordially invited to attend the meeting.
In the event you will be unable to attend, you are respectfully requested to
fill in, date, sign and return the enclosed proxy card at your earliest
convenience in the enclosed return envelope.
By Order of the Board of Directors
ENID TANENHAUS
Senior Vice President, General Counsel
and Secretary
March 20, 2006
Chicago, Illinois
IMPORTANT:
PLEASE FILL IN, DATE, SIGN AND PROMPTLY MAIL THE ENCLOSED PROXY CARD IN THE
POSTPAID ENVELOPE PROVIDED TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE
MEETING. IF YOU ATTEND THE MEETING YOU MAY VOTE IN PERSON IF YOU WISH TO DO SO
EVEN THOUGH YOU HAVE SENT IN YOUR PROXY.
CNA SURETY CORPORATION
CNA CENTER
333 S. WABASH
CHICAGO, ILLINOIS 60685
(312) 822-5000
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is being mailed or otherwise furnished to shareholders
of CNA Surety Corporation, a Delaware Corporation (the "Company"), on or about
March , 2006 , in connection with the solicitation by the Board of Directors
of the Company (the "Board") of proxies to be voted at the Annual Meeting of
Shareholders ("the Annual Meeting") of the Company to be held at the Company's
business offices located at CNA Center, 41-South, 333 S. Wabash, Chicago,
Illinois 60685, at 9:00 A.M. CDT, on Tuesday, April 25, 2006, and at any
adjournment thereof. Shareholders who, after reading this Proxy Statement, have
any questions should contact Enid Tanenhaus, Secretary of the Company, in
Chicago at (312) 822-3895.
MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING
At the Annual Meeting, shareholders of the Company will consider and vote
upon:
(i) To elect seven directors to serve one-year terms, commencing
immediately upon their election, or to serve until their respective
successors are duly elected and qualified;
(ii) To approve the Company's proposed 2006 Long-Term Equity Compensation
Plan.
(iii) The ratification of the Board's appointment of the Company's
independent registered public accounting firm, Deloitte & Touche ,
for fiscal year 2006; and
(iv) The transaction of such other business as may properly come before the
meeting or any adjournment or adjournments thereof.
The date of this Proxy Statement is March 20, 2006.
PROXY SOLICITATION
The enclosed proxy is solicited by the Board. The cost of this proxy
solicitation is anticipated to be nominal and will be borne by the Company,
including charges and expenses of brokerage firms and others for forwarding
solicitation material to beneficial owners of the Company's Common Stock. The
solicitation generally will be effected by mail and such cost will include the
cost of preparing and mailing the proxy materials. In addition to the use of the
mails, proxies also may be solicited by personal interview, telephone,
telegraph, telecopy, or other similar means. Although solicitation will be made
primarily through the use of the mail, officers, directors, or employees of the
Company may solicit proxies personally or by the above described means without
additional remuneration for such activity. The Company will arrange for
brokerage houses, nominees and other custodians holding common stock of the
Company of record to forward proxy-soliciting material to the beneficial owners
of such shares, and will reimburse such record owners for the reasonable
out-of-pocket expenses incurred by them.
2005 ANNUAL REPORTS
Shareholders are concurrently being furnished with a copy of the Company's
2005 Annual Report to Shareholders, which contains its audited financial
statements for the year ended December 31, 2005. Additional copies of the
Company's Annual Report to Shareholders and Annual Report on Form 10-K for the
year ended December 31, 2005, as filed with the Securities and Exchange
Commission (the "SEC"), may be obtained through links on the Company's web site,
cnasurety.com or by contacting Ruth Jantz, representative
of the Company, at CNA Center, Chicago, Illinois 60685, (312) 822-5326, and such
copies will be furnished promptly at no expense.
VOTING SECURITIES AND PROXIES
Only shareholders of record at the close of business on March 1, 2006 (the
"Record Date"), have the right to receive notice of and to vote at the Annual
Meeting and any adjournment thereof. As of the Record Date, 43,483,334 shares of
the Company's Common Stock, $.01 par value, per share, were issued and
outstanding. Each share outstanding on the Record Date for the Annual Meeting
entitles the holder thereof to one vote upon each matter to be voted upon at the
Annual Meeting. The shareholders of a majority of the Company's issued and
outstanding Common Stock, present in person or represented by proxy, shall
constitute a quorum at the Annual Meeting. Abstentions and broker non-votes are
counted as present for purposes of determining the presence or absence of a
quorum for the transaction of business. If, however, a quorum is not present or
represented at the Annual Meeting, the shareholders entitled to vote at the
Annual Meeting, whether present in person or represented by proxy, shall only
have the power to adjourn the Annual Meeting until such time as a quorum is
present or represented. At such time as a quorum is present or represented by
proxy, the Annual Meeting will reconvene without notice to shareholders, other
than an announcement at the prior adjournment of the Annual Meeting, unless the
adjournment is for more than thirty (30) days or a new record date has been set.
If a proxy in the form enclosed is duly executed and returned, the shares
of the Company's Common Stock represented thereby will be voted in accordance
with the specifications made thereon by the shareholder. If no such
specifications are made, such proxy will be voted (i) for election of the
Management Nominees (as hereinafter defined) for directors; (ii) to approve the
proposed 2006 Long-term Equity Compensation Plan (iii) for ratification of
Deloitte & Touche as the Company's independent registered public accounting firm
for fiscal year 2006; and (iv) at the discretion of Proxy Agents (as hereinafter
defined) with respect to such other business as may properly come before the
Annual Meeting or any adjournment thereof. Abstentions are counted in
tabulations of the votes cast on proposals presented to shareholders, as to the
materials specifically proposed herein, broker non-votes are not counted for
purposes of determining whether a proposal has been approved. Under applicable
Delaware law, a broker non-vote will have no effect on the outcome of the
election of directors. A proxy is revocable at any time prior to its exercise by
either a subsequently dated, properly executed proxy appointment which is
received by the Company prior to the time votes are counted at the Annual
Meeting, or by a shareholder giving notice of revocation to the Company in
writing prior to the Annual Meeting or during the Annual Meeting prior to the
time votes are counted. The mere presence at the Annual Meeting of a shareholder
who appointed a proxy does not itself revoke the appointment.
ELECTION OF DIRECTORS (PROPOSAL I)
VOTING AND THE MANAGEMENT NOMINEES
At the Annual Meeting seven directors will be elected to serve one-year
terms commencing immediately upon their election, or to serve until their
respective successors are duly elected and qualified. The nominees are as
follows:
Philip H. Britt
Lori S. Komstadius
James R. Lewis
Roy E. Posner
Robert Tinstman
Adrian M. Tocklin
John F. Welch
2
Mr. Britt, Ms. Komstadius, Mr. Lewis, Mr. Posner, Mr. Tinstman, Ms. Tocklin
and Mr. Welch are currently serving as directors of the Company. For information
regarding the Management Nominees, see "Directors and Executive Officers of the
Registrant."
At the Annual Meeting, if a quorum is present, the vote of holders of a
majority of the Company's Common Stock having the power to vote present in
person or represented by proxy shall elect the directors. It is the present
intention of John Corcoran and Enid Tanenhaus, who will serve as the Company's
proxy agents at the Annual Meeting (the "Proxy Agents"), to vote the proxies
which have been duly executed, dated and delivered and which have not been
revoked in accordance with the instructions set forth thereon or if no
instruction had been given or indicated, for the election of the Management
Nominees as directors. The Board does not believe that any of the Management
Nominees will be unwilling or unable to serve as a director. However, if prior
to the election of directors any of the Management Nominees becomes unavailable
or unable to serve, the Board reserves the right to name a substitute nominee or
nominees and the Proxy Agents expect to vote the proxies for the election of
such substituted nominee or nominees.
VOTE REQUIRED
Proposal to elect seven directors requires an affirmative vote of holders
of a majority of the voting power represented by shares of our common stock
present in person or represented by proxy and entitled to vote at the Annual
Meeting.
THE BOARD RECOMMENDS A VOTE IN FAVOR OF THE MANAGEMENT NOMINEES. IF A
CHOICE IS SPECIFIED ON THE PROXY BY A SHAREHOLDER, THE SHARES WILL BE VOTED AS
SPECIFIED. IF NO SPECIFICATION IS MADE, THE SHARES WILL BE VOTED "FOR" THE
MANAGEMENT NOMINEES.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth the name, age, position and offices with the
Company, present principal occupation or employment and material occupations and
employment for the past five years of each person who is presently a director, a
nominee for director, or an executive officer of the Company.
PHILIP H. BRITT, age 59; Director of the Company since March 3, 1998.
Retired. Senior Vice President, Insurance Industry Division of Bank One, NA
(formerly First Chicago NBD) from April 1988 through February 2002; various
other positions with First Chicago NBD and its predecessor from 1982 through
April 1988.
JOHN CORCORAN, age 42; Senior Vice President and Chief Financial Officer of
the Company since January, 2004; Executive Officer since October 2003; Group
Vice President and Senior Financial Officer Specialty Lines from October, 1998
to January, 2002 CNA Insurance Companies; Senior Vice President and Senior
Financial Officer Global and Specialty Lines from January 2002 to September
2003, CNA Insurance Companies. (Affiliates of CNA Financial Corp. "CNAF" owns
63.8% of the company's stock.)
MICHAEL A. DOUGHERTY, age 47; Senior Vice President Field Management and
Marketing since September 2001, Senior Vice President and Chief Marketing
Officer of the Company since November 1997. Senior Vice President Aon Risk
Services of Illinois from April 1992 until November 1997. Midwest Regional Bond
Manager, AIG from August 1988 to April 1992. Various management positions within
the bond division of the St. Paul Companies from June 1980 to August 1988.
DOUGLAS W. HINKLE, age 53; Chief Underwriting Officer of the Company since
March 2004, Western Division Director, St. Paul Surety from January, 2003 until
March, 2004; AVP Western Territory Practice Leader, from December 2001 until
2004, St. Paul American from 2000 until 2001; VP Western Territorial Executive,
Fireman's Fund; from 1999 until December 2001; AVP Surety reinsurance Executive,
Fireman's Fund; from 1996 until 1999; Surety Manager & Acting Officer Manager,
Fireman's Fund, from 1986 until 1996 Surety Manager, Fireman's Fund.
3
LORI S. KOMSTADIUS, age 47; Executive Vice President Human Resources since
10/04; Senior Vice President since 10/01 of the CNA Insurance Companies, before
joining CNA Insurance Companies in 2001, Assistant Vice President St. Paul
Companies; various leadership positions in the underwriting, claims,
administrative service and corporate quality organizations. Prior to that held
associated positions at A.T. Kearney, Inc and Heidrick & Struggles, Inc. Ms.
Komstadius is on the board of United Service Organizations.
JAMES R. LEWIS, age 57; Director and Chairman of the Board of the Company
since May 2003; President and Chief Executive Officer, Property and Casualty
Operations of the CNA Insurance companies since August 2002; Executive Officer
of CNA Financial Corporation ("CNAF") since 2002; from August 2001 to August
2002, Executive Vice President, U.S. Insurance Operations, Property and Casualty
Operations of the CNA Insurance companies; from November 1992 to August 2001,
Senior Vice President of USF&G Corporation.
ROY E. POSNER, age 72; Retired. Director of the Company since September
30, 1997. Chief Financial Officer and Senior Vice President of Loews
Corporation, the parent corporation of CNAF, from 1973 until February 1997.
THOMAS A. POTTLE, age 46; Senior Vice President of the Company since March
1999; Vice President of the Company from September 30, 1997 until March 1999;
Secretary of the Company from September 30, 1997 to May 1998; and Assistant
Secretary since May 1998; Assistant Vice President and Surety Controller of CNA
Insurance companies from 1996 until September 30, 1997; Surety Controller of CNA
Insurance companies from September 1994 until 1996; and various positions with
CCC from 1986 until September 1994.
ENID TANENHAUS, age 48; Senior Vice President, General Counsel and
Secretary of the Company since January 2, 2001; Senior Vice President, Secretary
and General Counsel, Coregis Group, Inc. until December 2000; Vice President,
Secretary and General Counsel CNA UniSource of America from December 1997 until
June 1999; and various legal positions with CNA Insurance companies from 1988
until December 1997.
ROBERT A. TINSTMAN, Age 59; Director of the Company since August 2004;
Executive Chairman of Angelo Iafrate Construction Company and James Construction
Group since May, 2002. Prior to that he was President & CEO of Morrison Knudsen
Corporation ("MK") from March 1995 to February 1999. Mr. Tinstman currently
serves on Idacorp/Idaho Power Board of Directors and is Chairman of the
Investment and Compensation Committee since 1999; he also serves on Idacorp
Technologies Board of Directors since January 2000; and serves on Home Federal
Savings Board of Directors serving as Chairman of the Audit Committee since
December 1999.
ADRIAN M. TOCKLIN, age 54; Retired; Director since September 30, 1997 and
Chairman of the Board from September 30, 1997, until March 3, 1998. President
and Chief Executive Officer of Tocklin & Associates from January 1999 to
December 2003. President, CNA Diversified Operations unit of the CNA Insurance
Companies from May 1995 until April 1998. President and Chief Operating Officer
of Continental Insurance Company and its property and casualty affiliates
("CIC") and all of its insurance subsidiaries from June 1994 until May 1995;
Executive Vice President of Continental Insurance Company from September 1992
until June 1994; various other positions with CIC since December 1974. Ms
Tocklin is also a Director of Thrivent Financial for Lutherans, which is the
largest Fraternal organization in the U.S. She serves on the Audit Committee as
well as Finance and Investment Committee. She is a Director and Treasurer of
Lutheran Services Florida, where she serves on the Audit Committee.
JOHN F. WELCH, age 49; Director of the Company since August, 2003;
President and Chief Executive Officer of the Company since August, 2003; Chief
Underwriting Officer, St. Paul Surety from May, 2002 until June 2003; from
August 2000 until May 2002, President Aflanzadora Insurgentes SA CV Mexico City;
from 1997 to 2000 Chief Financial Officer, Aflanzadora Insurgentes SA CV Mexico
City; from 1989 to 1997 held various positions with USF&G; from August, 1979
until November 1989 held various surety management positions, Continental
Insurance Company.
4
BOARD AND COMMITTEE MEETINGS
In excess of 50% of the Company's shares are held by CNAF and its
subsidiaries. Pursuant to the listing standards of the New York Stock Exchange
("Exchange") the Company is a "Controlled Company" and consequently is exempt
from the Exchange's requirements relating to maintenance of a majority of
independent directors and independent nominating/corporate governance and
compensation committees. However, a majority of the Company's directors are
independent and the Company has a Compensation Committee consisting solely of
independent directors. The Board of Directors consider shareholder director
nominees under the same criteria utilized by the Board of Directors to evaluate
nominees proposed by management or members of the Board of Directors. These
criteria include a potential nominee's character, judgment, business experience
and areas of expertise, among other relevant considerations, such as the
requirements of stock exchange rules and applicable laws and regulations.
DIRECTOR INDEPENDENCE
The Board of Directors annually reviews its independence and performance.
For 2005, the Board and the Audit Committee completed anonymous self evaluation
forms. The Board of Directors and Audit Committee discussed these evaluations at
the February 14, 2006 meeting. Both the self evaluations of the Audit Committee
and the Board of Directors indicated that the Board and the Audit Committee
believe that they are functioning well and receive adequate access to and
information from management. At the February 14, 2006 meeting, the Board of
Directors determined that a majority of the Board as currently constituted and
the current nominees listed above qualify as independent directors pursuant to
the applicable rules of the Exchange and the Securities and Exchange Commission
("SEC"). The independent directors are Philip Britt, Roy Posner, Robert Tinstman
and Adrian Tocklin. In determining independence, the Board affirmatively
determined whether or not each director or nominee has any material relationship
with the Company. In assessing materiality, the Board considered all relevant
facts and circumstances, not merely from the standpoint of the director or
nominee, but from that of any person or organization with which the director or
nominee, but from that of any person or organization with which the director or
nominee has an affiliation. The Board considers the frequency and regularity of
any services provided by or to, or other transactions between, the Company and
the director or nominee or affiliated organization, whether they are being
carried out at arm's length in the ordinary course of business and whether they
are being provided or conducted substantially on the same terms as those
prevailing at the time from unrelated parties for comparable transactions.
Material relationships can include commercial banking, industrial, legal,
accounting, charitable and familial relationships. Independence means (i) not
being a present or former employee of the Company; (ii) not personally receiving
or having an immediate family member who receives more than $100,000 per year in
direct compensation from the Company other than director and committee fees and
pension or other forms of deferred compensation; (iii) not being an employee, or
having an immediate family member employed as an executive officer of another
company where any current executive officer of the Company serves on that
company's compensation committee; (iv) not being employed by or affiliated with
or having an immediate family member employed by or affiliated with a present or
former internal or external auditor of the Company within the three previous
years; or (v) not being a director who is an executive officer or employee, or
whose immediate family member is an executive officer of a company that makes
payments to, or receives payments from the Company for property or services in
an amount which does not exceed the greater of $1 million or 2% of the other
company's consolidated gross revenues.
CORPORATE GOVERNANCE AND ETHICS
The Board has adopted Corporate Governance Guidelines and a Code of
Business Ethics both of which are attached as Appendices to this proxy
statement, and are available on the Company's website at cnasurety.com, and will
be provided to any shareholder upon request by contacting Ruth Jantz,
representative of the Company, at CNA Center, Chicago, Illinois, (312) 822-5326.
Such copies will be furnished promptly at no charge. The Corporate Governance
Guidelines provide that shareholders and other interested parties may
communicate with the non-management members of the Board by sending such
communications in care
5
of the Company's General Counsel, CNA Center 41-South, Chicago, Illinois 60685.
It is the Company's policy to forward all such communications to the Board.
COMMITTEES AND MEETINGS
The Board intends to meet without management in Executive Session at its
regularly scheduled meetings. The members have decided that a presiding director
is not necessary and that the independent directors will rotate the task of
presiding over Executive Sessions.
The Board has an Executive Committee, an Audit Committee, a Compensation
Committee and Investment Committee. The Audit Committee and the Compensation
Committee consist solely of independent directors. The Company does not have a
nominating/corporate governance committee. The Board relies on the Exchange
exemption for controlled companies in not having a nominating/corporate
governance committee, but the Board's current policy is that all directors
participate in the consideration of director nominees.
The Executive Committee currently consists of Messrs. Lewis, Posner and
Welch. The Executive Committee did not meet during 2005. The Executive Committee
possesses and may exercise the full and complete authority of the Board in the
management and business affairs of the Company during the intervals between the
meetings of the Board. Any action by the Executive Committee is reported to the
Board at its next meeting and such action is subject to revision and alteration
by the Board, provided that no rights of third persons can be prejudicially
affected by the subsequent action of the Board. Vacancies on the Executive
Committee are filled by the Board. However, during the temporary absence of a
member of the Executive Committee, due to illness or inability to attend a
meeting or for other cause, the remaining member(s) of the Executive Committee
may appoint a member of the Board to act in the place and with all the authority
of such absent member. The current members of the Executive Committee will
continue in office until the Committee is dissolved, terminated or reorganized,
or if such members are replaced.
The Company's Audit Committee currently consists of Messrs., Britt,
Tinstman and Posner (Chair) and Ms. Tocklin. During 2005, the Audit Committee
held 11 meetings. The Board determined at its February 14, 2006 meeting that all
Audit Committee members are financially literate. In addition, the Board
determined that pursuant to the standards set forth in statutes and regulations,
Roy Posner qualifies as an audit committee financial expert and is "independent"
as that term is used in Exchange Act Section 10A(m)(3). The Board adopted an
Audit Committee Charter in March 2000 and amended and restated the Audit
Committee Charter on February 17, 2004, which governs the Audit Committee. As
described in the Audit Committee Charter, the Audit Committee is authorized and
(a) has the power to review the financial reports and other financial
information provided by the Corporation to governmental entities and the public,
including the certifications made by the principal executive officer and
principal financial officer with respect to the Company's reports filed with the
Securities and Exchange Commission; the Corporation's systems of internal
controls regarding finance, accounting, internal audit, legal compliance and
ethics that the Corporation's management and the Board have established; and the
Corporation's auditing, accounting and financial reporting processes generally
including the review of critical accounting policies and financial statement
presentation, (b) has the sole authority to retain, compensate and evaluate the
Company's independent registered public accounting firm, and the scope of and
fees for their audits, and (c) any and all related party agreements and
arrangements between the Corporation and its affiliates and any disputes that
may arise hereunder. However, the Company's management is responsible for its
financial statements and reporting process, including its system of internal
controls. The Company's independent auditors are responsible for expressing an
opinion on the conformity of the Company's audited financial statements with
accounting principles generally accepted in the United States. A copy of the
Audit Committee Charter as amended and restated is available on the Company
website at cnasurety.com, is attached as appendices to this proxy statement, and
will be provided to any shareholder upon request by contacting Ruth Jantz,
representative of the Company, at CNA Center, Chicago, Illinois, (312) 822-5326.
Copies will be furnished promptly at no charge.
6
The Company Compensation Committee currently consists of Messrs. Britt, Posner,
Tinstman and Ms. Tocklin (Chair). During 2005, the Compensation Committee held 4
meetings. The Compensation Committee generally sets compensation policy, and
reviews and administers all compensation matters for the five most highly
compensated executive officers of the Company as well administering the
Company's stock option plan. A copy of the Compensation Committee Charter is
available on the Company website at cnasurety.com and will be provided to any
shareholder upon request by contacting Ruth Jantz, representative of the
Company, at CNA Center, Chicago, Illinois, (312) 822-5326. Copies will be
furnished promptly at no charge.
The Company also has an Investment Committee, which currently consists of
Ms. Tocklin and Messrs. Posner and Britt (Chair). During 2005, the Investment
Committee held 4 meetings. The Investment Committee establishes investment
policies and oversees the management of the Company's investment portfolio.
During 2005, 5 meetings of the Board of Directors were held.
In fiscal year 2005, each of the directors attended in excess of 75% of the
aggregate of the total meetings of the Board and the total number of meetings of
committees on which he or she served. The Company encourages directors to attend
its annual meeting. In 2005 board members, Philip Britt, Roy Posner, Robert
Tinstman, Adrian Tocklin and John Welch attended the Company's annual meeting.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of the
Company's outstanding Common Stock ("Reporting Persons"), file reports of
ownership and changes in ownership of such securities with the SEC. Reporting
Persons are required to deliver copies of all Section 16(a) forms to the Company
simultaneously for filing with the SEC. Based solely upon review of the copies
of the forms furnished to the Company, and written representations from certain
Reporting Persons that no other reports were required. The Company believes that
for 2005 all reports required by Section 16(a) of the Exchange Act have been
timely filed.
7
EXECUTIVE COMPENSATION
The following tables show information with respect to the annual
compensation (including option grants) for services rendered to the Company (or
its predecessors) for the year ended December 31, 2005 by the chief executive
officer and those persons who were, at December 31, 2005, the four other most
highly compensated executive officers of the Company.
SUMMARY COMPENSATION TABLE
LONG-TERM INCENTIVE
OTHER ANNUAL ---------------------- ALL OTHER
SALARY BONUS COMPENSATION OPTIONS LONG TERM COMPENSATION(3)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) CASH PAYOUTS ($)
--------------------------- ---- ------- ------- ------------ ------- ------------ ------------------------
John F. Welch................. 2005 400,000 450,000 4,530 26,500 138,000 82,660
President and Chief 2004 400,000 452,000 4,792 29,700 66,000 64,019
Executive Officer 2003 192,308 376,111 8,113 68,600 -- 3,039
Michael A. Dougherty.......... 2005 207,000 89,010 58,856(1) 5,500 28,566 27,471
Senior Vice President 2004 207,000 139,400 -- 6,200 13,662 31,344
of the Company 2003 207,000 153,820 -- 7,700 -- 33,248
John F. Corcoran.............. 2005 225,000 94,500 2,890 6,000 31,050 26,828
Chief Financial Officer 2004 225,000 90,000 -- 6,700 14,850 23,265
of the Company 2003 50,192 14,500 -- 12,100 -- 48
Enid Tanenhaus................ 2005 210,000 92,400 24,034(2) 5,600 28,980 31,288
General Counsel 2004 210,000 134,000 4,000 6,200 13,860 31,466
of the Company 2003 210,000 150,400 2,200 5,900 34,038
Douglas W. Hinkle............. 2005 225,000 105,750 363 6,000 31,050 31,409
Chief Underwriting Officer 2004 176,538 162,452 1,843 10,600 12,000 17,895
of the Company 2003 -- -- -- -- -- --
---------------
(1) Mr. Dougherty received $58,556 in other annual compensation in 2005. This
consisted of $58,856 from the exercise of stock options.
(2) Ms. Tanenhaus received $24,034 in other annual compensation in 2005. This
consisted of $20,034 from the exercise of stock options, $725.00 for
financial planning services and $3,275 for club memberships.
(3) All other compensation consists of 401 (K) Plan Matching Contributions,
401(K) Plan Basic Contributions, 401 (K) Discretionary Contributions,
Deferred Compensation Matching Contributions, Deferred Compensation Basic
Contributions, Deferred Compensation Discretionary Contributions and the
Imputed Cost of Company paid Life Insurance. These amounts are detailed in
the next table.
DEFERRED DEFERRED DEFERRED
401(K) PLAN 401(K) PLAN 401(K) PLAN COMPENSATION COMPENSATION COMPENSATION
MATCHING BASIC DISCRETIONARY MATCHING BASIC DISCRETIONARY
CONTRIBUTIONS CONTRIBUTIONS CONTRIBUTION CONTRIBUTIONS CONTRIBUTIONS CONTRIBUTIONS
------------- ------------- ------------- ------------- ------------- -------------
John F. Welch.......... 2005 9,450 10,500 4,200 8,550 35,300 14,120
2004 9,225 10,250 4,100 8,775 22,250 8,900
2003 2,769
Michael A. Dougherty... 2005 5,484 10,500 4,200 5,003 2,001
2004 3,104 10,250 4,100 6,211 5,291 2,116
2003 9,000 -- 6,000 12,939 -- 5,026
John F. Corcoran....... 2005 8,942 6,300 4,200 1,183 3,596 2,397
2004 5,850 7,155 4,100 4,275 1,005 670
2003
Enid Tanenhaus......... 2005 9,450 10,500 4,200 4,893 1,957
2004 2,925 10,250 4,100 6,525 5,270 2,108
2003 9,000 -- 6,000 13,770 -- 4,980
Douglas W. Hinkle...... 2005 7,875 10,500 4,200 -- 5,965 2,386
2004 6,620 7,788 3,115
2003 -- -- -- -- -- --
LIFE
INSURANCE
---------
John F. Welch.......... 540 82,660
519 64,019
270 3,039
Michael A. Dougherty... 283 27,471
272 31,344
283 33,248
John F. Corcoran....... 210 26,828
210 23,265
48 48
Enid Tanenhaus......... 288 31,288
288 31,466
288 34,038
Douglas W. Hinkle...... 483 31,409
372 17,895
-- --
8
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM
OPTIONS DURING BASE PRICE EXPIRATION ---------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
---- ----------- ----------- ----------- ---------- --------- ---------
John F. Welch................ 26,500 7.5% 13.07 10/25/15 217,830 552,260
Michael A. Dougherty......... 5,500 1.6% 13.07 10/25/15 45,210 114,620
Enid Tanenhaus............... 5,600 1.6% 13.07 10/25/15 46,032 116,704
Douglas W. Hinkle............ 6,000 1.7% 13.07 10/25/15 49,320 125,040
John F. Corcoran............. 6,000 1.7% 13.07 10/25/15 49,320 125,040
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
VALUE OF UNEXERCISED
SHARES ACQUIRED NUMBER OR UNEXERCISED IN-THE-MONEY OPTIONS
ON EXERCISE VALUE OPTIONS AT FY-END (#) AT FY-END ($)
NAME (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- --------------- ------------ ------------------------- -------------------------
John F. Welch........... 0 0 41,725/83,075 184,532/261,555
Michael A. Dougherty.... 28,791 58,856 41,209/15,950 29,126/49,928
Enid Tanenhaus.......... 4,475 20,034 16,525/14,700 24,073/43,094
Douglas W. Hinkle....... 0 0 2,650/13,950 8,502/34,505
John. F. Corcoran....... 0 0 7,725/17,075 35,362/52,770
LONG TERM INCENTIVE PLAN(2)
The following table includes information regarding future estimated
long-term incentive cash awards to the Named Executive Officers:
ESTIMATED FUTURE PAYOUT
-------------------------------
NAME PERFORMANCE PERIOD THRESHOLD TARGET MAXIMUM
---- ------------------ --------- -------- --------
John F. Welch................................ 2005 - 2007 $50,000 $200,000 $400,000
Michael A. Dougherty......................... 2005 - 2007 $10,350 $ 41,400 $ 82,800
Enid Tanenhaus............................... 2005 - 2007 $10,500 $ 42,000 $ 84,000
John Corcoran................................ 2005 - 2007 $11,250 $ 45,000 $ 90,000
Douglas W. Hinkle............................ 2005 - 2007 $11,250 $ 45,000 $ 90,000
---------------
(2) The long-term incentive cash awards are made under the Long-Term Incentive
Plan which is administered by the Compensation Committee. The long-term
incentive cash awards are generally granted annually and are earned based on
return on equity targets for three-year performance periods and will become
payable only to the extent that performance goals are achieved. Payments, if
any, would occur the first quarter of the year following the end of the
performance cycle and can vary 0% to 200% of target based on the attainment
of performance goals. For example, the Long Term Cash Incentive payment that
was made in the first quarter of 2006, referenced in the Summary
Compensation Table, was a composite payment made up of amounts payable for
goals reached for years 2003, 2004, and 2005.
COMPENSATION OF DIRECTORS
Directors, except for employees of the Company or its affiliates, for 2005
were compensated at the annual rate of $30,000, paid in quarterly installments,
and except for Audit Committee meetings, received $1,500 for each meeting of the
Board and committee meeting which they attended. Audit Committee members receive
$2,500 for each meeting attended. In addition, Mr. Posner is paid an additional
retainer of $7,500 for his
9
service as 2005 chairperson of the Audit and Compensation Committee for his 2005
service in view of the workload of the Audit Committee chairperson. In July
2005, Audit Committee appointed Mr. Tinstman, with his expertise in the
management and restructuring of construction firms, as its representative to
review, advise and direct management in connection with restructuring of the
large contractor discussed on page 20 . In recognition of the additional time
that Mr. Tinstman spent on such efforts, the Committee voted to pay Mr. Tinstman
a one time extra stipend of $10,000.
EMPLOYMENT CONTRACTS
Mr. Welch began his employment as a senior officer of the Company on June
30, 2003 and became CEO August 31, 2003. The Company entered into an employment
agreement with Mr. John F. Welch that ran from his June 30, 2003 date of hire
until December 31, 2005. A new employment contract was entered into with Mr.
Welch on December 13, 2005, to replace his employment contract that was expiring
December 31, 2005. The Committee evaluated and established Mr. Welch's salary
and bonus structure and other benefits based upon industry data, information on
other public companies, Mr. Welch's industry experience and expertise as well as
the expected and past performance of the Company. The new employment agreement
that was entered into with Mr. Welch has a three year term effective January 1,
2006 and ending December 31, 2008. Other than an increase in base salary to
$435,000, the new contract has substantially similar terms to the expiring
contract.
The agreement provides for a minimum annual base salary of $435,000. Mr.
Welch also is entitled to an annual incentive bonus (up to 200% of his base
salary) contingent on achievement of performance criteria approved by the
Compensation Committee, and participation in long term cash incentive programs
for key executives adopted by the Compensation Committee of the Board equivalent
to 50 to 100 percent of his base salary. He also was granted stock options as
part of his employment agreement. Mr. Welch also is eligible to participate in
the Company's benefit programs.
The agreement provides for a severance benefit if his employment is
terminated without cause by the Company or by Mr. Welch for good reason
contingent upon Mr. Welch's continuing compliance with the non competition,
non-solicitation and confidentiality provisions of the agreement. The severance
benefit for termination for good reason or without cause consists of an amount
equal to Mr. Welch's then base compensation prorated through the end of the
contract term, December 31, 2008, but in no event less than twelve months and
certain bonuses and long term compensation awards held by him at the date of
termination as well as continuation in the Company's health benefit plans. In
addition, the agreement also contains a severance benefit consisting of payment
of one year of Mr. Welch's then annual base salary, continuation in the
Company's health benefit plans for one year and certain bonuses and long term
compensation awards held by him at the date of termination if the Company fails
to extend the agreement.
A severance pay and benefits continuation agreement was entered into with
Mr. John Corcoran on June 9, 2005. This letter agreement provides for a
severance benefit if his employment is terminated without cause by the Company
prior to April 1, 2007 contingent upon Mr. Corcoran's execution of a general
release as provided by CNA Surety. The severance benefit for termination without
cause consists of an amount equal to Mr. Corcoran's then annual base salary,
continuation in the Company's health benefit AD&D, Contributory Life and
Dependent Life plans for one year from the date of termination at the employee
contribution rate then in effect.
AUDIT COMMITTEE REPORT
The Audit Committee serves as an independent and objective party to:
- monitor the Company's financial reporting process and internal control
system;
- retain and review and appraise the audit efforts of the Company's
independent registered public accounting firm and internal auditors;
- facilitate communications between the party's involved in the audit
process;
10
- review and appraise the fairness of related party transactions.; and
- monitor and review corporate governance and adherence to NYSE listing
standards.
The Audit Committee is composed of four non-employee directors, each of
whom is "independent" as required by applicable listing standards of the New
York Stock Exchange. The Audit Committee also anonymously completed a self
evaluation of its performance and discussed the responses at a February 14, 2006
committee meeting.
The Audit Committee met 11 times in 2005. The meetings were designed, among
other things, to facilitate and encourage communication among the Audit
Committee, management, the internal auditors and Deloitte & Touche ("Deloitte &
Touche"), the Company's independent registered public accounting firm. The Audit
Committee discussed with the Company's internal auditors and independent
registered public accounting firm the overall scope and plans for their
respective audits. The Audit Committee met with the internal and independent
registered public accounting firm, with and without management present, to
discuss the results of their examination and their evaluations of the Company's
internal controls and consolidated financial statements. The Committee reviewed
the Company's internal controls and, consistent with Section 302 of the
Sarbanes-Oxley Act of 2002 and the rules adopted thereunder, met with management
and the auditors prior to the filing of officers' certifications required by
that statute to receive any information concerning (a) significant deficiencies
in the design or operation of internal controls which could adversely affect the
Company's ability to record, process, summarize and report financial data and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls. During
fiscal year 2005, management continued its testing and evaluation of the
adequacy of the Company's system of internal control over financial reporting,
as required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules
and regulations. The Audit Committee also met separately with management and
internal auditors to discuss the performance of Deloitte & Touche.
In the performance of its oversight function, the Committee has considered
and discussed the audited financial statements with management and the
independent registered public accounting firm. The Committee has also discussed
with the independent registered public accounting firm the matters required to
be discussed by the standard adopted or referenced by the Public Company
Accounting Oversight Board ("PCAOB") including the Statement on Auditing
Standards No. 61, (Codification of Statements on Auditing Standards, AU380),
Communication with Audit Committees, as currently in effect. Finally, the
Committee has received the written disclosures and the letter from the
independent auditors required by PCAOB and/or Independence Standards Board
Standard No. 1, Independence Discussions with Audit Committees, as currently in
effect. The Committee has discussed with the independent registered public
accounting firm the registered public accounting firm independence.
Based upon the reports and discussions described in this report, and
subject to the limitations on the role and responsibilities of the Audit
Committee referred to above and in the Charter, the Audit Committee recommended
to the Board that the audited financial statements be included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2005 to be filed with
the Securities and Exchange Commission and determined that the provision of
non-audit services by Deloitte & Touche to the Company in 2005 was compatible
with maintaining the independence of Deloitte & Touche in its audit of the
Company.
SUBMITTED BY THE AUDIT COMMITTEE
OF THE COMPANY'S BOARD OF DIRECTORS
Philip H. Britt
Robert Tinstman
Adrian Tocklin
Roy E. Posner (Chairperson)
11
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 2005:
None of the members of the Compensation Committee was an officer (or former
officer) or employee of the Company or any of its subsidiaries;
None of the members of the Compensation committee entered into (or agreed
to enter into) any transaction or series of transactions with the Company or any
of its subsidiaries in which the amount involved exceeds $60,000;
All of the members of the Compensation Committee were independent as
required by the applicable listing standard of the New York Stock Exchange; and
None of the executive officers of the Company served as a director,
generally, or was a member of the Compensation Committee (or another Board
committee with similar functions) of any entity where one of that entity's
executive officers served on the Company's Compensation Committee or otherwise
served as a director on the Board.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee (the "Committee") met 4 times in 2005. The
Committee reviews the compensation policies and annual goals for the Chief
Executive Officer and four other executive officers who report to the Chief
Executive Officer, listed on the Summary Compensation Table appearing on pages
10-11. The Committee also oversees the administration and approval of the
retirement, savings and other benefit plans of the Company.
The Committee's philosophy is to provide a compensation package that
attracts, motivates and retains executive talent and delivers rewards for
excellent performance and financial consequences for underperformance. The
compensation policy of the Company for its executive officers (including those
named in the Summary Compensation Table) has been to pay base salaries, annual
incentive bonuses, and long term incentives that are both competitive and
recognize the accomplishment of the Company's stated goals of building a
financial services business focusing on surety, fidelity and other related
products. The Committee also believes that a significant portion of executive
compensation should be closely linked to both the Company's and the individual's
performance. This "pay for performance" philosophy is reflected in the Company's
compensation practices, which tie a significant portion of executive
compensation to the achievement of both the short and long term objectives of
the Company. Annual incentive bonuses are directly linked to the achievement of
short term objectives set by the Committee. In addition, equity-based long term
incentive awards are designed to help motivate executives to meet the Company's
long term performance objectives and serve to align the interests of executives
with those of the Company's shareholders, as the Company's executives will
benefit under their long term incentive awards from any appreciation in the
Company's stock price in the same manner as the Company's other shareholders.
The Company's long term cash incentive program serves to help achieve executive
continuity and serves to help motivate executives to meet the Company's long
term performance objectives set by the Committee.
The core elements of Executive Compensation include, base salary,
performance based annual incentive awards, and long term equity and cash based
incentive awards. The Company also provides certain other benefits to its
executive officers that are not tied to any formal individual or company
performance criteria and are intended to be part of a competitive overall
compensation program, such as paid time off, medical benefits, dental benefits,
life insurance, long-term disability insurance, and both qualified and
supplemental retirement savings plans.
With respect to Mr. Welch's compensation as reported for the year ended
December 31, 2005, in addition to base salary compensation of $400,000 he was
paid an additional short term incentive bonus of $400,000 on March 4, 2005, as
stipulated by his employment contract and the payment of which was directly
linked to the achievement of certain short term objectives set by the Committee.
Additionally, the final $50,000 installment
12
of Mr. Welch's signing bonus, as stipulated by his employment contract, was paid
on July 8, 2005. He also was granted stock options as part of his employment
agreement on his first day of employment and as part of the Company's Long Term
Incentive Program, At December 31, 2005, granted options were as follows:
received 50,000 stock options (at $9.85 per share) on June 30, 2003 (the
"Start-up Grant"), 18,600 (at $9.42 per share) on November 11, 2003 (the
"November 2003 Grant"), 29,700 (at $12.06 per share) on November 9, 2004 (the
"November 2004 Grant") , and 26,500 (at $13.07 per share) on October 25, 2005
(the "October 2005 Grant"). These options vest in equal amounts over a four-year
period commencing on June 30, 2004, November 11, 2004, November 9, 2005, and
October 25, 2006, respectively. A total of 25,000 stock options of the Start-up
Grant vested on June 30, 2004, a total of 9,300 of the options from November
2003 Grant vested on November 11, 2004, and 7,425 of the options from the
November 2004 Grant vested on November 9, 2005. Mr. Welch also received a
payment of $66,000 on March 4, 2005 by virtue of his participation and
achievement of various goals prescribed by the Committee in the Company's Cash
Long Term Incentive Plan.
Other benefits Mr. Welch received which are not listed above include
participation in the company's paid time off, medical benefits, dental benefits,
life insurance, and long-term disability insurance programs as well as
participation in both qualified and supplemental retirement savings plans.
The Committee reviews and determines the base salaries of the Chief
Executive Officer and other members of senior management. Salaries are also
reviewed in the case of promotions or any other significant changes in
responsibilities. In each case the Committee takes into account the results
achieved by the executive, his or her future potential, their scope of
responsibilities and experience, and competitive salary practices.
A new employment contract was entered into with Mr. Welch on December 13,
2005, to replace his employment contract that was expiring December 31, 2005.
The Committee evaluated and established Mr. Welch's salary and bonus structure
and other benefits based upon industry data, information on other public
companies, Mr. Welch's industry experience and expertise as well as the expected
and past performance of the Company. The new employment agreement that was
entered into with Mr. Welch has a three year term effective January 1, 2006 and
ending December 31, 2008. Other than an increase in base salary to $435,000, the
new contract has substantially similar terms to the expiring contract.
Compensation payable to other executive officers included a mix of base
salary, short and long term incentive bonuses and stock option grants. Annual
incentive bonuses for executive officers are based, in part, on attainment of
certain enterprise-wide financial goals (including the Company's GAAP combined
ratio and amount of gross written premium), as well as, personal goals and
shared goals related to that portion of the Company's business for which such
executive officer is primarily responsible. Stock options vest over a four-year
period, with 25% becoming exercisable on each anniversary date of the grant
date, and have a ten year term. All stock options are granted with an exercise
price equal to the fair market value of the Company's common stock on the date
of grant. Long term cash incentive bonuses for executive officers are based on
return on equity targets for three-year performance periods and are payable only
to the extent that performance goals are achieved. The Committee retains the
discretion, in light of the Company's and the individual's performance and the
Committee's compensation objectives, to determine the overall funding for awards
and individual incentive award amounts.
It is the policy of the Company to structure its compensation in a manner
which will avoid the limitations imposed by the Omnibus Budget Reconciliation
Act of 1993 on the deductibility of executive compensation
13
under Section 162(m) of the Internal Revenue Code of 1986, as amended, to the
extent it can reasonably do so consistent with its goal of retaining and
motivating its executives in a cost effective manner.
SUBMITTED BY THE COMPENSATION COMMITTEE
OF THE COMPANY'S BOARD OF DIRECTORS
Philip H. Britt
Roy Posner
Robert Tinstman
Adrian M. Tocklin
14
PERFORMANCE GRAPH
Below is a graph comparing total shareholder return on the Company's Common
Stock over the period from December 31, 2000 through December 31, 2005 with a
broad equity market index, the S&P 500, and a published industry index, the S&P
Property and Casualty Insurance Index, as required by the rules of the SEC.
(LINE GRAPH)
-------------------------------------------------------------------------------------------------------
12/31/2000 12/31/2001 12/31/2002 12/31/2003 12/31/2004 12/31/2005
-------------------------------------------------------------------------------------------------------
CNA SURETY
CORPORATION 100.00 108.77 55.09 66.74 93.68 102.25
-------------------------------------------------------------------------------------------------------
S&P 500 INDEX 100.00 86.96 66.64 84.22 91.79 94.55
-------------------------------------------------------------------------------------------------------
PROPERTY-CASUALTY
INSURANCE 100.00 90.45 79.11 98.07 106.27 120.06
-------------------------------------------------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth, except as noted, certain information with
respect to each person or entity who is known by the management of the Company
to be the beneficial owner of more than 5% of the outstanding shares of the
Company's Common Stock as well as each director of the Company, each executive
officer named in the Summary Compensation Table and all directors and executive
officers as a group. Information in the table of security ownership of certain
beneficial owners and the table of security ownership of management below is
based upon reports filed with the SEC on or before March 3, 2006 pursuant to
Section 13(d) and 16(a) under the Securities Exchange Act of 1934 and other
written representations received by the Company with respect to the persons and
entities named in those tables. Beneficial ownership is defined for this
purpose, as the sole or shared power to vote, or to direct the disposition of
the Common Stock. Unless otherwise noted the persons in the following table have
sole voting and investment power with respect to all shares shown as
beneficially owned by them:
CERTAIN BENEFICIAL OWNERS
NAME AND ADDRESS OF AMOUNT OF NATURE
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
------------------- -------------------------- ----------------
Continental Casualty Company and Affiliates............. 27,425,147 63.3%
CNA Center
Chicago, IL 60685
Citigroup Global Markets Holdings, Inc. ................ 2,018,661 4.7%
---------------
(1) The number of shares of the Company's Common Stock indicated as beneficially
owned is reported on the basis of regulations of the SEC governing the
determination of beneficial ownership of securities.
15
MANAGEMENT
SHARES UPON
NAME OF SHARES OF DEFERRED EXERCISE OF PERCENT OF
BENEFICIAL OWNER COMMON STOCK(3) STOCK UNITS(1) STOCK OPTIONS(2)(3) TOTAL(2)(3) CLASS
---------------- --------------- -------------- ------------------- ----------- ----------
Philip H. Britt............. 3,097 9,919 -- 13,016 *
Roy E. Posner............... 250 1,458 -- 1,708 *
Adrian M. Tocklin........... 1,000 -- -- 1,000 *
Michael A. Dougherty........ 3,900 -- 41,209 45,109 *
John F. Welch............... -- -- 41,725 41,725 *
Enid Tanenhaus.............. 200 -- 16,525 16,725 *
John F. Corcoran............ -- -- 7,725 7,725 *
Thomas A. Pottle............ 1,300 -- 68,225 69,525 *
Douglas W. Hinkle........... 0 0 2,650 2,650 *
Lori S. Komstadius.......... 0 0 0 0 *
James R. Lewis.............. 0 0 0 0 *
Robert A. Tinstman.......... 0 0 0 0 *
All directors and executive
officers as a group (12
persons) including the
above-named persons....... 9,747 11,377 178,059 199,183 0.5%
---------------
* Less than 1%
(1) In January, 1998, the Company established the CNA Surety Corporation
Non-Employee Directors' Deferred Compensation Plan. Under this plan, each
director who is not a full-time employee of the Company or any of its
affiliates may defer all or a portion of the annual retainer fee that would
otherwise be paid to such director. The deferral amount will be deemed
vested in Common Stock Units equal to the deferred fees divided by the fair
market value of the Company's Common Stock as of each quarterly meeting. The
Committee voted to eliminate the Non-Employee Director Compensation Plan
effective January 1, 2005.
(2) Represents beneficial ownership of shares that may be acquired by the
exercise of stock options, which are currently exercisable or exercisable
within sixty days of the date of this table.
(3) The amounts of the Company's Common Stock and stock options beneficially
owned are reported on the basis of regulations of the SEC governing the
determination of beneficial ownership of securities.
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
TO BE ISSUED UPON WEIGHTED-AVERAGE NUMBER OF SECURITIES
EXERCISE OF EXERCISE PRICE OF REMAINING AVAILABLE FOR
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS FUTURE ISSUANCE UNDER
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS
------------- -------------------- ------------------- -------------------------
Equity compensation plans approved
by security holders.............. 1,587,909 $12.41 542,002
Equity compensation plans to be
approved by security holders.....
--------- ------ -------
Total.............................. 1,587,909 $12.41 542,002
========= ====== =======
16
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED PARTY REINSURANCE
Intercompany reinsurance agreements together with the Services and
Indemnity Agreement that are described below provide for the transfer of the
surety business written by Continental Casualty Company ("CCC") and The
Continental Insurance Company ("CIC") to Western Surety Company ("Western
Surety"). All these Agreements originally were entered into on September 30,
1997 (the "Merger Date"): (i) the Surety Quota Share Treaty (the "Quota Share
Treaty"); (ii) the Aggregate Stop Loss Reinsurance Contract (the "Stop Loss
Contract"); and (iii) the Surety Excess of Loss Reinsurance Contract (the
"Excess of Loss Contract"). All of these contracts have expired. Some have been
renewed on different terms as described below.
The Services and Indemnity Agreement provides the Company's insurance
subsidiaries with the authority to perform various administrative, management,
underwriting and claim functions in order to conduct the business of CCC and CIC
and to be reimbursed by CCC for services rendered. In consideration for
providing the foregoing services, CCC has agreed to pay Western Surety a
quarterly fee of $50,000. This agreement was renewed on January 1, 2006 and
expires on December 31, 2006; and is annually renewable thereafter. There was no
amount due to the CNA Surety insurance subsidiaries as of December 31, 2005.
Through the Quota Share Treaty, CCC and CIC transfer to Western Surety all
surety business written or renewed by CCC and CIC after the Merger Date. CCC and
CIC transfer the related liabilities of such business and pay to Western Surety
an amount in cash equal to CCC's and CIC's net written premiums written on all
such business, minus a quarterly ceding commission to be retained by CCC and CIC
equal to $50,000 plus 25% of net written premiums written on such business.
Under the terms of the Quota Share Treaty, CCC has guaranteed the loss and
loss adjustment expense reserves transferred to Western Surety as of September
30, 1997 by agreeing to pay Western Surety, within 30 days following the end of
each calendar quarter, the amount of any adverse development on such reserves,
as re-estimated as of the end of such calendar quarter. There has been no
adverse reserve development for the period from September 30, 1997 (date of
inception) through December 31, 2005.
The Quota Share Treaty was renewed on January 1, 2004 on substantially the
same terms with an expiration date of December 31, 2004; and is annually
renewable thereafter. The ceding commission paid to CCC and CIC by Western
Surety remained at 28% of net written premiums and contemplated an approximate
4% override commission for fronting fees to CCC and CIC on their actual direct
acquisition costs. Due to lower commissions paid to producers on the business
covered by the Quota Share Treaty, the actual override commission paid to CCC
and CIC for 2004 was approximately 7%. The Quota Share Treaty was renewed for
one year on January 1, 2005 on substantially the same terms except that the
ceding commission to CCC and CIC was reduced to 25% in order to provide an
approximate 4% override commission to CCC and CIC. The Quota Share Treaty was
renewed for one year on January 1, 2006 on substantially the same terms as 2005.
The Stop Loss Contract terminated on December 31, 2000 and was not renewed.
The Stop Loss Contract protected the insurance subsidiaries from adverse loss
experience on certain business underwritten after the Merger Date. The Stop Loss
Contract between the insurance subsidiaries and CCC limited the insurance
subsidiaries' prospective net loss ratios with respect to certain accounts and
lines of insured business for three full accident years following the Merger
Date. In the event the insurance subsidiaries' accident year net loss ratio
exceeded 24% in any of the accident years 1997 through 2000 on certain insured
accounts (the "Loss Ratio Cap"), the Stop Loss Contract requires CCC at the end
of each calendar quarter following the Merger Date, to pay to the insurance
subsidiaries a dollar amount equal to (i) the amount, if any, by which their
actual accident year net loss ratio exceeds the applicable Loss Ratio Cap,
multiplied by (ii) the applicable net earned premiums. In consideration for the
coverage provided by the Stop Loss Contract, the insurance subsidiaries paid to
CCC an annual premium of $20,000. The CNA Surety insurance subsidiaries have
paid CCC all required annual premiums. As of December 31, 2005, the net amount
billed and received under the Stop Loss Contract was $45.9 million, which
included a return of $9.0 million in 2005 due to a reduction of net loss ratios
for the years covered by the contract.
17
The Excess of Loss Contract provided the insurance subsidiaries of CNA
Surety with the capacity to underwrite large surety bond exposures by providing
reinsurance support from CCC. The Excess of Loss Contract provided $75 million
of coverage for losses in excess of $60 million per principal. Subsequent to the
Merger Date, the Company entered into a second excess of loss contract with CCC
("Second Excess of Loss Contract"). The Second Excess of Loss Contract provided
unlimited coverage for principal losses that exceed the foregoing coverage of
$75 million per principal provided by the Excess of Loss Contract, or aggregate
losses per principal in excess of $135 million. Both Excess of Loss Contracts
commenced following the Merger Date and continued until September 30, 2002. The
discovery period for losses covered by the Excess of Loss Contracts extends
until September 30, 2006.
The Company and CCC previously participated in a $40 million excess of $60
million reinsurance contract effective from January 1, 2004 to December 31, 2004
providing coverage exclusively for the one large national contractor that is
excluded from the Company's third party reinsurance. The premium for this
contract was $3.0 million plus an additional premium of $6.0 million if a loss
is ceded under this contract. The Company and CCC entered into a new contract
covering the large national contractor effective January 1, 2005 to December
31,2005 on the same terms as the 2004 contract. In the second quarter of 2005,
this contract was amended to provide unlimited coverage in excess of the $60
million retention, to increase the premium to $7.0 million, and to eliminate the
additional premium provision. This treaty provides coverage for the life of
bonds either in force or written during the term of the treaty which is from
January 1, 2005 to December 31, 2005. As of December 31, 2005, the Company has
ceded $50.0 million under the terms of this contract. In November 2005, the
Company and CCC agreed by addendum to extend this contract for twelve months.
This extension, expiring December 31, 2006, was for an additional minimum
premium of $0.8 million, subject to adjustment based on the level of actual
premiums written on bonds for the large national contractor.
The Company and CCC entered into a $50 million excess of $100 million
contract for the period of January 1, 2004 to December 31, 2004. The premium for
this contract was $6.0 million plus an additional premium if a loss was ceded
under this contract. Effective January 1, 2005, the Company and CCC entered into
a new $50 million excess of $100 million contract in force through December
31,2005. The premium for this contract was $4.8 million plus an additional
premium of $14.0 million if a loss is ceded under this contract. In the second
quarter of 2005, this contract was amended to exclude coverage for the large
national contractor, to reduce the premium to $3.0 million, and to reduce the
additional premium to $7.0 million. As of December 31, 2005, no losses have been
ceded under this contract, which has not been renewed for 2006.
As of December 31, 2005 and December 31, 2004, CNA Surety had an insurance
receivable balance from CCC and CIC of $61.0 million and $16.4 million,
respectively. CNA Surety had no reinsurance payables to CCC and CIC as of
December 31, 2005 and December 31, 2004.
LARGE NATIONAL CONTRACTOR
The Company has provided significant surety bond protection guaranteeing
projects undertaken by the large national contract principal that is excluded
from the Company's third party insurance. As previously described, during the
second quarter of 2005, the Company and CCC executed amendments to the
reinsurance treaties that provide reinsurance protection for losses associated
with the large national contractor. Coverage for all losses in excess of an
aggregate $60.0 million is now provided under one treaty.
The Company intends to continue to provide limited surety bonds on behalf
of the contractor to support the continuing restructuring efforts, subject to
the contractor's initial and ongoing compliance with the Company's underwriting
standards. Indemnification and subrogation rights, including rights to contract
proceeds on construction projects in the event of default, exist that reduce CNA
Surety's exposure to loss. However, existing reinsurance agreements limit the
Company's net loss exposure to the $60.0 million that has already been recorded.
The contractor's failure to achieve its extended restructuring plan or perform
its contractual obligations under the Company's surety bonds could have a
material adverse effect on CNA Surety's results of operations, cash flow and
equity. The Company estimates that possible additional losses, net
18
of indemnification and subrogation recoveries but before recoveries under
reinsurance contracts to be approximately $90.0 million pre-tax.
The Company has had discussions with its insurance regulatory authorities
regarding the level of bonds provided for this principal and will continue to
keep the insurance regulators informed of its ongoing gross exposure to this
account.
The related party reinsurance available to the Company for this principal
and the credit extended to the principal by affiliates of the Company are
described below.
REINSURANCE
The Company and CCC entered into a new contract covering the large national
contractor effective January 1, 2005 to December 31, 2005 on the same terms as
the 2004 contract. In the second quarter of 2005, this contract was amended to
provide unlimited coverage in excess of the $60 million retention. This treaty
provides coverage for the life of bonds either in force or written during the
term of the treaty which is from January 1, 2005 to December 31, 2005. As of
December 31, 2005, the Company has ceded $50.0 million under the terms of this
contract. In November 2005, the Company and CCC agreed by addendum to extend
this contract for twelve months. This extension expires December 31, 2006.
CNAF CREDIT FACILITY
Commencing in 2003, CNAF has provided loans through a credit facility in
order to help the large national contractor meet its liquidity needs and
complete projects which had been bonded by CNA Surety. In December of 2004, the
credit facility was amended to increase the maximum available loans to $106
million from $86 million at December 31, 2003. The amendment also provides that
CNAF may in its sole discretion further increase the amounts available for loans
under the credit facility, up to an aggregate maximum of $126 million. As of
December 31, 2005 and 2004, $132 million (including accrued interest) and $99
million had been advanced under the credit facility. Loews, through a
participation agreement with CNAF, provided funds for and owned a participation
of $40 million and $29 million of the loans outstanding as of December 31, 2005
and 2004, respectively, and has agreed to a participation of one-third of any
additional loans which may be made above the original $86 million credit
facility limit up to the $126 million maximum available line.
Loans under the credit facility are secured by a pledge of substantially
all of the assets of the contractor and certain of its affiliates. In connection
with the credit facility, CNAF has also guaranteed or provided collateral for
letters of credit which are charged against the maximum available line and, if
drawn upon, would be treated as loans under the credit facility. As of December
31, 2005 and 2004, these guarantees and collateral obligations aggregated $13
million.
The contractor implemented a restructuring plan intended to reduce costs
and improve cash flow, and appointed a chief restructuring officer to manage
execution of the plan. In the course of addressing various expense, operational
and strategic issues, however, the contractor has decided to substantially
reduce the scope of its original business and to concentrate on those segments
determined to be potentially profitable. As a consequence, operating cash flow,
and in turn the capacity to service debt, has been reduced below previous
levels. Restructuring plans have also been extended to accommodate these
circumstances. In light of these developments, CNAF recorded an impairment
charge of $56 million pretax ($36 million after-tax) for the fourth quarter of
2004, net of the participation by Loews, with respect to amounts loaned under
the credit facility and future impairment charges with respect to amounts loaned
under the credit facility in 2005 of $13.0 million pre-tax ($9.0 million
after-tax) during the first quarter. Any future draws under the credit facility,
if agreed to by CNAF pursuant to additional credit facility amendment, or
further changes in the large national contractor's business plan or projections
may necessitate further impairment charges.
Representatives from the Company and CNAF met with senior management of the
national contractor in June of 2005 to review their actual cash flow through
that date, as well as expected future cash flow. As a result of the discussions
with the contractor and after consideration of the contractor's overall
performance to date under the restructuring plan, CNAF made a decision not to
provide additional liquidity to the national
19
contractor beyond amounts currently available under the existing facility. In
addition, during the second quarter of 2005, CNAF recorded an additional
impairment charge of $21.0 million pre-tax ($13.0 million after-tax) to fully
impair the loan.
The June 2005 discussions with the large national contractor revealed
significant deterioration of the contractor's operations and cash flow. This
deterioration was concentrated in an operating division of the contractor that
had previously been placed into run off. As a result of these developments, the
Company determined that the large national contractor will likely be unable to
meet its obligations that are covered under the surety bonds. Accordingly, in
the second quarter of 2005, the Company established a $40.0 million loss reserve
based on an initial estimate of loss. In the third quarter of 2005, the Company
began a re-evaluation of the contractor's current restructuring efforts. Through
this re-evaluation that was completed in the fourth quarter, the Company
determined that there had been further deterioration of the contractors' actual
and projected cash flows. As a result, the Company increased its gross loss
reserves for this account by $70.0 million in the fourth quarter of 2005. After
applying expected reinsurance recoveries from CCC, the Company's net incurred
loss is $60.0 million, which is the Company's maximum exposure, net of
reinsurance, on this account. As of December 31, 2005, the Company has paid
approximately $26.0 million of losses to settle outstanding bonded obligations
of the contractor.
OTHER RELATED PARTY TRANSACTIONS
Effective July 1, 2004, CNA Surety entered into an Administrative Services
Agreement with CCC. This agreement, that replaced an agreement originally
effective January 1, 2001, allows the Company to purchase and/or have access to
certain services provided by CNAF. The Company will also pay CNAF a management
fee for its proportionate share of administrative and overhead costs incurred in
supporting the services provided pursuant to this agreement. The management fee
for the year 2006 is $2.0 million that shall be paid by CNA Surety to CNAF in
equal monthly installments by the last day of each month. The amounts paid were
$1.9 million, $1.8 million and $1.7 million for 2005, 2004 and 2003,
respectively. The management fee shall be increased as of January 1, the
"adjustment date", of each year this Administrative Services Agreement is in
force by the greater of 5% or the amount of the increase in the Consumer Price
Index for All Urban Consumers for the Chicago, Illinois area as reported by the
Bureau of Labor Statistics for the 12 month period immediately preceding the
adjustment date. The agreement also allows CCC to purchase services from the
Company. In 2005, 2004 and 2003, CCC paid the Company $0.8 million, $0.5 million
and $0.5 million, respectively, for services in connection with licensing and
appointing CCC's insurance producers as required by state insurance laws. This
agreement shall be effective so long as CNAF or their affiliates or shareholders
shall continue to own a majority interest in CNA Surety. This agreement may be
terminated by either party upon the provision of 30 days prior notice of such
termination to the other party.
The Company was charged $6.9 million, $7.4 million, and $6.1 million for
the years ended December 31, 2005, 2004 and 2003, respectively, for rents and
services provided under the Administrative Services Agreement. In 2005, the
Company received $0.1 million for direct costs incurred by CCC on the Company's
behalf. This credit resulted from the release of certain prior year expenses
allocated to the Company during 2005. In 2004 and 2003, the company was charged
$0.8 million and $1.4 million respectively for direct costs incurred by CCC on
the Company's behalf. The Company had no payable balance to CCC related to the
Administrative Services Agreement as of December 31, 2005 and 2004.
During the fourth quarter of 2004, the Company reached agreement with the
claimant on a bond regarding certain aspects of the claim resolution. The bond
was originally written by an affiliate and assumed by one of the Company's
insurance subsidiaries pursuant to the Quota Share Treaty. As part of this
agreement, the Company deposited $32.7 million with the affiliate in 2005 to
enable the affiliate to establish a trust to fund future payments under the
bond. This deposit is included on the Company's Consolidated Balance Sheets as
"Deposit with affiliated ceding company". This claim was previously fully
reserved. The Company is entitled to the interest income earned by the trust.
Western Surety has entered into a series of business transactions with
entities in which an affiliate of CCC had an interest. The first series involves
five separate real estate residual value insurance policies issued
20
by R.V.I. America Insurance Company ("RVI -- America") reinsured by Western
Surety through the Quota Share Treaty. RVI America is a wholly owned subsidiary
of R.V.I. America Corporation, which is a wholly owned subsidiary of R.V.I.
Guaranty Company Ltd. of Bermuda ("RVI -- Bermuda"), an unconsolidated affiliate
of CCC. The transactions involve policies with limits totaling approximately
$11.5 million. CCC reinsured the full extent of RVI -- America's exposure on the
policies. Pursuant to the Quota Share Treaty, Western Surety was, in turn,
reinsuring all of CCC's exposures on the policies. Western Surety reinsured all
of its exposure on the policies with RVI-Bermuda, a non-admitted reinsurer. The
policy limits range from $1.7 million to $3.0 million with an average policy
limit of approximately $2.3 million and total limits of all policies of $11.5
million. Net premium amounts retained in 2000 relative to these reinsurance
transactions totaled $0.5 million as follows: RVI -- America, $0.1 million; CCC,
$0.1 million; Western Surety, $0.1 million; and RVI -- Bermuda, $0.2 million.
CCC's ownership interest of RVI -- Bermuda was disposed of in December, 2005.
In addition, from time to time Western Surety provided surety bonds
guaranteeing insurance payments of certain companies to CCC and its affiliates
under retrospectively rated insurance policies underwritten by CCC and its
affiliates. Under the terms of these bonds, referred to as insurance program
bonds, if the principal, the insured company, failed to make a required premium
payment, CCC and its affiliates would have a claim against the Company under the
bond. The Company now has a policy not to issue such bonds to companies insured
by CCC and its affiliates. The last such bond was written in 2001 and currently
bonds with $2.6 million of total penal sums remain as of December 31, 2005.
Western Surety from time to time provides license and permit bonds and
appeal bonds to CCC and its affiliates and to clients of CCC and its affiliates.
Under procedures established by the Audit Committee, the Company may issue
appeal bonds for CCC and its affiliates and their clients with penal sums of $10
million or less without prior Audit Committee approval as long as those bonds
meet the Company's normal underwriting standards, the rates charged are market
rates and that the Company has received the indemnity of CCC. Bonds greater than
$10 million require the prior approval of the Audit Committee. As of December
31, 2005, the total amount of the outstanding appeal and license and permit
bonds written on behalf of CCC and its affiliates was approximately $99.7
million, which was comprised of 49 bonds. Western Surety has entered into
indemnity agreements with CCC and its affiliates indemnifying Western Surety for
any loss arising from the issuance of appeal bonds for CCC and its affiliates.
The premium for these bonds was approximately $0.6 million in 2005, $0.5 million
in 2004 and $0.4 million in 2003.
APPROVAL OF 2006 LONG-TERM EQUITY COMPENSATION PLAN
(PROPOSAL 2)
INTRODUCTION
On February 13, 2006 the Board of Directors (the "Board") adopted a new
2006 Long-Term Equity Compensation Plan (the "Plan"), subject to shareholder
approval. The Plan permits the grant of stock options, stock appreciation rights
("SARs"), restricted stock, performance units and performance shares, incentive
awards and bonus shares to eligible employees.
Shareholders are being asked to approve the Plan. Shareholder approval of
the Plan is necessary, among other reasons, (i) to allow the Company to comply
with the New York Stock Exchange rules requiring shareholder approval of equity
compensation plans, (ii) to allow the Company to grant incentive stock options
described in Section 421 of the Internal Revenue Code (the "Code") and (iii) to
allow performance-based awards made under the Plan to executive officers of the
Company to be fully deductible by the Company for federal income tax purposes
under Code Section 162(m) if and to the extent the Compensation Committee
determines that compliance with the performance-based exception to tax
deductibility limitations under Code Section 162(m) is desirable.
The material features of the Plan are summarized below. The full text of
the Plan is also attached as Exhibit I to this Proxy Statement. The summary
below is qualified in its entirety by the text of the Plan.
21
PURPOSE
The Plan is intended to allow selected employees, directors and consultants
of the Company and its subsidiaries to acquire or increase equity ownership in
the Company, thereby strengthening their commitment to the success of the
Company and stimulating their efforts on behalf of the Company, and to assist
our Company and its subsidiaries in attracting new employees, directors and
consultants and retaining existing employees, directors and consultants. The
Plan is also intended to optimize the profitability and growth of the Company
through incentives that are competitive with the Company's goals; to provide
employees, directors and consultants with an incentive for excellence in
individual performance, and to promote teamwork among employees, directors and
consultants. The Plan is not intended to be the exclusive vehicle for providing
incentive or other compensation to employees and officers.
ADMINISTRATION
The Plan will be administered by a committee (the "Committee") consisting
of two or more members of the Board. If and to the extent that compliance with
Rule 16b-3 under the Securities Exchange Act of 1934 or the performance-based
exception to tax deductibility limitations under Section 162(m) of the Code is
desirable, the Committee must be comprised of two or more directors who qualify
as "non-employee directors" under Rule 16b-3 and "outside directors" under
Section 162(m) of the Code. Subject to the terms of the Plan, the Committee has
full power and discretion to select those persons to whom awards will be
granted; to determine the terms, conditions, sizes and types of awards; to
determine the consideration to be received (if any) for restricted stock; to
amend any award agreement; to cancel awards and grant substitute awards; to
accelerate exercisability or waive other terms and conditions of any award; to
cancel, with the grantee's consent, outstanding awards and to grant new awards
in substitution therefore; to make adjustments in the terms and conditions of
awards in recognition of unusual or nonrecurring events; to construe and
interpret the Plan and any award agreement; to establish, amend and revoke rules
and regulations for the administration of the Plan; and to take any other action
with respect to matters relating to the Plan for which it is responsible.
The Board may reserve to itself or delegate to another committee of the
Board consisting of one or more directors any or all of its authority. Unless
expressly provided to the contrary, such delegation shall not extend to awards
to executive officers or awards that are intended to comply with the
performance-based exception to tax deductibility limitations under Section
162(m) of the Code unless the committee to which such authority is delegated
consists of two or more directors who qualify as "non-employee directors" under
Rule 16b-3 and "outside directors" under Section 162(m) of the Code.
ELIGIBILITY
The Plan provides for awards to employees (including employees on leave of
absence), directors of the Company or any subsidiary, and consultants to the
Company or a subsidiary. Some awards will be provided to officers and others who
are deemed by the Company to be "insiders" for purposes of Section 16 of the
Securities Exchange Act of 1934. As of December 31, 2005 the Company and its
Subsidiaries had approximately 747 full-time employees (including officers), all
of whom will be eligible to participate in the Plan. A subsidiary is defined in
the Plan (for purposes other than the grant of incentive stock options) as a
corporation with respect to which the Company owns 50% or more of the
then-outstanding stock, or a limited liability company, partnership, joint
venture or other unincorporated entity with respect to which the Company owns
50% or more of the then-outstanding profits interest.
SHARES AVAILABLE
3,000,000 shares of the Company's common stock ($0.01 par value) will be
available under the terms of the Plan for issuance in settlement of awards. The
3,000,000 shares available for issuance under the Plan include the 546,402
shares remaining available for issuance (as of the January 1, 2006 effective
date of the Plan) under the CNA Surety Corporation 1997 Long-Term Equity
Compensation Plan (the "Prior Plan"). Accordingly no more awards will be made
under the Prior Plan. On March 13, 2006, the last reported sale price of the
Company's common stock on the New York Stock Exchange was $17.21 per share.
22
The shares delivered to settle awards made under the Plan may be authorized
and unissued shares or treasury shares. If any shares subject to any award
granted under the Plan are forfeited or otherwise terminated without delivery of
shares, the shares subject to such awards will again be available for issuance
under the Plan. In addition, any shares withheld or applied as payment for
shares issued upon exercise of an award, or (other than with respect to
restricted stock awards) for the withholding or payment of taxes due upon
exercise of the award, will again be available for grant under the Plan. If a
SAR is settled in shares, only the number of shares delivered in settlement will
be charged against the number of available shares, regardless of the number of
shares with respect to which the SAR was originally granted and exercised.
If a change in corporate capitalization (including a stock split, share
combination, merger, consolidation, separation, spinoff, other distribution of
shares, reorganization, partial or complete liquidation, stock dividend or other
distribution, reorganization or partial or complete liquidation), affects the
shares such that an adjustment is appropriate in order to prevent dilution or
enlargement of the rights, the Committee in its sole discretion will make an
equitable change or adjustment as it deems appropriate in the number and class
of shares and/or the price of shares subject to outstanding awards, and in the
number of shares available as set forth above and in the limits on particular
awards and types of awards summarized below.
LIMITS ON AWARDS
The Plan limits the total number of shares that may be granted as SARs to
1,000,000 shares, as restricted stock to 1,000,000 shares, and as bonus shares
to 300,000 shares. In addition, the Plan limits the number of shares that may be
granted annually to a single grantee. This limit for options is 200,000 shares,
for SARs is 200,000 shares, for restricted stock is 100,000 shares, and for
performance shares or performance units is the value of 100,000 shares. The plan
also limits the maximum aggregate payout annually to a single grantee for cash
incentive awards to 300% of base salary up to a maximum base salary of
$1,000,000. If the performance period for performance shares or performance
units, or for incentive awards, is more than one year, these per-grantee limits
apply to each 12-month period in the performance period.
SUMMARY OF AWARDS UNDER THE PLAN
The Plan permits the granting of any or all of the following types of
awards to all grantees:
- stock options, including incentive stock options ("ISOs"), nonqualified
stock options ("NQSOs"), and performance based options ;
- stock appreciation rights ("SARs"), and performance based SARS;
- restricted stock including restricted stock shares and restricted stock
units;
- performance units and performance shares;
- incentive awards including annual incentive awards and long-term
incentive awards; and
- bonus shares.
Generally, awards under the Plan are granted for no consideration other
than prior and future services. Awards granted under the Plan may, in the
discretion of the Committee, be granted alone or in addition to, in tandem with
or in substitution for, any other award under the Plan or other plan of the
Company. The material terms of each award, including the extent to which the
grantee may exercise the award after termination of employment or other
termination of affiliation, are set forth in a written award agreement between
the grantee and the Company. The term of an option or SAR or other period during
which any award may be outstanding may not exceed 10 years from the grant date.
Awards are generally nontransferable except on death, subject to a limited
exception for NQSOs noted below.
STOCK OPTIONS
The Committee is authorized to grant stock options, including ISOs. A stock
option allows a grantee to purchase a specified number of shares at a
predetermined price during a fixed period measured from the date
23
of grant. The purchase price per share of stock subject to a stock option (the
"option price") is determined by the Committee and set forth in the award
agreement; provided that the option price must be a least 100% of the fair
market value per share on the date of grant (110% of fair market value in the
case of ISOs granted to a 10% owner).
The term of each option is determined by the Committee and set forth in the
award agreement, except that the term of a stock option may not exceed ten
years. Options are exercisable in whole or in part at such time or times as
determined by the Committee and set forth in the award agreement. Options may be
exercised by payment of the purchase price in cash, by tender of stock that was
purchased in the open market or held for at least six months, or with the
approval of the committee and subject to applicable law, surrender of restricted
stock held for at least six months or cashless exercise through a broker.
Options are generally nontransferable except on death, and except that to the
extent provided in the award agreement, NQSOs may be transferred as gifts to
certain family members or their related trusts.
SARS
The Committee is authorized to grant SARs. A SAR entitles the grantee to
receive the excess of the fair market value of a share on the date of exercise
over the strike price of the SAR. The strike price of an SAR is determined by
the Committee and set forth in the award agreement; provided that the strike
price must be at least 100% of the fair market value per share on the date of
grant. SARs may be tandem SARs (granted in connection with a related option or
other award expiring at the same time, where exercise of the other award will
cancel the SAR and exercise of the SAR will cancel the other award), or
free-standing SARs. Times and methods of exercise and settlement and other terms
of the SARs are determined by the Committee, subject to the terms of the Plan.
RESTRICTED STOCK
The Committee may award restricted stock in the form of restricted stock
shares or restricted stock units. Restricted stock shares are transferred at the
time of the award but remain subject to transfer restrictions and risk of
forfeiture until restrictions established by the Committee lapse. Restricted
stock units are unfunded rights to receive shares in the future, subject to risk
of forfeiture until certain restrictions established by the Committee lapse.
Restrictions may be time-based or performance-based (or both). A grantee
receiving restricted stock shares may have the rights of a shareholder of the
Company, including the right to vote the shares and the right to receive any
dividends, in the discretion of the Committee and to the extent set forth in the
award agreement. A grantee receiving restricted stock units may have the right
to receive any dividends, in the discretion of the Committee and to the extent
set forth in the award agreement, but not the right to vote the shares (until
actually delivered to the grantee).
PERFORMANCE UNITS/SHARES
The Committee may grant performance units or performance shares, which
entitle a grantee to cash or shares conditioned upon the fulfillment of certain
performance conditions and other restrictions as specified by the Committee and
reflected in the award agreement. The initial value of a performance unit is
determined by the Committee at the time of grant. The initial value of a
performance share is the fair market value of a share on the grant date. The
Committee will determine the terms and conditions of such awards, including
performance and other restrictions placed on these awards, which will be
reflected in the award agreement. It is expected that the performance measures
for performance and shares units will generally be selected from among those
listed in the Plan and noted below.
A grantee receiving performance units or performance shares may have the
right to receive any dividends on shares earned from the grants of performance
units or performance shares in the discretion of the Committee and to the extent
set forth in the award agreement; and may have the right to vote the shares in
the discretion of the Committee to the extent set forth in the award agreement.
24
INCENTIVE AWARDS
The Committee may grant annual and long-term incentive awards under the
Plan for a fiscal year of the Company (for annual awards) or other performance
period (for long-term awards). The Committee will determine the eligible
employees who are eligible to receive incentive awards. Generally, this
determination will be made within the first 90 days of the fiscal year or other
performance period, or if an employee is hired or promoted to a position which
warrants grant of an incentive award after the first day of the year, within
ninety (90) days of such hiring or promotion but not later than the lapse of 25%
of the remainder of such fiscal year or other performance period after such
hiring or promotion.
For each fiscal year or other performance period, the Committee will
establish performance measures and performance goals and the threshold, target
and maximum bonus opportunity for the grantee upon attainment of the performance
goals. The Committee has absolute discretion to reduce (but not increase) the
amount of a participant's incentive award to any amount less than maximum
incentive award. A reduction in the amount of the annual incentive award payable
to any grantee will not affect the annual incentive award payable to any other
grantee. Except as otherwise determined by the Committee in its discretion, a
participant will not be entitled to receive an annual incentive award for a
performance period if the grantee's employment terminates during the performance
period.
As soon as practicable after the end of the fiscal year or other
performance period, but not later than March 15 of the calendar year following
the end of the performance period, the Committee will determine and certify in
writing the degree of attainment of the performance goals, the Committee will
determine the amount of the incentive award to be paid to each grantee of an
incentive award, and the incentive awards will be paid. In the discretion of the
Committee and as set forth in the award agreement, incentive awards may be paid
in cash, shares, restricted stock, options, or other form of equity. In the
discretion of the Committee, and subject to applicable tax requirements, an
award agreement may provide for the deferral of incentive awards.
BONUS SHARES
Subject to the terms of the Plan, the Committee may grant bonus shares to
any eligible person in such amount, and upon such terms and conditions, as the
Committee determines.
PERFORMANCE-BASED AWARDS
The Committee may require satisfaction of predetermined performance goals,
consisting of one or more business criteria and a targeted performance level
with respect to such criteria, as a condition of awards being granted or
becoming exercisable or payable under the Plan, or as a condition to
accelerating the timing of such events.
The performance measure(s) to be used for purposes of any awards (other
than stock options or SARs) intended to satisfy the "performance based"
exception to tax deductibility limitations under Code Section 162(m) will be
chosen from among the following (all of which may be determined on an aggregate
or per-share basis and on a pre-tax or after-tax basis):
- earnings;
- net income;
- net operating income;
- cash flow provided by operations;
- free cash flow;
- return measures (including return on assets, equity or sales);
- earnings before or after any of interest, taxes, depreciation or
amortization;
- gross revenues;
25
- share price (including growth measures and total shareholder return or
attainment of a specified value for a specified period of time);
- reductions in expense levels;
- strategic business criteria based on objective standards of rate
adequacy, premium growth, market share retention, budget, operating plan,
customer/employee satisfaction, customer/employee diversity, business
development or special projects);
- combined ratio (or any of its components); and/or
- gross or net written premiums.
The Committee has the discretion to adjust the determinations of the degree
of attainment of the predetermined performance goals. However, awards which the
Committee intends to qualify for the performance-based exception to the tax
deduction limitations under Code Section 162(m) may not be adjusted upward
unless the Committee intends to amend the award to no longer qualify for the
performance-based exception. The Committee retains the discretion to adjust such
awards downward.
AMENDMENT AND TERMINATION OF THE PLAN
The Board may amend, alter, suspend, or terminate the Plan without further
shareholder approval, unless such approval is required by law or regulation or
under the rules of any stock exchange or automated quotation system on which the
common stock is then listed or quoted. However the Board may not without
shareholder approval increase the total number of shares reserved for the Plan
or change the individuals eligible to participate in the Plan.
In addition no amendment or termination of the Plan may materially and
adversely affect the right of a grantee under any award granted under the Plan
without the consent of the grantee, unless required by law (including tax laws)
or regulation or under the rules of any stock exchange or automated quotation
system on which the common stock is then listed or quoted.
Unless earlier terminated by the Board, the Plan will terminate when no
shares remain reserved and available for issuance or, if earlier, on December
31, 2015.
FEDERAL INCOME TAX CONSEQUENCES
The Company believes that under present law the following are the federal tax
consequences generally arising with respect to awards granted under the Plan.
This summary is for shareholder informative purposes and is not intended to
provide tax advice to grantees.
The grant of an option or SAR will create no tax consequences for the
grantee or the Company. The grantee will have no taxable income upon exercising
an ISO (except that the alternative minimum tax may apply) and the Company will
receive no deduction at the time. Upon exercising an option other than an ISO,
the grantee must generally recognize ordinary income equal to the difference
between the exercise price and the fair market value of the freely transferable
and nonforfeitable stock acquired on the date of exercise. Upon exercising an
SAR, the grantee must generally recognize ordinary income equal to the cash or
the fair market value of the freely transferable and nonforfeitable stock
received. In the case of SARs and options other than ISOs, the Company will be
entitled to a deduction for the amount recognized as ordinary income by the
grantee. The treatment to a grantee of a disposition of shares acquired upon the
exercise of an SAR or option depends on how long the shares have been held and
on whether such shares are acquired by exercising an ISO or by exercising an
option other than an ISO. Generally, there will be no tax consequences to the
Company in connection with a disposition of shares acquired under an option
except that the Company will be entitled to a deduction (and the grantee will
recognize ordinary taxable income) if shares acquired under an ISO are disposed
of before the applicable ISO holding periods have been satisfied.
With respect to other awards granted under the Plan that may be settled
either in cash, in stock or other property that is either not subject to a
substantial risk of forfeiture or that may be transferred free of the risk of
26
forfeiture, the grantee must generally recognize ordinary income equal to the
cash or the fair market value of shares or other property received. The Company
will be entitled to a deduction for the same amount. With respect to awards
involving stock or other property that is subject to a substantial risk of
forfeiture and restricted as to transferability, the grantee must generally
recognize ordinary income equal to the fair market value of the shares or other
property received at the time the risk of forfeiture lapses or the property
becomes transferable free of the risk of forfeiture, whichever occurs earlier.
The Company will be entitled to a deduction for the same amount. In certain
circumstances, a grantee may elect to be taxed at the time of receipt of shares
or other property rather than upon the lapse of restrictions on transferability
or the substantial risk of forfeiture.
The foregoing provides only a general description of the application of
federal income tax laws to certain types of awards under the Plan. The summary
does not address the effects of foreign, state and local tax laws. Because of
the variety of awards that may be made under the Plan and the complexities of
the tax laws, grantees are encouraged to consult a tax advisor as to their
individual circumstances.
NEW PLAN BENEFITS
It is not possible to determine either how many discretionary grants, nor
what types, will be made to grantees in the future. It is also not possible to
determine how many discretionary grants will vest rather than be forfeited.
Therefore, it is not possible to determine with certainty the dollar value or
number of shares of our common stock that will be distributed to grantees.
VOTE REQUIRED
Adoption of the proposal to approve the Plan requires an affirmative vote
of holders of a majority of the voting power represented by shares of our common
stock present in person or represented by proxy and entitled to vote at the
Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE 2006 LONG-TERM
EQUITY COMPENSATION PLAN.
RATIFICATION OF APPOINTMENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
(PROPOSAL 3)
The Audit Committee has selected Deloitte & Touche LLP, independent registered
public accounting firm, to audit the financial statements of the Company for the
2006 fiscal year. Deloitte & Touche LLP has audited the Company's financial
statements as of and for the years ended December 31, 1999, 2000, 2001, 2002,
2003, 2004 and 2005. A representative of Deloitte & Touche LLP will be present
at the meeting and be available to respond to appropriate questions. A
description of the fees paid to Deloitte & Touche LLP in fiscal 2005 is
described below.
At the Annual Meeting, if a quorum is present, the vote of holders of a
majority of the Company's Common Stock having the power to vote held by
shareholders present in person or represented by proxy shall ratify the
appointment, by the Board of Directors, of Deloitte & Touche LLP as the
Company's independent registered public accounting firm. It is the present
intention of the Company's Proxy Agents to vote at the Annual Meeting the
proxies which have been duly executed, dated and delivered and which have not
been revoked in accordance with the instructions set forth thereon or if no
instruction had been given or indicated, for the ratification the appointment of
Deloitte & Touche LLP as the Company's independent registered public accounting
firm.
For the years ended December 31, 2005 and 2004, professional services were
performed by Deloitte & Touche LLP, the member firms of Deloitte Touche
Tohmatsu, and their respective affiliates (collectively, "Deloitte"), which
includes Deloitte Consulting.
27
AUDIT FEES
The aggregate fees billed for the audit of the Company's annual financial
statements for the fiscal years ended December 31, 2005 and 2004 and for the
reviews of the financial statements included in the Company's Quarterly Reports
on Form 10-Q were $1,100,000 and $1,110,960, respectively.
AUDIT-RELATED FEES
The aggregate fees billed for Audit-Related services for the fiscal years
ended December 31, 2005 and 2004 were $45,438 and $79,044, respectively. These
fees generally include fees for consents and comfort letters, accounting
consultations, Sarbanes Oxley Act Section 404 advisory services, and SEC related
matters.
TAX FEES
None.
ALL OTHER FEES
None.
The Audit Committee has established a pre-approval policy with regard to
audit, audit-related and certain non-audit engagements by the Company of its
independent registered public accounting firm. Under this policy, the Audit
Committee annually pre-approves certain limited, specified recurring services
which may be provided by Deloitte, subject to maximum dollar limitations. All
other engagements for services to be performed by Deloitte must be separately
pre-approved by the Audit Committee. The Audit Committee has also designated the
Chairperson of the Committee as having authority to pre-approve such engagements
as allowed by the policy, subject to reporting on such pre-approvals to the
Committee at its next scheduled meeting. 100% of the audit fees and audit
related fees were pre-approved by the audit committee.
VOTE REQUIRED
Proposal to ratify the audit committees appointment of Company's
independent registered public accounting firm Deloitte & Touche, for fiscal year
2006 requires an affirmative vote of holders of a majority of the voting power
represented by shares of our common stock present in person or represented by
proxy and entitled to vote at the Annual Meeting.
THE BOARD RECOMMENDS A VOTE "FOR" THE RATIFICATION OF DELOITTE & TOUCHE LLP AS
THE COMPANY'S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. IF A CHOICE IS
SPECIFIED ON THE PROXY BY THE SHAREHOLDER, THE SHARES WILL BE VOTED AS
SPECIFIED. IF NO CHOICE SPECIFICATION IS MADE, SHARES WILL BE VOTED "FOR"
RATIFICATION OF DELOITTE & TOUCHE LLP AS THE COMPANY'S INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM.
SHAREHOLDERS' PROPOSALS FOR 2007 ANNUAL MEETING
Under the rules of the SEC, the Company is required to disclose the
deadline for submitting shareholder proposals for inclusion in the Company's
proxy statement and form of proxy for the Company's next annual meeting,
calculated in the manner provided by the rule of the SEC and the date after
which notice of a proposal submitted outside the processes of the rule of the
SEC is considered untimely. Under the calculation provided by the rule of the
SEC, a proposal submitted by a shareholder for the 2006 Annual Meeting of
Shareholders of the Company must be received by the Secretary of the Company,
CNA Center, Chicago, Illinois 60685, by November 1, 2006 in order to be eligible
to be included in the Company's proxy statement for that meeting. Under the
Company's By-Laws, to be timely, a shareholder's notice of a shareholder
proposal submitted outside the process for inclusion in the proxy statement must
be delivered to, or mailed and received at, the principal executive offices of
the Company, not less than fifty (50) days nor more than seventy-five (75) days
prior to the meeting; provided, however, that in the event that less than
sixty-five
28
(65) days notice or prior public disclosure of the date of the meeting is given
or made to shareholders, notice by the shareholder to be timely must be so
received not later than the close of business on the fifteenth day following the
day on which such notice of the date of the annual meeting was mailed or such
public disclosure was made.
OTHER MATTERS
The Company knows of no business, which will be presented at the Annual
Meeting other than the election of Directors to the Board, and the ratification
of the Company's independent auditors. However, if other matters properly come
before the meeting, it is the intention of the Proxy Agents to vote upon such
matters in accordance with their good judgment in such matters.
By Order of the Board of Directors
ENID TANENHAUS
Secretary
29
EXHIBIT 1
CNA SURETY CORPORATION
AUDIT COMMITTEE CHARTER
(AS AMENDED AND RESTATED ON FEBRUARY 17, 2004)
PURPOSE
The Audit Committee's primary function is to assist the Board of Directors
of CNA Surety Corporation (the "Company") with its responsibility of overseeing
the integrity of the Company's financial statements, the Company's compliance
with legal and regulatory requirements, the qualifications and independence of
the Company's independent accountants and the performance of the Company's
internal audit staff and independent accountants. The Committee shall prepare
the Audit Committee Report for the Company's annual proxy statement.
COMMITTEE MEMBERSHIP
The Committee shall be comprised of three or more directors, as determined
by the Board from time to time, except to the extent that temporary vacancies
are created by the resignation or removal of a Committee member. The Board has
authority to appoint the Committee members, who serve at the pleasure of the
Board, and to designate the Committee Chairperson. Each member of the Committee
must satisfy the independence, experience, financial expertise and other
requirements of the New York Stock Exchange, Inc. (the "Exchange") and
applicable laws and regulations. Committee members may not serve on the audit
committees of more than two other public companies unless approved by the Board
and such approval is disclosed in the Company's proxy statement. No member of
the Committee may receive, directly or indirectly, any consulting, advisory or
other compensatory fee from the Company other than (i) director's fees, which
may be received in cash, stock options or other in-kind consideration ordinarily
available to directors; (ii) a pension or other deferred compensation for prior
services that is not contingent on future service; and (iii) any other regular
benefits that other directors receive.
MEETINGS
The Committee shall meet as often as it determines to be appropriate, but
not less frequently than quarterly. The Committee shall periodically meet
separately with management, the internal auditors and the independent
accountants. The Committee shall also meet periodically in executive sessions
without Company management present. The Committee may request any employee or
officer of the Company or its outside counsel or independent accountants to
attend a meeting or to meet with the Committee or its advisors. The Committee
may fix its own rules of procedure, subject to the requirements of this Charter,
exchange rules and applicable laws and regulations.
AUTHORITY AND RESPONSIBILITIES
Company management is responsible for preparing financial statements. The
Committee's primary responsibility is oversight. To carry out this
responsibility, the Committee shall undertake the common recurring activities
described below, but may diverge from this list as appropriate under the
circumstances. The Committee may form and delegate authority to sub-committees
consisting of one or more members when appropriate.
1. Oversight of the Independent Accountants. The Committee shall:
(a) have sole authority to directly appoint, retain, compensate, evaluate
and terminate the Company's independent accountants and to approve all
engagement fees and terms, including mandatory pre-approval of all engagements
of the independent accountants in accordance with policies and procedures
adopted by the Committee from time to time or as required by Exchange rules or
applicable laws or regulations;
30
(b) oversee the work of the independent accountants, including resolution
of disagreements between management and the independent accountants regarding
financial reporting, and the independent accountants shall report directly to
the Committee;
(c) at least annually, review reports from the independent accountants
regarding their internal quality-control procedures, any material issues raised
by the most recent internal quality-control review or peer review or any
regulatory or professional inquiry within the preceding five years, and all
relationships between the independent accountants and the Company;
(d) annually evaluate the qualifications, performance and independence of
the independent accountants and the lead partner, taking into account the
opinions of management and the internal auditors, and present its conclusions to
the Board;
(e) annually seek assurances that partners of the independent accountants
who are directly involved in the audit are rotated as required by regulations or
Exchange rules and that no partner earns or receives compensation based on the
performance of any services for the Company other than audit, review or attest
services;
(f) consider annually whether, in order to assure continuing auditor
independence, the Company should rotate its independent accounting firm on a
regular basis;
(g) set policies for the Company's hiring of current or former employees of
the independent accountants;
(h) instruct the independent accountants that such firm is ultimately
accountable to the Board of Directors of the Company and the Committee, as
representatives of the shareholders;
(i) instruct the independent accountants to submit to the Committee
annually a formal written statement of the fees billed in each of the last two
fiscal years for each of the following categories of services rendered by the
independent accountants to the Company and each of its subsidiaries: (i) the
audit of the Company's annual financial statements and the reviews of its
quarterly financial statements, or services that are normally provided by the
independent accountants in connection with statutory and regulatory filings or
engagements; (ii) assurance and related services not included in clause (iii)
that are reasonably related to the performance of the audit or review of
financial statements, in the aggregate and by each service; (iv) tax compliance,
tax advice and tax planning services, in the aggregate and by each service; and
(v) all other products and services rendered by the independent accountants, in
the aggregate and by each service; and
(j) obtain from the independent accountants assurance that each audit is
conducted in a manner consistent with Section 10A of the Securities Exchange Act
of 1934, which sets forth certain procedures to be followed in any audit of
financial statements required under that Act.
2. Oversight of Financial Reporting and Controls. The Committee shall:
(a) meet with the independent accountants prior to any audit to discuss the
planning and staffing of the audit;
(b) review and discuss with management and the independent accountants the
annual audited financial statements and quarterly financial statements to be
included in the Company's reports filed with the Securities and Exchange
Commission ("SEC"), including Management's Discussion and Analysis of Financial
Condition and Results of Operations;
(c) review and discuss the following with management and the independent
accountants, in connection with the Committee's review of the Company's annual
financial statements and, as appropriate, quarterly financial statements and
related disclosures:
- critical accounting policies and financial statement presentation,
including key accounting decisions and judgments, significant changes
in the selection or application of accounting principles, the
rationale for such choices and the alternatives available under
generally accepted accounting principles ("GAAP");
31
- material written communications between the independent accountants
and management, including any "management" or "internal control"
letter issued or proposed to be issued by the independent accountants
and management's responses;
- any problems encountered in the audit or review of the financial
statements, including any disagreements between management and the
independent accountants or limitations on the activities of the
independent accountants, and management's responses;
- the effect of regulatory and accounting initiatives, as well as
off-balance sheet structures, on the financial statements;
- any accounting adjustments that were noted or proposed by the
independent accountants but were "passed" (as immaterial or
otherwise);
- communications between the audit team and the independent accountants'
national office respecting auditing or accounting issues presented by
the engagement;
- the certifications made by the principal executive officer and
principal financial officer with respect to the Company's periodic
reports filed with the SEC;
- management's report on internal control over financial reporting and
the independent accountants' related attestation report and any
material changes in the Company's internal control over financial
reporting;
- any change in the provision of internal audit services; and
- major financial risk exposures and the steps management has taken to
monitor and control such exposures, including the Company's risk
assessment and risk management policies;
(d) review the type and presentation of information to be included in
earnings press releases (particularly any "pro forma" or "adjusted" non-GAAP
information), as well as financial information and earnings guidance which
management may provide to analysts and rating agencies; provided, however, that
such review need not take place in advance of each earnings release or each
instance in which guidance may be provided;
(e) annually review and discuss with the independent accountants and
management the provision of internal audit services to the Company (either
internal or outsourced) and the internal audit function audit plan,
responsibilities, budget and staffing;
(f) establish procedures for the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal accounting
controls or auditing matters and the confidential, anonymous submission by
employees of the Company of concerns regarding questionable accounting or
auditing matters;
(g) advise management, purveyor of internal audit services and the
independent accountants that they are expected to provide to the Committee a
timely analysis of significant financial reporting issues and practices;
(h) consider any reports or communications (and management's and/or the
internal audit department's responses thereto) submitted to the Committee by the
independent auditors required by or referred to in Statement of Accounting
Standards 61; and
(i) inquire of the Company's Chief Executive Officer and Chief Financial
Officer as to the existence of any significant deficiencies in the design or
operation of internal controls that could adversely affect the Company's ability
to record, process, summarize and report financial data, any material weakness
in internal controls, and any fraud, whether or not material, that involves
management or other employees who have a significant role in the Company's
internal controls.
3. Compliance with Legal and Regulatory Requirements. The Committee shall
periodically discuss with the Company's General Counsel any significant legal,
compliance or regulatory matters that may have a material effect on the
Company's business, financial statements or compliance policies including
material notices to or inquiries received from governmental agencies.
32
4. Additional Responsibilities of the Committee. The Committee shall make
regular reports to the Board. The Committee shall annually review and evaluate
the Committee's own performance and review and reassess the adequacy of this
Charter and recommend any proposed changes to the Board for approval.
5. Additional Powers of the Committee. The Committee shall have the
authority, to the extent it deems necessary or appropriate, to retain special
legal, accounting or other experts to advise the Committee and carry out its
duties, and to conduct or authorize investigations into any matters within its
scope of responsibilities. The Committee shall be provided with the funding and
other resources required to discharge its duties and responsibilities, including
payment of reasonable compensation to the independent accountants and to any
advisors employed by the Committee.
6. Delegation to Subcommittee. The Committee may in its discretion
delegate all or a portion of its duties and responsibilities to a subcommittee
of the Committee. The Committee may also, in its discretion, delegate to one or
more of its members the authority to pre-approve any audit or non-audit services
to be performed by the independent auditors as permitted by applicable law and
regulation, provided that any such approvals are presented to the Committee for
review at its next scheduled meeting.
LIMITATIONS OF THE COMMITTEE'S ROLE
While the Committee has the responsibilities and powers set forth in this
Charter, it is not the duty of the Committee to prepare financial statements,
plan or conduct audits or determine that the Company's financial statements and
disclosures are complete or accurate or in accordance with GAAP or applicable
laws or regulations. The Committee's job is to review and recognize that the
Company's management is responsible for preparing the Company's financial
statements and that the independent accountants are responsible for auditing or
reviewing those financial statements, as applicable. The Committee recognizes
that management and the independent accountants have more time, knowledge and
detailed information concerning the Company than do Committee members.
Consequently, in performing its functions, the Committee is not providing any
expert or special assurance as to the Company's financial statements or any
professional certification as to the independent accountants' work.
33
EXHIBIT 2
CNA SURETY CORPORATION
CORPORATE GOVERNANCE GUIDELINES
INTRODUCTION
The following Corporate Governance Guidelines have been adopted by the
Board of Directors to assist the Board in the exercise of its responsibilities.
These Guidelines reflect the Board's commitment to monitor the effectiveness of
policy and decision making both at the Board and management levels, with a view
to enhancing shareholder value over the long term.
These Guidelines set forth certain goals and expectations of the Board but
are not intended to bind the Board in any particular circumstance or to affect
the Board's obligations or authority under the Company's charter or by-laws, the
rules of the New York Stock Exchange, Inc. (the "Exchange") or applicable laws
or regulations.
COMPOSITION OF THE BOARD
Because the Company is a "controlled company" for purposes the listing
standards of the Exchange, it is exempt from the Exchange's requirements
relating to maintenance of a majority of independent directors and independent
nominating/corporate governance and compensation committees. The Company shall
disclose any reliance upon this exemption and the basis for its identification
as a controlled company in its annual proxy statement.
The Board shall from time to time review the manner in which the Board and
its leadership are configured, with a view toward maintaining a structure that
will best serve the Company and its shareholders.
It is the policy of the Board that the Chairman of the Board of Directors
shall not be an officer of the Company, and that the officers of the Company
shall be chosen by the Board. The Board continues to reserve the right to amend
this policy, if in the Board's determination it is in the interests of the
Company and its shareholders to do so.
DIRECTOR QUALIFICATION STANDARDS
The Board is responsible for selecting candidates for Board membership.
Candidates are selected for their character, judgment, business experience and
areas of expertise, among other relevant considerations, such as the
requirements of stock exchange rules and applicable laws and regulations. The
Board recognizes that the needs of the Board, in terms of the relative
experience and other qualifications of its members, may change over time. The
Board may appoint one or more of the officers of the Company to screen
candidates for membership, establish criteria for nominees and recommend to the
Board one or more nominees for election to the Board at the annual meeting of
shareholders. Final approval of any candidate shall be determined by the Board.
Each director is expected to provide advance written notice to the Chief
Executive Officer of his or her acceptance of an invitation to serve on the
board of directors or the audit committee or compensation committee of any other
public company. Directors are also expected to report changes in their business
or professional affiliations or responsibilities to the Chief Executive Officer.
The Board does not believe it is advisable to establish a term limit for
directors because such a limit may deprive the Company and its shareholders of
the contribution of directors who have been able to develop valuable insights
into the Company and its operations over time.
DIRECTOR RESPONSIBILITIES
Standard of Care for Directors. Directors should exercise their business
judgment to act in what they reasonably believe to be in the best interests of
the Company and its shareholders in a manner consistent with
34
their fiduciary duties. In considering the best long-term and short-term
interests of the Company, directors may consider the needs of employees,
suppliers and customers of the Company and its subsidiaries, communities in
which the Company and its subsidiaries conduct business and other pertinent
factors in addition to the objective of maximizing shareholder value.
Directors shall be provided with information to advise them about the
Company's business, performance and prospects, as well as any matters submitted
for Board action. Such information will be made available to the directors
periodically and, in any event, within a reasonable period of time before
meetings where the subject matter of such information is on the meeting agenda.
Information should be relevant, concise and timely. Requests for action by the
Board should include the recommendation of management and be accompanied by data
sufficient for the directors to make a meaningful determination as to the
advisability of the matter.
Directors should regularly attend meetings of the Board and all committees
upon which they serve. To prepare for meetings, directors should review the
materials that are sent to them in advance of those meetings and otherwise spend
the necessary time and effort to discharge their responsibilities appropriately.
Meetings of the Board. The Board expects that it will meet approximately
at least four times a year. Additional meetings (or actions to be taken by
unanimous consent) may be scheduled as necessary or appropriate in light of
circumstances. The Company's Secretary shall prepare an annual schedule of
meetings for the Board and the Audit, Compensation and Investment Committees. To
the extent practicable, the schedule shall be designed to accommodate discussion
of agenda subjects that are generally of a recurring nature and are expected to
be discussed during the ensuing year. Certain matters should be addressed by the
Board at least annually, including a review of the Company's strategic plan or
objectives, business and financial performance for the prior year and compliance
with applicable law and Exchange listing standards.
Meetings of the Board shall be chaired by the Chairman of the Board. The
Company's Chief Financial Officer, General Counsel and Secretary should also
attend all meetings of the Board, subject to the Board's discretion to excuse
one or more of these officers from all or portions of any meeting.
The Secretary of the Company shall prepare the agenda of each meeting of
the Board for review by the Chairman of the Board and the other directors. Any
director may suggest agenda items and may raise at meetings other matters that
they consider worthy of discussion. Directors must disclose to the other
directors any potential conflicts of interest they may have with respect to any
matter under discussion and, if appropriate, refrain from participating in such
discussion and from voting on a matter in which they may have a conflict.
Directors shall preserve the confidentiality of material of a confidential or
otherwise sensitive nature given or presented to the Board.
Non-management Directors. Non-management directors shall meet at regularly
scheduled regular executive sessions without management participation. The
non-management directors shall either select a non-management director to
preside at each executive session or shall establish a procedure by which the
presiding director for each executive session shall be selected. Non-management
directors who do not meet the independence requirements of Exchange rules and
applicable laws and regulations may participate in these sessions, but those
directors who do meet the referenced independence requirements must meet in
separate executive session without the participation of other directors at least
once a year.
COMMUNICATIONS WITH NON-MANAGEMENT DIRECTORS
Interested parties may communicate directly and confidentially with the
Board's non-management directors by contacting such directors in writing at the
following address:
Non-Management Directors
c/o General Counsel
CNA Surety Corporation
41 Floor
CNA Center
Chicago, Illinois 60685
35
COMMITTEES OF THE BOARD
The Board will maintain a standing Audit Committee, Compensation Committee,
Investment Committee and Executive Committee, as well as such other standing or
ad hoc committees as the Board deems appropriate. Each committee shall have the
authority and responsibilities delineated in the resolutions creating the
committee and any applicable committee charter, subject to the Company's charter
and by-laws, stock exchange rules and applicable laws and regulations. The Board
shall have the authority to disband any ad hoc or standing committee when it
deems it appropriate to do so.
Members of the Audit, Compensation, Investment and Executive Committees and
their chairpersons shall be appointed by the Board each year at the annual
meeting of the Board. It is the Board's policy that only non-management
directors shall serve on the Audit Committee and Compensation Committees and
that members of those Committee meet the independence and other requirements of
Exchange rules and applicable laws and regulations.
The Audit Committee shall have a written charter approved by the Board. The
Audit Committee charter shall be reviewed by the Committee at least annually in
light of its activities, changes in Exchange rules, applicable laws or
regulations and other relevant considerations. Suggested revisions to such
charters shall be presented to the Board for approval.
The chairpersons of the various committees, in consultation with their
committee members, shall determine the frequency and length of committee
meetings. The chairperson of each committee, in consultation with appropriate
Company officers, will establish the agenda for each committee meeting.
Committee members and other directors may suggest additional agenda items for
committee meetings upon reasonable notice to the committee chairperson.
To the extent practicable, information regarding matters to be considered
at committee meetings shall be distributed to committee members a reasonable
period of time before the meeting. Following a meeting the committee chairperson
shall report to the Board on the committee's activities, and minutes of
committee meetings shall be distributed to all directors for their information.
DIRECTOR ACCESS TO MANAGEMENT AND INDEPENDENT ADVISORS
The Company shall provide each director with complete access to management
and management information, subject to reasonable advance notice and reasonable
efforts to avoid disruption to the business. The Board and, to the extent set
forth in any applicable committee charter or resolution establishing such
committee, Board committees have the right to consult and retain independent
legal and other advisors at the expense of the Company. Management shall be
responsive to requests for information from Board members. The Board encourages
the Chairman of the Board and the Chief Executive Officer to invite members of
management to make presentations at Board meetings in order to provide insights
into the Company's business or to provide individuals with exposure to the Board
for purposes of management development. Directors may suggest possible guests to
the Chairman or the Chief Executive Officer.
DIRECTOR COMPENSATION
From time to time the Board will review the form and amount of
compensation, including cash, equity-based awards and other compensation, paid
to directors and committee members. In this regard, the Board may request that
management report to it periodically on the status of the Board's compensation
in relation to other similarly situated companies. The Board continues to
believe that an alignment of director interests with those of shareholders is
important.
DIRECTOR ORIENTATION AND CONTINUING EDUCATION
The Board, in consultation with management, will establish or direct
management to establish an appropriate orientation program for newly elected
directors either prior to or within a reasonable period of time after their
nomination or election as a director. The orientation program may be of a formal
or informal nature. The orientation program shall address the Company's
strategic plans, significant risk exposures and
36
compliance programs (including its Code of Business Conduct and Ethics) and may
include presentations by management, the internal auditors and the independent
accountants.
MANAGEMENT SUCCESSION
The Board will, from time to time as it considers appropriate, conduct a
review of the performance and compensation of the Chief Executive Officer.
The Board will establish and review such formal or informal policies and
procedures, consulting with the Chief Executive Officer and others as it
determines to be appropriate, regarding succession planning for the office of
Chief Executive Officer.
COMMUNICATIONS WITH PUBLIC AND OTHERS
The Board believes that management speaks for the Company. Directors are
expected to refrain from communicating with institutional investors, other
stockholders, governmental or community officials, analysts or the press
regarding the business of the Company.
RELIANCE ON MANAGEMENT AND OUTSIDE ADVICE
In performing its functions, the Board and each Board committee is entitled
to rely on the advice, reports and opinions of management, counsel, accountants,
auditors and other expert advisors. The Board shall have the authority to retain
and approve the fees and retention terms of its outside advisors.
ANNUAL PERFORMANCE EVALUATION OF THE BOARD
The Board will conduct a self-evaluation annually to determine whether it
and its committees are functioning effectively. The Board will discuss the
evaluation to determine what, if any, action could improve Board and committee
performance. The Board, with the assistance of Company management, shall review
these Guidelines on an annual basis to determinate whether any changes are
appropriate.
37
EXHIBIT 3
CNA SURETY CORPORATION
CODE OF BUSINESS CONDUCT AND ETHICS
INTRODUCTION
CNA Surety Corporation (the "Company" or "we") is committed to maintaining
high standards for honest and ethical conduct in all of its business dealings.
This Code of Business Conduct and Ethics (referred to as this "Code") covers a
wide range of business practices and procedures. It does not cover every issue
that may arise, but rather is intended to set out basic principles with which we
expect you, our employees, officers and directors, to comply. Each of you is
expected to conduct yourself in accordance with the policies set forth in this
Code and seek to avoid even the appearance of improper behavior. All supervisory
and management personnel, including all officers and directors of the Company,
have a special responsibility to lead according to the standards in this Code.
Our supervisory and management personnel are also expected to adhere to and
promote our "open door" policy. This means that they are available to any of you
who may have ethical concerns, questions or complaints.
APPLICABILITY
As noted above, this Code covers all employees, officers and directors of
the Company and its wholly-owned subsidiaries, including but not limited to all
Senior Financial Officers and other personnel that deal with financial reporting
and record-keeping. It is important to understand that this Code does not
substitute for or replace in any way the document titled "Our Commitment to
Professional Conduct" (the "Commitment") available in the Company's Employee
Handbook and on the Company's intranet website, but rather supplements the
guidance set out there. The Commitment continues to apply to all employees,
officers and directors, as does this Code. The Company is confident that there
are no inconsistencies between the principles explained in this Code and the
more specific guidance of the Commitment. If anyone covered by either document
believes there is inconsistency between them or is otherwise confused about how
they relate to each other, please contact the Company's General Counsel at
312-822-3895, or contact the CNA Financial Corporation's ("CNAF") Senior Vice
President-Internal Audit at 312-822-4580. (Pursuant to the approval and
direction of the Company's Audit Committee which is comprised solely of
independent directors, the Company currently outsources its internal audit
function to CNAF.)
The principles of conduct set out in this Code are binding upon covered
persons regardless where their offices are located or their business activities
occur. If any conflicts arise between those principles and laws, regulations or
other governmental requirements applicable to covered persons, please contact
the Company's General Counsel at 312-822-3895 for guidance.
COMPLYING WITH THE LAW IS REQUIRED
Obeying the law, both in letter and in spirit, is the foundation on which
this Company's ethical standards are built. You should respect and obey the
laws, rules and regulations of the United States and the states, counties,
cities and other jurisdictions in which we operate. Although not all of you are
expected to know the details of these laws, it is important that you know enough
to determine when to seek advice from your supervisors, managers or others. The
Company's Law Department is available to all employees who have any questions
about the details of laws and regulations applicable to them. If a law conflicts
with a policy in this Code, the law takes precedence over this Code; however, if
a local custom or policy conflicts with this Code, this Code takes precedence
over it.
INSIDER TRADING IS PROHIBITED
Legal compliance includes complying with the so-called "insider trading"
prohibitions under the federal securities laws and regulations. The federal
securities laws impose civil and criminal liability on anyone who
38
buys, sells or otherwise trades in securities while in possession of material
nonpublic information, commonly called "inside information," about the company
that issued the securities. This applies equally to trading in securities of the
Company and its subsidiaries and in the securities of other companies.
Inside information may take many forms. Precisely what constitutes
"material nonpublic" information in a particular situation may be difficult to
determine in advance since it always depends on the particular facts and
circumstances.
You should take a broad view of "materiality" and consider information
about an issuer of securities, whether positive or negative, to be material if
either (i) there is a reasonable likelihood that it would be considered
important to a prudent investor in making an investment decision about that
company or (ii) the public disclosure of the information would be reasonably
likely to impact the price of that company's securities. Some examples of
information that very often is sensitive and likely to be material include
financial results or forecasts, a significant regulatory action or litigation
development, a possible merger, acquisition or divestiture, financial problems,
a significant financing or capital transaction, a significant change in business
strategy or product development, or a significant management change. These
examples are only illustrative and are not intended to be exhaustive.
Information is considered "nonpublic" if it has not previously been
disclosed to the investing public through a broadly disseminated release, such
as a news release over the major business wire services or the radio, television
or print media or inclusion in a document filed with the Securities and Exchange
Commission (the "SEC").
The potential for insider trading liability is wide. For example, you could
be responsible for trades made by persons to whom you have disclosed inside
information (a "tip"), whether or not you intended to, or did, realize any
profit from the "tipping." The general rule and the Company's policy is that if
you have material nonpublic information about the Company or another issuer of
securities, you must abstain from trading in that company's securities and you
may not disclose the inside information to others who might use it to trade or
recommend that company's securities to others.
CONFLICTS OF INTEREST
A "conflict of interest" occurs when your individual private interests
interfere with the interests of the Company or even when they only appear to
interfere or conflict. If you have a conflict of interest it may be difficult
for you to perform or work objectively and effectively, or to exercise your
sound business judgment on behalf of the Company. Conflicts of interest should
be avoided.
It may not always be clear whether a situation presents a conflict of
interest or potential conflict of interest. For example, a conflict of interest
can arise involving your family members or even your close friends. Examples of
some potential conflicts of interest are:
- Receipt of an improper personal benefit as a result of your position with
the Company, whether that benefit is received from the Company or a third
party, such as a competitor, customer or supplier.
- Obtaining a loan, guarantee of obligations or other similar financial
accommodation from the Company or from a third party, such as a
competitor, customer or supplier.
- Serving as an officer, employee or consultant, or otherwise having a
material financial interest in a competitor, customer or supplier of the
Company.
If a situation arises which you believe could involve a conflict of
interest, or even the appearance of a conflict of interest, on your part, you
should report the matter to your manager or department head. If you are an
executive officer of the Company, any potential conflict of interest must be
reported to the Company's General Counsel.
39
CORPORATE OPPORTUNITIES BELONG TO THE COMPANY
Employees, officers and directors have a duty to advance the Company's
legitimate interests when the opportunity to do so arises. You are prohibited
from taking personal opportunities that properly belong to the Company or its
subsidiaries or which you discover through the use of corporate property,
information or position. You are also prohibited from using corporate property,
information or position for personal gain or competing with the Company or a
subsidiary of the Company.
CONFIDENTIALITY MUST BE MAINTAINED
You must maintain the confidentiality of confidential information entrusted
to you by the Company or our subsidiaries, suppliers, customers and others with
whom we conduct business. Furthermore, you may not use any such information for
your own (or any third party's) profit or advantage. You may disclose
confidential information when disclosure is authorized by the Law Department or
required by laws, regulations or legal proceedings. Confidential information
generally includes non-public information that might be useful to competitors or
others, or harmful to the owner of the information if disclosed. Your obligation
to preserve confidential information continues even after your employment ends.
You should consult the Law Department if you believe you may have a legal
obligation to disclose confidential information.
COMPETITORS AND OTHERS MUST BE DEALT WITH FAIRLY
We seek to outperform our competition fairly and honestly. We seek
competitive advantages through superior performance, never through unethical or
illegal business practices. We do not permit or condone improper taking or use
of proprietary information of others, possessing trade secret information that
was obtained without the owner's consent, or inducing such disclosures by past
or present employees of other companies. You should endeavor to deal fairly with
our customers, suppliers, competitors and employees and not attempt to take
unfair advantage of anyone through manipulation, concealment, abuse of
privileged or confidential information, misrepresentation or any other
intentional unfair-dealing practice.
COMPANY ASSETS AND PROPERTY MUST BE PROTECTED AND USED PROPERLY
You should endeavor to protect the assets and property of the Company and
its subsidiaries and ensure their efficient use. Theft, carelessness and waste
have a direct impact on profitability. You should immediately report any
suspected incident of fraud or theft affecting the Company. You should not use
Company assets for non-Company business, though incidental personal use is
permitted. You may never use Company funds or property in furtherance of any
unlawful purpose.
Your obligation to protect the assets and property of the Company and its
subsidiaries includes our proprietary information, including intellectual
property, such as trade secrets, patents, trademarks and copyrights, and
business, marketing and strategic plans, designs, databases, records, salary
information and any unpublished financial data and reports. You may not use or
distribute this information without proper authorization.
ACCURATE BOOKS AND RECORDS MUST BE MAINTAINED
It is our policy to comply with the financial reporting and accounting
regulations that apply to the Company. All of the Company's books, records,
accounts and financial statements must be maintained in reasonable detail, must
accurately and fairly represent the Company's transactions and must conform to
legal requirements and our system of internal controls. You may not create or
participate in the creation of records that are misleading or artificial. No
unrecorded or "off the books" funds or assets are to be maintained except where
a senior financial officer has determined that they are required or permitted
under applicable laws and regulations.
40
You should retain Company records in accordance with our record retention
policies. In the event litigation or a governmental investigation is under way
or threatened which may involve any records under your control, you should
consult the Company's Law Department for guidance with regard to maintaining
those records.
COMPLETE, ACCURATE AND TIMELY DISCLOSURE IS REQUIRED
As a public company with shares traded on the New York Stock Exchange, the
Company is required to make various disclosures to the public, including by
filing regular reports with the SEC. The Company is committed to full compliance
with these important obligations and we seek to provide full, fair, accurate,
timely and understandable disclosure in our SEC filings, press releases and
other public communications. To assist in this endeavor, the Company maintains
disclosure controls and procedures, including internal financial controls, under
which you may be requested to provide information or otherwise participate in
the financial accounting and disclosure process. If you participate in this
process, you have a responsibility to provide information and disclosures in a
timely manner and to assure that information and disclosures you provide are
complete, accurate and understandable. You may never make a materially false or
misleading statement or withhold any material information or assist others in
doing so.
IMPROPER PAYMENTS ARE PROHIBITED
The purpose of business entertainment and gifts in a commercial setting is
to create good will and sound working relationships, not to gain unfair
advantage with customers, suppliers or others with whom we do business. You
should never give, offer or accept a gift, entertainment or other item of value
unless it: (1) is not a cash gift, (2) is consistent with customary business
practices, (3) is not excessive in value, (4) cannot be construed as a bribe or
payoff and (5) does not violate any law or regulation. You should take
particular care to avoid accepting any favor or anything of value which could
reasonably be interpreted as influencing your judgment in performing your duties
for the Company. In addition, there is a wide variety of federal, state, local
and foreign laws governing the offering or making of gifts, payments, favors and
other gratuities to a government official and you must comply with those laws.
If you are uncertain about the propriety of any gift or payment, you should
consult the Company's Law Department.
REPORTING PROCEDURES; COMPLIANCE WITH THIS CODE
You are urged to promptly report illegal or unethical behavior, including
financial misconduct and other violations of this Code. If you wish, your
concerns or complaints will be kept confidential and your identity will be kept
anonymous, though we may be required by law to reveal this information in some
circumstances. The Company will not allow retaliation against you if you report
misconduct by others as long as your report is made in good faith.
The following are some guidelines you may follow in reporting violations of
this Code or other misconduct, or if you are unsure about how to handle a
situation:
- You are encouraged as a first step to speak openly and freely to your
manager, division head or department head;
- If for any reason you are not comfortable approaching your supervisor,
division head or department head or you are not satisfied that your
complaint has been handled fairly or appropriately, then you can contact
the Company's Vice President, Chief Human Resources Executive, at (312)
822-7517 (barbara.wood@cnasurety.com) or the Company's Senior Vice
President & General Counsel at (312) 822-3895
(enid.tanenhaus@cnasurety.com); or
41
- If your concerns or complaints relate to the Company's financial,
accounting, internal controls or auditing activities, then:
- YOU MAY RAISE THEM WITH THE CNAF'S SENIOR VICE PRESIDENT, INTERNAL AUDIT
AT (312) 822-4580 (WILLIAM.NACHTSHEIM@CNA.COM); OR
- YOU MAY UTILIZE THE SPECIAL AUDIT COMMITTEE PROCEDURES FOR COMPLAINTS
REGARDING ACCOUNTING, INTERNAL ACCOUNTING CONTROLS AND AUDITING MATTERS,
WHICH HAVE BEEN ADOPTED BY THE AUDIT COMMITTEE OF THE BOARD FOR THIS
PURPOSE.
ACCOUNTABILITY FOR ADHERENCE TO THIS CODE
As a condition of your employment with the Company, you accept the
responsibility of complying with the policies set forth in this Code. If you
violate any of these policies, you will be subject to disciplinary action,
including suspension or termination of employment for cause, or other legal
action if appropriate under the circumstances. This Code is not intended to and
does not create a contract of employment between you and the Company, nor does
it guarantee that your employment with the Company will continue as long as you
comply with its policies.
AMENDMENT, MODIFICATION AND WAIVER OF THIS CODE
Only the Board of Directors may amend or modify this Code. Only the Board
or an authorized committee of the Board may waive the requirements of this Code
for executive officers or directors. We will promptly disclose any such waivers
to the extent required by applicable stock exchange rules or laws or
regulations.
42
EXHIBIT 4
CNA SURETY CORPORATION
2006 LONG-TERM EQUITY COMPENSATION PLAN
TABLE OF CONTENTS
PAGE
----
Article 1. Establishment, Effective Date, Objectives, and
Duration........................................ 1
Article 2. Definitions..................................... 1
Article 3. Administration.................................. 5
Article 4. Shares Subject to the Plan, Maximum Awards and
Section 162(m) Compliance....................... 7
Article 5. Eligibility and General Conditions of Awards.... 9
Article 6. Stock Options................................... 11
Article 7. Stock Appreciation Rights....................... 12
Article 8. Restricted Stock................................ 13
Article 9. Performance Units and Performance Shares........ 14
Article 10. Incentive Awards................................ 15
Article 11. Bonus Shares.................................... 16
Article 12. Beneficiary Designation......................... 16
Article 13. Deferrals....................................... 17
Article 14. Rights of Employees/Directors................... 17
Article 15. Change in Control............................... 17
Article 16. Amendment, Modification, and Termination........ 17
Article 17. Withholding..................................... 18
Article 18. Successors...................................... 18
Article 19. Additional Provisions........................... 19
i
CNA SURETY CORPORATION 2006 LONG-TERM EQUITY
COMPENSATION PLAN
ESTABLISHMENT, EFFECTIVE DATE, OBJECTIVES, AND DURATION
Establishment of the Plan. CNA Surety Corporation, a Delaware corporation
(hereinafter referred to as the "Company" ), hereby establishes an incentive
compensation plan to be known as the "CNA Surety Corporation 2006 Long-Term
Equity Compensation Plan" (hereinafter referred to as the "Plan" ). The Plan was
approved by the Board of Directors of the Company on February 14, 2006, and,
subject to the approval of the shareholders of the Company, shall be effective
as of January 1, 2006 ("Effective Date" ).
Objectives of the Plan. The Plan is intended to allow selected employees,
directors and consultants of the Company and its Subsidiaries to acquire or
increase equity ownership in the Company, thereby strengthening their commitment
to the success of the Company and stimulating their efforts on behalf of the
Company, and to assist the Company and its Subsidiaries in attracting new
employees, directors and consultants and in retaining existing employees,
directors, and consultants. The Plan is also intended to optimize the
profitability and growth of the Company through incentives which are consistent
with the Company's goals; to provide employees, directors, and consultants with
an incentive for excellence in individual performance; and to promote teamwork
among employees, directors, and consultants.
Duration of the Plan. The Plan shall commence on the Effective Date and
shall remain in effect, subject to the right of the Board of Directors to amend
or terminate the Plan at any time pursuant to Article 16 hereof, until the
earlier of December 31, 2015, or the date all Shares subject to it shall have
been purchased or acquired and the restrictions on all Restricted Stock shall
have lapsed according to the Plan's provisions. The termination of the Plan
shall not adversely affect any Awards outstanding on the date of termination.
DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings set
forth below:
"Award" means Options, including Incentive Stock Options and Non-Qualified
Stock Options, Restricted Stock, Bonus Shares, Stock Appreciation Rights (SARs),
Performance Units, Performance Shares, or Incentive Awards granted under the
Plan.
"Award Agreement" means the written agreement by which an Award shall be
evidenced.
"Board" or "Board of Directors" means the Board of Directors of the
Company.
"Bonus Opportunity" means the threshold, target and maximum bonus
opportunity for an Incentive Award for an individual for a year or other
Performance Period, based on threshold, target and maximum bonus levels
specified as a percentage of the Grantee's base salary in effect on the first
day of such year or other Performance Period (or such later date as such person
is designated as an eligible Grantee) as determined by the Committee.
"Bonus Shares" means Shares that are awarded to a Grantee without cost and
without restrictions in recognition of past performance (whether determined by
reference to another employee benefit plan of the Company or otherwise) or as an
incentive to become an employee, director or consultant of the Company or a
Subsidiary.
"Cause" means, unless otherwise defined in an Award Agreement or in an
employment agreement between the Grantee and the Company, any one or more of the
following with respect to a Grantee:
(A) the Grantee's commission of a crime which, in the judgment of the
Committee, is likely to result in injury to the Company or a Subsidiary;
(B) the material violation by the Grantee of written policies of the
Company or a Subsidiary;
(C) the habitual neglect by the Grantee in the performance of his or
her duties to the Company or a Subsidiary;
(D) the action or inaction in connection with the Grantee's duties to
the Company or a Subsidiary resulting, in the judgment of the Committee, in
a material injury to the Company or a Subsidiary;
(E) the Grantee's rendering of services for any organization or
engaging directly or indirectly in any business which is or becomes
competitive with the Company or a Subsidiary or which organization or
business, or the rendering of services to such organization or business, is
or becomes otherwise prejudicial to or in conflict with the interests of
the Company or a Subsidiary;
(F) any attempt by the Grantee, directly or indirectly, to induce any
employee of the Company or a Subsidiary to be employed or perform services
elsewhere or any attempt directly or indirectly to solicit the trade or
business of any current or prospective customer, supplier or partner of the
Company or a Subsidiary; or
(G) any other conduct by or act of the Grantee determined by the
Committee to be injurious, detrimental, or prejudicial to any interest of
the Company or a Subsidiary.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and regulations and rulings thereunder. References to a particular section
of the Code include references to successor provisions.
"Committee" means the committee of the Board appointed pursuant to Article
3.
"Common Stock" means the common stock, $.0l par value, of the Company.
"Consultant" means a non-employee consultant or advisor to the Company or a
Subsidiary who is a natural person (other than a non-employee director)
providing bona fide services that are not in connection with an offer or sale of
Company equity securities in a capital raising transaction; provided the
individual does not directly or indirectly maintain or promote a market in
Company securities.
"Company" has the meaning set forth in Section 1.1.
"Covered Employee" means a Grantee who, as of the last day of the fiscal
year of inclusion in income of the value of an Award is one of the group of
"covered employees," within the meaning of Section 162(m) of the Code, with
respect to the Company.
"Disability" means, for purposes of the exercise of an Incentive Stock
Option alter Termination of Affiliation, a disability within the meaning of Code
Section 22(e)(3), and for all other purposes, a mental or physical condition
which, in the judgment of the Committee, renders a Grantee unable to perform any
of the principal job responsibilities which such Grantee held or the tasks to
which such Grantee was assigned at the time the disability was incurred, and
which condition is expected to be permanent or for an indefinite duration
exceeding two years.
"Disqualifying Disposition" has the meaning set forth in Section 6.4.
"Effective Date" has the meaning set forth in Section 1.1.
"Eligible Person" means (i) any employee (including any officer) of the
Company or any Subsidiary, including any such employee who is on an approved
leave of absence, layoff, or has been subject to a disability which does not
qualify as a Disability; (ii) any director of the Company or any Subsidiary; and
(iii) any person performing services for the Company or a Subsidiary as
Consultant.
"Exchange Act" means the Securities Exchange Act of 1934, and regulations
and rulings thereunder. References to a particular section of, or rule under,
the Exchange Act include references to successor provisions.
"Fair Market Value" of an equity security means the closing price of such
security on such date (or, if no sale of such security was reported for such
date, on the next preceding date on which a sale of such security was reported)
as reported in the principal consolidated transaction reporting system for the
New York Stock Exchange (or, if such security is not listed on the New York
Stock Exchange, on such other national exchange
2
or over-the-counter market on which such security is principally traded);
provided that if such Fair Market Value as of any date cannot be so determined,
Fair Market Value shall be determined by the Committee by whatever means or
method it, in the good faith exercise of its discretion, shall at such time deem
appropriate. Except as provided in the following sentence, the valuation of an
equity security on any date shall be determined as of that date (or, if no sale
of such security was reported for such date, on the most recent trading day
prior to such date on which a sale of such other security was reported). On the
exercise or vesting date of an Award denominated in Shares, the valuation of
Shares shall be determined as of the last trading day preceding the exercise or
vesting of the Award.
"Freestanding SAR" means a SAR that is granted independently of any other
Award.
"Grant Date" has the meaning set forth in Section 5.2.
"Grantee" means an individual who has been granted an Award.
"Incentive Award" means an Award under Section 10 of the Plan based on
achievement of Performance Goals over a Performance Period which may be one
fiscal year or less ("Annual Incentive Awards" ) or more than one fiscal year
("Long-Term Incentive Awards").
"Incentive Stock Option" or "ISO" means an Option granted as an Award under
the Plan that is intended to meet the requirements of Section 422 of the Code.
"including" or "includes" means "including, without limitation," or
"includes, without limitation", respectively.
"Insider" shall mean a person who is subject to potential liability under
Section 16(b) of the Exchange Act with respect to transactions involving equity
securities of the Company.
"Mature Shares" means Shares for which the holder thereof has good title,
free and clear of all liens and encumbrances, and which such holder either (i)
has held for at least six months or (ii) has purchased on the open market.
"Minimum Consideration" means $.01 per Share or such other amount that is
from time to time considered to be capital for purposes of Section 154 of the
Delaware General Corporation Law.
"Non-Qualified Stock Option" or "NQSO" means an Option granted as an Award
under the Plan that is not intended to meet the requirements of Section 422 of
the Code.
"Option" means an Incentive Stock Option or a Non-Qualified Stock Option.
"Option Price" means the price at which a Share may be purchased by a
Grantee pursuant to an Option.
"Option Term" means the period beginning on the Grant Date of an Option and
ending on the expiration date of such Option, as specified in the Award
Agreement for such Option and as may, in the discretion of the Committee and
consistently with the provisions of the Plan, be extended from time to time
prior to the expiration date of such Option then in effect.
"Performance-Based Exception" means the performance-based exception from
the tax deductibility limitations of Code Section 162(m).
"Performance Goals" means the objective or subjective criteria determined
by the Committee, the degree of attainment of which will affect (a) in the case
of an Award other than the Incentive Award, the amount of the Award the Grantee
is entitled to receive or retain, and (h) in the case of an Incentive Award, the
portion of the individual's Bonus Opportunity potentially payable as an
Incentive Award. Performance Goals may contain threshold, target, and maximum
levels of achievement and, to the extent the Committee intends an Award
(including the Incentive Award) to comply with the Performance-Based Exception,
the Performance Goals shall be chosen from among the measures (the "Performance
Measures") set forth in Section 4.4.
"Performance Period" means the period over which achievement of Performance
Goals is measured.
3
"Period of Restriction" means the period during which the transfer or
delivery of Restricted Stock is limited in some way (based on the passage of
time, the achievement of performance goals, or upon the occurrence of other
events as determined by the Committee, in its discretion), and the Restricted
Stock is subject to a substantial risk of forfeiture, as provided in Article 8
hereof
"Person" shall have the meaning ascribed to such term in Section 3(a)(9) of
the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a
"group" as defined in Section 13(d) thereof.
"Plan" has the meaning set forth in the introductory paragraph.
"Required Withholding" has the meaning set forth in Article 17.
"Restricted Stock" means Restricted Stock Shares or Restricted Stock Units.
"Restricted Stock Shares" means Shares that are granted as an Award under
the Plan but that are subject to forfeiture if the restrictions imposed by the
Committee and specified in the Award Agreement, which restrictions may be
time-based or performance-based, are not satisfied.
"Restricted Stock Units" means rights granted as an Award under the Plan to
receive Shares, that are subject to forfeiture if the restrictions imposed by
the Committee, which restrictions may be time-based or performance-based, are
not satisfied.
"Rule 16b-3" means Rule 16b-3 of the SEC under the Exchange Act, as amended
from time to time, together with any successor rule.
"Retirement" means for any Grantee who is an employee, a Termination of
Affiliation by the Grantee upon attaining age 65 with at least five years of
service as an employee of the Company or a Subsidiary.
"SEC" means the Securities and Exchange Commission.
"Share" means a share of Common Stock.
"Strike Price" of any SAR shall equal, for any Tandem SAR that is
identified with an Option, the Option Price of such option, or for any other
SAR, 100% of the Fair Market Value of a Share on the Grant Date of such SAR;
provided that the Committee may specify a higher Strike Price in the Award
Agreement.
"Stock Appreciation Right" or "SAR" means a right granted as an Award under
the Plan to receive, as of the date specified in the Award Agreement, an amount
equal to the number of Shares with respect to which the SAR is exercised,
multiplied by the excess of (a) the Fair Market Value of one Share on the
Exercise Date, over (b) the Strike Price.
"Subsidiary" means, for purposes of grants of Incentive Stock Options, a
corporation as defined in Code Section 424(f) (with the Company being treated as
the employer corporation for purposes of this definition), and, for all other
purposes, a United States or foreign corporation with respect to which the
Company owns, directly or indirectly, 50% or more of the then-outstanding common
stock, or a limited liability company, partnership, joint venture, or other
unincorporated entity with respect to which the Company owns, directly or
indirectly, 50% or more of the then-outstanding profits interest.
"Tandem SAR" means a SAR that is granted in connection with a related
Award, the exercise of which shall require forfeiture of the right to purchase a
Share under the related Award (and when a Share is purchased under the related
Award, the Tandem SAR shall similarly he canceled).
"10% Owner" means a person who owns capital stock (including stock treated
as owned under Code Section 424(d)) possessing more than 10% of the total
combined voting power of all classes of capital stock of the Company or any
Subsidiary.
"Termination of Affiliation" occurs on the first day on which an individual
is for any reason no longer providing services for the Company or any of its
Subsidiaries in the capacity of an employee, director or Consultant, or with
respect to an individual who is an employee or director of or Consultant to
Subsidiary, the first day on which the Company no longer, directly or
indirectly, owns voting securities possessing at least 50% of the combined
voting power of the then-outstanding securities of a corporation entitled to
vote generally in
4
the election of directors of such Subsidiary, if a corporation, or at least 50%
of the then-outstanding profits interest of such Subsidiary if a limited
liability company, partnership, joint venture, or other unincorporated entity.
ADMINISTRATION
Committee. Subject to Section 3.2, the Plan shall be administered by a
committee (the "Committee") which shall consist of two or more directors of the
Company. To the extent the Board considers it desirable to comply with Rule
16b-3 or to meet the Performance-Based Exception, all of the members of the
Committee shall qualify as "outside directors" within the meaning of the
regulations under Section 162(m) of the Code and "non-employee directors" within
the meaning of Rule 16b-3 in respect of the exemption of grants to Insiders from
potential liability under Section 16(b) of the Exchange Act. The number of
members of the Committee shall from time to time be increased or decreased, and
shall be subject to such other conditions, in each case as the Board deems
appropriate.
Delegation Authority. The Board may reserve to itself or delegate to
another committee of the Board any or all of the authority of the Committee with
respect to Awards. Such other committee (the "Management Committee") may consist
of one (or such greater number as may from time to time be required by the
bylaws of the Company) or more directors who may, but need not be, officers or
employees of the Company or a Subsidiary. Unless such delegation expressly
provides to the contrary, such delegated authority shall not extend to Awards
intended to comply with the Performance-Based Exception or Awards to Insiders
intended to be exempt under Rule 16b-3, unless the Management Committee meets
the requirements of the second sentence of Section 3.1. Unless such delegation
expressly provides to the contrary, such delegation shall not prevent the
Committee described in Section 3.1 from taking any subsequent action that is
required or permitted by the Plan respecting an Award granted by the Management
Committee. To the extent that the Board has reserved to itself or delegated to
such Management Committee the authority of the Committee, all references to the
Committee in the Plan shall be to the Board or such Management Committee. The
Management Committee may not grant Awards relating to an aggregate of more than
200,000 Shares in any calendar year unless the Board gives its prior approval of
a larger number of Shares.
Powers of Committee. Subject to the express provisions of the Plan, the
Committee has full and final authority and sole discretion as follows:
to determine when and to whom Awards should be granted and the terms
and conditions applicable to each Award (which need not be identical),
including conditions intended to comply with Code Section 409A, the number
of Shares or the amount of cash or other property to which an Award will
relate, the term of the Award, any Option Price, Strike Price, any
limitation or restriction, any schedule for or performance conditions
relating to the earning of the Award or the lapse of restrictions,
forfeiture restrictions, restrictions on exercisability or transferability,
any Performance Measures and Performance Goals including those relating to
the Company and/or a Subsidiary, vesting based on the passage of time, the
benefit payable under any SAR, Performance Unit or Performance Share, and
whether or not specific Awards shall be identified with other specific
Awards, and if so whether they shall be exercisable cumulatively with, or
alternatively to, such other specific Awards; based in each case on such
considerations as the Committee shall determine;
to determine the sizes and types of Awards;
to determine the amount, if any, that a Grantee shall pay for
Restricted Stock, whether to permit or require the payment of cash
dividends thereon to be deferred and the terms related thereto, when
Restricted Stock (including Restricted Stock Shares acquired upon the
exercise of an Option) shall be forfeited and whether such shares shall be
held in escrow;
to correct any defect or supply any omission or reconcile any
inconsistency, and to construe and interpret the Plan, the rules and
regulations, and Award Agreement or any other instrument entered into or
relating to an Award under the Plan, and to make all determinations,
including factual determinations, necessary or advisable for the
administration of the Plan;
5
to make, amend, and rescind rules relating to the Plan, including
rules with respect to the exercisability and nonforfeitability of Awards
upon the Termination of Affiliation of a Grantee;
with the consent of the Grantee, to amend any Award Agreement at any
time, including an amendment to permit transfers of such Awards to the
extent permitted by the Plan; provided that the consent of the Grantee
shall not be required for any amendment which (a) does not adversely affect
the rights of the Grantee, (b) is required by the listing criteria of any
exchange on which Shares are traded; or (c) is necessary or advisable (as
determined by the Committee) to carry out the purpose of the Award as a
result of any new or change in existing applicable law (including any new
or changed requirement of the Code to obtain a tax benefit or to avoid a
tax or a tax penalty for either the Company or any Grantee);
to cancel, with the consent of the Grantee, outstanding Awards and to
grant new Awards in substitution therefor;
to accelerate the exercisability (including exercisability within a
period of less than one year after the Grant Date) of, and to accelerate or
waive any or all of the terms and conditions applicable to, any Award or
any group of Awards for any reason and at any time, including in connection
with a Termination of Affiliation (other than for Cause), provided that the
Committee may not accelerate the payment of any Award which is deferred
compensation within the meaning of Section 409A of the Code if such
acceleration would subject the Award to any additional tax under Section
409A of the Code;
subject to Section 1.3 and Section 5.3, to extend the time during
which any Award or group of Awards may be exercised;
to make such adjustments or modifications to Awards to Grantees
working outside the United States as are advisable to fulfill the purposes
of the Plan;
to impose such additional terms and conditions upon the grant,
exercise or retention of Awards as the Committee may, before or
concurrently with the grant thereof, deem appropriate, including limiting
the percentage of Awards which may from time to time be exercised by a
Grantee;
to appoint such agents including without limitation management of the
Company, as the Committee may deem necessary or advisable to assist the
Committee in administration of the Plan;
without the consent of the Grantee, to make adjustments in the terms
and conditions of, and the criteria in, Awards in recognition of unusual or
nonrecurring events (including events described in Section 4.4(a))
affecting the Company or any Subsidiary or the financial statements of the
Company or any Subsidiary, or in response to changes in applicable laws,
regulations or accounting principles; provided, however, that in no event
shall such adjustment increase the value of an Award for a person expected
to be a Covered Employee for whom the Committee desires to have the
Performance-Based Exception apply; and
to take any other action with respect to any matters relating to the
Plan for which it is responsible.
The determination of the Committee on all matters relating to the Plan or
any Award Agreement shall be final, conclusive and binding on all Persons,
except to the extent the Committee may subsequently modify, or take further
action not consistent with, its prior action. If not specified in the Plan, the
time at which the Committee must or may make any determination shall be
determined by the Committee, and any such determination may thereafter be
modified by the Committee. This express grant of any specific power to the
Committee, and the taking of any action by the Committee, shall not be construed
as limiting any power or authority of the Committee. No member of the Committee
shall be liable for any action or determination made in good faith with respect
to the Plan or any Award.
6
SHARES SUBJECT TO THE PLAN, MAXIMUM AWARDS AND SECTION 162(M) COMPLIANCE
Number of Shares Available for Grants. Subject to adjustment as provided
in Section 4.2 hereof, the number of Shares hereby reserved for issuance under
the Plan shall be three million (3,000,000) which shall consist of the sum of
(a) 2,453,598, plus (b) 546,402 remaining Shares as of the Effective Date of
this Plan under the CNA Surety Corporation 1997 Long-Term Equity Compensation
Plan (the "1997 Plan") not subject to outstanding Awards under the 1997 Plan and
not delivered out of Shares reserved thereunder. If any Shares subject to an
Award granted hereunder are forfeited or such Award otherwise terminates without
the issuance of such Shares or of other consideration in lieu of such Shares,
the Shares subject to such Award, to the extent of any such forfeiture or
termination shall again he available for grant under the Plan. If a SAR is
settled in Shares, only the number of Shares delivered in settlement of a SAR
shall cease to he available for grant under the Plan, regardless of the number
of Shares with respect to which the SAR was exercised. If any Shares subject to
an Award granted hereunder are withheld or applied as payment in connection with
the exercise of an Award (including the withholding of Shares on the exercise of
a SAR that is settled in Shares) or, except with respect to Restricted Stock,
the withholding or payment of taxes related thereto, such Shares shall again be
available for grant under the Plan. The Committee shall determine the
appropriate methodology for calculating the number of shares issued pursuant to
the Plan. Shares issued pursuant to the Plan may be treasury Shares or newly
issued Shares.
Maximum Awards. Awards shall be subject to the following limits:
Options: The maximum aggregate number of Shares that may be granted
in the form of Options, pursuant to any Awards granted in any one calendar
year to any one single Grantee, shall be two hundred thousand (200,000).
SARS: The maximum aggregate number of SARs available under the Plan
shall be one million (1,000,000), and the maximum aggregate number of SARs
that may be granted in any one calendar year to any one single Grantee
shall be two hundred thousand (200,000).
Restricted Stock: The maximum aggregate number of Shares that may be
granted as Restricted Stock under the Plan shall be one million
(1,000,000), and the maximum aggregate grant with respect to Awards of
Restricted Stock granted in any one calendar year to any one Grantee shall
be one hundred thousand (100,000).
Bonus Shares: The maximum number of Shares that maybe granted as
Bonus Shares under the Plan shall be 300,000.
Performance Shares/Performance Units: The maximum aggregate payout
(determined as of the end of the applicable performance period) with
respect to Awards of Performance Shares or Performance Units granted in any
one calendar year to any one Grantee shall be equal to the value of one
hundred thousand (100,000) Shares; provided, however, that if the
Performance Period applicable to a Performance Unit exceeds twelve months,
the 100,000 share limit shall apply to each 12-month period in the
Performance Period.
Incentive Awards: The maximum aggregate payout (determined as of the
end of the applicable performance period) with respect to Incentive Awards
granted in any one calendar year to any one Grantee shall be 300% of the
Grantee's base salary (as in effect on the first day of the performance
period or, if later, the date the Grantee becomes an employee of the
Company or any Subsidiary) up to a maximum of $1 million in base salary;
provided, however, that if the Performance Period applicable to an
Incentive Award exceeds twelve months, the foregoing limit shall apply to
each 12-month period in the Performance Period.
If an Award denominated in Shares is cancelled, the cancelled Award continues to
count against the maximum number of Shares for which an Award denominated in
Shares may be granted to a Grantee in any calendar year. The Share limits of
this Section 4.2 shall be adjusted to the extent necessary to reflect
adjustments to Shares required by Section 4.3.
7
Adjustments in Authorized Shares. In the event of any change in corporate
capitalization, including a stock split, or share combination or a corporate
transaction, including any merger, consolidation, separation, including a
spin-off, or other distribution of stock or property of the Company, any
reorganization (whether or not such reorganization comes within the definition
of such term in Code Section 368) or any partial or complete liquidation of the
Company, such adjustment shall be made in the number and class of Shares which
may be delivered under Section 4.1, in the number and class of and/or price of
Shares subject to outstanding Awards granted under the Plan, and in the Award
limits set forth in Section 4.2, as may be determined to be appropriate and
equitable by the Committee, in its sole discretion, to prevent dilution or
enlargement of rights; provided, however, that the number of Shares subject to
any Award shall always be a whole number.
Performance-Based Exception Under Section 162(m).
Performance Measures. Unless and until the Committee proposes for
shareholder vote and shareholders approve a change in the general
performance measures set forth in this Section 4.4, the attainment of which
may determine the degree of payout and/or vesting with respect to Awards
designed to qualify for the Performance-Based Exception, the performance
measure(s) to be used for purposes of such Awards shall be chosen from
among the following and including any of the following in the aggregate or
on a per-Share basis and on a pre-tax or after-tax basis:
Earnings;
Net income;
Net operating income;
Cash flow provided by operations;
Free cash flow;
Return measures (including return on assets, equity, or sales);
Earnings (before or after any of interest, taxes, depreciation or
amortization);
Gross revenues;
Share price (including growth measures and total shareholder return or
attainment by the Shares of a specified value for a specified period of
time);
Reductions in expense levels;
Strategic business criteria, consisting of one or more objectives
based on meeting objective standards of rate adequacy, premium growth,
market share retention, budget, operating plan, customer/employee
satisfaction, customer/employee diversity, business development or special
projects;
Combined ratio (or any of its components); and
Gross or net written premiums.
provided that the Committee may, on the Grant Date of an Award intended to
comply with the Performance-Based Exception, and in the case of other Awards, at
any time, provide that the formula for such Award may include or exclude items
to measure specific objectives, such as losses from discontinued operations,
extraordinary gains or losses, the cumulative effect of accounting changes,
acquisitions or divestitures, foreign exchange impacts and any unusual,
nonrecurring gain or loss.
FLEXIBILITY AS TO TIMING, WEIGHTING, APPLICABLE BUSINESS UNIT. For Awards
intended to comply with the Performance-Based Exception, the Committee shall set
the Performance Goals within the time period prescribed by Section 162(m) of the
Code. The levels of performance required with respect to Performance Measures
may be expressed in absolute or relative levels and may be based upon a set
increase or rate of growth, set positive result, maintenance of the status quo,
set decrease or set negative result. Performance Measures may differ for Awards
to different Grantees. The Committee shall specify the weighting (which may he
the same or different for multiple objectives) to be given to each performance
objective for purposes of
8
determining the final amount payable with respect to any such Award. Any one or
more of the Performance Measures may apply to the Company as a whole, or to a
Grantee, a department, unit, division or function within the Company, or any one
or more Subsidiaries; and may apply either alone or relative to the performance
of other businesses or individuals (including industry or general market
indices).
DISCRETION TO ADJUST. The Committee shall have the discretion to adjust
the determinations of the degree of attainment of the pre-established
performance goals; provided, however, that Awards which are designed to qualify
for the Performance-Based Exception may not (unless the Committee determines to
amend the Award so that it no longer qualifies for the Performance-Based
Exception) be adjusted upward. The Committee shall retain the discretion to
adjust such Awards downward. All determinations by the Committee as to the
achievement of the Performance Measure(s) shall be certified in writing prior to
payment of the Award.
ALTERATION OF PERFORMANCE MEASURES. In the event that applicable laws
change to permit Committee discretion to alter the governing Performance
Measures without obtaining stockholder approval of such changes, and still
qualify for the Performance-Based Exception, the Committee shall have sole
discretion to make such changes without obtaining stockholder approval.
ELIGIBILITY AND GENERAL CONDITIONS OF AWARDS
Eligibility. The Committee may in its discretion grant Awards to any
Eligible Person, whether or not he or she has previously received an Award.
Grant Date. The Grant Date of an Award shall be the date on which the
Committee grants the Award or such later date as specified in advance by the
Committee.
Maximum Term. Any provision of the Plan to the contrary notwithstanding,
the Option Term or other period during which an Award may be outstanding shall
under no circumstances extend more than 10 years after the Grant Date, and shall
be subject to earlier termination as herein provided.
Award Agreement. To the extent not set forth in the Plan, the terms and
conditions of each Award (which need not be the same for each grant or for each
Grantee) shall he set forth in an Award Agreement, provided that the terns and
conditions of Incentive Awards may be set forth in a resolution or other
document adopted by the Committee and generally applicable to all Grantees of
Incentive Awards, which resolution or other document shall be deemed an Award
Agreement for purposes of this Plan.
Restrictions on Share Transferability. The Committee may impose such
restrictions on any Shares acquired pursuant to the exercise of an Option
granted under the Plan as it may deem advisable, including restrictions under
applicable federal securities laws, under the requirements of any stock exchange
or market upon which Shares are then listed or traded, and under any blue sky or
state securities laws applicable to such Shares.
Termination of Affiliation. Each Grantee's Award Agreement shall set forth
the extent to which the Grantee shall have the right to exercise the Award
following Termination of Affiliation. Such provisions shall be determined in the
sole discretion of the Committee, shall be included in the Award Agreement, need
not be uniform among all Awards granted under the Plan, and may reflect
distinctions based on the reasons for Termination of Affiliation.
Notwithstanding the foregoing, vesting of Restricted Stock and distributions or
payments with respect to other Awards intended to qualify for the
Performance-Based Exception shall occur at the time they would have, but for the
Termination of Affiliation, if such Termination of Affiliation is for a reason
other than death, Disability, or in connection with a change of control of the
Company or a Subsidiary.
Nontransferability of Awards.
Each Award granted hereunder shall not be assignable or transferable other
than by will or the laws of descent and distribution and may be exercised,
during the Grantee's lifetime, only by the Grantee or his or her guardian or
legal representative, except that, a Grantee may, in a manner and to the extent
permitted by the Committee in its discretion, designate in writing a beneficiary
to exercise an Award after the Grantee's death in
9
accordance with Article 12, and Non-Qualified Stock Options may be transferred
in accordance with subsection (b).
Notwithstanding subsection (a) above, to the extent provided in the Award
Agreement, Nonqualified Stock Options may be transferred, without consideration,
to a Permitted Transferee. For this purpose, a "PERMITTED TRANSFEREE" in respect
of any Grantee means any member of the Immediate Family of such Grantee, any
trust of which all of the primary beneficiaries are such Grantee or members of
his or her Immediate Family, or any partnership (including limited liability
companies and similar entities) of which all of the partners or members are such
Grantee or members of his or her Immediate Family; and the "IMMEDIATE FAMILY" of
a Grantee includes any child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law,
including adoptive relationships, any person sharing the employee's household
(other than a tenant or employee), a trust in which these persons have more than
fifty percent of the beneficial interest, a foundation in which these persons
(or the employee) control the management of assets, and any other entity in
which these persons (or the employee) own more than fifty percent of the voting
interests. Such Award may he exercised by such transferee in accordance with the
terms of such Award.
A transferee, beneficiary, guardian, legal representative or other person
claiming any rights under the Plan from or through any Grantee shall be subject
to the provisions of the Plan and any applicable Award Agreement, except to the
extent the Plan and Award Agreement otherwise provide with respect to such
persons, and to any additional restrictions or limitations deemed necessary or
appropriate by the Committee.
Nothing herein shall be construed as requiring the Committee to honor the order
of a domestic relations court regarding an Award, except to the extent required
under applicable law.
Cancellation and Rescission of Awards.
Unless the Award Agreement specifies otherwise, the Committee may cancel,
rescind, suspend, withhold, or otherwise limit or restrict any unexercised Award
at any time if the Grantee is not in compliance with all applicable provisions
of the Award Agreement and the Plan or if the Grantee has a Termination of
Affiliation for Cause.
Upon exercise, payment, or delivery pursuant to an option, the Grantee
shall certify in a manner acceptable to the Company that he or she is in
compliance with the terms and conditions of the Plan. In the event a Grantee
fails to comply with the provisions of this Section 5.8 prior to, or during the
six months after, any exercise, payment, or delivery pursuant to an Award, such
exercise, payment, or delivery may be rescinded by the Committee within two
years thereafter. In the event of any such rescission, the Grantee shall pay to
the Company the amount of any gain realized or payment received as a result of
the rescinded exercise, payment, or delivery in such manner and on such terms
and conditions as may be required, and the Company shall be entitled to set-off
against the amount of any such gain any amount owed to the Grantee by the
Company.
Exercise by Non-Grantee. If as permitted by the Plan any Award is
exercised by, or benefits under an Award are to be paid to any person other than
the Grantee, references in this Plan to the Grantee shall include such person,
and such person shall provide at the time of exercise of an Award or prior to
payment of the Award such documentation as may reasonably be required by the
Committee, including without limitation, evidence of authority of such person or
persons to exercise or receive payment of the Award and if the Committee so
specifies, evidence satisfactory to the Company that any death taxes payable
with respect to such Shares have been paid or provided for.
No Cash Consideration for Awards. Awards may be granted for no cash
consideration or for such minimal cash consideration as may be required by
applicable law.
No Fractional Shares. No fractional Shares shall be issued or delivered
pursuant to the Plan or any Award, and the Committee shall determine whether
cash, other securities, or other property shall be paid or transferred in lieu
of any fractional Shares, or whether such fractional Shares or any rights
thereto shall be canceled, terminated, or otherwise eliminated.
10
Tax Obligations. No Award shall be settled, whether in cash or Shares,
unless the applicable tax withholding requirements have been met to the
satisfaction of the Committee.
STOCK OPTIONS
Grant of Options. Subject to the terms and provisions of the Plan, Options
may be granted to any Eligible Person in such number, and upon such terms, and
at any time and from time to time as shall be determined by the Committee.
Award Agreement. Each Option grant shall be evidenced by an Award
Agreement that shall specify the Option Price, the Option Term, the number of
shares to which the Option pertains, the time or times at which such Option
shall be exercisable and such other provisions as the Committee shall determine.
Option Price. The Option Price of an Option under this Plan shall be at
least equal to one hundred percent (100%) of the Fair Market Value of a Share on
the Grant Date.
Grant of Incentive Stock Options. At the time of the grant of any Option,
the Committee may in its discretion designate that such Option shall be made
subject to additional restrictions to permit it to qualify as an Incentive Stock
Option. Any Option designated as an Incentive Stock Option:
shall, if granted to a 10% Owner, have an Option Price not less than
110% of the Fair Market Value of a Share on the Grant Date;
shall be for a period of not more than 10 years (five years in the
case of an Incentive Stock Option granted to a 10% Owner) from the Grant
Date, and shall be subject to earlier termination as provided herein or in
the applicable Award Agreement;
shall not have an aggregate Fair Market Value (determined for each
Incentive Stock Option at its Grant Date) of the Shares with respect to
which Incentive Stock Options are exercisable for the first time by such
Grantee during any calendar year (under the Plan and any other stock option
plan of the Grantee's employer or any parent or Subsidiary thereof ("Other
Plans")), determined in accordance with the provisions of Code Section 422,
which exceeds $100,000 (the "$100,000 Limit");
shall, if the aggregate Fair Market Value of the Shares (determined on
the Grant Date) with respect to the portion of such grant which is
exercisable for the first time during any calendar year ("Current Grant")
and all Incentive Stock Options previously granted under the Plan and any
Other Plans which are exercisable for the first time during a calendar year
("Prior Grants") would exceed the $100,000 Limit, be exercisable as
follows:
the portion of the Current Grant which would, when added to any Prior
Grants, be exercisable with respect to Shares which would have an aggregate
Fair Market Value (determined as of the respective Grant Date for such
options) in excess of the $100,000 Limit shall, notwithstanding the terms
of the Current Grant, be exercisable for the first time by the Grantee in
the first subsequent calendar year or years in which it could be
exercisable for the first time by the Grantee when added to all Prior
Grants without exceeding the $100,000 Limit; and
if, viewed as of the date of the Current Grant, any portion of a
Current Grant could not be exercised under the preceding provisions of this
Section during any calendar year commencing with the calendar year in which
it is first exercisable through and including the last calendar year in
which it may by its terms be exercised, such portion of the Current Grant
shall not be an Incentive Stock Option, but shall be exercisable as a
separate Option at such date or dates as are provided in the Current Grant;
shall be granted within 10 years from the earlier of the date the Plan
is adopted or the date the Plan is approved by the stockholders of the
Company;
shall require the Grantee to notify the Committee of any disposition
of any Shares issued pursuant to the exercise of the Incentive Stock Option
under the circumstances described in Code Section 421(b)
11
(relating to certain disqualifying dispositions) (any such circumstance, a
"Disqualifying Disposition"), within 10 days of such Disqualifying
Disposition; and
shall by its terms not be assignable or transferable other than by
will or the laws of descent and distribution and maybe exercised, during
the Grantee's lifetime, only by the Grantee; provided, however, that the
Grantee may, to the extent provided in Article 12 of the Plan and in the
manner specified by the Committee, designate in writing a beneficiary to
exercise his or her Incentive Stock Option after the Grantee's death; and
shall, if such Option nevertheless fails to meet the foregoing
requirements, or otherwise fails to meet the requirements of Section 422 of
the Code for an Incentive Stock Option, be treated for all purposes of this
Plan, except as otherwise provided in subsections (i) and (ii) above, as a
Non-Qualified Stock Option.
Notwithstanding the foregoing, the Committee may, without the consent of
the Grantee, at any time before the exercise of an Option (whether or not an
Incentive Stock Option), take any action necessary to prevent such option from
being treated as an Incentive Stock Option.
Exercise and Payment. Options granted under this Article 6 shall be
exercised by the delivery of a written notice of exercise to the Company
identifying the Option being exercised and setting forth the number of Shares
with respect to which the Option is being exercised, accompanied by full payment
for the Shares.
Payment of the Option Price may be made by any one or more of the following
means:
cash, personal check or wire transfer;
Mature Shares, valued at their Fair Market Value on the date of
exercise;
with the approval of the Committee, Restricted Stock held by the
Grantee for at least six months prior to the exercise of the option, each
such share valued at the Fair Market Value of a Share on the date of
exercise; or
pursuant to procedures previously approved by the Company, but subject
to applicable law (including Section 402 of the Sarbanes-Oxley Act of 2002
relating to extensions of credit in the form of a loan to directors and
executive officers (or the equivalent thereof)), through the sale of the
Shares acquired on exercise of the Option through a broker-dealer to whom
the Grantee has submitted an irrevocable notice of exercise and irrevocable
instructions to deliver promptly to the Company the amount of sale or loan
proceeds sufficient to pay for such Shares, together with, if requested by
the Company, the amount of federal, state, local or foreign withholding
taxes payable by Grantee by reason of such exercise.
The Committee may in its discretion specify that, if any Restricted
Stock Shares ("Tendered Restricted Shares") are used to pay the Option
Price, (x) all the Shares acquired on exercise of the option shall be
subject to the same restrictions as the Tendered Restricted Shares,
determined as of the date of exercise of the option, or (y) a number of
Shares acquired on exercise of the option equal to the number of Tendered
Restricted Shares shall be subject to the same restrictions as the Tendered
Restricted Shares, determined as of the date of exercise of the option.
STOCK APPRECIATION RIGHTS
Grant of SARs. Subject to the terms and conditions of the Plan, SARs maybe
granted to any Eligible Person at any time and from time to time as shall be
determined by the Committee. The Committee may grant Freestanding SARs, Tandem
SARs, or any combination thereof. Any SAR related to a Non-Qualified Stock
Option may be granted at the same time such Option is granted or at any time
thereafter before exercise or expiration of such Option. Any SAR related to an
Incentive Stock Option must be granted at the same time such Option is granted.
Award Agreements. Each SAR shall be evidenced by an Award Agreement in
such form as the Committee may approve, which shall contain such terms and
conditions not inconsistent with the provisions of
12
the Plan as shall be determined from time to time by the Committee. The
Committee shall have complete discretion in determining the number of SARs
granted to each Grantee (subject to Article 4), the Strike Price thereof
(subject to Section 7.3), and, consistent with the provisions of the Plan, in
determining the terms and conditions pertaining to such SARs. The Committee may
impose such conditions or restrictions on the exercise of any SAR as it shall
deem appropriate.
Strike Price. The Strike Price of a SAR under this Plan shall be at least
equal to one hundred percent (100%) of the Fair Market Value of a Share on the
Grant Date.
Exercise of Tandem SAR. Tandem SARs may be exercised for all or part of
the Shares subject to the related Award upon the surrender of the right to
exercise the equivalent portion of the related Award. A Tandem SAR may be
exercised only with respect to the Shares for which its related Award is then
exercisable.
Notwithstanding any other provision of this Plan to the contrary, with
respect to a Tandem SAR granted in connection with an ISO; (i) the Tandem SAR
will expire no later than the expiration of the underlying ISO; (ii) the value
of the payout with respect to the Tandem SAR may be for no more than one hundred
percent (100%) of the difference between the Option Price of the underlying ISO
and the Fair Market Value of the Shares subject to the underling ISO at the time
the Tandem SAR is exercised; and (iii) the Tandem SAR may be exercised only when
the Fair Market Value of the Shares subject to the ISO exceeds the Option Price
of the ISO.
Exercise of Freestanding SARs. Freestanding SARs may be exercised upon
whatever terms and conditions the Committee, in its sole discretion, imposes
upon them.
Exercise and Payment of SAR Amount. SARs shall be exercised by the
delivery of a written notice to the Company identifying the SAR being exercised
and setting forth the number of Shares with respect to which the SAR is being
exercised. Upon exercise of a SAR, the Grantee shall be entitled to receive
payment from the Company in an amount determined by multiplying:
The difference between the Fair Market Value of a Share on the date of
exercise and the Strike Price, by
The number of Shares with respect to which the SAR is exercised;
provided that the Committee may provide that the benefit payable on
exercise of any SAR shall not exceed such percentage of The Fair Market
Value of a Share on the Grant Date as the Committee shall specify.
At the discretion of the Committee, the payment upon SAR exercise may be in
cash, in Shares of equivalent value, or in some combination thereof, as set
forth in the Award Agreement.
RESTRICTED STOCK
Grant of Restricted Stock. Subject to the terms and provisions of the
Plan, the Committee, at any time and from time to time, may grant Restricted
Stock to any Eligible Person in such amounts as the Committee shall determine.
Restricted Stock may be granted as Restricted Stock Shares or Restricted Stock
Units.
Award Agreement. Each grant of Restricted Stock shall be evidenced by an
Award Agreement that shall specify the Period(s) of Restriction, the number of
Restricted Stock Shares or Units granted, and such other provisions as the
Committee shall determine. The Committee shall impose such other conditions
and/or restrictions on any Restricted Stock granted pursuant to the Plan as it
may deem advisable, including restrictions based upon the achievement of
specific Performance Goals, time-based restrictions on vesting following the
attainment of the Performance Goals, and/or restrictions under applicable
federal or state securities laws.
Other Restrictions. The Committee shall determine the amount, if any, that
a Grantee shall pay for Restricted Stock Shares, provided that except with
respect to Restricted Stock Shares issued from treasury shares, for which no
payment need be required, the Committee shall require the Grantee to pay at
least the Minimum Consideration for each Restricted Stock Share. Such payment
shall be made in full by the Grantee
13
before the delivery of the Shares and in any event no later than 10 days after
the Grant Date for Restricted Stock Shares.
Effect of Forfeiture. If Restricted Stock Shares are forfeited, then if
the Grantee was required to pay for such Restricted Stock or acquired such
Restricted Stock upon the exercise of an option, the Grantee shall be deemed to
have resold such Restricted Stock to the Company at a price equal to the lesser
of (x) the amount paid by the Grantee for such Restricted Stock, or (y) the Fair
Market Value of the Shares on the date of such forfeiture. The Company shall pay
to the Grantee the required amount as soon as is administratively practical.
Restricted Stock Shares that have been forfeited shall cease to be outstanding,
and shall no longer confer on the Grantee thereof any rights as a stockholder of
the Company, from and after the date of the event causing the forfeiture,
whether or not the Grantee accepts the Company's tender of payment for such
Restricted Stock.
Escrow; Legends. The Committee may provide that the certificates for any
Restricted Stock Shares (x) shall be held (together with a stock power executed
in blank by the Grantee) in escrow by the Secretary of the Company until such
Restricted Stock Shares become nonforfeitable or are forfeited or (y) shall bear
an appropriate legend restricting the transfer of such Restricted Stock Shares.
If any Restricted Stock Shares become nonforfeitable, the Company shall cause
certificates for such Shares to be issued without such legend.
Crediting Restricted Stock Units. If Restricted Stock Units are granted,
the Company shall establish an account ("RSU Account" ) on its books for each
Eligible Person who receives a grant of Restricted Stock Units. Restricted Stock
Units shall be credited to the Grantee's RSU Account as of the Grant Date of
such Restricted Stock Units. RSU Accounts shall be maintained for recordkeeping
purposes only and the Company shall not be obligated to segregate or set aside
assets representing securities or other amounts credited to RSU Accounts. The
obligation to make distribution of Shares or other amounts credited to RSU
Accounts shall be an unfunded unsecured obligation of the Company.
Settlement of RSU Accounts. The Company shall settle an RSU Account by
delivering to the Grantee a number of Shares equal to the whole number of Shares
underlying the Restricted Stock Units then credited to the Grantee's RSU Account
(or a specified portion in the event of any partial settlement); provided that
any fractional Shares underlying Restricted Stock Units remaining in the RSU
Account on the Settlement Date shall be distributed in cash in an amount equal
to the Fair Market Value of a Share as of the Settlement Date multiplied by the
remaining fractional Restricted Stock Unit. Unless the Settlement Date is
deferred pursuant to Article 13, the "Settlement Date" for all Restricted Stock
Units credited to a Grantee's RSU Account shall be the earlier of (a) the lapse
of the Period of Restriction applicable to an Award of Restricted Stock Units,
or (b) promptly following the Grantee's death or disability (as defined in Code
Section 409A(a)(2)(C)(i)).
Voting and Dividend Equivalents. At the discretion of the Committee and to
the extent set forth in the Award Agreement and consistent with the requirements
of Section 409A, a Grantee may be entitled to receive dividend equivalents with
respect to Shares in connection with grants of Restricted Stock Shares or
Restricted Stock Units which have been awarded but not yet vested in the
Grantee. In addition, a Grantee may, at the discretion of the Committee and to
the extent set forth in the Award Agreement, be entitled to exercise his or her
voting rights with respect to Restricted Stock Shares. No voting rights shall be
exercised with respect to Restricted Stock Units.
PERFORMANCE UNITS AND PERFORMANCE SHARES
Grant of Performance Units/Shares. Subject to the terms of the Plan,
Performance Units and/or Performance Shares may be granted to any Eligible
Person in such amounts and upon such terms, and at any time and from time to
time as shall be determined by the Committee.
Value of Performance Units/Shares. Each Performance Unit shall have an
initial value that is established by the Committee at the time of grant. Each
Performance Share shall have an initial value equal to the Fair Market Value of
a Share on the date of grant. The Committee shall set Performance Goals in its
discretion which, depending on the extent to which they are met, will determine
the number and/ or value of Performance Units/Shares that will be paid out to
the Grantee. The Committee may set the Performance
14
Goals for Awards of Performance Units at threshold, target and maximum
performance levels, with the number or value of the Performance Units payable
tied to the degree of attainment of the various performance levels during the
Performance Period. No payment shall be made with respect to a Performance Unit
if the threshold performance level is not attained. If Performance Goals are
attained between performance levels (i.e., either between the threshold and
target performance levels or between the target and maximum performance levels)
the number or value of the Performance Unit at the end of the Performance Period
shall be determined by linear interpolation, unless otherwise provided by the
Committee at the time of grant. To the extent the Committee deems it appropriate
to comply with Section 162(m) of the Code, all Performance Goals shall he
objective, and shall be based on Performance Measures.
Earning of Performance Units/Shares. Subject to the terms of this Plan,
after the applicable Performance Period has ended, the holder of Performance
Units/Shares shall be entitled to receive payout on the number and value of
Performance Units/Shares earned by the Grantee over the Performance Period, to
be determined as a function of the extent to which the corresponding performance
goals have been achieved. If the Performance Unit Award is intended to comply
with the Performance-Based Exception, the Committee shall certify the level of
attainment of the Performance Goals in writing before the Award is settled.
If a Grantee is promoted, demoted or transferred to a different business
unit of the Company during a Performance Period, then, to the extent the
Committee determines the performance goals or Performance Period are no longer
appropriate, the Committee may adjust, change or eliminate the performance goals
or the applicable Performance Period as it deems appropriate in order to make
them appropriate and comparable to the initial performance goals or Performance
Period.
Form and Timing of Payment of Performance Units/Shares. Payment of earned
Performance Units/Shares shall be made in a single lump sum following the close
of the applicable Performance Period. Subject to the terms of this Plan, the
Committee, in its sole discretion, may pay earned Performance Units/Shares in
the form of cash or in Shares (or in a combination thereof) which have an
aggregate Fair Market Value equal to the value of the earned Performance
Units/Shares at the close of the applicable Performance Period. Such Shares may
he granted subject to any restrictions deemed appropriate by the Committee. The
determination of the Committee with respect to the form of payout of such Awards
shall be set forth in the Award Agreement pertaining to the grant of the Award.
At the discretion of the Committee and to the extent set forth in the Award
Agreement, a Grantee may be entitled to receive any dividends declared with
respect to Shares which have been earned in connection with grants of
Performance Units and/or Performance Shares which have been earned but not yet
distributed to the Grantee. In addition, a Grantee may, at the discretion of the
Committee and to the extent set forth in the Award Agreement, be entitled to
exercise his or her voting rights with respect to such Shares.
INCENTIVE AWARDS
Incentive Awards. Subject to and consistent with the provisions of the
Plan, Incentive Awards may be granted to any Eligible Person in accordance with
this Article 10. Incentive Awards shall be based on achievement of Performance
Goals over a Performance Period which may be one fiscal year or less ("Annual
Incentive Awards") or more than one fiscal year ("Long-Term Incentive Awards").
The Committee shall designate the individuals eligible to be granted an
Incentive Award for a year or other Performance Period within the first ninety
(90) days of such year or other Performance Period or, in the case of a
newly-hired or newly-promoted Grantee, not later than the elapse of 25% of the
remainder of such year or other Performance Period after such hiring or
promotion. The Committee may designate an Eligible Person as eligible for a full
year or other Performance Period or for a period of less than a full year or
other Performance Period. The opportunity for a Covered Employee to be granted
an Incentive Award shall be, and the opportunity for a Grantee other than a
Covered Employee may in the discretion of the Committee be, evidenced by an
Award Agreement, which shall specify the individual's Bonus Opportunity, the
Performance Goals, and such other terms not inconsistent with the Plan as the
Committee shall determine.
15
Determination of Amount of Incentive Awards.
AGGREGATE MAXIMUM. The Committee may establish guidelines as to the
maximum aggregate amount of Incentive Awards payable for any year.
ESTABLISHMENT OF PERFORMANCE GOALS AND BONUS OPPORTUNITIES. Within the
first ninety (90) days of each year or other Performance Period, the Committee
shall establish Performance Goals for the year or other Performance Period(which
may be the same or different for some or all Eligible Persons) and shall
establish the threshold, target and maximum Bonus Opportunity for each
Participant for the attainment of specified threshold, target and maximum
Performance Goals. Performance Goals and Bonus Opportunities may be weighted for
different factors and measures as the Committee shall determine.
COMMITTEE CERTIFICATION AND DETERMINATION OF AMOUNT OF ANNUAL INCENTIVE
AWARD. The Committee shall determine and certify in writing the degree of
attainment of Performance Goals as soon as administratively practicable after
the end of each year or other Performance Period but not later than March 15 of
the calendar year following the end of such year or other Performance Period.
The Committee shall determine an individual's maximum annual Incentive Award
based on the level of attainment of the Performance Goals (as certified by the
Committee) and the individual's Bonus Opportunity. The Committee reserves the
discretion to reduce (but not below zero), but not increase the amount of an
individual's Incentive Award below the maximum Incentive Award. The
determination of the Committee to reduce (or not pay) an individual's Incentive
Award for a year or other Performance Period shall not affect the maximum
Incentive Award payable to any other individual. No Incentive Award shall be
payable to an individual unless at least the threshold Performance Goal is
attained.
TERMINATION OF AFFILIATION. If an individual has a Termination of
Affiliation during the year or other Performance Period, the Committee may
authorize the payment of an Incentive Award to such individual, and in the
absence of such authorization, the individual shall receive no Incentive Award
for such year or other Performance Period.
Time of Payment of Incentive Awards. Incentive Awards shall be paid as
soon as administratively practicable after the Committee determines the amount
of the Incentive Award, but not later than March 15 of the calendar year
following the year or other Performance Period for which the Committee has
certified the degree of attainment of Performance Goals.
Form of Payment of Incentive Awards. An individual's Incentive Award shall
be paid in cash, Shares, Restricted Stock, Options, or any other form of equity
or any combination thereof as is provided in the Award Agreement. The Committee
may provide in an Award Agreement that payment of an Incentive Award may be
deferred in accordance with any rules or procedures that may be established by
the Committee from time to time in accordance with the Plan and Section 409A of
the Code, either before or after the decision or election to defer is made.
BONUS SHARES
Subject to the terms of the Plan, the Committee may grant Bonus Shares to
any Eligible Person, in such amount and upon such terms and at any time and from
time to time as shall be determined by the Committee.
BENEFICIARY DESIGNATION
Each Grantee under the Plan may, from time to time, name any beneficiary or
beneficiaries (who may be named contingently or successively) to whom any
benefit under the Plan is to be paid in case of his or her death before he or
she receives any or all of such benefit. Each such designation shall revoke all
prior designations by the same Grantee, shall be in a form prescribed by the
Company, and will be effective only when filed by the Grantee in writing with
the Company during the Grantee's lifetime. In the absence of any such
designation or the survival of any designated beneficiary, benefits remaining
unpaid at the Grantee's death shall be paid to the Grantee's surviving spouse,
if any, or if none then to the Grantee's surviving
16
descendants per stirpes, or if neither surviving spouse nor surviving
descendants, then to the estate of the last to die of the Grantee and any
designated beneficiary.
DEFERRALS
At the discretion of the Committee and to the extent set forth in the Award
Agreement and consistent with the requirements of Section 409A, the Committee
may permit or require a Grantee to defer receipt of the payment of cash or the
delivery of Shares that would otherwise be due by virtue of the exercise of an
Option or SAR, the lapse or waiver of restrictions with respect to Restricted
Stock, the satisfaction of any requirements or goals with respect to Performance
Units/Shares, or an Incentive Award. If any such deferral is required or
permitted, the Committee shall, in its sole discretion, establish rules and
procedures for such payment deferrals that are in accordance with the Plan and
Section 409A of the Code.
RIGHTS OF EMPLOYEES/DIRECTORS
Employment. Nothing in the Plan shall interfere with or limit in any way
the right of the Company to terminate any Grantee's employment at any time, nor
confer upon any Grantee's right to continue in the employ of the Company.
Participation. No Employee or Director shall have the right to be selected
to receive an Award under this Plan, or, having been so selected, to be selected
to receive a future Award.
CHANGE IN CONTROL
Treatment of Outstanding Awards. The Committee may provide in an Award
Agreement for different terms and conditions to apply prior to and after a
change in control of the Company or a Subsidiary.
Occurrence of Change of Control. The Committee may set rules for
determining when a change of control of the Company or a Subsidiary has
occurred.
AMENDMENT, MODIFICATION, AND TERMINATION
Amendment, Modification, and Termination. Subject to the terms of the
Plan, the Board may at any time and from time to time, alter, amend, suspend or
terminate the Plan in whole or in part without the approval of the Company's
stockholders, except (i) as such stockholder approval may be required under the
listing requirements of any securities exchange or national market system on
which are listed the Company's equity securities and except that (ii) the Board
may not without the approval of the Company's stockholders amend the Plan to (x)
increase the total number of shares reserved for the purposes of the Plan, or to
(y) change the individuals or class of individuals eligible to participate in
the Plan.
Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring
Events. The Committee may make adjustments in the terms and conditions of, and
the criteria included in, Awards in recognition of unusual or nonrecurring
events (including the events described in Section 4.3 hereof) affecting the
Company or the financial statements of the Company or of changes in applicable
laws, regulations, or accounting principles, whenever the Committee determines
that such adjustments are appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan; provided that no such adjustment to an Award intended to meet
the requirements of the Performance Based Exception shall be authorized to the
extent that such adjustment would be inconsistent with the Award's meeting the
requirements of Section 162(m) of the Code.
Awards Previously Granted. Notwithstanding any other provision of the Plan
to the contrary, no termination, amendment, or modification or the Plan shall
adversely affect in any material way any Award previously granted under the
Plan, without the written consent of the Grantee of such Award unless such
termination, amendment, or modification is required by the listing criteria of
any exchange on which Shares of the Company are traded or is necessary or
advisable (as determined by the Committee) to carry out the
17
purposes of the Plan as a result of any new or change in applicable law
(including any requirement of the Code to obtain a tax benefit or to avoid a tax
or tax penalty for either the Company or any Grantee).
WITHHOLDING
Withholding.
Mandatory Tax Withholding.
Whenever under the Plan, Shares are to be delivered upon exercise or
payment of an Award or upon Restricted Stock Shares becoming nonforfeitable
or Restricted Stock Units becoming payable, or any other event with respect
to rights and benefits hereunder, the Company shall be entitled to require
(i) that the Grantee remit an amount in cash, or in the Company's
discretion, Mature Shares, sufficient to satisfy all federal, state, and
local tax withholding requirements related thereto ("Required
Withholding"), (ii) the withholding of such Required Withholding from
compensation otherwise due to the Grantee or from any Shares due to the
Grantee under the Plan or (iii) any combination of the foregoing.
Any Grantee who makes a Disqualifying Disposition or an election under
Code Section 83(b) shall remit to the Company an amount sufficient to
satisfy all resulting Required Withholding; provided that, in lieu of or in
addition to the foregoing, the Company shall have the right to withhold
such Required Withholding from compensation otherwise due to the Grantee or
from any Shares or other payment due to the Grantee under the Plan.
Elective Share Withholding.
Subject to the following subsection, a Grantee may elect the
withholding ("Share Withholding") by the Company of a portion of the Shares
otherwise deliverable to such Grantee upon the exercise of an Award or upon
Restricted Stock Shares becoming nonforfeitable or Restricted Stock Units
becoming payable (each, a "Taxable Event") having a Fair Market Value equal
to (i) the minimum amount necessary to satisfy Required Withholding
liability attributable to the Taxable Event; or (ii) with the Committee's
prior approval, a greater amount, not to exceed the estimated total amount
of such Grantee's tax liability with respect to the Taxable Event.
Each Share Withholding election shall be subject to the following
conditions:
any Grantee's election shall be subject to the Committee's
discretion to revoke the Grantee's right to elect Share Withholding at
any time before the Grantee's election if the Committee has reserved the
right to do so in the Award Agreement;
the Grantee's election must be made before the date (the "Tax
Date") on which the amount of tax to be withheld is determined; and
the Grantee's election shall be irrevocable.
Notification under Code Section 83(b). If the Grantee, in connection with
the exercise of any option, or the grant of Restricted Stock Shares, makes the
election permitted under Code Section 83(b) to include in such Grantee's gross
income in the year of transfer the amounts specified in Code Section 83(b), then
such Grantee shall notify the Company of such election within 10 days of filing
the notice of the election with the Internal Revenue Service, in addition to any
filing and notification required pursuant to regulations issued under Code
Section 83(b). The Committee may, in connection with the grant of an Award or at
any time thereafter, prohibit a Grantee from making the election described
above.
SUCCESSORS
All obligations of the Company under the Plan with respect to Awards
granted hereunder shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation, or otherwise of all or substantially all of the business
and/or assets of the Company.
18
ADDITIONAL PROVISIONS
Gender and Number. Except where otherwise indicated by the context, any
masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
Severability. If any part of the Plan is declared by any court or
governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not invalidate any other part of the Plan. Any Section or part
of a Section so declared to be unlawful or invalid shall, if possible, be
construed in a manner which will give effect to the terms of such Section or
part of a Section to the fullest extent possible while remaining lawful and
valid.
Requirements of Law. The granting of Awards and the issuance of Shares
under the Plan shall be subject to all applicable laws, rules, and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required. Notwithstanding any provision of the Plan or any
Award, Grantees shall not be entitled to exercise, or receive benefits under,
any Award, and the Company shall not be obligated to deliver any Shares or
deliver benefits to a Grantee, if such exercise or delivery would constitute a
violation by the Grantee or the Company of any applicable law or regulation.
Securities Law Compliance. If the Committee deems necessary to comply with
any applicable securities law, the Committee may require a written investment
intent representation by the Grantee and may require that a restrictive legend
be affixed to certificates for Shares. If, based upon the advice of counsel for
the Company, the Committee determines that the exercise or nonforfeitability of,
or delivery of benefits pursuant to, any Award would violate any applicable
provision of (i) federal or state securities laws or (ii) the listing
requirements of any national securities exchange or national market system on
which are listed any of the Company's equity securities, then the Committee may
postpone any such exercise, nonforfeitability or delivery, as applicable, but
the Company shall use all reasonable efforts to cause such exercise,
nonforfeitability or delivery to comply with all such provisions at the earliest
practicable date.
No Rights as a Shareholder. A Grantee shall not have any rights as a
shareholder of the Company with respect to the Shares (other than Restricted
Stock Shares) which may be deliverable upon exercise or payment of such Award
until such shares have been delivered to him or her. Restricted Stock Shares,
whether held by a Grantee or in escrow by the Secretary of the Company, shall
confer on the Grantee all rights of a shareholder of the Company, except as
otherwise provided in the Award Agreement or the Plan. At the time of a grant of
Restricted Stock Shares, the Committee may require the payment of cash dividends
thereon to be deferred and, if the Committee so determines, reinvested in
additional Restricted Stock Shares. Stock dividends and deferred cash dividends
issued with respect to Restricted Stock Shares shall be subject to the same
restrictions and other terms as apply to the Restricted Stock Shares with
respect to which such dividends are issued. The Committee may in its discretion
provide for payment of interest on deferred cash dividends.
Nature of Payments. Awards shall be special incentive payments to the
Grantee and shall not be taken into account in computing the amount of salary or
compensation of the Grantee for purposes of determining any pension, retirement,
death, disability or other benefit under (a) any pension, retirement,
profit-sharing, bonus, disability insurance or other employee benefit plan of
the Company or any Subsidiary, or any agreement between (i) the Company or any
Subsidiary and (ii) the Grantee, except as such plan or agreement shall
otherwise expressly provide.
Employment Agreement Supersedes Award Agreement. In the event a Grantee is
a party to an employment agreement with the Company or Subsidiary, that provides
for annual incentive or for vesting, extended exercisability or transferability
of equity compensation awards on terms more favorable to the Grantee than the
Grantee's Award Agreement, the employment agreement shall be controlling;
provided that (a) if the Grantee is a Section 16 Person, any terms in the
employment agreement requiring Compensation Committee, Board, or shareholder
approval in order for an exemption from Section 16(b) of the Exchange Act to be
available to such terns shall have been approved by the Compensation Committee,
Board or shareholders, as applicable, and (b) the employment agreement shall not
be controlling to the extent the Grantee and Grantee's employer agree it shall
not be controlling.
19
Non-Exclusivity of Plan. Neither the adoption of the Plan by the Board nor
its submission to the shareholders of the Company for approval shall be
construed as creating any limitations on the power of the Board to adopt such
other compensatory arrangements for employees as it may deem desirable.
Unfunded Status of Awards; Creation of Trusts. The Plan is intended to
constitute an "unfunded" plan for incentive and deferred compensation. With
respect to any payments not yet made to a Grantee pursuant to an Award, nothing
contained in the Plan or any Award Agreement shall give any such Grantee any
rights that are greater than those of a general creditor of the Company;
provided, however, that the Committee may authorize the creation of trusts or
make other arrangements to meet the Company's obligations under the Plan to
deliver cash, Shares or other property pursuant to any Award which trusts or
other arrangements shall be consistent with the "unfunded" status of the Plan
unless the Committee otherwise determines.
Military Service. Awards shall be administered in accordance with Section
414(u) of the Code and the Uniformed Services Employment and Reemployment Rights
Act of 1994.
Obligations. Unless otherwise specified in the Award Agreement, the
obligation to deliver, pay or transfer any amount of money or other property
pursuant to Awards under this Plan shall be the sole obligation of a Grantee's
employer; provided that the obligation to deliver or transfer any Shares
pursuant to Awards under this Plan shall be the sole obligation of the Company.
Shareholder Approval. All Awards granted on or after the Effective Date
and prior to the date the Company's shareholders approve the amended and
restated Plan are expressly conditioned upon and subject to approval of the
amended and restated Plan by the Company's shareholders.
Governing Law. To the extent not preempted by federal law, the Plan, and
all agreements hereunder, shall be construed in accordance with and governed by
the laws of the state of Illinois, other than its laws respecting choice of law.
20
[CNA SURETY LOGO] +
000000000.000 ext
000000000.000 ext
000000000.000 ext
MR A SAMPLE 000000000.000 ext
DESIGNATION (IF ANY) 000000000.000 ext
ADD 1 000000000.000 ext
ADD 2 000000000.000 ext
ADD 3
ADD 4
ADD 5
ADD 6 C 1234567890 J N T
[ ] Mark this box with an X if
you have made changes to
your name or address details
above.
================================================================================
ANNUAL MEETING PROXY CARD
================================================================================
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH YOUR SPECIFIC DIRECTIONS BELOW. IF
THE PROXY IS SIGNED AND RETURNED WITHOUT SUCH DIRECTIONS, IT WILL BE VOTED FOR
ALL PROPOSALS.
A ELECTION OF DIRECTORS
1. The Board of Directors recommends a vote FOR the listed nominees.
FOR WITHHOLD FOR WITHHOLD
01 - Philip H. Britt [ ] [ ] 05 - Lori Komstadius [ ] [ ]
02 - Roy E. Posner [ ] [ ] 06 - Robert Tinstman [ ] [ ]
03 - Adrian M. Tocklin [ ] [ ] 07 - John F. Welch [ ] [ ]
04 - James R. Lewis [ ]
B ISSUES
The Board of Directors recommends a vote FOR the following proposals.
FOR AGAINST ABSTAIN
2. To approve the Company's proposed 2006 [ ] [ ] [ ]
Long-Term Equity Compensation Plan.
3. To ratify the Audit Committee's [ ] [ ] [ ]
appointment of the Company's
independent registered public
accounting firm, Deloitte & Touche,
for fiscal year 2006.
4. To transact such other business as may properly come
before the meeting or any adjournment or adjournments thereof.
C AUTHORIZED SIGNATURES - SIGN HERE - THIS SECTION MUST BE COMPLETED FOR YOUR
INSTRUCTIONS TO BE EXECUTED.
Please sign exactly as name appears hereon. Executors, Administrators, Trustees,
etc. should so indicate when signing. Joint owners should each sign.
Signature 1 - Please keep Signature 2 - Please keep Date (mm/dd/yyyy)
signature within the box signature within the box
------------------------- ------------------------- -----------------
/ /
-- -- -- -- --
------------------------- ------------------------- -----------------
================================================================================
PROXY - CNA SURETY CORPORATION
================================================================================
CNA CENTER
41 FLOOR
333 S. WABASH
CHICAGO, ILLINOIS 60685
(312) 822-5000
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
ON APRIL 25, 2006
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of CNA Surety
Corporation (the "Company") will be held at CNA Center, 41 Floor, 333 S. Wabash,
Chicago, IL 60685 on Tuesday, April 25, 2006, at 9:00 a.m. CDT.
The Board of Directors has fixed the close of business on March 1, 2006, as the
record date (the "Record Date") for the determination of shareholders entitled
to notice of, and to vote at, the Annual Meeting. You are cordially invited to
attend the meeting. In the event you will be unable to attend, you are
respectfully requested to fill in, date, sign and return the enclosed proxy at
your earliest convenience in the enclosed envelope.
IMPORTANT: PLEASE FILL IN, DATE, SIGN AND PROMPTLY MAIL THE ENCLOSED PROXY CARD
IN THE POSTPAID ENVELOPE PROVIDED TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT
THE MEETING. IF YOU ATTEND THE MEETING YOU MAY VOTE IN PERSON IF YOU WISH TO DO
SO EVEN THOUGH YOU HAVE SENT IN YOUR PROXY.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
-------------------------------------
THIS IS YOUR PROXY.
YOUR VOTE IS IMPORTANT.
REGARDLESS OF WHETHER YOU PLAN TO ATTEND THE ANNUAL MEETING OF SHAREHOLDERS, YOU
CAN BE SURE YOUR SHARES ARE REPRESENTED AT THE MEETING BY PROMPTLY RETURNING
YOUR PROXY IN THE ENCLOSED ENVELOPE. THANK YOU FOR YOUR ATTENTION TO THIS
IMPORTANT MATTER.