<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission file number 1-9627
ZENITH NATIONAL INSURANCE CORP.
[Exact name of registrant as specified in its charter]
DELAWARE 95-2702776
[State or other jurisdiction of [I.R.S. Employer
incorporation or organization] identification No.]
21255 Califa Street, Woodland Hills, California 91367-5021
[Address of principal executive offices [Zip Code]
[818] 713-1000
[Registrant's telephone number, including area code]
Not Applicable
[Former name, former address and former fiscal year, if changed since last
report.]
Indicate by check mark whether the registrant [1] has filed all reports required
to be filed by Section 13 or 15[d] of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and [2] has been subject to such filing
requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. At July 29, 1994, 18,909,000
shares of common stock were outstanding, net of 5,069,000 shares of treasury
stock.
Page 1
<PAGE>
PART I FINANCIAL INFORMATION
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
ITEM 1:
<TABLE>
<CAPTION>
Dollars and Shares in Thousands
ASSETS JUNE 30,1994 DEC. 31, 1993
<S> <C> <C>
Investments
Fixed maturities:
At amortized cost (market $395,020 & $438,705) $ 394,042 $ 401,337
At fair value (cost $842,773 & $687,075) 807,847 705,682
Floating rate preferred stocks, at fair value (cost $22,780 & $30,582) 23,226 31,495
Convertible and non redeemable preferred stocks, at fair value
(cost $8,463 & $11,545) 7,916 11,246
Common stocks, at fair value (cost $24,069 & $14,485) 23,908 15,575
Mortgage loans on real estate 1,457 4,515
Policy loans 40,581 39,609
Short-term investments (at cost, which approximates fair value) 139,422 276,841
Other investments 21,772 14,097
------------ ------------
TOTAL INVESTMENTS 1,460,171 1,500,397
Cash 12,030 8,560
Accrued investment income 21,340 21,635
Premiums receivable 72,740 59,188
Premium notes receivable, collateralized by letters of credit 721 1,647
Receivable from reinsurers and prepaid reinsurance premiums 55,692 57,426
Earned but unbilled premiums receivable 3,870 4,586
Deferred policy acquisition costs 110,517 108,416
Federal Income taxes 5,156
Properties and equipment, less accumulated depreciation 49,069 47,042
Excess of cost over net assets acquired and purchased intangibles and other assets 24,549 25,225
Other assets 25,815 23,668
------------ ------------
TOTAL ASSETS $ 1,841,670 $ 1,857,790
------------ ------------
------------ ------------
LIABILITIES
Policy liabilities and accruals
Unpaid losses and loss expenses $ 505,457 $ 513,270
Future policy benefits for life insurance contracts 156,960 154,501
Deposits on deferred annuity contracts 563,003 545,956
Policy and contract claims 5,114 5,934
Unearned premiums 127,523 111,896
Policyholders' dividends accrued and accumulated 34,368 30,378
Other policyholder funds 16,215 16,857
Reserves on loss portfolio transfers 10,307 11,119
Senior notes payable, less unamortized issue costs of $950 & $1,011 74,050 73,989
Federal income tax 14,255
Other liabilities 32,195 30,170
------------ ------------
TOTAL LIABILITIES 1,525,192 1,508,325
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par - shares authorized 1,000; issued and outstanding,
none in 1994 and 1993
Common stock, $1 par - shares authorized 50,000; issued 23,977,
outstanding 18,908, 1994; issued 23,910, outstanding 18,841,1993 23,977 23,910
Additional paid-in capital 250,318 249,092
Retained earnings 157,708 148,043
Net unrealized appreciation (depreciation) on investments, net of $3,900 of
deferred tax benefit in 1994 and $7,093 deferred tax expense in 1993 (30,769) 13,176
------------ ------------
401,234 434,221
Less treasury stock at cost (5,069 shares, 1994 and 1993) (84,756) (84,756)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 316,478 349,465
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,841,670 $ 1,857,790
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of this statement.
Page 2
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
Dollars in Thousands, except per share data 1994 1993 1994 1993
<S> <C> <C> <C> <C>
CONSOLIDATED REVENUES:
Property and casualty premium income $ 100,601 $ 104,552 $ 198,472 $ 201,798
Health and life premium income and other policy charges 15,305 15,640 30,727 32,329
Net investment income 24,455 23,683 47,598 48,007
Realized gains on investments 431 5,659 2,247 10,656
Real estate sales 8,773 8,773
Income from legal settlement 1,760 1,760
----------- ----------- ----------- -----------
Total revenues 151,325 149,534 289,577 292,790
EXPENSES:
Property and casualty losses and loss expenses incurred 66,657 69,453 126,113 136,636
Health and life benefits and other policy credits 20,369 20,741 40,019 43,037
Policy acquisition costs 22,569 20,220 42,061 38,716
Other underwriting and operating expenses 19,762 13,051 36,612 26,743
Policyholders' dividends and participation 4,121 4,912 12,969 8,726
Interest expense 1,480 1,696 3,052 3,470
----------- ----------- ----------- -----------
Total expenses 134,958 130,073 260,826 257,328
Income from operations before federal income tax, 16,367 19,461 28,751 35,462
Federal income tax 5,467 4,361 9,651 7,762
----------- ----------- ----------- -----------
NET INCOME $ 10,900 $ 15,100 $ 19,100 $ 27,700
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
EARNINGS PER SHARE:
Net income per share $ 0.57 $ 0.78 $ 1.00 $ 1.44
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
Page 3
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
Dollars in thousands 1994 1993
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Premiums collected $ 236,652 $ 241,557
Investment income received 47,817 48,080
Deposits on universal life-type contracts 6,653 10,152
Proceeds from sales of real estate 8,773
Recovery from legal settlement 5,886
Losses & loss adjustment expenses paid (132,595) (136,929)
Health claims paid (15,659) (16,598)
Death and surrender benefits paid (6,719) (6,103)
Underwriting & other operating expenses paid (75,169) (71,784)
Real estate construction costs paid (4,536)
Reinsurance premiums paid (11,951) (9,443)
Dividends paid to policyholders (10,094) (6,214)
Special policyholders' dividend - Proposition 103 rollback refund (18,391)
Interest paid (3,448) (3,487)
Interest on deferred annuity contracts (16,021) (17,299)
Income taxes (paid) refunded (17,600) 209
Purchase of trading portfolio investments (5,741)
Proceeds from sales of trading portfolio investments 112,206
------------ ------------
Net cash flows from operating activities 118,454 13,750
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments:
Debt securities Held-to-Maturity (15,286)
Debt and equity securities Available-for-Sale (553,029)
Other debt and equity securities and other investments (8,431) (396,245)
Proceeds from maturities and exchanges of investments:
Debt securities Held-to-Maturity 22,440
Debt and equity securities Available-for-Sale 65,500
Other debt and equity securities and other investments 3,371 109,319
Proceeds from sales of investments:
Debt and equity securities Available-for-Sale 226,972
Other debt and equity securities and other investments 1,229 231,862
Capital and other expenditures (4,178) (2,216)
Losses and loss adjustment expenses paid under portfolio transfers (812) (1,231)
Net decrease in short-term investments 138,482 20,746
------------ ------------
Net cash flows from investing activities (123,742) (37,765)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid to common stockholders (9,427) (9,473)
Proceeds from exercise of stock options 1,196 5,578
Deposits on deferred annuity contracts 22,046 32,733
Acquisition costs of deferred annuity contracts, deferred (2,088) (3,507)
Annuitization & return of policyholders' balances on deferred annuity contracts (18,990) (11,378)
Interest on deferred annuity contracts 16,021 17,299
Purchase of treasury shares (1,462)
------------ ------------
Net cash flows from financing activities 8,758 29,790
------------ ------------
Net increase in cash 3,470 5,775
Cash at beginning of period 8,560 1,856
------------ ------------
Cash at June 30, $ 12,030 $ 7,631
------------ ------------
------------ ------------
(continued)
Page 4
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(continued)
FOR THE SIX MONTHS
ENDED JUNE 30,
1994 1993
(Dollars in Thousands)
RECONCILIATION OF NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income $ 19,100 $ 27,700
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation 2,156 2,442
Amortization of intangibles and discount on notes 737 712
Net (accretion) amortization of bonds and preferred stocks (212) 851
Realized gains on investments (2,247) (10,656)
Decrease (increase) in:
Accrued investment income 295 (942)
Premiums receivable (11,910) (9,619)
Receivable from reinsurers 1,734 2,115
Deferred policy acquisition costs (13) (6,609)
Federal income taxes (8,280) 7,971
Increase (decrease) in:
Unpaid losses and loss expenses (7,813) (689)
Future policy benefits for life insurance contracts 2,459 7,866
Policy and contract claims (820) (414)
Unearned premiums 15,627 11,078
Policyholders' dividends accrued and accumulated 3,990 2,578
Special policyholders' dividend - Proposition 103 rollback refund (18,111)
Other policyholder funds (642) 410
Net cash from trading portfolio 106,465
Other (2,172) (2,933)
---------- ----------
Net cash flows from operating activities $ 118,454 $ 13,750
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
Page 5
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Computation of Earnings per Share:
Dollars and Shares in Thousands, Except
per Share Data
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
<S> <C> <C> <C> <C>
1994 1993 1994 1993
(A) Net income $ 10,900 $ 15,100 $ 19,100 $ 27,700
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
(B) Number of shares used in calculating
primary earnings per share:
Weighted average outstanding shares
during the period 18,886 19,057 18,870 18,994
Additional common shares issuable under
employee stock options using the
treasury stock method (1) 180 301 181 298
---------- ---------- ---------- ----------
19,066 19,358 19,051 19,292
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per share (A)/(B) $ 0.57 $ 0.78 $ 1.00 $ 1.44
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
(C) Number of fully diluted shares:
Weighted average outstanding shares
during the period 18,886 19,057 18,870 18,994
Additional common shares issuable under
employee stock options using the
treasury stock method (2) 191 301 186 341
---------- ---------- ---------- ----------
19,077 19,358 19,056 19,335
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per share (A)/(C) $ 0.57 $ 0.78 $ 1.00 $ 1.43
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
<FN>
(1) Based on the average market price during the period.
(2) Based on the higher of the average market price or price at the end of each
period.
</TABLE>
Note 2. Proposed Sale of CalFarm Life
In June 1994, Zenith determined not to pursue the previously announced proposed
sale of CalFarm Life and terminated all negotiations with respect to such sale.
Note 3. Federal Income Taxes
An allowance of approximately $8.2 million was established at June 30, 1994 for
the deferred tax asset associated with unrealized losses on investments.
Page 6
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
In the opinion of management, all adjustments necessary for a fair presentation
of the results of operations for the periods presented (consisting only of
normal recurring adjustments) have been included. The results of operations for
an interim period are not necessarily indicative of the results for an entire
year.
On May 25, 1994, the Board of Directors declared a regular quarterly cash
dividend of $.25 per share on the outstanding shares, payable August 12, 1994 to
stockholders of record at the close of business on July 29, 1994.
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of operations of Zenith's business segments were as follows:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------- ----------------------------------------
Dollars in Thousands, Three Months Ended June 30, Six Months Ended June 30,
except per share data 1994 Per 1993 Per 1994 Per 1993 Per
Share Share Share Share
- - ----------------------------------------------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) after tax and before
realized gains:
Property and Casualty $8,460 $8,711 $15,225 $16,248
Health and Life 2,174 2,159 4,144 4,060
Parent (15) (1,429) (1,730) (3,264)
------------------------------------- ----------------------------------------
Total 10,619 $0.56 9,441 $0.49 17,639 $0.92 17,044 $0.89
Realized gains (losses) on
investments after tax:
Property and Casualty 180 2,452 1,340 3,960
Health and Life 95 3,376 114 6,355
Parent 6 (169) 7 341
---------------------------------------- ----------------------------------------
Total 281 0.01 5,659 0.29 1,461 0.08 10,656 0.55
Net Income (loss)
Property and Casualty 8,640 11,163 16,565 20,208
Health and Life 2,269 5,535 4,258 10,415
Parent (9) (1,598) (1,723) (2,923)
-------------------------------------- ----------------------------------------
Total $10,900 $0.57 $15,100 $0.78 $19,100 $1.00 $27,700 $1.44
--------------------------------------- ----------------------------------------
--------------------------------------- ----------------------------------------
</TABLE>
Results of the Property and Casualty operation reflect losses incurred from the
Northridge earthquake of $1.5 million, or $.08 per share, and $7.4 million, or
$.39 per share, for the quarter and six months ended June 30, 1994,
respectively. In addition, the results of the Property and Casualty operation
for the six months ended June 30, 1994, compared to the corresponding period in
1993, reflect a decline in after-tax investment income (excluding Parent) of
$1.2 million. See pages 10 and 11 for a discussion of investment income and
yields. Results of the Parent for the quarter and six months
Page 7
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
ended June 30, 1994 reflect $1.1 million, or $.06 per share, of income from
litigation which was settled in 1993. Following is a discussion of the
comparative results of Zenith's business segments:
PROPERTY AND CASUALTY OPERATIONS:
Premiums earned, underwriting results and combined ratios for the three months
and six months ended June 30, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
% %
Dollars in Thousands 1994 1993 Increase 1994 1993 Increase
(Decrease) (Decrease)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums earned
Workers' Compensation $54,554 $65,401 (17%) $107,522 $123,376 (13%)
Automobile and Other
Property & Casualty 37,567 33,723 11% 74,092 76,132 10%
Reinsurance 8,480 5,428 56% 16,858 11,290 49%
--------- --------- ------------------------
Total $100,601 $104,552 (4%) $198,472 $201,798 (2%)
--------- ---------- ------------------------
--------- ---------- ------------------------
Underwriting Income (Loss)
Before Taxes
Workers' Compensation $4,360 $3,047 $9,579 $5,454
Automobile and Other
Property & Casualty (3,190) (1,102) (5,288) (3,847)
Reinsurance 2,070 1,485 513 2,852
----------------------------- ------------------------
Total $3,240 $3,430 $4,804 $4,459
Combined Ratios
Workers' Compensation 92.0% 95.3% 91.1% 95.6%
Automobile and Other
Property & Casualty 108.5% 103.3% 107.1% 105.7%
Reinsurance 75.6% 72.6% 97.0% 74.7%
Total 96.8% 96.7% 97.6% 97.8%
- - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Workers' Compensation premiums decreased in the quarter and six months ended
June 30, 1994 compared to the corresponding periods in 1993 principally because
of decreases in minimum rates in July 1993 and January 1994 and a decrease in
new and renewal surcharge business due to favorable industry trends, offset in
part by increased new business, principally in the Los Angeles area and Texas.
Workers' Compensation underwriting income increased in the quarter and six
months ended June 30, 1994 compared to the corresponding periods in 1993
primarily because of favorable loss frequency and loss development trends,
partially offset by $.8 million and $2.8 million for the quarter and six months,
respectively, of expenses attributable to repairs to Zenith's home office
building and operating costs relating to the Northridge earthquake in January
1994. The profitability of Zenith's Workers' Compensation operation for the
quarter and six months ended June 30, 1994 is above average compared to Zenith's
historical results and no prediction
Page 8
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
can be made or should be implied as to the sustainability of these profit
margins. Specifically, during the second quarter of 1994, claim frequency
increased compared to prior periods. In addition, competition is intense for
workers' compensation business and some of Zenith's competitors are paying very
high levels of commissions to attract business. Finally, the California
Insurance Commissioner has scheduled a hearing on August 31, 1994 to review
minimum rates that will be applicable from September 15, 1994. Any reduction in
minimum rates would have an adverse effect on Zenith's Workers' Compensation
premium income in the future.
The increases in premiums earned in the Automobile and Other Property and
Casualty and Reinsurance operations in the quarter and six months ended June 30,
1994 compared to the corresponding periods in 1993 were principally attributable
to new business and to rate increases for Farmowners' and Homeowners' policies
in the Automobile and Other Property and Casualty operation. Results of
operations in the quarter and six months ended June 30, 1994 in the Automobile
and Other Property and Casualty operation were adversely affected by $.5 million
and $2.8 million, respectively, of losses attributable to claims arising out of
the Northridge earthquake. In addition, results of operations in the Automobile
and Other Property and Casualty operation declined as a result of net
underwriting losses from the involuntary participation in the California
Assigned Risk Plan of $.7 million and $1.2 million for the quarter and six
months ended June 30, 1994, respectively, compared to underwriting gains of
$.4 million and $.1 million for the quarter and six months ended June 30,
1993, respectively. Results of operations in the Reinsurance operation were
reduced by $1.0 million and $5.8 million for the quarter and six months ended
June 30, 1994, respectively, of losses attributable to claims arising out of the
Northridge earthquake.
An uncertain political and regulatory environment, both state and federal,
including proposals relating to National Health Insurance, a proposed California
initiative to create a single payer health system and the 1993 workers'
compensation legislation in California and other areas; the lack of economic
growth in parts of California; a highly competitive insurance industry; and the
changing environment for controlling medical, legal and rehabilitation costs, as
well as fraud and abuse, are all factors that continue to impact the environment
in which Zenith operates. Although management is currently unable to predict
the effect of any of the foregoing, these trends and uncertainties could have a
material effect on Zenith's future operations and financial condition.
HEALTH AND LIFE:
In June 1994, Zenith announced that it had determined not to pursue the
previously announced proposed sale of CalFarm Life and has terminated all
negotiations with respect to such sale.
Results of operations of the Health and Life segment were relatively unchanged
for the quarter and six months ended June 30, 1994 compared to the corresponding
periods in 1993. The amount of deposits received by CalFarm Life on deferred
annuity contracts fluctuates and continues to be influenced by economic and tax
uncertainties and by competition
Page 9
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
in the market for such products. Reduced investment yields on CalFarm Life's
investment portfolio (discussed below under "Investments") did not materially
affect the profitability of its deferred annuities and interest sensitive life
insurance contracts because of the company's ability to manage the "spread"
between the interest earned and the interest credited to contract holders.
In June 1994 A.M. Best, an insurance rating service, changed the rating for
CalFarm Life from A+ (Superior) to A (Excellent). Management believes that this
rating change will not materially impact the operations of CalFarm Life. CalFarm
Life continues to maintain a strong capital and surplus position, in relation to
overall insurance risk which is higher than the requirements of the guidelines
of the National Association of Insurance Commissioners ("NAIC").
INVESTMENTS:
During the first six months of 1994, interest rates, which reached historically
low levels in the latter part of 1993, increased with a corresponding decline in
the fair values of fixed maturity investments and some decline in the value of
certain equity securities. At June 30, 1994, the unrealized loss on fixed
maturities identified as available-for-sale was $34,296,000, before deferred
taxes, compared to an unrealized gain of $18,755,000, before deferred taxes, at
December 31,1993. This change caused a decrease in stockholders' equity of
$42,629,000, after deferred taxes, between December 31, 1993 and June 30, 1994.
Stockholders' equity will continue to be affected by future volatility, if any,
in the bond markets.
Results of operations are significantly impacted by investment income, which was
as follows:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------
Investment Income Three Months Ended June 30, Six Months Ended June 30,
Dollars in Thousands 1994 1993 1994 1993
- - -------------------------------------------------------------------------------------------------
Property and Causalty Portfolio (incl. parent)
<S> <C> <C> <C> <C>
Pre-tax $9,537 $9,505 $18,249 $19,511
Post-tax 6,447 6,595 12,336 13,560
Health and Life Portfolio
Pre-tax 14,918 14,178 29,349 26,496
Post-tax 9,697 9,357 19,077 18,807
Consolidated
Pre-tax 24,455 23,683 47,598 48,007
Post-tax $16,144 $15,952 $31,413 $32,367
- - -------------------------------------------------------------------------------------------------
</TABLE>
Page 10
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The yields on invested assets were as follows:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------
Investment Yields Three Months Ended June 30, Six Months Ended June 30,
1994 1993 1994 1993
- - -------------------------------------------------------------------------------------------------
Property and Causalty Portfolio (incl. parent)
<S> <C> <C> <C> <C>
Pre-tax 5.2% 5.4% 5.0% 5.6%
Post-tax 3.5% 3.8% 3.3% 3.9%
Health and Life Portfolio
Pre-tax 7.7% 8.0% 7.6% 8.1%
Post-tax 5.0% 5.3% 5.0% 5.4%
- - -------------------------------------------------------------------------------------------------
</TABLE>
The decrease in yields was attributable to generally lower interest rates at the
beginning of 1994 compared to the beginning of 1993, the company's substantial
position in short-term investments at the beginning of 1994, and lower yields on
corporate bonds in the first six months of 1994 compared to the corresponding
period in 1993 caused, in part, by the early redemption of certain issues in
1993.
Zenith maintains a diversified portfolio consisting of common stocks, preferred
stocks, principally investment grade bonds and other investments. The goal is
to maintain safety and liquidity, enhance principal values and achieve increased
rates of return consistent with regulatory constraints.
The distribution of Zenith's consolidated investment portfolio is shown in the
following table:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
AT JUNE 30, 1994 AT DECEMBER 31, 1993
Dollars in Thousands Carrying % of Total Market Carrying % of Total Market
Value Value Value Value
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bonds:
Investment grade
U.S. Government securities $513,523 35.2% $511,294 $442,369 29.4% $443,551
Other 634,421 43.5% 637,628 613,680 40.9% 649,866
Non-Investment grade 25,921 1.8% 25,921 17,995 1.2% 17,995
Stocks:
Redeemable preferred:
Investment grade 26,042 1.8% 26,042 30,589 2.0% 30,589
Non-Investment grade 1,982 0.1% 1,982 2,386 0.2% 2,386
Other preferred 31,142 2.1% 31,142 42,741 2.9% 42,741
Common 23,908 1.6% 23,908 15,575 1.0% 15,575
Short-term investments
U.S. Government securities 32,700 2.2% 32,700 124,306 8.3% 124,306
Other 106,722 7.3% 106,722 152,535 10.2% 152,535
Other Investments 63,810 4.4% 58,221 3.9%
- - ------------------------------------------------------------------------------------------------------------------------------------
Total investments $1,460,171 100.0% $1,500,397 100.0%
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 11
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The carrying value of non-investment grade bonds and preferred stocks owned by
Zenith's property and casualty subsidiaries was 5.2% and 6.2% of statutory
surplus at June 30, 1994 and December 31, 1993, respectively. The carrying value
of non-investment grade bonds owned by Zenith's life insurance subsidiary was
35.4% and 34.8% of statutory capital and surplus at June 30, 1994 and December
31, 1993, respectively. The carrying values of non-investment grade bonds and
preferred stocks for these comparisons are based upon values and ratings used by
the Securities Valuation Office of the NAIC. The NAIC may assign a
non-investment grade rating to a security that is rated investment grade by one
or more rating agency.
The change in the carrying value of Zenith's consolidated investment portfolio
during 1994 was as follows:
<TABLE>
<CAPTION>
Dollars in thousands
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Carrying Value at December 31, 1993 $1,500,397
Purchases at cost 582,487
Maturities and exchanges of investments (91,311)
Proceeds from sales of investments:
Avilable-for-sale (226,972)
Trading portfolio (112,206)
Held-to-Maturity None
Other investments (1,229)
--------
Total proceeds from disposals of investments: (340,407)
Realized gains from maturities and exchanges of investments:
Held-to-maturity 425
Available-for-sale 362
Realized gains from sales of investments:
Available-for-sale 827
Trading portfolio 122
Other investments 511
--------
Total realized gains on investments 2,247
Unrealized losses on investments (54,938)
Decrease in short-term investments (138,484)
net accretion of bonds and preferred stocks and other changes 180
- - ------------------------------------------------------------------------------------------------------------------------
Carrying Value at June 30, 1994 $1,460,171
- - ------------------------------------------------------------------------------------------------------------------------
</TABLE>
REAL ESTATE:
In the second quarter of 1994, Zenith recognized revenues of $8,773,000 on
closings of sales of homes by its wholly-owned real estate development
subsidiary. Income before taxes for the quarter and six months ended June 30,
1994 was $749,000 and such income is included in the Parent business segment.
Page 12
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY:
Zenith is principally dependent upon its portfolio of marketable securities and
the investment yields thereon, dividends from its insurance subsidiaries, whose
operations are supported by their own cash flow, and available lines of credit
($50,000,000 at June 30, 1994) to pay its expenses, service debt and pay any
cash dividends which may be declared to its stockholders. In the opinion of
management, Zenith's sources of liquidity are sufficient to fund its short-term
and long-term requirements for liquidity.
Page 13
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Stockholders' Meeting of Zenith was held on May 25, 1994. Two
matters were presented to a vote of the Stockholders.
One matter was the election of Directors. The tabulation of votes for the
nominees, all of whom were elected, are as follows:
<TABLE>
<CAPTION>
Director Votes For Votes Withheld
- - -------- --------- --------------
<S> <C> <C>
George E. Bello 14,911,569 122,434
Max M. Kampelman 14,912,456 121,547
Jack M. Ostrow 14,912,456 121,547
William Steele Sessions 14,911,307 122,696
Harvey L. Silbert 14,912,456 121,547
Robert M. Steinberg 14,911,569 122,434
Saul P. Steinberg 14,912,456 121,547
Gerald Tsai, Jr. 14,912,456 121,547
Stanley R. Zax 14,911,560 122,443
</TABLE>
With respect to the election of Directors, there were no votes cast against any
Director, no abstentions and no broker non-votes.
The second matter was a vote to approve a performance-based bonus plan for
Executive Officers of Zenith. The matter was approved by the Stockholders. The
tabulation of votes is as follows:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes
- - --- ------- ------- ----------------
<S> <C> <C> <C>
12,087,700 402,609 103,468 2,440,226
</TABLE>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
[a] Exhibits
[11] Statement re: computation of per share earnings
Part I, Item 1, Note 1 of the consolidated financial
statements is incorporated herein by reference
[b] Reports on Form 8-K
None
Page 14
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ZENITH NATIONAL INSURANCE CORP.
Registrant
Date: August 10, 1994 /s/ Stanley R. Zax
---------------------------------------------
Stanley R. Zax, Chairman of the Board
& President (Principal Executive Officer)
Date: August 10, 1994 /s/ Fredricka Taubitz
---------------------------------------------
Fredricka Taubitz, Executive Vice President
& Chief Financial Officer (Principal
Accounting Officer)
Page 15
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit No. Description Page
- - ----------- -----------
[11] Statement re: computation of per share earnings 6
incorporated herein by reference to Part I, Item 1,
Note 1 of the consolidated financial statements
Page 16
