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 under Rule 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)(1) 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:
--------------------------------------------------------------------------------
CNA SURETY CORPORATION
CNA PLAZA
333 S. WABASH
CHICAGO, ILLINOIS 60685
(312) 822-5000
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
ON MAY 11, 2004
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 Plaza, 13-South, 333 S. Wabash, Chicago, IL 60685, on
Tuesday, May 11, 2004, 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 ratify the Audit Committee's appointment of the Company's independent
auditors, Deloitte & Touche LLP, for fiscal year 2004; and
3. 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, 2004, 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 at your earliest convenience
in the enclosed return envelope.
By Order of the Board of Directors
ENID TANENHAUS
Secretary
March 15, 2004
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 PLAZA
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 15, 2004, 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 Plaza, 13-South, 333 S. Wabash, Chicago,
Illinois 60685, at 9:00 A.M. CDT, on Tuesday, May 11, 2004, 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) The ratification of the Board's appointment of the Company's
independent auditors, Deloitte & Touche LLP, for fiscal year 2004;
and
(iii) 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 15, 2004.
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.
2003 ANNUAL REPORTS
Shareholders are concurrently being furnished with a copy of the Company's
2003 Annual Report to Shareholders, which contains its audited financial
statements for the year ended December 31, 2003. Additional copies of the
Company's Annual Report and Form 10-K for the year ended December 31, 2003, 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 Plaza, 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, 2004 (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, 42,991,871 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) for
ratification of Deloitte & Touche LLP as the Company's Independent Auditors for
fiscal year 2004; and (iii) 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. In accordance with the
Company's by-laws, the Board has the authority to decrease the size of the
Board. Mark Vonnahme resigned from the Board effective August 31, 2003.
Philip H. Britt
James R. Lewis
Ken Miller
Tom Pontarelli
Roy E. Posner
Adrian M. Tocklin
John Welch
Mr. Britt, Mr. Lewis, Mr. Miller, Mr. Pontarelli, Mr. Posner, 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
2
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.
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(1)
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 57; 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, Member of the Association of Insurance and Financial Analysts.
JOHN CORCORAN, age 40; Senior Vice President and Chief Financial Officer of
the Company since January 1, 2004; Group Vice President & Senior Financial
Officer and Chief Information Officer CNA insurance companies Specialty Lines
from January, 2002; from October, 1998 to July, 2002 Group Vice President and
Senior Financial Officer, Specialty Lines CNA insurance companies.
MICHAEL A. DOUGHERTY, age 45; 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 51; 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.
JAMES R. LEWIS, age 55; 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.
KEN MILLER, age 61; Director of the Company since August 2003; President
and Chief Executive officer of Ken Miller Capital, LLC since August 2002.
Independent financial advisor from January 2002 to
---------------
(1) David F. Paul retired from the Company effective December 31, 2003. John S.
Heneghan resigned from the Company effective December 31, 2003. Mark
Vonnahme retired from the Company effective August 31, 2003.
3
August 2002. Prior to that Vice Chairman of Credit Suisse First Boston
Corporation from 1994 to July 2001 and thereafter as Senior Advisor to Credit
Suisse through December 2001.
ROY E. POSNER, age 70; 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 PONTARELLI, age 55; Director of the Company since May 2003;
Executive Vice President, Human Resources and Corporate Services of the CNA
insurance companies since March 2000; from January 1998 to March 2000, Group
Vice President, Human Resources Infrastructure; Chairman, President and CEO,
Washington National Insurance Company from 1996 to 1998; Executive Vice
President, Law and Administration of Washington National from 1989 to 1996.
ADRIAN M. TOCKLIN, age 52; 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 present.
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.
THOMAS A. POTTLE, age 44; 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 46; 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.
JOHN WELCH, age 49; Director of the Company since August 2003; President &
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 Afianzadora Insurgentes SA CV Mexico City; from March, 1997
until August 2000, Chief Operating Officer, Afianzadora Insurgentes SA CV,
Mexico City; from August, 1989 to March, 1997, Vice President Underwriting,
USF&G Corporation; from August 1979 until November 1989 held various surety
management positions, Continental Insurance.
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. The Board of Directors will 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.
Currently, however, the Board of Directors annually reviews its
independence and at its February 17, 2003 meeting 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, Ken Miller, Roy Posner 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
4
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.
The Board has adopted Corporate Governance Guidelines and a Code of
Business Ethics both of which are attached as Appendices 1 and 2 to this proxy
statement, 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 Plaza, 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 of the Company's General Counsel, CNA Plaza -- 13S,
Chicago, Illinois 60685. It is the Company's policy to forward all such
communications to the Board.
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 2003. 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. Tocklin, Britt,
Miller, and Posner (Chair). During 2003, the Audit Committee held ten meetings.
The Board determined at its February 17, 2004 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
5
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 11, 2003, 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 public
auditors, 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 attached as appendix 3 to this proxy statement, 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 Plaza, Chicago,
Illinois, (312) 822-5326. Copies will be furnished promptly at no charge. The
Company Compensation Committee currently consists of Messrs. Britt, Miller, and
Ms. Tocklin (Chair). During 2003, the Compensation Committee held six 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.
The Company also has an Investment Committee, which currently consists of
Ms. Tocklin and Messrs. Posner and Britt (Chair), during 2003, the Investment
Committee held four meetings. The Investment Committee establishes investment
policies and oversees the management of the Company's investment portfolio.
During 2003, nine meetings of the Board of Directors were held.
In fiscal year 2003, 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 2003 board members, Philip Britt, Roy Posner, Adrian
Tocklin and Mark Vonnahme attended the Company's annual meeting as did Ken
Miller, who subsequent to the annual meeting became a member of the Board in
August 2003.
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 with 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 2003 all reports required by Section 16(a) of the Exchange Act have been
timely filed.
6
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, 2003 by the chief executive
officer and those persons who were, at December 31, 2003, the four other most
highly compensated executive officers of the Company.
SUMMARY COMPENSATION TABLE
OTHER ANNUAL ALL OTHER
SALARY BONUS COMPENSATION OPTIONS COMPENSATION(1)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
--------------------------- ---- ------- ------- ------------ ------- ---------------
Mark C. Vonnahme................. 2003 437,308 241,250 201,193 -- 38,239
President and Chief Executive 2002 400,000 201,825 -- 39,800 60,616
Officer of the Company 2001 400,000 375,000 -- 52,868 75,458
Michael A. Dougherty............. 2003 207,000 160,540 -- 7,700 26,142
Senior Vice President 2002 195,000 66,300 -- 7,800 27,382
of the Company 2001 195,000 75,000 -- 11,384 34,116
John S. Heneghan(2).............. 2003 215,000 61,940 -- -- 13,083
Senior Vice President and 2002 200,000 60,000 -- 6,000 26,523
Chief Financial Officer 2001 200,000 65,000 53,110 9,400 30,751
of the Company
Enid Tanenhaus................... 2003 210,000 156,000 2,200 5,900 29,158
Vice President of 2002 200,000 60,000 -- 6,000 22,770
the Company 2001 195,384 107,200 -- 12,000 15,632
John F. Welch.................... 2003 192,308 176,111 8,113 50,000 3,039
President and Chief Executive
Officer of the Company
---------------
(1) Mr. Vonnahme retired from the Company effective August 31, 2003.
(2) Mr. Heneghan retired from the Company effective December 31, 2003.
(1) All Other Compensation is comprised as follows:
DEFERRED
401(K) DEFERRED COMPENSATION
401(K) PLAN PLAN PROFIT COMPENSATION PROFIT FINANCIAL
MATCHING SHARING MATCHING SHARING PLANNING LIFE
CONTRIBUTIONS CONTRIBUTION CONTRIBUTIONS CONTRIBUTIONS SERVICES INSURANCE
------------- ------------ ------------- -------------- --------- ---------
Mark C. Vonnahme.......... 2003 $9,000 $3,000 $19,597 $ 6,000 $ -- $642
2002 9,000 5,100 18,150 18,589 -- 965
2001 7,650 7,650 35,342 23,850 -- 966
Michael A. Dougherty...... 2003 9,000 3,000 12,939 920 -- 283
2002 9,000 5,100 6,808 3,000 -- 174
2001 7,650 7,650 9,917 4,725 -- 174
John S. Heneghan.......... 2003 9,000 3,000 -- 900 -- 183
2002 9,000 5,100 8,606 2,850 -- 180
2001 7,650 7,650 11,464 3,825 -- 162
Enid Tanenhaus............ 2003 9,000 3,000 13,770 900 2,200 288
2002 9,000 1,615 9,225 -- 2,750 180
2001 5,694 -- 7,258 -- 2,500 180
John F. Welch............. 2003 2,769 -- -- -- -- 270
2002 -- -- -- -- -- --
2001 -- -- -- -- -- --
OTHER
EXECUTIVE
PERQUISITES
-----------
Mark C. Vonnahme.......... --
8,812
--
Michael A. Dougherty...... --
3,300
4,000
John S. Heneghan.......... --
787
--
Enid Tanenhaus............ --
--
--
John F. Welch............. --
--
--
(2) Other Annual Compensation for Mr. Heneghan for 2002 includes $53,110 for
compensation received on the exercise of stock options.
7
COMPENSATION OF DIRECTORS
Directors, except for employees of the Company or its affiliates, for 2003
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. Beginning in May 2003, Audit
Committee members began receiving $2,500 for each meeting attended. In addition,
Mr. Posner and Ms. Tocklin were paid an additional retainer of $7,500 on March
4, 2003 for their services as 2003 chairpersons of the Audit and Compensation
Committees. Ms. Tocklin's retainer was for 2003, due to the Compensation
Committee's task of retaining a new Company Chief Executive Officer. Mr. Posner
was paid $7,500 on February 11, 2004 for his 2004 service as Audit Committee
chairperson. In view of the workload of the Audit Committee chairperson, the
Company intends to continue this additional stipend to its Audit Committee
chair. The Company's Board of Directors and the Company's shareholders have
previously approved the CNA Surety Corporation Non-Employee Directors Deferred
Compensation Plan (the "Directors Stock Plan"). The Directors Stock Plan
provides non-employee directors an opportunity to defer receipt of the annual
retainer fees and have them deemed invested in stock units, thereby enhancing
the long-term mutuality of interest between directors and shareholders.
EMPLOYMENT CONTRACTS
The Company entered into employment agreements with Mr. Mark C. Vonnahme
and with certain other executive officers. The agreement with Mr. Vonnahme was
to run from January 1, 2002 through December 31, 2003, with automatic one-year
renewals unless the Company or Mr. Vonnahme provided the other party with thirty
(30) day written notice of intent not to renew. Mr. Vonnahme's contract was on
substantially the same terms as his prior contract for the period January 1,
2000 through December 31, 2001. The Company had previously entered into an
employment agreement with Mr. Vonnahme on October 3, 1997, which ran through
December 31, 1999. The most recent agreement provided for a minimum annual base
salary of $400,000. Mr. Vonnahme was also entitled to an annual incentive bonus
(up to 150% of his base salary) contingent on achievement of performance
criteria approved by the Compensation Committee, and participation in long-term
incentive compensation programs for key executives adopted by the Compensation
Committee of the Board equivalent to 100% of his base salary. In addition, Mr.
Vonnahme was eligible to participate in the Company's stock option plan and to
participate in Company benefit programs. The agreement provided for a severance
benefit if his employment was terminated without cause by the Company, by Mr.
Vonnahme for good reason, for non-renewal of the agreement at the end of the
initial two year term, or within one year after of a change in control of the
Company contingent upon Mr. Vonnahme's continuing compliance with the
non-competition, non-solicitation and confidentiality provisions of the
agreement. Mr. Vonnahme informed the Board of his intention to retire from the
Company on or before December 31, 2003. The Board and Mr. Vonnahme agreed that
based on the terms of the contract, he would be paid the severance benefit if he
continued his duties as CEO until the Board retained a successor and for a
transition period after the successor was retained. The Board chose John F.
Welch as the Company's new CEO. Mr. Welch began his employment as a senior
officer of the Company on June 30, 2003 and became CEO after the August 31, 2003
effective date of Mr. Vonnahme's retirement. Consequently, Mr. Vonnahme is
entitled to the severance benefit set forth in the employment contract. The
severance benefit consists of payment of two years of Mr. Vonnahme's annual base
salary ($400,000), continuation in all of the Company's health benefit plans for
up to two years, receipt of amounts in which he is vested or otherwise entitled
to receive pursuant to any plan maintained by the Company, plus payment of
certain bonuses and long term compensation awards held by him at the date of
termination. As part of the agreement, Mr. Vonnahme agreed to certain
confidentiality, non-competition, and non-solicitation provisions.
The Company also entered into two-year employment agreements with Messrs.
Heneghan, and Paul as executive officers, commencing January 1, 2001, and ending
December 31, 2003. The agreements were to renew automatically for one additional
one-year term unless the Company or the Executive provides the other thirty days
written notice that the agreements would not be renewed. Both Mr. Heneghan and
Mr. Paul provided the Company notice of their intents not to renew their
contract prior to December 1, 2003. The employment agreements provided for an
annual base salary of $200,000 for Mr. Heneghan, and $195,000 for
8
Mr. Paul which amounts were subject to either the Compensation Committee's or
the Board of Directors' annual review, and provided for additional compensation
in the form of an annual incentive bonus contingent on achievement of
performance criteria approved by the Compensation Committee, a long-term
incentive compensation program which includes participation in the Company's
stock option plan, and participation in Company benefit programs. The agreements
also provided for a severance benefit if the officer's employment was terminated
without cause by the Company, with cause by the officer for good reason, for
non-renewal of the agreement at the end of the initial two-year term, or within
one year after a Change in Control. In as much as Mr. Heneghan and Mr. Paul
provided the Company with the requisite notice of their intents not to renew
their contracts, they are entitled to the severance benefit. The severance
benefit consists of payment of two years of the officer's then base salary,
continuation in all of the Company's health benefit plans for up to two years,
receipt of amounts in which the officer is vested or otherwise entitled to
receive pursuant to any plan maintained by the Company, plus payment of certain
bonuses and long term compensation awards held by the officer at the date of
termination. As part of the agreements, Mr. Heneghan and Mr. Paul agreed to
certain confidentiality, non-competition, and non-solicitation provisions.
In January 2003, the Company entered into deferred bonus agreements with
Mr. Dougherty, Mr. Pottle, Ms. Tanenhaus and Mr. Waters that provided for 2
payments of $50,000 in January and August 2003 and a third payment of $50,000 in
August 2004. If the Company terminates Mr. Dougherty, Mr. Pottle, Ms. Tanenhaus
and Mr. Waters without cause prior to August 2005, any remaining portion of the
bonus will be payable immediately. The deferred bonus agreements obligate Mr.
Dougherty, Mr. Pottle, Ms. Tanenhaus and Mr. Waters to certain confidentiality,
non-competition and non-solicitation provisions and to repay portions of the
bonus if they voluntarily terminate employment with the Company prior to August
1, 2005.
The Company entered into an employment agreement with Mr. John F. Welch
that runs from June 30, 2003 date of hire until December 31, 2005. The agreement
provides for a minimum annual base salary of $400,000. Mr. Welch received a
signing bonus of $200,000 payable in three installments, assuming he remains
employed with the Company: $100,000 was paid on August 1, 2003, $50,000 will be
payable on June 20, 2004, the first anniversary of the contract and $50,000 will
be payable on June 30, 2005, the second anniversary of the contract. In addition
Mr. Welch was paid an Additional Bonus of $200,000 on March 5, 2004. Mr. Welch
also is entitled to an annual incentive bonus (up to 150% of his base salary)
contingent on achievement of performance criteria approved by the Compensation
Committee, and participation in long term incentive programs for key executives
adopted by the Compensation Committee of the Board equivalent to 50 to 100
percent of his base salary. In recognition of the Additional Bonus payment, Mr.
Welch was not paid an annual incentive bonus for 2003. In addition, under the
agreement, Mr. Welch is eligible to participate in the Company's stock option
plan and received 50,000 stock options on June 30, 2003 and 18,600 on November
11, 2003. These options vest in equal amounts over a four-year period commencing
on June 30, 2004 and on November 11, 2004 respectively. 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, 2005, 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 through December 31, 2005.
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.
9
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 auditors and internal auditors;
- facilitate communications between the party's involved in the audit
process; and
- review and appraise the fairness of related party transactions.
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 met ten times in 2003. The meetings were designed,
among other things, to facilitate and encourage communication among the Audit
Committee, management, the internal auditors and Deloitte & Touche LLP
("Deloitte & Touche"), the Company's independent auditors. The Audit Committee
discussed with the Company's internal and independent auditors the overall scope
and plans for their respective audits. The Audit Committee met with the internal
and independent auditors, 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. The
Audit Committee also met separately with management and internal auditors to
discuss the performance of Deloitte & Touche.
The Audit Committee also discussed with Deloitte & Touche the matters
required to be discussed under generally accepted auditing standards, including,
among other things, matters related to the conduct of the audit of the Company's
consolidated financial statements and the matters required to be discussed by
Statement on Auditing Standards No. 61, Communication with Audit Committees, as
currently in effect. Deloitte & Touche provided the Audit Committee with written
disclosures and communications required by Independence Standards Board Standard
No. 1, Independence Discussions with Audit Committees, as currently in effect,
and discussed with the Audit Committee its independence from the Company. When
considering Deloitte & Touche's independence, the Audit Committee considered
management's confirmations with respect to certain services performed for the
Company by Deloitte & Touche, including non-auditing services. The Audit
Committee also considered the amount of fees paid to Deloitte & Touche for audit
and non-audit services.
Based upon the Audit Committee's review and these meetings, discussions and
reports, and subject to the limitations on the Audit Committee's role and
responsibilities referred to above and in the Audit Committee charter, the Audit
Committee recommended to the Board of Directors that the Company's audited
consolidated financial statements for the fiscal year ended December 31, 2003 be
included in the Company's Annual Report on Form 10-K.
SUBMITTED BY THE AUDIT COMMITTEE
OF THE COMPANY'S BOARD OF DIRECTORS
Philip H. Britt
Ken Miller
Adrian Tocklin
Roy E. Posner (Chairperson)
10
COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION
During the fiscal year ended December 31, 2003:
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 are independent as
required by the applicable listing standard of the New York Stock Exchange.
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 policy of the Company for its executive officers
(including those named in the Summary Compensation Table) has been to pay base
salaries, annual 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.
Effective January 1, 2002, the Company entered into two year employment
agreements with Mark C. Vonnahme, John S. Heneghan, and David F. Paul. Mr.
Vonnahme resigned effective August 31, 2003, while Mr. Heneghan and Mr. Paul did
not renew their contracts and resigned effective December 31, 2003. The Company
also entered into an employment agreement with Mr. John F. Welch effective June
30, 2003 and ending December 31, 2005.
With respect to Mr. Vonnahme's compensation as reported for the year ended
December 31, 2003, in addition to base compensation, he was paid an annual
incentive bonus for performance for the year ended December 31, 2002, targeted
at 100% percent of his 2002 base salary, granted stock options as part of the
Company's Long Term Incentive Program which were capable of vesting in 2003. Mr.
Vonnahme also was granted stock options as part of an initial stock option grant
in 1997 made to officers. Compensation payable to other executive officers also
includes a mix of base salary, incentive bonuses and stock option grants.
To assess Mr. Vonnahme's entitlement to receive the annual incentive bonus
for 2002 performance, the Committee set individual goals for him. These goals
measured achievement of the plan for Net Operating Income on an enterprise-wide
basis. Mr. Vonnahme did not achieve 100% of the goals established for 2002 and
was paid an incentive bonus of $200,000 in 2003 equal to 50% of his base salary.
The stock options granted Mr. Vonnahme, capable of vesting in 2003 were as
follows: Mr. Vonnahme was granted 57,100 stock options (at $11.00 per share), on
October 11, 1999 representing an option value equivalent to 100% of his base
salary at the time granted. These options vested in equal amounts over a four-
year period commencing on October 11, 2000. On October 11, 2003 Mr. Vonnahme
became vested of 14,275 stock options from this October 1999 grant. Mr. Vonnahme
also was granted an additional 36,000 stock options (at $11.50 per share) on
November 14, 2000 representing an option value equivalent to 50% of his base
salary at the time granted. These options, which vest in equal amounts over a
four-year period commencing on November 14, 2001. On November 14, 2003 Mr.
Vonnahme became vested of 9,000 stock options from this November 2000 grant. On
March 6, 2001 Mr. Vonnahme was granted an additional 11,668 stock options (at
$13.05 per share) as replacement for the performance shares previously
forfeited. These options were to vest in equal amounts over a four-year period
commencing on March 6, 2002. On March 6, 2003, Mr. Vonnahme became vested of
2,917 stock options from this March 2001 grant. As a retiree,
11
Mr. Vonnahme has a period of two years following the date of his retirement
(August 31, 2003) to exercise any options that were exercisable as of the date
of his retirement.
Mr. Welch's compensation as reported for the year ended December 31, 2003
in addition to base compensation included the portion of his signing bonus
payable under his employment agreement in 2003. Although he 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, none of the options were
capable of vesting in 2003. The Committee evaluated and then established Mr.
Welch's salary, signing bonus and other benefits based upon his industry
experience and expertise as well as the expected performance of the Company.
Compensation payable to other executive officers included a mix of base salary,
incentive bonuses and stock option grants.
Annual incentive bonuses for other executive officers are also 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.
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 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(1)
Philip H. Britt
Ken Miller
Roy Posner
Adrian M. Tocklin
12
PERFORMANCE GRAPH
Below is a graph comparing total shareholder return on the Company's Common
Stock over the period from December 31,1998 through December 31, 2003 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]
-------------------------------------------------------------------------------------------------------
12/31/1998 12/31/1999 12/31/2000 12/31/2001 12/31/2002 12/31/2003
-------------------------------------------------------------------------------------------------------
CNA SURETY
CORPORATION 100.00 82.54 90.48 98.41 49.84 60.38
-------------------------------------------------------------------------------------------------------
S&P 500 INDEX 100.00 121.04 110.02 96.95 75.52 97.18
-------------------------------------------------------------------------------------------------------
PROPERTY-CASUALTY
INSURANCE 100.00 132.11 167.30 146.62 115.83 158.85
-------------------------------------------------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth, as of 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 2, 2004
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
13
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 63.8%
CNA Plaza
Chicago, IL 60685
Citigroup Global Markets Holdings, Inc. ................. 2,381,388 5.5%
---------------
(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.
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 *
Ken Miller................. -- 1,555 -- 1,555 *
Michael A. Dougherty....... 2,900 -- 53,708 56,608 *
Enid Tanenhaus............. 200 -- 8,950 9,150 *
John F. Corcoran........... 12,100 -- -- 12,100 *
Thomas A. Pottle........... 1,300 -- 55,375 56,675 *
John F. Welch.............. -- -- -- -- *
John S. Heneghan........... 1,500 -- -- 1,500 *
David F. Paul.............. -- -- -- -- *
All directors and executive
officers as a group (13
persons) including the
above-named persons...... 22,347 12,932 118,033 153,312 0.4%
---------------
* 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.
(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.
14
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............... 1,729,124 $12.11 1,021,407
Equity compensation plans not
approved by security holders......
--------- ------ ---------
Total............................... 1,729,124 $12.11 1,021,407
========= ====== =========
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 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 have expired;
some have been renewed on different terms as described below.
The Services and Indemnity Agreement provides the 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, 2004 and expires on December
31, 2004; and is annually renewable thereafter. There was no amount due to the
CNA Surety insurance subsidiaries as of December 31, 2003.
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 28% of net written premiums written on such business.
Under the terms of the Quota Share Treaty, CCC has guaranteed the loss and
loss adjustment expenses transferred to Western Surety 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 reestimated as of the end
of such calendar quarter. There was not any adverse reserve development for the
period from September 30, 1997 (date of inception) through December 31, 2003.
The Quota Share Treaty had an original term of five years from the Merger
Date and was renewed on October 1, 2002 on substantially the same terms with an
expiration date of December 31, 2004; was renewed again effective January 1,2004
and is annually renewable thereafter. The ceding commission paid to CCC and CIC
by Western Surety remained at 28% of net written premiums and contemplates an
approximate 4% override commission to CCC and CIC on their actual direct
acquisition costs.
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
exceeds 24% in any accident year between 1997 through 2000 on certain insured
accounts (the "Loss
15
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, 2003, the Company billed $54.9 million under
the Stop Loss Contract and had received $24.9 million.
The Excess of Loss Contracts 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 provides $75 million
of coverage for losses in excess of the $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
provides additional 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. In consideration
for the reinsurance coverage provided by the Excess of Loss Contracts, the
insurance subsidiaries paid to CCC, on a quarterly basis, a premium equal to 1%
of the net written premiums applicable to the Excess of Loss Contract, subject
to a minimum premium of $20,000 and $5,000 per quarter under the Excess of Loss
Contract and Second Excess of Loss Contract, respectively. The two Excess of
Loss Contracts collectively provided coverage for losses discovered on surety
bonds in force as of the Merger Date and for losses discovered on new and
renewal business written during the term of the Excess of Loss Contracts. 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, 2005.
Effective October 1, 2002, the Company secured replacement excess of loss
protection from CCC for per principal losses that exceed $60 million in two
parts -- a) $40 million excess of $60 million and b) $50 million excess of $100
million. This excess of loss protection is primarily necessary to support
contract surety accounts with bonded backlogs or work-in-process in excess of
$60 million. The Company generally limits support for new large commercial
surety accounts to $25 million. In addition to the foregoing structural changes
in its high layer excess of loss reinsurance programs, the cost for these
protections increased significantly as compared to the cost of the previous two
Excess of Loss Contracts. The $40 million excess of $60 million contract is for
a three year term beginning October 1, 2002 and provides annual aggregate
coverage of $80 million and $120 million aggregate coverage for the entire three
year term. The Company paid annual reinsurance premiums of $3.8 million (net of
expected return premium) in year one to CCC.
Effective January 1, 2004, the Company obtained replacement coverage from
third party reinsurers as part of the 2004 Excess of Loss Treaty. Accordingly,
the $40 million excess of $60 million contract with CCC was commuted effective
January 1, 2004. As part of this commutation, the Company is entitled to receive
a commutation payment of $10.9 million from CCC that is expected to be received
in the first quarter of 2004. As of December 31, 2003 the full amount of the
commutation payment had been recognized as a receivable. The Company and CCC
entered into a new $40 million excess of $60 million reinsurance contract
providing coverage exclusively for the one large national contractor that is
excluded from the Company's third party reinsurance. This contract is effective
from January 1, 2004 to December 31, 2004. The premium for this contract is $3.0
million plus an additional premium if a loss is ceded to this contract.
The reinsurance premium for the coverage provided by the $50 million excess
of $100 million contract was $6.0 million. This contract was effective October
1, 2002 and expires on December 31, 2003. The Company and CCC entered into a new
$50 million excess of $100 million contract for the period January 1, 2004 to
December 31, 2004. The premium for this contract is $6 million plus an
additional premium if a loss is ceded under the contract.
Effective October 1, 2003, the Company entered into a $3 million excess of
$12 million excess of loss contract with CCC. The reinsurance premium for the
coverage provided by the $3 million excess of $12 million contract was $0.3
million plus, if applicable, additional premiums based on paid losses. The
contract provided for aggregate coverage of $12 million. This contract
effectively lowered the Company's net
16
retention per principal for the remainder of 2003 to $12 million plus a 5%
co-participation in the $45 million layer of excess reinsurance with third party
reinsurers. This contract was to expire on December 31, 2004. Effective January
1, 2004, the Company obtained replacement coverage for both these contracts from
third party reinsurers as part of the 2004 Excess of Loss Treaty.
As of December 31, 2003 and December 31, 2002 CNA Surety had an insurance
receivable balance from CCC and CIC of $71.1 million and $51.7 million,
respectively. CNA Surety had no insurance payables to CCC and CIC as of December
31, 2003 and had reinsurance payables of $21.3 million to CCC and CIC as of
December 31, 2002.
LARGE NATIONAL CONTRACT PRINCIPAL
The Company has provided significant surety bond guaranteeing projects
undertaken a large national contract principal that is excluded from the
Company's third party insurance. 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
If the Company should suffer any losses that are discovered prior to
September 30, 2005 arising from bonds issued to the contractor with effective
dates of September 30, 2002 and prior, the Company would retain the first $60
million of losses on bonds written, and CCC would incur 100% of losses above $60
million pursuant to the extended discovery provisions of the two Excess of Loss
treaties that expired on September 30, 2002. Any losses discovered after
September 30, 2005 on bonds with effective dates prior to September 30, 2002
would be covered up to $150 million pursuant to the $50 million excess of $100
million contract with CCC described above and a twelve month contract with CCC
effective January 1, 2004 that provides $40 million excess of $60 million
reinsurance coverage exclusively for the national contractor.
For bonds that the Company has written after September 30, 2003, in
addition to the coverage provided by excess of loss reinsurance treaties
described above ($40 million excess of $60 million and $50 million excess of
$100 million) the Company and CCC have entered into facultative reinsurance in
connection with larger bonds. The Company's exposure on bonds written from
October 1, 2002 through October 31, 2003 was limited to $20 million per bond.
For bonds written subsequent to November 1, 2003, and for bonds the company may
write in 2004, the Company's exposure will be limited to $14.5 million per bond.
The Company believes the run-off protection provided by the expired
agreements, the current protection provided by the $40 million excess $60
million and the $50 million excess $100 million treaties, and the facultative
reinsurance provided for larger bonds written after September 30, 2002, should
limit the Company's exposure for bonds written on behalf of the national
contractor to $60 million.
CNAF CREDIT FACILITY
In December 2002 and January 2003, CNAF, parent of CCC, provided loans in
an aggregate amount of approximately $45 million to the national contractor. The
loans were provided by CNAF to help the contractor meet its liquidity needs. The
loans are evidenced by demand notes and until replaced by the credit facility
described below, accrue interest at 10%. CNAF has entered into a credit
agreement with a large national contractor that undertakes projects for the
construction of government and private facilities to provide an $86.4 million
credit facility. CNA Surety has provided significant surety bond protection for
projects by this contractor through surety bonds underwritten by CCC or its
affiliates. The credit facility and all loans under it will mature in March of
2006. Advances under the credit facility bear interest at the prime rate plus
6%. Payment of 3% of the interest is deferred until the credit facility matures,
and the remainder is to be paid monthly in cash. Loans under the credit facility
are secured by a pledge of substantially all of the assets of the contractor and
certain affiliates. Loews, parent of CNAF, and CNAF have entered into a
participation agreement, pursuant to which Loews has purchased a participation
interest in one-third of the loans and commitments under the credit facility, on
a dollar-for-dollar basis, up to a maximum of $25 million. Although Loews does
not have rights against the contractor directly under the participation
agreement, it shares
17
recoveries and certain fees under the facility proportionally with CNAF. In
March of 2003, CNAF purchased the contractor's outstanding bank debt for $16.4
million. The contractor purchased the bank debt and retired it, with $11.4
million of the purchase price being funded under the new credit facility and $5
million from money loaned to the contractor by its shareholders. Under its
purchase agreement with the banks, CNAF is also required to reimburse the banks
for any draws upon outstanding letters of credit issued by the banks for the
contractor's benefit. Of these letters of credit, a replacement due to expire in
August of 2004 remains in the amount of $3.4 million. Any CNAF reimbursements
for draws upon the banks' letters of credit will become obligations of the
contractor to CNAF as draws upon the credit facility. As of February 27, 2004,
$83 million was outstanding under the credit facility, including deferred
interest.
The contractor has initiated a restructuring plan that is intended to
reduce costs and improve cash flow, and a chief restructuring officer has been
appointed to manage execution of the plan. CNA Surety intends to continue to
provide surety bonds on behalf of the contractor during this restructuring
period, subject to the contractor's initial and ongoing compliance with CNA
Surety'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. While the Company
believes that the contractor's restructuring efforts will be successful and
provide sufficient cash flow for its operations, the contractor's failure to
achieve its restructuring plan or perform it contractual obligations under the
credit facility could have a material adverse effect on CNA Surety's future
results of operations, cash flow and capital. If such failures occur, the
Company estimates that possible losses, net of indemnification and subrogation
recoveries, but before recoveries under reinsurance contracts, could be up to
$200 million. However, the related party reinsurance treaties discussed above
should limit the Company's per principal exposure to approximately $60 million.
OTHER RELATED PARTY TRANSACTIONS
Effective January 1, 2001, CNA Surety renewed an Administrative Services
Agreement with CCC. The agreement 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 2004 is $1.8 million which shall be paid by CNA
Surety to CNAF in equal monthly installments by the last day of each month. 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 was amended in 2003 to allow CCC to purchase services from the
Company. In 2003, CCC paid the Company $ $0.2 million for services in connection
with licensing and appointing CCC's insurance producers as required by state
insurance laws. The Administrative Services Agreement will remain in effect so
long as CNAF or their affiliates or shareholders continue to own a majority
interest in CNA Surety. However, the 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 $6.1 million, $5.2 million and $5.7 million for the
years ended December 31, 2003, 2002 and 2001, respectively, for rents and
services provided under a previous Administrative Services Agreement. In
addition, the Company was charged $1.4 million, $1.0 million and $2.1 million
for direct costs incurred by CCC on the Company's behalf during 2003, 2002 and
2001, respectively. The Company had a payable balance to CCC of $0.3 million,
which was reflected in other liabilities in the Company's Consolidated Balance
Sheet at December 31, 2003.
Western Surety has entered into a series of business transactions with
entities in which an affiliate of CCC has an interest. The first series involves
five separate real estate residual value insurance policies issued 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"). RVI -- Bermuda, an unconsolidated
affiliate of CCC. The transactions involve policies with limits totaling
approximately $11.5 million. CCC is reinsuring the full extent of
RVI -- America's exposure on the policies. Pursuant to the
18
Quota Share Treaty, Western Surety is, in turn, reinsuring all of CCC's
exposures on the policies. Western Surety is reinsuring all of its exposure on
the policies with RVI-Bermuda, a non-admitted reinsurer. The policy limits range
from $119,785 to $2,954,164 with an average policy limit of approximately $1.8
million and total limits of all policies of $8,997,395 Net premium amounts
retained in 2000 relative to these reinsurance transactions totaled $519,278 as
follows: RVI -- America, $51,928; CCC, $130,858; Western Surety, $67,298; and
RVI -- Bermuda, $269,194.
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
30 bonds with $44.5 million of total penal sums remain.
Western Surety from time to time provides appeal and license and permit
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 such 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,
2003, the total amount of the outstanding appeal and license and permit bonds
written on behalf of CCC and its affiliates was approximately $81 million, which
was comprised of 39 bonds. Most of these bonds are small with only 2 bonds
exceeding $10 million. 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.
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
(PROPOSAL 2)
The Audit Committee has selected Deloitte & Touche LLP, independent
auditors, to audit the financial statements of the Company for the 2004 fiscal
year. Deloitte & Touche LLP has audited the Company's financial statements as of
and for the years ended December 31, 1998, 1999, 2000, 2001, 2002 and 2003. 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 2003 is attached as Exhibit hereto.
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 auditors. 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 auditors.
THE BOARD RECOMMENDS A VOTE "FOR" THE RATIFICATION OF DELOITTE & TOUCHE LLP
AS THE COMPANY'S INDEPENDENT AUDITORS. 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 AUDITORS.
19
SHAREHOLDERS' PROPOSALS FOR 2005 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 2005 Annual Meeting of
Shareholders of the Company must be received by the Secretary of the Company,
CNA Plaza, Chicago, Illinois 60685, by November 11, 2004, 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 (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
20
EXHIBIT A
INDEPENDENT AUDITORS' FEES
The following table summarizes the aggregate fees billed to CNA Surety
Corporation by the independent auditor:
($ IN THOUSANDS) 2003 2002
---------------- ---- ----
Audit fees(a)............................................... 741 621
Audit-related fees(b)....................................... 103 --
Tax fees(c)................................................. -- --
All other fees(d)........................................... -- --
--- ---
Total....................................................... 844 621
---------------
(a) Fees for audit services billed in 2003 consisted of:
- Audit of the Company's annual financial statements
Fees for audit services billed in 2002 consisted of:
- Audit of the Company's annual financial statement
(b) Fees for audit-related services billed in 2003 and 2002 consisted of:
- Sarbanes-Oxley Act Section 404 advisory services, consents and debt
offering services
In considering the nature of the services provided by the independent
auditor, the Audit Committee determined that such services are compatible with
the provision of independent audit services. The Audit Committee discussed these
services with the independent auditor and Company management to determine that
they are permitted under the rules and regulations concerning auditor
independence promulgated by the U.S. Securities and Exchange Commission (the
"SEC") to implement the Sarbanes-Oxley Act of 2002, as well as the American
Institute of Certified Public Accountants.
PRE-APPROVAL POLICY
The services performed by the independent auditor in 2003 were pre-approved
in accordance with the pre-approval policy and procedures adopted by the Audit
Committee at its February 19, 2002 meeting.
Services provided by the independent auditor during the following year that
are included in the Service List were pre-approved following the policies and
procedures of the Audit Committee.
Any requests for audit, audit-related, tax, and other services not
contemplated on the Service List must be submitted to the Audit Committee for
specific pre-approval and cannot commence until such approval has been granted.
Normally, pre-approval is provided at regularly scheduled meetings. However, the
authority to grant specific pre-approval between meetings, as necessary, has
been delegated to the Chairman of the Audit Committee. The Chairman must update
the Audit Committee at the next regularly scheduled meeting of any services that
were granted specific pre-approval.
In addition, although not required by the rules and regulations of the SEC,
the Audit Committee (generally) requests a range of fees associated with each
proposed service on the Service List and any services that were not originally
included on the Service List. Providing a range of fees for a service
incorporates appropriate oversight and control of the independent auditor
relationship, while permitting the Company to receive immediate assistance from
the independent auditor when time is of the essence.
On a quarterly basis, the Audit Committee reviews the status of services
and fees incurred year-to-date against the original Service List and the
forecast of remaining services and fees for the fiscal year.
21
APPENDIX 1
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
22
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
13 South
CNA Plaza
Chicago, Illinois 60685
23
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
24
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.
25
APPENDIX 2
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 buys, sells or
otherwise trades in securities while in possession of material nonpublic
information, commonly
26
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 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.
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 for yourself personally opportunities that properly
27
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.
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.
28
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 (bawood@cnasurety.com) or the Company's Senior Vice President &
General Counsel at (312) 822-3895 (etanenhaus@cnasurety.com); or
- 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.
29
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.
30
APPENDIX 3
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;
31
(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 (i) that are reasonably related to the performance of
the audit or review of financial statements, in the aggregate and by each
service; (iii) tax compliance, tax advice and tax planning services, in the
aggregate and by each service; and (iv) 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, earnings press releases:
- critical accounting policies and financial statement presentation,
including key accounting decisions and judgments, significant
changes in the selection or application of accounting
32
principles, the rationale for such choices and the alternatives
available under generally accepted accounting principles ("GAAP");
- 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.
33
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.
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 one of review and it recognizes 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.
34
DETACH HERE ZCNU2
PROXY
CNA SURETY CORPORATION
CNA PLAZA
333 S. WABASH
CHICAGO, ILLINOIS 60685
(312) 822-5000
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
ON MAY 11, 2004
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of CNA Surety Corporation (the "Company") will be held at CNA
Plaza, 13 South, 333 S. Wabash, Chicago, IL 60685 on Tuesday, May 11, 2004, at 9:00 a.m. CDT.
The Board of Directors has fixed the close of business on March 1, 2004, 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.
----------- -----------
SEE REVERSE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE SIDE
----------- -----------
CNA SURETY CORPORATION
C/O EQUISERVE TRUST COMPANY N.A.
P.O. BOX 8694
EDISON, NJ 08818-8694
-----------------------------------------------------------
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 (ATTACHED
BELOW) IN THE ENCLOSED ENVELOPE. THANK YOU FOR YOUR
ATTENTION TO THIS IMPORTANT MATTER.
-----------------------------------------------------------
DETACH HERE ZCNUC1
[X] PLEASE MARK
VOTES AS IN CNU
THIS EXAMPLE.
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.
FOR AGAINST ABSTAIN
1. Election of Directors. 2. To ratify the Board of Directors' appointment of the [ ] [ ] [ ]
Company's independent auditors, Deloitte & Touche LLP
Nominees: (01) Phillip H. Britt, for fiscal year 2004.
(02) Roy E. Posner, (03) Adrian M. Tocklin,
(04) James R. Lewis, (05) Ken Miller,
(06) Thomas Pontarelli, (07) John F. Welch.
FOR [ ] [ ] WITHHELD 3. To transact such other business as may properly come before the meeting or any
ALL FROM ALL adjournment thereof.
NOMINEES NOMINEES
[ ]
----------------------------------------
For all nominees except as written above
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]
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
METING. IF YOU ATTEND THE MEETING YOU MAY VOTE IN PERSON IF YOU WISH TO DO SO EVEN
THOUGH YOU HAVE SENT IN YOUR PROXY.
Please sign exactly as name appears hereon. Executors, Administrators, Trustees,
etc. should so indicate when signing. Joint owners should each sign.
Signature: Date: Signature: Date:
---------------------------- --------------- ------------------------------- ---------------