21ST CENTURY INSURANCE GROUP
CHIEF EXECUTIVE OFFICER SHORT TERM INCENTIVE PLAN


PURPOSE

The 21st Century Insurance Group Chief Executive Officer Short Term Incentive Plan (the "Plan") is an annual incentive compensation plan designed to focus the CEO on various pre-established corporate performance goals, business challenges and opportunities for each fiscal year. While each year's annual results should be maximized, it should be done in context with the steady, long-term development of 21st Century and its franchise with consumers. The Plan is intended to preserve 21st Century's corporate tax deduction for bonus compensation paid to executive officers by meeting the qualified performance-based compensation provisions under Section 162(m) of the Internal Revenue Code of 1986, as amended ("Code").

SECTION I    ELIGIBILITY AND PARTICIPATION PERIOD

Section 1.1 Participation in the Plan will be limited to the Chief Executive Officer of 21st Century Insurance Group ("Company"). Based upon the Compensation Committee's determination and subject to a retirement/ termination and promotion/new hire, participation of more than one chief executive officer within the same Plan Year is possible.

SECTION II    PLAN YEAR AND PERFORMANCE

Section 2.1 The Plan Year shall be the Company's fiscal year, which is currently the calendar year.

Section 2.2 The Compensation Committee shall establish in writing, within 90 days of the beginning of each Plan Year, one or more of the following specific performance goals: net income, combined loss and expense ratio, increase in written premium, stock price, earnings per share, book value, expansion of geographic and/or product markets, dividends, investment income, and return on equity.

SECTION III    CERTIFICATION OF PERFORMANCE GOALS AND PAYMENT

Section 3.1 As soon as practicable after each Plan Year, the Compensation Committee shall evaluate actual performance in comparison to the established performance goals and certify in writing to what extent such goals have been attained. Based on attained performance, the Compensation Committee shall compute the amount of Short Term Incentive Compensation ("STI") to be paid. The Compensation Committee shall have no discretion to increase the amount of the STI to be paid but may reduce the amount of such payment based on the CEO's performance or any other factors considered material to the purpose or administration of the Plan.

Section 3.2 The STI award shall be paid or payable by the Company in cash or stock as soon as practicable after certification pursuant to Section 3.1.

Section 3.3 An STI award that would have otherwise been payable to a participant who is not employed by the Company or a subsidiary or affiliate as of the last day of the Plan Year, may be prorated or may not be paid at all based on rules established by the Compensation Committee.

Section 3.4 The maximum amount of STI award that may be paid to any single participant under the Plan shall not exceed $5,000,000.

Section 3.5 The Company or any of its subsidiaries may deduct and withhold any applicable payroll taxes or any amounts owed by the employee to the Company or any of its subsidiaries.

SECTION IV    STOCKHOLDER APPROVAL AND OTHER LIMITATIONS

Section 4.1 No STI award shall be approved or paid under the Plan unless and until the material provisions of the plan are approved by the Company's stockholders by a majority of the votes cast in a separate vote on this matter.

Section 4.2 No person shall have a legal claim to an award under the STI.

Section 4.3 Except as required by law, awards are not subject to alienation, transfer, sale, assignment, pledge, encumbrance or levy of any kind. All payments shall be made from general assets of the Company and no participant shall have any claim to any specific assets of the Company.

Section 4.4 Neither the Plan nor any action taken with respect to the Plan shall be construed as giving any employee the right to be retained in the employ of the Company or any subsidiary.

SECTION V    ADMINISTRATION

Section 5.1 The Compensation Committee shall consist solely of three or more members of the Company's Board of Directors who qualify as "outside directors" as defined by Code Section 162(m).

Section 5.2 The Compensation Committee shall have full power and authority to administer and interpret the provisions of the Plan and to adopt such rules, regulations, agreements, guidelines and instruments for the administration of the Plan and for the conduct of its business as the Committee deems necessary or advisable.

Section 5.3 Except with respect to matters which under the Code are required to be determined in the sole and absolute discretion of the Compensation Committee, the Compensation Committee shall have full power to delegate to any officer or employee of the Company the authority to administer and interpret the procedural aspects of the Plan, subject to the Plan's terms.

Section 5.4 The Compensation Committee may rely on opinions, reports or statements of officers or employees of the Company or any subsidiary thereof and of Company counsel (inside or retained counsel), public accountants and other professional or expert persons in administering the Plan.

Section 5.5 The Board of Directors of the Company reserves the right to amend or terminate the Plan in whole or in part at any time. Unless otherwise prohibited by applicable law, any amendment required to conform the Plan to the requirements of the Code may be made by the Compensation Committee.

Section 5.6 The Company shall indemnify and hold harmless all members of the Compensation Committee against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to the Plan, except in the case of willful misconduct.

Section 5.7 The Plan does not constitute an employee benefit plan as defined by the Employee Retirement Income Security Act of 1974 ("ERISA"). The provisions of the Plan shall be construed and interpreted solely in accordance with the laws of the State of California.

 


2005 Short Term Incentive (STI) Plan

 

Purpose: to focus management on business challenges and opportunities within their control in the current year. While current year results should be maximized, it should be done in context with the steady, long-term development of the company and its franchise with consumers.

 

Composition:

 

 

1.

The Short Term Incentive score is created by using the Core Business Performance Matrix (as defined below) based upon Company results as externally reported to shareholders. Net Income is no longer a component of the formula.

 

 

2.

An STI “pool” is created by multiplying the STI performance score by the STI target percentage for each position and the paid salary of the individual. Management will recommend to the Compensation Committee any variances from the calculated amounts for each manager in the Plan based on that individual’s performance and contributions for the year.

 

 

3.

After approval of the Plan and communication of the Plan to management, the “pool amount” result of this Plan may not be subsequently modified without the affirmative vote of 2/3 of the full Compensation Committee and 2/3 of the full Board.

 

 

4.

Any revisions to this STI Plan, such as to the Core Business matrix for a subsequent year, are to be completed and approved by the Compensation Committee and the Board by September 30th of the year prior to the change taking effect.

 

 

5.

Bonus accruals are included in underwriting results.

 

Core Business Performance Matrix:

 

 

1.

Combined Ratio - calculated as the total Company combined ratio.

 

 

2.

Growth - calculated as the percentage growth in direct written premium.

 

 

3.

Results will be on a Calendar Year GAAP basis as externally reported to shareholders.

 

 

4.

Specifically excluded from results:

 

 

a.

Investment income, financing costs, income taxes, etc.

 

 

b.

SB1899, Northridge and similar pre 2003 earthquakes and Homeowners insurance exposures

 

 

c.

One time adjustments in Capitalized assets, such as for IT.

 

 

5.

Specifically includes the impact of new earthquakes, fire, flood and other natural disasters affecting the personal auto business.

 

 

6.

Specifically included is the revenue and profitability from cross-selling products to our customers. These products may be underwritten by 21st or other companies.

 

 

7.

Results will be placed against the attached matrix to produce a STI Performance Score. Results falling between the listed points will be interpolated.

 


 

2005 Core Business Performance Matrix:

 

 

Calendar Year GAAP Combined Ratio:

 

 

94

95

96

97

98

99

100

101

102

% Growth in DWP

30%

200

185

170

145

120

100

85

50

0

25%

180

165

150

130

100

85

50

0

0

20%

165

150

125

110

75

50

0

0

0

15%

145

125

100

75

50

25

0

0

0

10%

130

105

85

65

35

20

0

0

0

5%

105

90

70

55

25

15

0

0

0

0%

75

65

50

40

20

10

0

0

0

-5%

40

30

25

0

0

0

0

0

0

 

 

·

Numbers in tables represent % of target bonus to be paid.

 

 

·

Actual results are interpolated between chart values.

 

 

TARGET STI AS A

PERCENTAGE OF BASE

SALARY

CEO

150%

Operating

Committee

Officers

75%

Other Officers

50%

Managers

25%