<PAGE>
[LOGO]
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Form 10-K/A
AMENDMENT NO. 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OR
[ ] 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)
<TABLE>
<S> <C>
DELAWARE 95-2702776
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
</TABLE>
<TABLE>
<S> <C>
21255 CALIFA STREET, WOODLAND HILLS, CALIFORNIA 91367-5021
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 713-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- - --------------------------------------------------------- ---------------------------------------------------------
<S> <C>
Common Stock, $1.00 Par Value New York Stock Exchange
(TITLE OF CLASS)
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on March 25, 1994 was approximately
$238,222,000 (based on the closing sale price of such stock on such date).
At March 25, 1994, 18,866,000 shares of Common Stock were outstanding, net
of 5,069,000 shares of treasury stock.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Annual Report to Stockholders for fiscal year ended
December 31, 1993 -- Part I and Part II.
(2) Portions of the Proxy Statement in connection with the 1994 Annual
Meeting of Stockholders -- Part III.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Zenith National Insurance Corp. ("Zenith"), a Delaware corporation
incorporated in 1971, is a holding company. Zenith is engaged through its
directly and indirectly wholly-owned insurance subsidiaries, Zenith Insurance
Company ("Zenith Insurance"), CalFarm Insurance Company ("CalFarm Insurance"),
ZNAT Insurance Company ("ZNAT Insurance"), Zenith Star Insurance Company
("Zenith Star") and CalFarm Life Insurance Company ("CalFarm Life"), in the
business of writing workers' compensation insurance primarily in California;
reinsurance; annuities; health and life insurance coverages; and auto,
homeowners, farmowners and other coverages primarily in the rural areas of
California. In 1993, Zenith commenced real estate operations, developing private
residences for sale in Las Vegas, Nevada, through its wholly owned subsidiary,
Perma-Bilt, a Nevada Corporation ("Perma-Bilt").
The 1993 edition of Best's Key Rating Guide ("Best's") gives Zenith
Insurance, CalFarm Insurance and ZNAT Insurance, collectively, and CalFarm Life
ratings of A+ (superior). Standard & Poor's Corporation ("S&P") has rated the
claims-paying ability of Zenith Insurance, CalFarm Insurance and ZNAT Insurance
AA-(excellent) and the solvency of CalFarm Life BBBq (above average). Best's
ratings and S&P's ratings of claims-paying ability and solvency are based upon
factors of concern to policyholders and insurance agents and are not directed
toward the protection of investors.
At December 31, 1993, Zenith and its subsidiaries had approximately 1,600
employees.
The principal executive offices of Zenith are located at 21255 Califa
Street, Woodland Hills, California 91367-5021, telephone (818) 713-1000.
GLOSSARY OF SELECTED INSURANCE TERMS
The following terms when used herein have the following meanings:
<TABLE>
<S> <C>
Assume To receive from a ceding company all or a portion of a risk
in consideration of receipt of a premium.
Cede To transfer to a reinsurer all or a portion of a risk in
consideration of payment of a premium.
Combined ratio The sum of underwriting expenses, net incurred losses, loss
adjustment expenses and policyholders' dividends, expressed
as a percentage of net premiums earned.
Development The amount by which losses, measured subsequently by
reference to payments and additional estimates, differ from
those originally reported for a period. Development is
favorable when losses ultimately settle for less than
levels at which they were reserved or subsequent estimates
indicate a basis for reserve decreases on open claims.
Development is unfavorable when losses ultimately settle
for more than levels at which they were reserved or
subsequent estimates indicate a basis for reserve increases
on open claims.
Excess of loss reinsurance A form of reinsurance in which the reinsurer pays all or a
specified percentage of a loss caused by a particular
occurrence or event in excess of a fixed amount and up to a
stipulated limit.
Incurred but not reported Claims relating to insured events that have occurred but
claims have not yet been reported to the insurer or reinsurer.
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
Loss adjustment expenses The expenses of investigating and settling claims,
including legal and other fees, and general expenses of
administering the claims adjustment process.
Net premiums earned The portion of net premiums written applicable to the
expired period of policies.
Participating policy A policy upon which dividends may be paid after expiration.
Policyholders' surplus or The amount remaining after all liabilities are subtracted
statutory capital from all admitted assets, as determined in accordance with
statutory accounting practices. This amount is regarded as
financial protection to policyholders in the event an
insurance company suffers unexpected or catastrophic
losses.
Reinsurance A transaction in which an original insurer, or cedant,
remits a portion of the premium to a reinsurer, or assuming
company, as payment for the reinsurer's assumption of a
portion of the risk.
Reserves or loss reserves The balance sheet liability representing estimates of
amounts needed to pay reported and unreported claims and
related loss adjustment expenses (stated without reduction
for reinsurance ceded after 1992).
Retrocession A reinsurance of reinsurance assumed.
Statutory accounting Accounting principles prescribed or permitted by the
practices California Department of Insurance. In general, statutory
accounting practices address policyholder protection and
solvency and are more conservative in presentation of
earnings, surplus and assets than generally accepted
accounting principles.
Treaty A contract of reinsurance.
Underwriting The process whereby an insurer reviews applications
submitted for insurance coverage and determines whether it
will accept all or part, and at what premium, of the
coverage being requested.
Underwriting expenses The aggregate of policy acquisition costs and the portion
of administrative, general and other expenses attributable
to the underwriting process as they are accrued and
expensed.
</TABLE>
DESCRIPTION OF BUSINESS SEGMENTS
Zenith and its subsidiaries conduct business through a property and casualty
segment, health and life segment and a parent or holding company segment as
described in Note 15 -- "Segment Information" on pages 67 and 68 of the 1993
Annual Report to Stockholders, which note is hereby incorporated by reference.
The earnings of Zenith's property and casualty operations and its health and
life business are supplemented by the generation of investment income discussed
under "Investments."
PROPERTY AND CASUALTY -- WORKERS' COMPENSATION INSURANCE
Workers' compensation insurance provides coverage for the statutorily
prescribed benefits that employers are required to pay to their employees
injured in the course of employment. The standard workers' compensation policy
issued by Zenith Insurance provides payments for, among other things, temporary
or permanent disability benefits, death benefits, medical and hospital expenses
and expenses of vocational rehabilitation. The benefits payable and the duration
of such benefits are set by statute, and vary with the nature and severity of
the injury or disease and the wages, occupation and age of the employee. Zenith
Insurance writes workers' compensation insurance which represents 60% of
consolidated property and casualty premium earned for 1993
2
<PAGE>
and is the largest line of Zenith's property and casualty business. In 1993,
96.6% of Zenith's workers' compensation written premium was written in
California, Zenith's principal
workers' compensation insurance market.
Premiums for workers' compensation insurance are a function of the
applicable minimum premium rate, which includes the insured employer's
experience modification factor (where applicable), surcharges (where
applicable), and the amount of the insured employer's payroll. Payrolls may be
affected significantly by changes in employment and wage levels. A deposit
premium is paid at the beginning of the policy period, periodic installments are
paid during the period and the final amount of the premium is generally
determined as of the end of the policy period after the policyholder's payroll
records are audited.
In California, minimum premium rates for workers' compensation insurance are
established by the California Insurance Commissioner (the "Commissioner") and
through December 31, 1994, competition on the basis of rates lower than the
approved minimum is not permitted. Such rates vary with the approximately 450
categories of employment and among different employers, depending upon actual
loss experience, within any one employment category. Adverse loss experience,
which persisted until the latter part of 1992, in conjunction with minimum rates
that were inadequate, particularly in the Los Angeles area, served to create a
market for policies written at rates in excess of minimum rates. Zenith wrote
$54,945,000, $42,971,000 and $15,048,000 of surcharged business in 1993, 1992
and 1991, respectively. Favorable loss experience trends in 1993 have increased
the competition for such business.
Zenith Insurance issues participating policies to qualifying policyholders.
Policyholder dividends serve a twofold purpose: an economic incentive to
employers for safe operations, and an important step in ensuring equitable
pricing. Dividends may not legally be guaranteed and are paid after policy
expiration. The payment of participating dividends to policyholders is limited
by law to accumulated earned surplus from California workers' compensation
premiums. Zenith Insurance and its subsidiaries have approximately $185,000,000
of such accumulated earned surplus as of December 31, 1993.
In July, 1993, certain significant workers' compensation legislation was
signed into law in California. Among other things, the new laws affect the
California workers' compensation industry as follows:
Rating -- Effective January 1, 1995, the minimum rate law will be abolished
and companies will charge their own, actuarially determined rates. Minimum rates
were reduced by 7% from those in effect on July 16, 1993.
Benefits -- Maximum weekly benefits for temporary disability will be
increased on July 1, 1994, July 1, 1995 and July 1, 1996, from the current level
of $336 to $490 on July 1, 1996. Maximum weekly benefits for permanent
disability will be subject to increases on these same dates. Permanent partial
disability weekly benefits will increase from a maximum of $148 to $230 with the
greatest increases in cases where disability ratings exceed 70%. Death benefits
will be increased on July 1, 1994 and again on July 1, 1996. At July 1, 1996,
death benefits will amount to $125,000, $145,000 and $160,000 for a worker with
one, two and three total dependents, respectively.
Cost containment -- Major changes will provide a tougher standard for
compensability of stress claims, limit the number of medical-legal evaluations,
limit post termination claims, provide certain managed care flexibility, limit
medical self-referrals where there is a financial interest and provide limits on
vocational rehabilitation costs.
Management is unable to predict the impact that the above legislative changes
will have on its business. Historically, analysis and estimates of the impact of
legislative changes have been difficult to predict with any reasonable degree of
accuracy.
3
<PAGE>
In 1992, Zenith opened an office in Austin, Texas and commenced writing
workers' compensation business in the state of Texas. Premiums written in Texas
were $10,174,000 and $3,925,000 in 1993 and 1992, respectively. Certain aspects
of workers' compensation reform legislation enacted in Texas in 1992 have been
challenged with respect to their constitutionality. The matter is currently
before the Texas Supreme Court and the ultimate outcome is uncertain.
PROPERTY AND CASUALTY -- REINSURANCE
Zenith Insurance is selectively underwriting a book of assumed reinsurance.
Reinsurance transactions, or contracts, come in a variety of forms, but the
principal arrangements are either proportional in nature, in which the assuming
company shares pro-rata in the premiums and losses of the cedant, or
arrangements under which the assuming company pays losses in excess of a certain
limit in return for a premium, usually determined as a percentage of the
cedant's primary insurance premiums. Zenith operates its reinsurance activity as
a participant in contracts or treaties in which, typically, the reinsurance
coverage is syndicated to a number of assuming companies. Depending upon market
conditions and other factors, the volume of premiums written fluctuates widely
from year to year. Zenith's current participation in the reinsurance market is
limited principally to participation in the reinsurance of large individual
property risks and property catastrophe reinsurance. Events in recent years have
served to increase the premiums paid for such reinsurance and to increase the
amount of such risk retained by insurers and reinsurers. These developments have
created a market which management believes presents reasonable, acceptable
opportunities to produce favorable underwriting results. However, Zenith's
assumed reinsurance business is written with a view to limiting the company's
exposure to losses from any one event to a maximum of approximately 5% of
stockholders' equity. In the early years of Zenith Insurance's Reinsurance
operations, property business accounted for approximately 20% of reinsurance
premiums earned and, in 1993, property business accounted for approximately 79%
of reinsurance premiums earned.
PROPERTY AND CASUALTY -- OTHER, PRINCIPALLY AUTOMOBILE
Zenith, through CalFarm Insurance, offers a comprehensive line of property
and casualty insurance, including automobile, farmowners, commercial multiple
peril packages and homeowners coverage. Automobile insurance includes coverage
for automobile bodily injury, property damage and physical damage. Automobile
bodily injury and property damage insurance provide coverage for third party
liability, bodily injury and property damage arising from the ownership,
maintenance or use of an automobile. Automobile physical damage coverage insures
against physical loss of the insured's own vehicle. Farmowners and homeowners
insurance includes coverage for direct physical damage to real and personal
property, loss of personal property by theft and legal liability for injury to
others and damage to property of others. Commercial multiple peril insures
businesses against property damage and general liability.
Automobile insurance (both commercial and private passenger) is the largest
line of CalFarm Insurance's business, representing 16% of Zenith's property and
casualty premiums earned in 1993. CalFarm Insurance insured approximately 25,000
private passenger automobiles and 69,000 commercial and farm vehicles in 1993.
Farmowners business is the second largest line of CalFarm Insurance's business,
representing approximately 9% of Zenith's property and casualty premiums earned
in 1993.
Zenith's Automobile and Other Property and Casualty operations are subject
to the regulatory provisions of California Initiative Proposition 103
("Proposition 103") which was approved by California voters in 1988. The
principal effects of Proposition 103 on Zenith's Automobile and Other Property
and Casualty business are as follows: rates must be approved by the Insurance
Commissioner prior to use; rates on auto policies must be offered to "good
drivers" (as defined) at a discount of at least 20% from rates otherwise charged
and an insurer cannot refuse to sell a "good driver" policy to a qualified
applicant; automobile insurance policies on the books as of November 9, 1988 and
new and renewal policies written thereafter cannot be cancelled or non-renewed
except for non-payment, fraud or material misrepresentation, or a substantial
increase in
4
<PAGE>
hazard; and automobile insurance rates must be based on the following factors in
decreasing order of importance: driving record, number of miles driven, number
of years of driving experience, and other factors which may be adopted by the
Insurance Commissioner.
In January 1993, Zenith announced that it had reached an agreement with the
California Department of Insurance (the "Department") to resolve its Proposition
103 rollback refund contingency (see "Resolution of Contingencies Surrounding
Proposition 103" in Note 9 on page 66 of Zenith's 1993 Annual Report to
Stockholders, which note is hereby incorporated by reference). Under the
agreement, Zenith's subsidiaries refunded to each holder of an affected policy
issued or renewed between November 1988 and November 1989 an amount equal to
approximately
9.5 percent of the premium paid plus interest. The net cost of the refund, after
reinsurance, reduced income before taxes in 1992 by $16,078,000. As part of the
agreement, the Department gave final approval to all of Zenith's rate
applications on affected lines of business subsequent to the rollback period.
Rate increases of 8.0% and 15.0%, respectively, on farmowners and homeowners
policies were implemented effective July 1, 1993.
HEALTH AND LIFE
CalFarm Life offers a varied portfolio of life, health and annuity products,
and is not directly impacted by Proposition 103. The portfolio includes a
competitive line of Term Life, Universal Life and Interest Sensitive Life
insurance, Group Health insurance, and Single and Flexible Premium Annuity
products for both qualified and non-qualified markets. Less than 8% of CalFarm
Life's life insurance is written on substandard risks. The significant terms of
the life insurance products include credited interest rates (which are
guaranteed for 12 months from the date of issue and have minimum guarantees
ranging from 3% to 6%), mortality charges, and surrender (termination) charges
which generally diminish over 15 years. CalFarm Life's interest sensitive life
insurance products and annuity products contain features to minimize the effect
of inflation and interest rate fluctuations. As a result, management does not
believe the impact of inflation on these products will be material.
In 1993, CalFarm Life continued its sales of tax sheltered annuity products,
specifically, those designed for school teachers and administrators. Total
annuity deposits of $56,764,000, $83,600,000, and $80,203,000 were collected for
1993, 1992 and 1991, respectively. Zenith's ability to profit from its annuity
business depends upon its ability to manage the spread between the interest it
earns on its investment portfolio and the interest credited to the annuity
deposits; policy and premium persistency; the efficiency of operations; and the
limiting of its risk of defaults on its investment portfolio. CalFarm Life's
annuity products are primarily sold to school teachers in California and recent
(and future) budgetary actions with respect to education, in addition to the
weak California economy, may reduce annuity sales in the future. However,
increased personal federal income tax rates may increase the desire to
accumulate retirement income on a tax deferred basis.
Health insurance is the largest line of insurance written by CalFarm Life,
accounting for $41,370,000 or approximately 81% of its total premium income in
1993. Prior to July 1, 1993 health premiums were written under two group health
insurance programs sponsored by the California Farm Bureau Federation (the "Farm
Bureau"). Effective July 1, 1993, one of the Farm Bureau plans was discontinued
by CalFarm Life. Insureds under this plan were offered membership in the
remaining Farm Bureau-sponsored plan.
Life insurance premium rates are based on pricing assumptions as to future
mortality, investment yields, expenses, and persistency. Although a margin for
profit is included, the actual profitability of the products can be
significantly affected by the deviation of actual experience from the
assumptions. The actual experience in recent years on investment yields has been
more favorable than anticipated, while the experience on premium persistency on
new business has been less favorable than anticipated; experience with respect
to expenses and mortality rates have been in line with pricing assumptions.
5
<PAGE>
Life insurance in force is a measure of the total commitment of CalFarm Life
to pay benefits under the policies it has written that are currently in effect
or, "in force." Changes in life insurance in force are summarized in the
following table for all classes of insurance.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
--------------------------------------
1993 1992 1991
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
In force -- beginning of year..................... $2,951,649 $2,686,030 $2,447,958
Issued for new policies........................... 605,201 500,084 374,691
Reinstated policies............................... 1,514 2,066 915
Net additions (reductions) to policies............ (316,477) 32,921 90,869
Additions by dividend............................. 2,223 2,265 2,409
Reduction due to:
Death claims.................................... 6,159 6,974 6,128
Expirations and maturities...................... 2,665 2,770 2,679
Surrenders and lapses........................... 237,307 231,100 204,820
Conversions..................................... 21,801 30,873 17,185
---------- ---------- ----------
In force -- end of year........................... 2,976,178 2,951,649 2,686,030
Less reinsurance ceded.......................... 453,025 287,980 247,994
---------- ---------- ----------
Net retained in force -- end of year.............. $2,523,153 $2,663,669 $2,438,036
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The results of operations of CalFarm Life reflect the effect of purchase
accounting adjustments including policy liabilities and accruals and the value
of life insurance in force based on actuarial estimates. These actuarial
estimates were based on then current assumptions applied in calculating policy
reserves, policyholder dividend amounts and related policy acquisition costs to
be incurred, discounted to provide an appropriate rate of return.
PARENT
Zenith is a holding company owning directly or indirectly all of the capital
stock of certain California insurance and insurance related-companies. In 1993,
Zenith commenced a real estate operation through a newly formed subsidiary,
Perma-Bilt. Perma-Bilt has expended approximately $7.2 million through December
31, 1993 to acquire land in Las Vegas, Nevada and develop private residences for
sale in 1994.
LOSS AND LOSS EXPENSE RESERVES AND CLAIMS, AND LOSS DEVELOPMENTS
Zenith's property and casualty subsidiaries (the "P&C Companies") maintain
reserves for the payment of losses and for the expenses of settling both
reported and unreported claims that have been incurred under their insurance
policies. The amount of such reserves, as related to reported claims, is based
upon periodic case-by-case evaluation and judgment by the P&C Companies' claims
departments, with actuarial review. The estimate of unreported claims arising
from accidents which have not yet been reported to the P&C Companies, commonly
known in the industry as "incurred but not reported," is based upon the P&C
Companies' experience and statistical information with respect to the probable
number and nature of such claims. The P&C Companies monitor these factors and
revise their reserves as they deem appropriate. Reserves are based on estimates
and no assurance can be given that the ultimate liability will not be more or
less than such estimates.
Reference is made to "Property and Casualty Loss Development" on pages 50
and 51, the table setting forth statutory loss and loss adjustment expense
development by accident year on page 10 and the table setting forth the
reconciliation of changes in the liabilities for losses and loss adjustment
expenses on page 9 of the 1993 Annual Report to Stockholders, all of which are
hereby incorporated by reference. These tables and the reconciliation show
analysis of development of loss and loss adjustment expense liabilities as
originally estimated under generally accepted accounting principles at December
31 of each year presented, as well as analysis of development of statutory
6
<PAGE>
incurred loss and loss adjustment expense by accident year. The accounting
methods used to estimate these liabilities are described in Note 1 of the Notes
to Consolidated Financial Statements of Zenith as set forth on pages 58 through
61 of the 1993 Annual Report to Stockholders which note is hereby incorporated
by reference.
WORKERS' COMPENSATION
Zenith's Workers' Compensation reserves, on the average, are paid within
approximately 2 1/2-3 years. Zenith regards the timely settlement of its
Workers' Compensation claims as important to its profitability and makes
extensive use of compromise and releases for claim settlements to expedite this
process.
In recent years, the California workers' compensation industry has
experienced a relative increase in fraud and abuse including fraudulent claims
for psychological and continuous trauma types of injuries, often alleged after
the claimant has terminated his or her employment, and abusive billing practices
by medical-legal providers. Zenith Insurance has invested additional resources
in recent years to try to mitigate the effect of these adverse claims trends.
Loss adjustment expenses as a percentage of earned premium, increased to 28.5%
in 1993 from 21.4% and 13.2% for 1992 and 1991, respectively. Zenith believes
that the significant increase in expenditures on the loss adjustment process,
including measures to combat fraudulent claims and abuses of the workers'
compensation system, ultimately may cause the total loss and loss adjustment
expenses to be lower than would otherwise be the case although there can be no
assurance that total loss and loss adjustment expenses will be lower.
In 1993 the one year loss development on reserves showed unfavorable
development of $4,704,000, due principally to development of prior year reserves
for unpaid loss adjustment expenses caused by increased expenditures on the loss
adjustment process. The one year development on reserves for unpaid losses and
loss adjustment expenses in 1992 showed unfavorable development of $13,502,000
and favorable development of $464,000, in 1991.
Zenith Insurance maintains five regional offices in California and an office
in Texas, each of which is fully staffed to conduct all workers' compensation
claims operations, including review of initial reports of work injury,
assignment of appropriate field investigation and determination of whether
subrogation should be pursued. Workers' Compensation claims operations are
supported by a computer system that provides immediate access to policy coverage
verification and claims records and enables Zenith Insurance to detail claims
payment histories and policy loss experience reports.
AUTOMOBILE AND OTHER PROPERTY AND CASUALTY
Automobile and Other Property and Casualty loss reserves are paid, on the
average, within approximately 1 1/2-2 years.
In addition to inflated medical and hospital costs, an increase in the
incidence of fraudulent and questionable claims in recent years has given rise
to a steady increase in the cost of adjusting claims. The one year development
of Automobile and Other Property and Casualty reserves for unpaid losses and
loss adjustment expenses showed unfavorable development of $4,657,000 in 1993
and $5,177,000 in 1992 but showed favorable development of $1,741,000 for 1991.
Unfavorable development in 1993 was attributable to development of prior year
reserves for unpaid loss adjustment expenses caused by an increase in
expenditures on the loss adjustment process, particularly for legal expenses of
claims servicing.
Property losses in 1993 and 1992 were impacted by an adverse frequency of
weather and fire related losses. Losses in 1993 included $1,600,000, of which
$1,000,000 was assessed by the California Fair Plan, attributable to the
Southern California brush fires in the fall.
Commercial General Liability ("C.G.L.") policies written by CalFarm
Insurance contain exclusion clauses for damages resulting from pollution, and
such losses are thereby substantially excluded
7
<PAGE>
from coverage. Although such claims have been received by CalFarm Insurance,
management believes that such claims will not have a material adverse effect on
Zenith's consolidated financial condition either individually or in the
aggregate.
CalFarm Insurance maintains three claims offices and four legal offices in
California to conduct all claims operations of the other property and casualty
business. All claims operations of
CalFarm Insurance are supervised by its home office claims department.
REINSURANCE
Zenith expects that, on the average, its Reinsurance reserves will be paid
in approximately 6-7 years.
Zenith's Reinsurance reserves constitute approximately 20% of its total
reserves, net of reinsurance, for property and casualty unpaid losses and loss
adjustment expenses at December 31, 1993, reflecting the longer average life of
such reserves relative to its other principal lines of business. In addition to
information supplied by ceding companies, Zenith makes use of industry
experience in arriving at estimates of ultimate losses for certain reinsurance
assumed arrangements. Reserve adequacy in 1992 and prior years was adversely
affected by development on property losses associated with catastrophes and
other large, worldwide property losses. The one year development of Reinsurance
reserves showed favorable development of $290,000 in 1993 and adverse
development of $1,255,000 and $5,290,000 in 1992 and 1991, respectively.
In 1992, Zenith Insurance incurred losses of approximately $9.8 million
associated with Hurricanes "Andrew" and "Iniki."
Zenith Insurance has participated, to a limited extent, in the reinsurance
arrangements of ceding companies that have written both directors' and officers'
liability coverage ("D & O") policies and professional indemnity policies,
including such coverage written for practicing certified public accountants.
Actions alleging negligence against directors, officers or accountants by
parties suffering financial losses in savings and loan failures give rise to
claims under D & O policies or professional indemnity policies which, in turn,
give rise to claims against Zenith Insurance. Such claims have not had, and are
not expected to have in the future, a material adverse effect on Zenith's
consolidated financial condition.
INVESTMENTS
Investment policies of Zenith and its insurance subsidiaries are established
by their respective Boards of Directors, taking into consideration California
legal restrictions with respect to investments in connection with reserve
obligations as well as the nature and amount of various kinds of investments.
(See "Business -- Regulation.") Zenith adjusts its investment strategy to
reflect the needs of Zenith's different businesses, changes in the economic
environment and tax laws and its objective of maximizing the rate of return with
consideration for maintaining principal values (see "Investments" under
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations on pages 41 through 44 of Zenith's 1993 Annual Report to
Stockholders which is hereby incorporated by reference). Historic declines in
interest rates during the three years ended December 31, 1993 have reduced
investment income while increasing the fair values of certain investments.
Partly as a result of concern over the volatility of interest rates, Zenith has
elected to maintain a relatively short average life and substantial liquidity in
its investment portfolio. At December 31, 1993 the investment portfolios of
Zenith, Zenith Insurance and CalFarm Insurance consisted primarily of
intermediate-term, taxable bonds, redeemable preferred stocks and short-term
investments. At December 31, 1993 CalFarm Life's investment portfolio consisted
primarily of taxable long-term, intermediate-term and short-term securities. The
average life of the consolidated portfolio was 6.8 years; the portfolio of all
companies excluding CalFarm Life had an average life of 2.4 years; and the
portfolio of CalFarm Life had an average life of 11.1 years. Investment income
by segment is set forth in Note 15 -- "Segment Information" on pages 67 and 68
of the 1993 Annual Report to Stockholders which note is hereby incorporated by
reference.
8
<PAGE>
REINSURANCE CEDED
In accordance with general industry practices, Zenith's insurance
subsidiaries annually purchase excess of loss reinsurance.
Reinsurance makes the assuming reinsurer liable to the ceding company to the
extent of the reinsurance. It does not, however, discharge the ceding company
from its primary liability to insureds in the event that the reinsurer is unable
to meet its obligations under such reinsurance treaty. Historically, no material
costs have been incurred by Zenith or its subsidiaries from uncollected
reinsurance.
Reinsurance premiums ceded by Zenith's insurance subsidiaries amounted to
$22,457,000, $22,231,000 and $21,498,000 in 1993, 1992 and 1991, respectively or
4.6%, 4.8% and 4.7% of earned premiums in 1993, 1992 and 1991, respectively.
Reinsurance reserves amounted to $44,552,000, $32,701,000 and $27,956,000 in
1993, 1992 and 1991, respectively, or 8.7%, 6.6% and 5.9% of gross reserves for
unpaid losses and loss adjustment expenses in 1993, 1992 and 1991, respectively.
The purpose of such reinsurance is to protect Zenith from the impact of large,
unforseen losses and such reinsurance reduces the magnitude of sudden and
unpredictable changes in net income and the capitalization of insurance
operations. Zenith monitors the financial condition of its reinsurers and does
not believe that it is exposed to any material risk of loss through its ceded
reinsurance arrangements. Zenith believes that its ceded reinsurance
arrangements are adequate and consistent with industry practice. Each insurance
subsidiary maintains separate reinsurance arrangements, which during 1993 were
as follows:
Zenith Insurance -- Workers' Compensation reinsurance covered all claims
between $500,000 and $100,000,000 per occurrence. The coverage from $500,000 to
$5,000,000 is placed with General Reinsurance Corporation, the coverage from
$5,000,000 to $10,000,000 with Employers Reinsurance Corporation and the
remaining three layers from $10,000,000 to $60,000,000 primarily with Cigna
Reinsurance Company, NAC Reinsurance Corporation, Prudential Reinsurance Company
and the London reinsurance market (primarily Lloyds' syndicates and certain
United Kingdom reinsurance companies). Catastrophe reinsurance covers an
additional $40,000,000 in excess of $60,000,000 and is placed with Northwestern
National Life Insurance Company, Cigna Reinsurance Company and Pinehurst
Accident Reinsurance Group. Zenith Insurance has never experienced a loss in
excess of $6,900,000. Zenith's Reinsurance division did not purchase any
reinsurance protection on its assumed business for 1991, 1992 or 1993. However,
Zenith's exposure to losses from assumed reinsurance is limited by the terms
upon which it is written to a maximum probable loss from any one event of
approximately 5% of Zenith's consolidated stockholders' equity.
CalFarm Insurance -- For personal property lines of business, reinsurance is
maintained for claims in excess of $200,000 up to $2,000,000 per occurrence. For
commercial property lines, reinsurance is maintained for claims in excess of
$200,000, up to $4,000,000 per occurrence. On liability coverages for both
personal and commercial lines, reinsurance covers losses up to $2,500,000 per
occurrence, subject to a retention of $500,000. This reinsurance coverage is all
placed with General Reinsurance Corporation. CalFarm Insurance also has property
catastrophe reinsurance, for which the lead reinsurer is General Reinsurance
Corporation, that provides for recovery of losses of 95% of $20,000,000, excess
of a retention of $5,000,000.
In addition, there is a quota share contract whereby CalFarm Insurance
retains 20% of the first $1,000,000 on most umbrella risks (comprehensive
coverage in excess of primary policy limits) underwritten, with the remainder of
up to $10,000,000 ceded to General Reinsurance Corporation. Facultative
reinsurance is placed on property coverage in excess of $2,000,000 on personal
lines and $4,000,000 on all other property lines, and on umbrella limits in
excess of $10,000,000. Facultative reinsurance is used on fewer than 5% of
CalFarm Insurance's policies. Facultative coverage is placed primarily with
General Reinsurance Corporation. Other companies used are Employers Reinsurance
Corporation, Munich American Reinsurance Company and other reinsurers rated A+
by A.M. Best Company.
9
<PAGE>
CalFarm Life -- Yearly renewable term insurance treaties are maintained with
eight life insurers, through which CalFarm Life ceded 16% and 11% of its
ordinary life insurance in force as of year end 1993 and 1992, respectively. Its
principal reinsurers are American United Life Insurance Company, Indiana;
Frankona America Life Reassurance Company, Missouri; Munich American Reassurance
Company, Georgia; North American Reassurance Company, New York; Gerling Global
Life Insurance Company, Canada; and Transamerica Occidental Life Insurance
Company, California. Maximum net retention on any one life is $250,000. CalFarm
Life also maintains reinsurance agreements with Employers Reinsurance
Corporation for excess risks on its accident and health contracts. This excess
risk reinsurance provides coverage for aggregate losses in excess of $2,400,000
on those claims that exceed $120,000 for each insured in each calendar year.
Pooling Agreement -- Zenith Insurance, CalFarm Insurance, ZNAT Insurance and
Zenith Star are parties to a pooling agreement. Under the agreement, the results
of underwriting operations are ceded (the risks are transferred) to Zenith
Insurance and are then reapportioned, or retro-ceded (the risks are transferred
back), to those three companies in the following proportions: Zenith Insurance,
79.5%; CalFarm Insurance, 18%; ZNAT Insurance, 2%; and Zenith Star, 0.5%.
Transactions pursuant to the pooling agreement are eliminated on consolidation
and have no impact on Zenith's Consolidated Financial Statements. As of December
31, 1993 no direct premiums have been written by Zenith Star.
MARKETING AND STAFF
Zenith Insurance's workers' compensation business is produced by
approximately 500 independent licensed insurance agents and brokers throughout
California and Texas along with the CalFarm agents referred to below. Zenith
Insurance's assumed reinsurance premiums are generated nationally by brokers and
reinsurance intermediaries.
CalFarm Insurance and CalFarm Life, through their affiliate CalFarm
Insurance Agency, maintain a sales force of approximately 240 agents who sell
insurance products exclusively for CalFarm Insurance and CalFarm Life, primarily
in rural and suburban areas. These agents operate out of 106 offices throughout
the State of California, including 37 offices shared with the Farm Bureau. In
addition, in certain areas, independent agents market CalFarm Insurance
products. CalFarm Life also markets a tax sheltered annuity product through a
managing general agent and approximately 750 appointed sub-agents.
Applications for insurance submitted by all agents and brokers are evaluated
by professional underwriters based upon numerous factors, including underwriting
criteria and standards, geographic areas of underwriting concentration,
actuarial judgments of rate adequacy, economic considerations, and review of
known data on the particular risk. Zenith's insurance subsidiaries, as opposed
to their agents and brokers, retain authority over underwriting, claims
processing, safety engineering and auditing.
CALIFORNIA FARM BUREAU FEDERATION
Prior to the acquisition by Zenith Insurance of its property and casualty
business, C-F Insurance Company (and its wholly-owned subsidiary CalFarm Life)
was owned by the Farm Bureau, a federation of each county farm bureau in the
State of California. The Farm Bureau was formed to provide its members with a
variety of agriculture-related services, including property and casualty, health
and life insurance. The Farm Bureau is California's largest general farm
organization, and represents more than 70,000 member families in 53 counties.
The Farm Bureau continues to work actively to encourage its membership to place
their insurance with CalFarm Life and CalFarm Insurance. Farm Bureau membership
is a prerequisite to the purchase of farmowners, automobile and health insurance
from CalFarm Life and CalFarm Insurance. Of the estimated 70,000 member
families, approximately 63% are insured by CalFarm Insurance or CalFarm Life.
The businesses of CalFarm Life and CalFarm Insurance are closely tied to the
California farm economy, however over 42% of Farm Bureau members (and CalFarm
Insurance and CalFarm Life insureds) are non-farmers and over 64% of CalFarm
Insurance and CalFarm Life premium volume is
10
<PAGE>
generated by non-farm business. Total revenues in CalFarm Insurance and CalFarm
Life attributable to sales that were sponsored by the Farm Bureau constituted
approximately 26%, 27% and 28% of Zenith's total consolidated revenues for the
years 1993, 1992 and 1991, respectively. The agreement of CalFarm Insurance and
CalFarm Life with the Farm Bureau, which is subject to cancellation by either
party on six months' notice, requires annual payments to the Farm Bureau of
$240,000 plus 2% of the gross written premium under the Farm Bureau group health
insurance program. Pursuant to such provisions, total payments to the Farm
Bureau were approximately $1 million in each of 1993, 1992 and 1991.
Zenith believes that its relationship with the Farm Bureau is mutually
beneficial. CalFarm Insurance and CalFarm Life benefit from the use of the
CalFarm name and the Farm Bureau membership lists, and their ability to sell
their products to Farm Bureau members is enhanced by the Farm Bureau
relationship. The Farm Bureau benefits since Farm Bureau membership is required
to obtain automobile, farmowners and health insurance policies (but not life
insurance) from CalFarm Insurance and CalFarm Life, which generates membership
and revenues for the Farm Bureau. If the relationship between CalFarm Insurance
and CalFarm Life and the Farm Bureau were terminated, Zenith believes that it
could retain a significant amount of the business it currently has with Farm
Bureau members because of the quality and tailored features of the products it
offers in what it regards as its "niche market" and the long-term relationships
established between its agents and these policyholders. In the event of such
termination, however, Zenith expects that there would be an increased risk of
nonrenewal of existing insurance coverage as well as a possible adverse effect
on new policy revenues, but it cannot estimate the financial impact of any such
termination. Zenith anticipates the continuation of a close working relationship
with the Farm Bureau and the promotion among its membership of the purchase of
insurance products from CalFarm Insurance and CalFarm Life as an attractive
feature of Farm Bureau membership.
COMPETITION
Competition in the insurance business is based upon price, product design
and quality of service. After December 31, 1994, the repeal of minimum rate laws
in California will introduce price as a basis of competition for California
workers' compensation policies. The insurance industry is highly competitive and
Zenith's subsidiaries compete not only with other stock companies, but with
mutual companies, other underwriting organizations and the State Compensation
Insurance Fund. Competition also exists from self-insurance and captive
insurers. Over the years there has been increased competition from
direct-writing companies and, in the property and casualty field, from
affiliates of large life insurance companies. Many companies in competition with
Zenith's subsidiaries have been in business for a much longer time, have a
larger volume of business, are more widely known, and/or possess substantially
greater financial resources.
REGULATION
CALIFORNIA DEPARTMENT OF INSURANCE
Zenith's insurance subsidiaries are subject to regulation and supervision by
the California Department of Insurance, which has broad regulatory, supervisory
and administrative powers. These powers relate, among other things, to the
granting and revocation of licenses to transact business; the licensing of
agents; the standards of solvency to be met and maintained; the nature of and
limitations on investments; approval of policy forms and rates; periodic
examination of the affairs of insurance companies; and the form and content of
required financial statements.
Zenith Insurance, CalFarm Insurance, ZNAT Insurance and Zenith Star are
required, with respect to their workers' compensation line of business, to
maintain on deposit investments meeting specified standards that have an
aggregate market value equal to the companies' loss reserves. For this purpose,
loss reserves are defined as the current estimate of reported and unreported
claims plus a statutory formula reserve based on a minimum of 65% of earned
premiums for the latest three years.
11
<PAGE>
CalFarm Life is required to establish, as liabilities, actuarial reserves on
life insurance policies and annuities as prescribed by regulatory authorities.
Statutory reserves are calculated at amounts that are, together with premiums or
annuity considerations to be received on outstanding policies or annuity
contracts, and with interest on such reserves compounded annually at certain
assumed rates, deemed sufficient to meet the policy obligations at death or
maturity or to meet the annuity obligations pursuant to the contract, each in
accordance with mortality tables used when the policy or contract was issued.
Detailed annual and quarterly reports must be filed by Zenith's insurance
subsidiaries with the California Department of Insurance, and their businesses
and accounts are subject to periodic examination by such agency, usually at
three year intervals. Zenith Insurance, CalFarm Insurance, ZNAT Insurance and
CalFarm Life Insurance, were examined as of December 31, 1990, and the report on
such examination contained no material findings.
THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS
The National Association of Insurance Commissioners ("NAIC") is a group
formed by state Insurance Commissioners to discuss issues and formulate policy
with respect to regulation, reporting and accounting of insurance companies.
Although the NAIC has no legislative authority and insurance companies are at
all times subject to the laws of their respective domiciliary states, and to a
lesser extent other states in which they conduct business, the NAIC is
influential in determining the form in which such laws are enacted. In
particular, the Model Insurance Laws, Regulations and Guidelines of the NAIC
(the "Model Laws") have been promulgated by the NAIC as a minimum standard by
which state regulatory systems and regulations are measured. Adoption of state
laws which provide for substantially similar regulations to those described in
the Model Laws is a requirement for the accreditation by the NAIC of a state's
insurance regulations.
The NAIC has adopted model regulations to require insurers to maintain
minimum levels of capital based on their investments and operations, known as
"risk based capital" ("RBC") requirements. Such requirements were adopted by
California for Life Insurance companies in 1993. Such regulations are expected
to be adopted for property and casualty insurers in 1994. Zenith does not
anticipate any adverse effects of such requirements because of the strong
capitalization of its insurance operations. At December 31, 1993, CalFarm Life's
adjusted capital under the RBC regulations was 375% of the RBC control, or
required, level of capital under the regulations.
The NAIC Insurance Regulatory Information System ("IRIS") was developed to
assist insurance departments in overseeing the financial condition of insurance
companies. Annually, IRIS key financial ratios (11 ratios for property and
casualty companies and 12 ratios for life companies) are calculated from data
supplied in annual statutory statements of insurance companies. These ratios are
reviewed by experienced financial examiners of the NAIC to select those
companies that merit highest priority in the allocation of the regulators'
resources. The 1993 IRIS results for the Zenith Insurance Group (consisting of
Zenith Insurance, CalFarm Insurance, ZNAT Insurance and Zenith Star) showed no
results outside the "normal range" for such ratios, as such range is determined
by the NAIC. At December 31, 1993, one such ratio for CalFarm Life, "change in
premium", was outside such "normal range" because of a decrease in the volume of
annuity receipts in 1993 compared to 1992. CalFarm Life's annuity receipts
decreased from $83 million in 1992 to $56 million in 1993, partly because of
economic and tax uncertainties and because of competition for such products.
INSURANCE HOLDING COMPANY SYSTEM REGULATORY ACT
Zenith's insurance subsidiaries are also subject to the California Insurance
Holding Company System Regulatory Act ("Holding Company Act"), which contains
certain reporting requirements, including the requirement that such subsidiaries
file information relating to capital structure, ownership, financial condition
and general business operation, and limits dividend payments by
12
<PAGE>
Zenith's insurance subsidiaries. See "Liquidity and Inflation" under
"Management's Discussion and Analysis of Consolidated Financial Condition and
Result of Operations" on pages 46 through 47 of Zenith's 1993 Annual Report to
Stockholders, which is hereby incorporated by reference.
HEALTH CARE REFORM
The federal and state executive branches and legislatures and the health
insurance industry continue to debate the level of responsibility of private
carriers to provide universal insurance for all American citizens, including the
uninsured and the uninsurable. Health care reform legislation was introduced
into the U.S. Congess in 1993. It is not possible to predict the impact of this
debate on CalFarm Life's business until definitive legislation, if any, emerges.
OTHER REGULATION
Property and casualty insurance coverage is subject to certain regulation as
described herein under "Property and Casualty -- Other, Principally Automobile"
under which Zenith's other property and casualty rates are subject to prior
approval by the California Department of Insurance. The provisions of
Proposition 103 do not apply to Workers' Compensation insurance or Reinsurance,
which combined to account for 66% of Zenith's property and casualty earned
premiums in 1993.
ITEM 2. PROPERTIES
Zenith Insurance owns a 120,000 square foot office facility in the Warner
Center area of Los Angeles which, since November of 1987, has been the corporate
home office of Zenith, Zenith Insurance, and ZNAT Insurance.
In addition, Zenith Insurance, CalFarm Insurance and CalFarm Life, in the
regular conduct of their business, are lessees of offices in various cities. See
Note 9 of the Notes to Consolidated Financial Statements of Zenith on pages 65
and 66 of the 1993 Annual Report to Stockholders, which note is hereby
incorporated by reference.
CalFarm Life owns 25% and CalFarm Insurance owns 75% of the home office
building (and surrounding property of approximately 4 acres) occupied by those
companies in Sacramento, California, consisting of 133,000 square feet.
Approximately 20% of the building is leased to the Farm Bureau and affiliates.
In addition, CalFarm Life and CalFarm Insurance Agency lease and occupy, in a
nearby building in Sacramento, California, approximately 30,000 square feet
under a lease expiring January 31, 1997.
ITEM 3. LEGAL PROCEEDINGS
Zenith and its subsidiaries are involved in certain litigation. In the
opinion of management, after consultation with legal counsel, such litigation in
which Zenith is a defendant is either without merit or the ultimate liability,
if any, will not have a material adverse effect on the consolidated financial
condition of Zenith.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Zenith's Common Stock, par value $1.00 per share, is traded on the New York
Stock Exchange. The table below sets forth the high and low sales prices of the
Common Stock for each quarterly period during the last two fiscal years.
<TABLE>
<CAPTION>
QUARTER 1993 1992
- - ------------------------------------------------------------ ------- -------
<S> <C> <C>
First
High...................................................... 29 1/4 17 1/4
Low....................................................... 19 5/8 14 1/2
Second
High...................................................... 27 1/4 19 1/4
Low....................................................... 23 1/4 15 1/2
Third
High...................................................... 29 1/8 19 1/2
Low....................................................... 23 1/2 16 1/2
Fourth
High...................................................... 28 3/4 20
Low....................................................... 21 1/4 16 3/8
</TABLE>
As of March 25, 1994, there were 476 holders of record of Zenith Common
Stock.
The table below sets forth information with respect to the amount and
frequency of dividends declared on Zenith Common Stock. Based upon Zenith's
financial condition, it is currently expected that cash dividends will continue
to be paid in the future.
<TABLE>
<CAPTION>
DATE OF DECLARATION TYPE AND AMOUNT OF RECORD DATE FOR
BY ZENITH BOARD DIVIDEND PAYMENT PAYMENT DATE
- - ------------------------------------ ----------------------- --------------------- ------------------------
<S> <C> <C> <C>
December 5, 1991.................... $.25 cash per share January 31, 1992 February 14, 1992
March 5, 1992....................... $.25 cash per share April 30, 1992 May 15, 1992
May 21, 1992........................ $.25 cash per share July 31, 1992 August 14, 1992
September 10, 1992.................. $.25 cash per share October 30, 1992 November 13, 1992
December 10, 1992................... $.25 cash per share January 29, 1993 February 12, 1993
March 11, 1993...................... $.25 cash per share April 30, 1993 May 14, 1993
May 26, 1993........................ $.25 cash per share July 30, 1993 August 13, 1993
September 8, 1993................... $.25 cash per share October 29, 1993 November 12, 1993
December 9, 1993.................... $.25 cash per share January 31, 1994 February 14, 1994
</TABLE>
The Holding Company Act limits the ability of Zenith Insurance and CalFarm
Life to pay dividends to Zenith, and of CalFarm Insurance, ZNAT Insurance and
Zenith Star to pay dividends to Zenith Insurance, by providing that the
California Department of Insurance must approve any dividend that, together with
all other such dividends paid during the preceding twelve months, exceeds the
greater of: (a) 10% of the paying company's statutory surplus as regards
policyholders at the preceding December 31; or (b) 100% of the net income (or in
the case of CalFarm Life, net gain from operations) for the preceding year. In
addition, any such dividend must be paid from policyholders' surplus
attributable to accumulated earnings. During 1993, Zenith Insurance paid
dividends of $25,000,000 to Zenith. During 1994, Zenith Insurance and CalFarm
Life will be able to pay $40,969,000 and $5,924,000, respectively, in dividends
to Zenith without prior approval. In addition, in 1994, $1,117,000 can be paid
by ZNAT Insurance and Zenith Star to Zenith Insurance which would be available
to Zenith in 1995.
ITEM 6. SELECTED FINANCIAL DATA.
The five-year record of operations and accompanying notes, included in
Zenith's 1993 Annual Report to Stockholders on pages 48 and 49, is hereby
incorporated by reference.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
"Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations," included in Zenith's 1993 Annual Report to
Stockholders on pages 36 to 47 is hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to pages 50 and 51 of Zenith's 1993 Annual Report to
Stockholders for information setting forth the loss and loss adjustment expense
liability development for 1983 through 1993 and page 10 for incurred loss and
loss adjustment expense development for 1988 through 1993, and to the
consolidated financial statements and notes thereto on pages 52 to 69 of
Zenith's 1993 Annual Report to Stockholders, all of which are hereby
incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
15
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the captions "Election of Directors" and
"Compliance with Section 16(a) of the Exchange Act" in the Proxy Statement in
connection with Zenith's 1994 Annual Meeting of Stockholders (the "Proxy
Statement") is hereby incorporated by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
OFFICER
NAME AGE POSITION TERM SINCE
- - ----------------- --- ---------------------------------------- ------ -------
<S> <C> <C> <C> <C>
Stanley R. Zax 56 Chairman of the Board, President(1) Annual 1977
Fredricka Taubitz 50 Executive Vice President and Annual 1985
Chief Financial Officer(1)
William L. Gentz 53 Senior Vice President(1) Annual 1989
James P. Ross 47 Senior Vice President and Actuary(1) Annual 1978
John J. Tickner 55 Senior Vice President and Secretary(1) Annual 1985
Keith E. Trotman 57 Senior Vice President(2) Annual 1988
Philip R. Hunt 51 Vice President, Finance(2) Annual 1988
Philip M. Joffe 39 President, CalFarm Life(2) Annual 1986
<FN>
- - ------------------------
(1) Officer of Zenith and subsidiaries.
(2) Officer of subsidiaries only.
</TABLE>
Each of the executive officers has, for more than five years, occupied an
executive position with Zenith or a subsidiary of Zenith.
There are no family relationships between any of the executive officers and
there are no arrangements or understandings pursuant to which any of them were
selected as officers.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the headings "Summary Compensation Table,"
"Option/SAR Grants in Last Fiscal Year," and "Aggregated Option/SAR Exercises in
Last Fiscal Year And Fiscal Year End Option/SAR Values," "Employment Agreements
and Termination of Employment and Change in Control Arrangements," "Compensation
Committee Interlocks and Insider Participation," and the last paragraph under
the heading "Election of Directors" in the Proxy Statement is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is hereby incorporated
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth in footnote 3 to the table set forth under the
caption "Election of Directors" and under the heading, "Loan to Executive
Officer" in the Proxy Statement is hereby incorporated by reference.
16
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of the report:
1. FINANCIAL STATEMENTS
Independent Accountant's Report
Financial Statements and notes thereto incorporated by reference
from the 1993 Annual Report to Stockholders in Item 8 of Part II
above:
Consolidated Financial Statements of Zenith National Insurance
Corp. and Subsidiaries:
Consolidated Balance Sheet as of December 31, 1993 and 1992
Consolidated Statement of Operations for the years ended
December 31, 1993, 1992 and 1991
Consolidated Statement of Cash Flows for the years ended
December 31, 1993, 1992 and 1991
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1993, 1992 and 1991
Notes to Consolidated Financial Statements
Table setting forth the reconciliation of changes in the
liabilities for losses and loss adjustment expenses on page 9 of
the 1993 Annual Report to Stockholders
Table setting forth incurred loss and loss adjustment expense
development on a statutory basis on page 10 of the 1993 Annual
Report to Stockholders
2.FINANCIAL STATEMENT SCHEDULES
Zenith National Insurance Corp. and Subsidiaries
As of December 31, 1993.
I -- Summary of Investments -- Other Than Investments in Related
Parties
As of December 31, 1993 and 1992
II -- Amounts Receivable From Related Parties and Underwriters,
Promoters and Employees Other Than Related Parties
For the years ended December 31, 1993, 1992 and 1991.
V -- Supplementary Insurance Information
VI -- Reinsurance
IX -- Short-term Borrowings
Zenith National Insurance Corp.
As of December 31, 1993 and 1992 and for the years ended December
31, 1993, 1992 and 1991.
III -- Condensed Financial Information of Registrant
Property and Casualty Loss Developments on pages 50 and 51 and on page
10 of the 1993 Annual Report to Stockholders.
Schedules other than those listed above are omitted since they are not
applicable, not required, or the information required to be set forth
therein is included in the consolidated financial statements, or in
notes thereto.
17
<PAGE>
3. EXHIBITS
The Exhibits listed below are filed in a separate Exhibit Volume to this
Report.
<TABLE>
<S> <C> <C>
3.1 Certificate of Incorporation of Zenith as in effect immediately prior to November 22,
1985. (Incorporated herein by reference to Exhibit 3 to Zenith's Amendment on Form 8,
date of amendment October 10, 1985, to Zenith's Current Report on Form 8-K, date of
report July 26, 1985). Certificate of Amendment to Certificate of Incorporation of
Zenith, effective November 22, 1985. (Incorporated herein by reference to Zenith's
Current Report on Form 8-K, date of report November 22, 1985).
3.2 By-Laws of Zenith, as currently in effect. (Incorporated herein by reference to Exhibit
3.2 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1988.)
4.1 Indenture dated as of May 1, 1992 entered into between Zenith and Norwest Bank
Minnesota, National Association, as trustee, pursuant to which Zenith issued its 9%
Senior Notes due May 1, 2002. (Incorporated herein by reference to Exhibit 4 to Zenith's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1992.)
10.1 Purchase Agreement, dated as of February 4, 1981, among Reliance Insurance Company,
Zenith, the Selling Stockholders referred to therein, and Eugene V. Klein, Daniel
Schwartz and Harvey L. Silbert as agents for the Selling Stockholders. (Incorporated
herein by reference to the exhibit to the Schedule 13D filed by Reliance Financial
Services Corporation on March 9, 1981 with respect to the common stock of Zenith).
10.2 Asset and Liability Assumption Agreement, dated as of June 4, 1985, between Zenith
Insurance and the Insurance Commissioner of the State of California (the
"Commissioner"). (Incorporated herein by reference to Exhibit 1 to Zenith's Current
Report on Form 8-K, date of report July 26, 1985).
10.3 Memorandum and Agreement of Closing dated as of July 26, 1985, among Zenith Insurance,
Zenith and the Commissioner (Incorporated herein by reference to Exhibit 10.6 to
Zenith's Annual Report on Form 10-K for the year ended December 31, 1985), together with
the following exhibits:
(a) Exhibit A -- Grant Deed, dated July 25, 1985, by the Commissioner in favor of Zenith
Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual
Report on Form 10-K for the year ended December 31, 1985).
(b) Exhibit B -- Bill of Sale, dated as of July 26, 1985, by the Commissioner in favor
of Zenith Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's
Annual Report on Form 10-K for the year ended December 31, 1985).
(c) Exhibit C -- Assignment of Assets and Assumption of Liabilities, dated as of July
26, 1985, between the Commissioner and Zenith Insurance. (Incorporated herein by
reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended
December 31, 1985).
(d) Exhibit D -- Noncompetition Agreement, dated as of July 26, 1985, between the
Commissioner and Zenith Insurance. (Incorporated herein by reference to Exhibit 28.3
to Zenith's Current Report on Form 8-K, date of report July 26, 1985).
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C>
(e) Exhibit E -- First Assignment Separate from Certificate, dated July 26, 1985, by the
Commissioner in favor of Zenith. (Incorporated herein by reference to Exhibit 10.6
to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985).
(f) Exhibit F -- Engagement and Reimbursement Agreement, dated as of July 26, 1985,
between Zenith Insurance and the Commissioner. (Incorporated herein by reference to
Exhibit 28.2 to Zenith's Current Report on Form 8-K, date of report July 26, 1985).
*10.4 Zenith's Non-Qualified Stock Option Plan, as in effect immediately prior to December 6,
1985. (Incorporated herein by reference to Zenith's Registration Statement on Form S-8
(SEC File No. 2-97962)).
*10.5 Zenith's Amended and Restated Non-Qualified Stock Option Plan, adopted by Zenith's Board
of Directors on December 6, 1985. (Incorporated herein by reference to Zenith's
Registration Statement on Form S-8
(SEC File No. 33-8948)).
*10.6 Employment Agreement, dated May 24, 1990, between Zenith and Fredricka Taubitz.
(Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10K
for the year ended December 31, 1990).
*10.7 Employment Agreement, dated October 1, 1990, between Zenith and John J. Tickner.
(Incorporated herein by reference to Exhibit 10.7 to Zenith's Annual Report on Form 10K
for the year ended December 31, 1990).
*10.8 Employment Agreement, dated as of February 28, 1990, between Zenith and Stanley R. Zax.
(Incorporated herein by reference to Exhibit 10.8 to Zenith's Annual Report on Form 10K
for the year ended December 31, 1990).
*10.9 Stock Option Agreement, dated as of May 19, 1987, between Zenith and Stanley R. Zax.
(Incorporated herein by reference to Exhibit 10.15 to Zenith's Annual Report on Form
10-K for the year ended December 31, 1987).
10.10 Promissory Note, dated January 9, 1991, in an original principal amount of $3,000,000,
by Stanley R. Zax in favor of Zenith. (Incorporated herein by reference to Exhibit 10.10
to Zenith's Annual Report on Form 10K for the year ended December 31, 1990).
10.11 Credit Agreement, as amended, dated as of November 30, 1988 between Zenith and Sanwa
Bank of California. (Incorporated herein by reference to Exhibit 10.11 to Zenith's
Annual Report on Form 10-K for the year ended December 31, 1992).
10.12 Revolving Note Agreement, dated July 1, 1993, between Zenith and City National Bank.
10.13 Revolving Note Agreement, dated August 15, 1993 between Zenith and City National Bank.
10.14 Letter of Credit Facility Agreement, dated December 1, 1993, between Sanwa Bank of
California and Zenith Insurance.
10.15 Agreement of Reinsurance #6966 between Zenith Insurance Company and General Reinsurance
Corporation, dated as of December 21, 1984. (Incorporated herein by reference to Exhibit
10.13 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.)
10.16 Workers' Compensation and Employers' Liability Reinsurance Agreement between Zenith
Insurance Company and Employers Reinsurance Corporation, effective January 1, 1986.
(Incorporated herein by reference to Exhibit 10.14 to Zenith's Annual Report on Form 10K
for the year ended December 31, 1991.)
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C>
10.17 Agreement of Reinsurance No. 7276 between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of February 5, 1988. (Incorporated herein by reference
to Exhibit 10.15 to Zenith's Annual Report on Form 10K for the year ended December 31,
1991.)
10.18 Agreement of Reinsurance No. B226 between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference
to Exhibit 10.16 to Zenith's Annual Report on Form 10K for the year ended December 31,
1991.)
10.19 Agreement of Reinsurance No. B197-A between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference
to Exhibit 10.17 to Zenith's Annual Report on Form 10K for the year ended December 31,
1991.)
10.20 Agreement of Reinsurance No. B196-A between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference
to Exhibit 10.18 to Zenith's Annual Report on Form 10K for the year ended December 31,
1991.)
10.21 Agreement of Reinsurance No. 7832 between General Reinsurance Corporation and CalFarm
Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993.
10.22 Agreement of Reinsurance No. 623-0005 between American Re-Insurance Company and CalFarm
Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993.
10.23 Agreement of Reinsurance No. 0079460 between Employers Reinsurance Corporation and
CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993.
10.24 Life, Disability and Accidental Death Automatic Reinsurance Agreement between CalFarm
Life Insurance Company and Transamerica Occidental Life Insurance Company, effective
June 1, 1983. (Incorporated herein by reference to Exhibit 10.20 to Zenith's Annual
Report on Form 10K for the year ended December 31, 1991.)
10.25 Life, Disability and Accidental Death Facultive Reinsurance Agreement between CalFarm
Insurance Company and Occidental Life Insurance Company of California, effective April
1, 1971. (Incorporated herein by reference to Exhibit 10.21 to Zenith's Annual Report on
Form 10K for the year ended December 31, 1991.)
10.26 Reinsurance Agreement between CalFarm Life Insurance Company and American United Life
Insurance Company, effective August 1, 1983. (Incorporated herein by reference to
Exhibit 10.22 to Zenith's Annual Report on Form 10K for the year ended December 31,
1991.)
10.27 Excess Major Medical Reinsurance Agreement (No. 0076820/Specific and Aggregate
Retentions) between CalFarm Life Insurance Company and Employers Reinsurance
Corporation, effective January 1, 1993.
10.28 Automatic Reinsurance Agreement between CalFarm Life Insurance Company and North
American Reassurance Company, effective June 1, 1991. (Incorporated herein by reference
to Exhibit 10.24 to Zenith's Annual Report on Form 10-K for the year ended December 31,
1992.)
10.29 Automatic Reinsurance Agreement between CalFarm Life Insurance Company and North
American Reassurance Company, effective February 21, 1991. (Incorporated herein by
reference to Exhibit 10.25 to Zenith's Annual Report on Form 10-K for the year ended
December 31, 1992.)
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C>
10.30 Yearly Renewable Term Reinsurance Agreement between CalFarm Life Insurance Company and
Gerling Global Life Insurance Company, effective March 1, 1992. (Incorporated herein by
reference to Exhibit 10.26 to Zenith's Annual Report on Form 10-K for the year ended
December 31, 1992.)
11 Computation of Earnings Per Share for the three (3) years ended
December 31, 1993
13 Zenith's Annual Report to Stockholders for the year ended
December 31, 1993, but only to the extent such report is expressly incorporated by
reference herein, and such report is not otherwise to be deemed "filed" as a part of
this Annual Report on Form 10-K.
21 Subsidiaries of Zenith.
23 Consent of Coopers & Lybrand, dated March 29, 1994. (Incorporated herein by reference to
page F-1 of this Annual Report on Form 10-K).
28 Property and Casualty Loss Statistics.
99.1 Information required by rule 15d-21 under the Securities Exchange Act of 1934 for the
year ended December 31, 1993 for the Zenith Investment Partnership 401(k) Plan.
<FN>
- - ------------------------
*Management contract or compensatory plan or arrangement
</TABLE>
(b) REPORTS ON FORM 8-K
None
21
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
Zenith National Insurance Corp.
-------------------------------
(Registrant)
Date: June 29, 1994 By: s/Fredricka Taubitz/s
----------------- ---------------------------
(Signature)
Fredricka Taubitz
Executive Vice President
& Chief Financial Officer
22
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANT
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (File Nos. 33-8948 and 33-22219) of our report dated February 17, 1994
on our audits of the consolidated financial statements and financial statement
schedules of Zenith National Insurance Corp. and subsidiaries as of December 31,
1993 and 1992, and for each of the three years in the period ended December 31,
1993, which is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND
Los Angeles, California
March 29, 1994
F-1
- - --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANT'S REPORT
To the Stockholders and Board of Directors
of Zenith National Insurance Corp.
We have audited the consolidated financial statements of Zenith National
Insurance Corp. and subsidiaries as of December 31, 1993 and 1992, and for each
of the three years in the period ended December 31, 1993, which financial
statements are included on pages 52 through 68 of the Company's 1993 Annual
Report to Stockholders and incorporated by reference herein. We have also
audited the financial statement schedules listed in the index on page 17 of this
Form 10-K. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Zenith National
Insurance Corp. and subsidiaries as of December 31, 1993 and 1992, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for investments as of December 31, 1993.
COOPERS & LYBRAND
Los Angeles, California
February 17, 1994
F-2
<PAGE>
SCHEDULE I -- SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN RELATED PARTIES
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
DECEMBER 31, 1993
<TABLE>
<CAPTION>
COLUMN D
COLUMN C ---------------
COLUMN A COLUMN B ---------- AMOUNT AT WHICH
- - -------------------------------------------------- ---------- FAIR SHOWN IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
- - -------------------------------------------------- ---------- ---------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities
Bonds:
United States Government and government
agencies and authorities.................... $ 441,946 $ 443,551 $ 442,369
Public utilities.............................. 71,438 75,849 73,178
Industrial and miscellaneous.................. 541,811 592,012 558,497
Redeemable preferred stocks..................... 33,217 32,975 32,975
---------- ---------- ---------------
Total fixed maturities.................... 1,088,412 1,144,387 1,107,019
---------- ---------- ---------------
Equity securities
Floating rate preferred stocks.................. 30,582 31,495 31,495
Convertible and nonredeemable preferred
stocks........................................ 11,545 11,246 11,246
Common stocks, industrial....................... 14,485 15,575 15,575
---------- ---------- ---------------
Total equity securities................... 56,612 58,316 58,316
---------- ---------- ---------------
Mortgage loans on real estate..................... 4,515 4,515 4,515
Policy loans...................................... 39,609 39,609 39,609
Short-term investments............................ 276,841 276,841 276,841
Other investments................................. 14,097 14,097 14,097
---------- ---------- ---------------
Total investments......................... $1,480,086 $1,537,765 $ 1,500,397
---------- ---------- ---------------
---------- ---------- ---------------
</TABLE>
F-3
<PAGE>
SCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES AND
UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COLUMN D
------------------------- COLUMN E
--------------------------
COLUMN B DEDUCTIONS
---------- ------------------------- BALANCE AT END OF PERIOD
COLUMN A BALANCE AT COLUMN C (1) (2) --------------------------
- - ------------------------------ BEGINNING ---------- AMOUNTS AMOUNTS (1) (2)
NAME OF DEBTOR OF PERIOD ADDITIONS COLLECTED WRITTEN OFF CURRENT NOT CURRENT
- - ------------------------------ ---------- ---------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
1993
Stanley R. Zax $2,300,000 -0- $2,300,000 -0- -0- -0-
1992
Stanley R. Zax $2,800,000 -0- $ 500,000 -0- $2,300,000 -0-
1991
Stanley R. Zax -0- $3,000,000 $ 200,000 -0- $2,800,000 -0-
</TABLE>
In January 1991, Zenith loaned the sum of $3,000,000 to Mr. Zax. The loan
was evidenced by a promissory note which was payable on January 9, 1994, with
interest, payable each quarter until maturity, at a rate equal to the Prime
Rate. The loan was unsecured.
Under the terms of the loan, Mr. Zax was able to prepay, without penalty,
all or any portion of the principal indebtedness, together with accrued and
unpaid interest. The note was repaid in full on September 23, 1993.
F-4
<PAGE>
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ZENITH NATIONAL INSURANCE CORP.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1993 1992
------------ ------------
<S> <C> <C>
Investments
Common stocks, at market (cost $607,000, 1993 and $3,955,000, 1992)..................... $ 637,000 $ 4,015,000
Short-term investments (at cost which approximates market).............................. 14,996,000 9,192,000
Cash...................................................................................... 1,869,000 2,260,000
Investment in subsidiaries (Note A)....................................................... 405,982,000 362,975,000
Federal income taxes receivable from subsidiaries (Note A)................................ 3,139,000
Other assets.............................................................................. 13,716,000 5,084,000
------------ ------------
Total assets...................................................................... $437,200,000 $386,665,000
------------ ------------
------------ ------------
LIABILITIES
Senior notes payable, less unamortized discount of $1,011,000, 1993 and $1,132,000,
1992.................................................................................... $ 73,989,000 $ 73,868,000
Cash dividends payable to stockholders.................................................... 4,711,000 4,704,000
Federal income taxes payable.............................................................. 3,925,000
Other liabilities......................................................................... 5,110,000 6,495,000
------------ ------------
Total liabilities................................................................. 87,735,000 85,067,000
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par--shares authorized 1,000,000; issued and outstanding, none in 1993
and 1992................................................................................
Common stock, $1 par--shares authorized 50,000,000; issued 23,910,000, outstanding
18,841,000, 1993; issued 23,562,000, outstanding 18,813,000, 1992....................... 23,910,000 23,562,000
Additional paid-in capital................................................................ 249,092,000 242,226,000
Retained earnings......................................................................... 148,043,000 113,867,000
Net unrealized appreciation (depreciation) on investments net of $7,093,000 deferred taxes
in 1993................................................................................. 13,176,000 (668,000)
------------ ------------
434,221,000 378,987,000
Less treasury stock at cost (5,069,000 shares, 1993 and 4,749,000 shares, 1992)........... (84,756,000) (77,389,000)
------------ ------------
Total stockholders' equity........................................................ 349,465,000 301,598,000
------------ ------------
Total liabilities and stockholders' equity........................................ $437,200,000 $386,665,000
------------ ------------
------------ ------------
</TABLE>
See notes to condensed financial information.
F-5
<PAGE>
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ZENITH NATIONAL INSURANCE CORP.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1992 1991
------------ ------------- -------------
<S> <C> <C> <C>
Investment income, net of expenses of $51,000, 1993, $51,000, 1992 and $35,000,
1991........................................................................... $ 492,000 $ 852,000 $ 400,000
Realized gains (losses) on investments.......................................... 895,000 (1,447,000) (1,754,000)
Lawsuit settlement.............................................................. 7,561,000
------------ ------------- -------------
Total revenue................................................................... 8,948,000 (595,000) (1,354,000)
Operating expense............................................................... 3,478,000 3,222,000 3,236,000
Interest expense................................................................ 6,658,000 6,472,000 5,430,000
------------ ------------- -------------
Loss from operations before federal income tax benefit, equity in net income of
insurance subsidiaries, extraordinary item and cumulative effect of accounting
change........................................................................ (1,188,000) (10,289,000) (10,020,000)
Federal income tax benefit...................................................... 516,000 3,128,000 2,857,000
------------ ------------- -------------
Loss from operations before equity in net income of insurance subsidiaries,
extraordinary item and cumulative effect of accounting change................. (672,000) (7,161,000) (7,163,000)
Extraordinary item -- debt retirement cost, net of tax benefit of $698,000...... (1,355,000)
Cumulative effect of change in accounting for income taxes...................... (187,000)
Equity in net income of insurance subsidiaries
(Note A)...................................................................... 53,872,000 37,403,000 53,064,000
------------ ------------- -------------
Net income...................................................................... $ 53,200,000 $ 28,700,000 $ 45,901,000
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
See notes to condensed financial information.
F-6
<PAGE>
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ZENITH NATIONAL INSURANCE CORP.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1993 1992 1991
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Investment income received.................................................... $ 485,000 $ 846,000 $ 400,000
Recovery from lawsuit settlement.............................................. 4,094,000
Operating expenses paid....................................................... (3,309,000) (3,674,000) (2,616,000)
Interest paid................................................................. (6,552,000) (6,073,000) (5,128,000)
Income taxes refunded......................................................... 8,524,000 1,206,000 5,104,000
------------- ------------- -------------
Net cash flows from operating activities.................................... 3,242,000 (7,695,000) (2,240,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of invested assets................................................... (2,597,000)
Proceeds from sales of invested assets........................................ 4,243,000 1,219,000
Net change in short-term investments.......................................... (7,264,000) (7,716,000) (145,000)
Cash received (advanced) received from note receivable........................ 2,300,000 500,000 (2,800,000)
------------- ------------- -------------
Net cash flows from investing activities.................................... (721,000) (8,594,000) (2,945,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received from bank line of credit........................................ 1,000,000 6,350,000 32,300,000
Cash paid on bank line of credit.............................................. (1,000,000) (40,150,000) (36,600,000)
Cash dividends paid to common stockholders.................................... (19,018,000) (18,927,000) (19,012,000)
Retirement of Senior Notes payable 1994....................................... (17,740,000)
Net proceeds from issuance of Senior Notes payable 2002....................... 73,787,000
Proceeds from exercise of stock options....................................... 6,261,000 4,526,000 599,000
Purchase of treasury shares................................................... (7,367,000) (5,686,000) (4,954,000)
Dividends received from subsidiaries.......................................... 25,000,000 15,000,000 33,000,000
Capital contribution to subsidiary............................................ (250,000)
Loan to subsidiary............................................................ (7,538,000)
------------- ------------- -------------
Net cash flows from financing activities.................................... (2,912,000) 17,160,000 5,333,000
Net increase (decrease) in cash................................................. (391,000) 871,000 148,000
Cash at beginning of year....................................................... 2,260,000 1,389,000 1,241,000
------------- ------------- -------------
Cash at end of year............................................................. $ 1,869,000 $ 2,260,000 $ 1,389,000
------------- ------------- -------------
------------- ------------- -------------
RECONCILIATION OF NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 53,200,000 $ 28,700,000 $ 45,901,000
Net income of insurance subsidiaries.......................................... (53,872,000) (37,403,000) (53,064,000)
Realized (gains)/losses on investments........................................ (895,000) 1,447,000 1,754,000
Amortization of discount and issue costs on senior notes...................... 121,000 1,822,000 457,000
Federal income taxes.......................................................... 8,007,000 (2,433,000) 2,247,000
Increase in receivable from lawsuit settlement................................ (3,467,000)
Other......................................................................... 148,000 172,000 465,000
------------- ------------- -------------
Net cash flow from operating activities..................................... $ 3,242,000 $ (7,695,000) $ (2,240,000)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to condensed financial information.
F-7
<PAGE>
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ZENITH NATIONAL INSURANCE CORP.
NOTES TO CONDENSED FINANCIAL INFORMATION
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
Zenith National Insurance Corp. (Zenith) and subsidiaries.
A. Investment In Subsidiaries:
Zenith owns, directly or indirectly, 100% of the outstanding stock of
Zenith Insurance Company, CalFarm Insurance Company, ZNAT Insurance Company,
Zenith Star Insurance Company, CalFarm Life Insurance Company and
Perma-Bilt, a Nevada Corporation. These investments are included in the
financial statements on the equity basis of accounting. Temporary advances
in the ordinary course of business are included in other assets. The excess
of cost over net assets acquired of $2,009,000 represents the unamortized
excess of cost over underlying net tangible assets of companies acquired
prior to 1970, which is considered to have continuing value.
Zenith files a consolidated federal income tax return. The equity in the
income of insurance subsidiaries of $53,872,000 in 1993, $37,403,000 in 1992
and $53,064,000 in 1991 is net of a provision for federal income tax expense
of $20,795,000 in 1993, $3,498,000 in 1992 and $9,476,000 in 1991.
Zenith has formulated tax allocation procedures with its subsidiaries
and the 1993, 1992 and 1991 condensed financial information reflect Zenith's
portion of the consolidated taxes.
Zenith Insurance Company paid dividends to Zenith of $25,000,000 in
1993, $15,000,000 in 1992 and $33,000,000 in 1991. CalFarm Insurance Company
paid a dividend of $5,000,000 to Zenith Insurance Company in 1992.
F-8
<PAGE>
SCHEDULE V -- SUPPLEMENTARY INSURANCE INFORMATION
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COLUMN C
-------------
COLUMN B FUTURE POLICY COLUMN E
------------ BENEFITS, ------------ COLUMN G
DEFERRED LOSSES, COLUMN D OTHER POLICY COLUMN F -----------
COLUMN A POLICY CLAIMS ------------ CLAIMS AND ------------ NET
- - ------------------------------ ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT
SEGMENT COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME
- - ------------------------------ ------------ ------------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
1993
- - ------------------------------
Property and Casualty
Workers' compensation....... $ 4,264,000 $286,452,000 $32,109,000 $244,661,000
Automobile and other
property/casualty......... 11,704,000 87,418,000 68,182,000 137,945,000
Reinsurance................. 1,048,000 94,848,000 6,889,000 23,295,000
------------ ------------- ------------ ------------ ------------ -----------
17,016,000 468,718,000 107,180,000 405,901,000 $36,643,000
Health and Life............... 91,400,000 153,771,000 4,716,000 $ 5,934,000 63,921,000 55,339,000
Reinsurance ceded............. 45,282,000
Registrant.................... 492,000
------------ ------------- ------------ ------------ ------------ -----------
Total....................... $108,416,000 $667,771,000 $111,896,000 $ 5,934,000 $469,822,000 $92,474,000
------------ ------------- ------------ ------------ ------------ -----------
------------ ------------- ------------ ------------ ------------ -----------
1992
- - ------------------------------
Property and Casualty
Workers' compensation....... $ 4,647,000 $266,092,000 $30,853,000 $221,652,000
Automobile and other
property/casualty......... 10,460,000 90,262,000 56,663,000 137,392,000
Reinsurance................. 620,000 107,795,000 3,378,000 18,382,000
------------ ------------- ------------ ------------ ------------ -----------
15,727,000 464,149,000 90,894,000 377,426,000 $42,276,000
Health and Life............... 75,292,000 138,000,000 5,502,000 $ 7,041,000 64,448,000 53,486,000
Reinsurance ceded............. 33,387,000 5,403,000
Registrant.................... 852,000
------------ ------------- ------------ ------------ ------------ -----------
Total....................... $ 91,019,000 $635,536,000 $101,799,000 $ 7,041,000 $441,874,000 $96,614,000
------------ ------------- ------------ ------------ ------------ -----------
------------ ------------- ------------ ------------ ------------ -----------
1991
- - ------------------------------
Property and Casualty
Workers' compensation....... $ 3,726,000 $241,439,000 $24,295,000 $208,989,000
Automobile and other
property/casualty......... 11,220,000 90,848,000 58,010,000 140,732,000
Reinsurance................. 1,637,000 107,893,000 7,868,000 26,347,000
------------ ------------- ------------ ------------ ------------ -----------
16,583,000 440,180,000 90,173,000 376,068,000 $45,727,000
Health and Life............... 60,027,000 134,308,000 5,406,000 $ 7,209,000 61,556,000 49,558,000
Registrant.................... 400,000
------------ ------------- ------------ ------------ ------------ -----------
Total....................... $ 76,610,000 $574,488,000 $95,579,000 $ 7,209,000 $437,624,000 $95,685,000
------------ ------------- ------------ ------------ ------------ -----------
------------ ------------- ------------ ------------ ------------ -----------
<CAPTION>
COLUMN H COLUMN I
------------- ------------
BENEFITS, AMORTIZATION COLUMN J
CLAIMS, OF DEFERRED ----------- COLUMN K
COLUMN A LOSSES AND POLICY OTHER ------------
- - ------------------------------ SETTLEMENT ACQUISITION OPERATING PREMIUMS
SEGMENT EXPENSES COSTS EXPENSES WRITTEN
- - ------------------------------ ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
1993
- - ------------------------------
Property and Casualty
Workers' compensation....... $164,815,000 $ 33,317,000 $19,736,000 $245,917,000
Automobile and other
property/casualty......... 96,715,000 26,598,000 20,336,000 143,223,000
Reinsurance................. 13,678,000 3,384,000 896,000 26,807,000
------------- ------------ ----------- ------------
275,208,000 63,299,000 40,968,000 415,947,000
Health and Life............... 84,448,000 2,202,000 24,267,000
Reinsurance ceded.............
Registrant.................... 3,478,000
------------- ------------ ----------- ------------
Total....................... $359,656,000 $ 65,501,000 $68,713,000 $415,947,000
------------- ------------ ----------- ------------
------------- ------------ ----------- ------------
1992
- - ------------------------------
Property and Casualty
Workers' compensation....... $166,065,000 $ 33,868,000 $20,260,000 $228,209,000
Automobile and other
property/casualty......... 96,224,000 26,231,000 20,061,000 136,077,000
Reinsurance................. 27,443,000 3,674,000 1,267,000 13,892,000
------------- ------------ ----------- ------------
289,732,000 63,773,000 41,588,000 378,178,000
Health and Life............... 85,493,000 (494,000) 18,898,000
Reinsurance ceded.............
Registrant.................... 3,222,000
------------- ------------ ----------- ------------
Total....................... $375,225,000 $ 63,279,000 $63,708,000 $378,178,000
------------- ------------ ----------- ------------
------------- ------------ ----------- ------------
1991
- - ------------------------------
Property and Casualty
Workers' compensation....... $145,961,000 $ 33,856,000 $22,491,000 $213,956,000
Automobile and other
property/casualty......... 92,599,000 27,278,000 20,163,000 143,257,000
Reinsurance................. 26,291,000 7,033,000 691,000 23,195,000
------------- ------------ ----------- ------------
264,851,000 68,167,000 43,345,000 380,408,000
Health and Life............... 79,924,000 88,000 18,634,000
Registrant.................... 3,236,000
------------- ------------ ----------- ------------
Total....................... $344,775,000 $ 68,255,000 $65,215,000 $380,408,000
------------- ------------ ----------- ------------
------------- ------------ ----------- ------------
</TABLE>
F-9
<PAGE>
SCHEDULE VI -- REINSURANCE
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COLUMN F
COLUMN C COLUMN D ----------
COLUMN B ------------ ----------- PERCENTAGE
-------------- CEDED TO ASSUMED COLUMN E OF AMOUNT
GROSS OTHER FROM OTHER -------------- ASSUMED
COLUMN A AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET
- - ------------------------------------------------------- -------------- ------------ ----------- -------------- ----------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1993
Life insurance in force................................ $2,976,178,000 $453,025,000 $2,523,153,000
-------------- ------------ --------------
-------------- ------------ --------------
Premiums earned
Life insurance....................................... $ 22,707,000 $ 156,000 $ 22,551,000
Accident and health insurance........................ 42,667,000 1,297,000 41,370,000
Property and casualty insurance...................... 400,811,000 21,004,000 $26,094,000 405,901,000 6.4%
-------------- ------------ ----------- -------------- ----------
Total premiums earned............................ $ 466,185,000 $ 22,457,000 $26,094,000 $ 469,822,000 5.6%
-------------- ------------ ----------- -------------- ----------
-------------- ------------ ----------- -------------- ----------
DECEMBER 31, 1992
Life insurance in force................................ $2,951,649,000 $287,980,000 $2,663,669,000
-------------- ------------ --------------
-------------- ------------ --------------
Premiums earned
Life insurance....................................... $ 20,891,000 $ 574,000 $ 20,317,000
Accident and health insurance........................ 44,935,000 804,000 44,131,000
Property and casualty insurance...................... 378,922,000 20,853,000 $19,357,000 377,426,000 5.1%
-------------- ------------ ----------- -------------- ----------
Total premiums earned............................ $ 444,748,000 $ 22,231,000 $19,357,000 $ 441,874,000 4.4%
-------------- ------------ ----------- -------------- ----------
-------------- ------------ ----------- -------------- ----------
DECEMBER 31, 1991
Life insurance in force................................ $2,686,030,000 $247,994,000 $2,438,036,000
-------------- ------------ --------------
-------------- ------------ --------------
Premiums earned
Life insurance....................................... $ 18,850,000 $ 428,000 $ 18,422,000
Accident and health insurance........................ 43,770,000 636,000 43,134,000
Property and casualty insurance...................... 368,971,000 20,434,000 $27,531,000 376,068,000 7.3%
-------------- ------------ ----------- -------------- ----------
Total premiums earned............................ $ 431,591,000 $ 21,498,000 $27,531,000 $ 437,624,000 6.3%
-------------- ------------ ----------- -------------- ----------
-------------- ------------ ----------- -------------- ----------
</TABLE>
F-10
<PAGE>
SCHEDULE IX -- SHORT-TERM BORROWINGS
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COLUMN A COLUMN D COLUMN E COLUMN F
- - ---------------------------------------- ----------- ----------- -------------
CATEGORY COLUMN B COLUMN C MAXIMUM AVERAGE WEIGHTED
OF ----------- -------------- AMOUNT AMOUNT AVERAGE
AGGREGATE BALANCE WEIGHTED OUTSTANDING OUTSTANDING INTEREST RATE
SHORT-TERM AT END OF AVERAGE DURING THE DURING THE DURING THE
BORROWINGS PERIOD INTEREST RATE PERIOD PERIOD (1) PERIOD (2)
- - ---------------------------------------- ----------- -------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Amounts payable to banks (3)
1993.................................. -0- -0- $ 1,000,000 $ 83,000 5.45%
1992.................................. -0- -0- $20,000,000 $ 5,883,000 5.95%
1991.................................. $16,900,000 5.95% $26,350,000 $18,133,000 7.9%
<FN>
- - ------------------------
(1) Computed on the average of month-end balances.
(2) Computed using actual daily amount charged when line was drawn, divided by
the number of days outstanding.
(3) Amounts payable to banks are borrowed under a line of credit borrowing
arrangement which is subject to renewal, annually, on July 1.
</TABLE>
F-11
<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
------------------------
ZENITH NATIONAL INSURANCE CORP.
(Exact name of registrant as specified in its charter)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
EXHIBIT LIST
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- - --------- -------------------------------------------------------------------------------------- -----------------
<S> <C> <C>
3.1 Certificate of Incorporation of Zenith as in effect immediately prior to November 22,
1985. (Incorporated herein by reference to Exhibit 3 to Zenith's Amendment on Form 8,
date of amendment October 10, 1985, to Zenith's Current Report on Form 8-K, date of
report July 26, 1985). Certificate of Amendment to Certificate of Incorporation of
Zenith, effective November 22, 1985. (Incorporated herein by reference to Zenith's
Current Report on Form 8-K, date of report November 22, 1985).
3.2 By-Laws of Zenith, as currently in effect. (Incorporated herein by reference to
Exhibit 3.2 to Zenith's Annual Report on Form 10-K for the year ended December 31,
1988.)
4.1 Indenture dated as of May 1, 1992 entered into between Zenith and Norwest Bank
Minnesota, National Association, as trustee, pursuant to which Zenith issued its 9%
Senior Notes due May 1, 2002. (Incorporated herein by reference to Exhibit 4 to
Zenith's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992.)
10.1 Purchase Agreement, dated as of February 4, 1981, among Reliance Insurance Company,
Zenith, the Selling Stockholders referred to therein, and Eugene V. Klein, Daniel
Schwartz and Harvey L. Silbert as agents for the Selling Stockholders. (Incorporated
herein by reference to the exhibit to the Schedule 13D filed by Reliance Financial
Services Corporation on March 9, 1981 with respect to the common stock of Zenith).
10.2 Asset and Liability Assumption Agreement, dated as of June 4, 1985, between Zenith
Insurance and the Insurance Commissioner of the State of California (the
"Commissioner"). (Incorporated herein by reference to Exhibit 1 to Zenith's Current
Report on Form 8-K, date of report July 26, 1985).
10.3 Memorandum and Agreement of Closing dated as of July 26, 1985, among Zenith Insurance,
Zenith and the Commissioner (Incorporated herein by reference to Exhibit 10.6 to
Zenith's Annual Report on Form 10-K for the year ended December 31, 1985), together
with the following exhibits:
(a) Exhibit A -- Grant Deed, dated July 25, 1985, by the Commissioner in favor of
Zenith Insurance. (Incorporated herein by reference to
Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31,
1985).
(b) Exhibit B -- Bill of Sale, dated as of July 26, 1985, by the Commissioner in favor
of Zenith Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's
Annual Report on Form 10-K for the year ended December 31, 1985).
(c) Exhibit C -- Assignment of Assets and Assumption of Liabilities, dated as of July
26, 1985, between the Commissioner and Zenith Insurance. (Incorporated herein by
reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year
ended December 31, 1985).
(d) Exhibit D -- Noncompetition Agreement, dated as of July 26, 1985, between the
Commissioner and Zenith Insurance. (Incorporated herein by reference to Exhibit
28.3 to Zenith's Current Report on Form 8-K, date of report July 26, 1985).
(e) Exhibit E -- First Assignment Separate from Certificate, dated July 26, 1985, by
the Commissioner in favor of Zenith. (Incorporated herein by reference to Exhibit
10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- - --------- -------------------------------------------------------------------------------------- -----------------
<S> <C> <C>
(f) Exhibit F -- Engagement and Reimbursement Agreement, dated as of July 26, 1985,
between Zenith Insurance and the Commissioner. (Incorporated herein by reference
to Exhibit 28.2 to Zenith's Current Report on Form 8-K, date of report July 26,
1985).
*10.4 Zenith's Non-Qualified Stock Option Plan, as in effect immediately prior to December
6, 1985. (Incorporated herein by reference to Zenith's Registration Statement on Form
S-8 (SEC File No. 2-97962)).
*10.5 Zenith's Amended and Restated Non-Qualified Stock Option Plan, adopted by Zenith's
Board of Directors on December 6, 1985. (Incorporated herein by reference to Zenith's
Registration Statement on Form S-8
(SEC File No. 33-8948)).
*10.6 Employment Agreement, dated May 24, 1990, between Zenith and Fredricka Taubitz.
(Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form
10K for the year ended December 31, 1990).
*10.7 Employment Agreement, dated October 1, 1990, between Zenith and John J. Tickner.
(Incorporated herein by reference to Exhibit 10.7 to Zenith's Annual Report on Form
10K for the year ended December 31, 1990).
*10.8 Employment Agreement, dated as of February 28, 1990, between Zenith and Stanley R.
Zax. (Incorporated herein by reference to Exhibit 10.8 to Zenith's Annual Report on
Form 10K for the year ended December 31, 1990).
*10.9 Stock Option Agreement, dated as of May 19, 1987, between Zenith and Stanley R. Zax.
(Incorporated herein by reference to Exhibit 10.15 to Zenith's Annual Report on Form
10-K for the year ended December 31, 1987).
10.10 Promissory Note, dated January 9, 1991, in an original principal amount of $3,000,000,
by Stanley R. Zax in favor of Zenith. (Incorporated herein by reference to Exhibit
10.10 to Zenith's Annual Report on Form 10K for the year ended December 31, 1990).
10.11 Credit Agreement, as amended, dated as of November 30, 1988 between Zenith and Sanwa
Bank of California. (Incorporated herein by reference to Exhibit 10.11 to Zenith's
Annual Report on Form 10-K for the year ended December 31, 1992).
10.12 Revolving Note Agreement, dated July 1, 1993, between Zenith and City National Bank.
10.13 Revolving Note Agreement, dated August 15, 1993 between Zenith and City National Bank.
10.14 Letter of Credit Facility Agreement, dated December 1, 1993, between Sanwa Bank of
California and Zenith Insurance.
10.15 Agreement of Reinsurance #6966 between Zenith Insurance Company and General
Reinsurance Corporation, dated as of December 21, 1984. (Incorporated herein by
reference to Exhibit 10.13 to Zenith's Annual Report on Form 10K for the year ended
December 31, 1991.)
10.16 Workers' Compensation and Employers' Liability Reinsurance Agreement between Zenith
Insurance Company and Employers Reinsurance Corporation, effective January 1, 1986.
(Incorporated herein by reference to Exhibit 10.14 to Zenith's Annual Report on Form
10K for the year ended December 31, 1991.)
10.17 Agreement of Reinsurance No. 7276 between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of February 5, 1988. (Incorporated herein by
reference to Exhibit 10.15 to Zenith's Annual Report on Form 10K for the year ended
December 31, 1991.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- - --------- -------------------------------------------------------------------------------------- -----------------
<S> <C> <C>
10.18 Agreement of Reinsurance No. B226 between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by
reference to Exhibit 10.16 to Zenith's Annual Report on Form 10K for the year ended
December 31, 1991.)
10.19 Agreement of Reinsurance No. B197-A between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by
reference to Exhibit 10.17 to Zenith's Annual Report on Form 10K for the year ended
December 31, 1991.)
10.20 Agreement of Reinsurance No. B196-A between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by
reference to Exhibit 10.18 to Zenith's Annual Report on Form 10K for the year ended
December 31, 1991.)
10.21 Agreement of Reinsurance No. 7832 between General Reinsurance Corporation and CalFarm
Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993.
10.22 Agreement of Reinsurance No. 623-0005 between American Re-Insurance Company and
CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993.
10.23 Agreement of Reinsurance No. 0079460 between Employers Reinsurance Corporation and
CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993.
10.24 Life, Disability and Accidental Death Automatic Reinsurance Agreement between CalFarm
Life Insurance Company and Transamerica Occidental Life Insurance Company, effective
June 1, 1983. (Incorporated herein by reference to Exhibit 10.20 to Zenith's Annual
Report on Form 10K for the year ended December 31, 1991.)
10.25 Life, Disability and Accidental Death Facultive Reinsurance Agreement between CalFarm
Insurance Company and Occidental Life Insurance Company of California, effective April
1, 1971. (Incorporated herein by reference to Exhibit 10.21 to Zenith's Annual Report
on Form 10K for the year ended December 31, 1991.)
10.26 Reinsurance Agreement between CalFarm Life Insurance Company and American United Life
Insurance Company, effective August 1, 1983. (Incorporated herein by reference to
Exhibit 10.22 to Zenith's Annual Report on Form 10K for the year ended December 31,
1991.)
10.27 Excess Major Medical Reinsurance Agreement (No. 0076820/Specific and Aggregate
Retentions) between CalFarm Life Insurance Company and Employers Reinsurance
Corporation, effective January 1, 1993.
10.28 Automatic Reinsurance Agreement between CalFarm Life Insurance Company and North
American Reassurance Company, effective June 1, 1991. (Incorporated herein by
reference to Exhibit 10.24 to Zenith's Annual Report on Form 10-K for the year ended
December 31, 1992.)
10.29 Automatic Reinsurance Agreement between CalFarm Life Insurance Company and North
American Reassurance Company, effective February 21, 1991. (Incorporated herein by
reference to Exhibit 10.25 to Zenith's Annual Report on Form 10-K for the year ended
December 31, 1992.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- - --------- -------------------------------------------------------------------------------------- -----------------
<S> <C> <C>
10.30 Yearly Renewable Term Reinsurance Agreement between CalFarm Life Insurance Company and
Gerling Global Life Insurance Company, effective March 1, 1992. (Incorporated herein
by reference to Exhibit 10.26 to Zenith's Annual Report on Form 10-K for the year
ended December 31, 1992.)
11 Computation of Earnings Per Share for the three (3) years ended
December 31, 1993.
13 Zenith's Annual Report to Stockholders for the year ended December 31, 1993, but only
to the extent such report is expressly incorporated by reference herein, and such
report is not otherwise to be deemed "filed" as a part of this Annual Report on Form
10-K.
21 Subsidiaries of Zenith
23 Consent of Coopers & Lybrand, dated March 29, 1994. (Incorporated herein by reference
to page F-1 of this Annual Report on Form 10-K).
28 Property and Casualty Loss Statistics.
99.1 Information required by rule 15d-21 under the Securities Exchange Act of 1934 for the
year ended December 31, 1993 for the Zenith Investment Partnership 401(k) Plan.
<FN>
- - ------------------------
*Management contract or compensatory plan or arrangement
</TABLE>
<PAGE>
CITY NATIONAL BANK REVOLVING NOTE
(INTEREST TIED TO PRIME)
11552 Note No.
-----
$20,000,000.00
Head Office
Beverly Hills, California
July 1, 1993
On September 1, 1993, the undersigned, ZENITH NATIONAL INSURANCE CORP., a
Delaware corporation ("Borrower"), promises to pay to the order of CITY NATIONAL
BANK, a national banking association ("CNB"), at its office in this city, in
lawful money of the United States of America and in immediately available funds,
the principal sum of Twenty Million Dollars ($20,000,000), or so much thereof as
may be advanced and be outstanding, with interest thereon to be computed on each
advance from the date of its disbursement at a rate computed on the basis of a
360-day year, actual days elapsed, equal to the Prime Rate of CNB, as it exists
from time to time, minus fifty-five one hundredths of one percent (0.55%) per
year. Any change in the Prime Rate shall become effective on the same business
day on which the Prime Rate shall change, without prior notice to Borrower.
All or any portion of the principal of this Note may be borrowed, repaid
and reborrowed from time to time prior to maturity, provided at the time of any
borrowing no Event of Default (as herein defined) exists, and provided further
that the total borrowings outstanding at any one time shall not exceed the
principal amount stated above. Each borrowing and repayment hereunder shall be
noted in the books and records of CNB. The excess of borrowings over repayments
shall evidence the principal balance due hereon from time to time and at any
time. Borrowings hereunder shall be conclusively presumed to have been made to
or for the benefit of Borrower when made as noted in such books and records.
Interest accrued on this Note shall be payable on September 1, 1993.
The occurrence of any of the following with respect to Borrower or any
guarantor of this Note or any general partner of such Borrower or guarantor,
shall constitute an "Event of Default" hereunder:
1. The failure to make any payment of principal or interest when due under
this Note;
2. The filing of a petition by or against any of such parties under any
provisions of the BANKRUPTCY CODE;
3. The appointment of a receiver or an assignee for the benefit of creditors;
4. The commencement of dissolution or liquidation proceedings or the
disqualification of any such parties, which is a corporation, partnership,
joint venture or any other type of entity;
5. The death or incapacity of any of such parties who is an individual;
6. The revocation of any guaranty of this Note;
7. Any financial statement provided by any of such parties to CNB is false or
misleading;
<PAGE>
8. Any material default in the payment or performance of any obligation, or
any material default under any provisions of any contract or instrument
pursuant to which any of such parties has incurred any obligation for
borrowed money, any purchase obligation or any other liability of any kind
to any person or entity, including CNB;
9. Any sale or transfer of all or a substantial or material part of the assets
of any of such parties other than in the ordinary course of business; or
10. Any violation, breach or default under any letter agreement, guaranty,
security agreement, deed of trust or any other contract or instrument
executed in connection with this Note or securing this Note.
Upon the occurrence of any Event of Default, CNB, at its option, may
declare all sums of principal and interest outstanding hereunder to be
immediately due and payable without presentment, demand, protest or notice of
dishonor all of which are expressly waived by Borrower, and CNB shall have no
obligation to make any further advances hereunder. Each Borrower agrees to pay
all costs and expenses, including reasonable attorneys' fees, expended or
incurred by the holder (or allocable to the holder's in-house counsel) in
connection with the enforcement of this Note or the collection of any sums due
hereunder and irrespective of whether suit is filed. Any principal or interest
not paid when due hereunder shall thereafter bear additional interest from its
due date at a rate of two percent (2.0%) per year higher than the interest rate
as determined and computed above, and continuing thereafter until paid.
Should more than one person or entity execute this Note as a Borrower, the
obligations of each such Borrower shall be joint and several.
This Note and all matters relating hereto, shall be governed by the laws of
the State of California.
ZENITH NATIONAL INSURANCE CORP., a
Delaware corporation
By: /s/
-------------------------------
Stanley R. Zax, Chairman of the
Board/President
<PAGE>
CITY NATIONAL BANK REVOLVING NOTE
(INTEREST TIED TO PRIME)
____ Note No.
$20,000,000.00
Head Office
Beverly Hills, California
August 15, 1993
On July 1, 1994, the undersigned, ZENITH NATIONAL INSURANCE CORP., a
Delaware corporation ("Borrower"), promises to pay to the order of CITY NATIONAL
BANK, a national banking association ("CNB"), at its office in this city, in
lawful money of the United States of America and in immediately available funds,
the principal sum of Twenty Million Dollars ($20,000,000), or so much thereof as
may be advanced and be outstanding, with interest thereon to be computed on each
advance from the date of its disbursement at a rate computed on the basis of a
360-day year, actual days elapsed, equal to the Prime Rate of CNB, as it exists
from time to time, minus fifty-five one hundredths of one percent (0.55%) per
year. Any change in the Prime Rate shall become effective on the same business
day on which the Prime Rate shall change, without prior notice to Borrower.
All or any portion of the principal of this Note may be borrowed, repaid
and reborrowed from time to time prior to maturity, provided at the time of any
borrowing no Event of Default (as herein defined) exists, and provided further
that the total borrowings outstanding at any one time shall not exceed Twenty
Million Dollars ($20,000,000.00). Each borrowing and repayment hereunder shall
be noted in the books and records of CNB. The excess of borrowings over
repayments shall evidence the principal balance due hereon from time to time and
at any time. Borrowings hereunder shall be conclusively presumed to have been
made to or for the benefit of Borrower when made as noted in such books and
records.
Interest accrued on this Note shall be payable on the first day of each
calendar quarter, commencing October 1, 1993.
A facility fee equal to $75,000.00 shall be payable in four (4) equal
consecutive installments, each in the amount of $18,750.00, on August 15, 1993,
November 15, 1993, February 15, 1994, and May 15, 1994.
The occurrence of any of the following with respect to Borrower shall
constitute an "Event of Default" hereunder:
1. The failure to make any payment of principal or interest when due under
this Note, when such failure continues for ten (10) days after notice form
CNB;
2. The filing of a petition by or against Borrower under any provisions of
the BANKRUPTCY CODE;
3. The appointment of a receiver or an assignee for the benefit of Borrower's
creditors;
4. The commencement of dissolution or liquidation proceedings or the
disqualification of Borrower, whether a corporation, partnership, joint
venture or any other type of entity;
5. Any financial statement provided by Borrower to CNB is false or
misleading;
<PAGE>
6. Any material default in the payment or performance of any obligation, or
any material default under any provisions of any material contract or
instrument pursuant to which Borrower has incurred any obligation for
borrowed money, any purchase obligation or any other liability of any kind
to any person or entity; including CNB;
7. Any sale or transfer of all or a substantial or material part of the
assets of Borrower other than in the ordinary course of business; or
8. Any material violation, breach or default under any letter agreement or
any other contract or instrument executed in connection with this Note of
securing this Note.
Upon the occurrence of any Event of Default, CNB, at its option, may
declare all sums of principal and interest outstanding hereunder to be
immediately due and payable without presentment, demand, protest or notice of
dishonor all of which are expressly waived by Borrower, and CNB shall have no
obligation to make any further advances hereunder. Borrower agrees to pay all
costs and expenses, including reasonable attorneys' fees, expended or incurred
by the holder (or allocable to the holder's in-house counsel) in connection with
the enforcement of this Note or the collection any sums due hereunder and
irrespective of whether suit is filed. Any principal or interest not paid when
due hereunder shall thereafter bear additional interest from its due date at a
rate of two percent (2.0%) per year higher than the interest rate as determined
and computed above, and continuing thereafter until paid.
Should more than one person or entity execute this Note as a Borrower, the
obligations of each such Borrower shall be joint and several.
This Note and all matters relating hereto, shall be governed by the laws
of the State of California.
ZENITH NATIONAL INSURANCE CORP., a
Delaware corporation
By: /s/
----------------------------------
Stanley R. Zax, Chairman of the
Board/President
<PAGE>
LETTER OF CREDIT FACILITY AGREEMENT
THIS LETTER OF CREDIT FACILITY AGREEMENT (the "Agreement") is made and
entered into this 1st day of December 1993 by and between SANWA BANK CALIFORNIA
(the "Bank") and ZENITH INSURANCE COMPANY (the "Borrower").
SECTION I
AGREEMENT TO LEND
1.01 COMMITMENT TO LEND. Subject to the terms and conditions of this
Agreement and so long as no Event of Default occurs, the Bank agrees to extend
to the Borrower the credit accommodations that follow.
1.02 LETTER OF CREDIT FACILITY. The Bank agrees to issue standby letters
of credit (each a "Letter of Credit") on behalf of the Borrower upon the
Borrower's application therefor which application shall be in the Bank's
standard form and to which an attachment in the form of Exhibit "A" (or in such
form as the parties mutually agree) may at Borrower's option be attached [the
"Application"]. At no time, however, shall the total available amount of all
Letters of Credit outstanding (plus any unpaid draws paid by the Bank) exceed
the sum of $3,000,000; provided that any sums repaid hereunder may be
reborrowed. Each Letter of Credit shall be in form and substance satisfactory
to the Bank, provided that the Bank may refuse to issue a Letter of Credit due
to the nature of the transaction or its terms or in connection with any
transaction where the Bank, due to the beneficiary or the nationality or
residence of the beneficiary, would be prohibited by any applicable law,
regulation or order from issuing such Letter of Credit.
1.03 LETTER OF CREDIT FEES; COSTS The Borrower hereby agrees to pay to
the Bank on the date of issuance and each calendar quarter thereafter (in
advance), a Letter of Credit Fee in the amount of .25% per quarter of the face
amount of each Letter of Credit outstanding and upon the Bank's request, the
Borrower shall promptly pay to the Bank issuance fees and such other fees,
commissions, costs and any out-of-pocket expenses charged or incurred by the
Bank with respect to any Letter of Credit. The Letter of Credit Fee and other
costs and fees, where applicable, shall be computed on the basis of 360 days per
year, but charged on the actual number of days elapsed.
1.04 INDEMNIFICATION. In the event that the Bank agrees to issue any
Letter of Credit wherein the Letter of Credit is subject to and governed by the
laws of a state other than the State of California and the Uniform Customs and
Practice for Documentary Credits (1983 Revision), International Chamber of
Commerce Publication No. 400 or subsequent revisions ("UCP 400") and, further
providing that in the event of any conflict between the laws of a state other
than the State of California and UCP 400, the laws of the state other than the
State of California will control, the Borrower hereby indemnifies and holds the
Bank, including, without limitation, its directors, officers, agents, employees,
successors and assigns, harmless from and against any and all liability, loss,
claims, demands, causes of action, judgments, damages and expenses, including
without limitation, reasonable attorneys fees, in connection with the Bank
making: (i) any payment pursuant to the Letter of Credit where such payment is
legal, authorized or otherwise appropriate under the other state's version of
the Uniform Commercial Code or UCP 400 (ii) any payment after the expiry date of
the Letter of Credit where a draw was made prior to the expiry date which the
Bank did not honor but which the Bank or any court or other finder of fact
determines should have been honored.
In the event that the Bank agrees to issue any Letter of Credit
wherein: (a) the Bank agrees to make payment to any successor by operation of
law of the named beneficiary including, without limitation, any liquidator,
rehabilitator, receiver or conservator; and (b) the Bank agrees to make payment
following the expiration of the Letter of Credit during an interruption of
business as described in Article 19 of UCP 400 or Article 17 of the Uniform
Customs and Practice for Documentary Credits (1993 Revision), International
Chamber of Commerce Publication No. 500 ("UCP 500") if the Letter of Credit is
drawn against within 30 days after the resumption of business, the Borrower
hereby indemnifies and holds the Bank harmless including, without limitation,
its directors, officers, agents, employees, successor and assigns , from and
against any and all liability, loss, claims, demands, causes of action,
judgments, damages and expenses, including without limitation, reasonable
attorney fees, in connection with the Bank making payment to any successor in
interest, liquidator, rehabilitator, receiver or conservator of the beneficiary
or any party that purports to be any successor in interest, liquidator,
rehabilitator, receiver or conservator of the beneficiary and in connection with
any payment made after the expiration date of the Letter of Credit as a result
of interruption of business as described in Article 19 of UCP 400 or Article 17
of UCP 500.
-1-
<PAGE>
1.05 REPAYMENT OF DRAWINGS. The Borrower hereby promises and agrees to
pay to the Bank immediately upon the Bank's demand, the amount of each drawing
under each Letter of Credit issued hereunder (each, a "Drawing").
1.06 EXPIRATION DATE. Unless earlier terminated in accordance with the
terms of this Agreement, the commitment by the Bank to issue Letters of Credit
shall automatically terminate on December 31, 1994 (the "Expiration Date") and
no Letter of Credit shall expire on a date which is after the Expiration Date.
SECTION II
CONDITIONS PRECEDENT
2.01 CONDITIONS PRECEDENT TO FIRST LETTER OF CREDIT. Prior to issuance of
the first Letter of Credit hereunder, the Borrower shall deliver or cause to be
delivered to the Bank, in form and substance satisfactory to the Bank, evidence
relating to the duly given approval and authorization of the execution, delivery
and performance of this Agreement, all other documents, instruments and
agreements required under this Agreement and all other actions to be taken by
the Borrower hereunder or thereunder.
2.02 CONDITIONS PRECEDENT TO EACH LETTER OF CREDIT. The obligation of the
Bank to issue each Letter of Credit (including the first Letter of Credit) is
subject to the further conditions precedent that, as of the date of the issuance
of each Letter of Credit and thereafter:
A. REPRESENTATIONS AND WARRANTIES. The representations and
warranties set forth below and in any other document, instrument, agreement or
certificate delivered to the Bank hereunder are true and correct.
B. EVENT OF DEFAULT. No event has occurred and is continuing which
constitutes, or, which with the lapse of time or giving of notice or both, would
constitute an Event of Default as defined below.
C. APPLICATION. The Borrower shall deliver to the Bank no later than
10:00 a.m. one day prior to the day such Letter of Credit is to be issued, a
duly executed form of the Application.
D. MISCELLANEOUS DOCUMENTS. Such other documents and opinions as the
Bank may reasonably require with respect to the transactions described in this
Agreement.
For the purposes hereof, the Borrower's delivery to the Bank of an
Application shall be deemed to constitute the Borrower's representation and
warranty that the statements set forth in Section 2.02A and 2.02B above are true
and correct.
SECTION III
REPRESENTATIONS AND WARRANTIES
The Borrower hereby makes the following representations and warranties to
the Bank, which representations and warranties are continuing:
3.01 STATUS. The Borrower is a corporation duly organized and validly
existing under the laws of the State of California, and is properly licensed,
qualified to do business and in good standing in, and, where necessary to
maintain the Borrower's rights and privileges, has complied with the fictitious
name statute of, every jurisdiction in which the Borrower is doing business.
3.02 AUTHORITY. The execution, delivery and performance by the Borrower
of this Agreement and any documents referred to or required hereunder have been
duly authorized and do not and will not: (i) violate any provision of any law,
rule, regulation, writ, judgment or injunction presently in effect materially
affecting the Borrower; (ii) result in a material breach of or constitute a
material default under any material agreement to which the Borrower is a party
or by which it or its properties may be bound or affected; or (iii) require any
consent or approval of its stockholders or violate any provision of its articles
of incorporation or by-laws.
3.03 LEGAL EFFECT. This Agreement constitutes, and any document,
instrument or agreement required hereunder when delivered will constitute,
legal, valid and binding obligations of the Borrower enforceable against the
Borrower in accordance with their respective terms.
-2-
<PAGE>
3.04 FINANCIAL STATEMENTS. All financial statements, information and
other data which may have been or which may hereafter be submitted by the
Borrower to the Bank are true, accurate and correct and have been or will be
prepared in accordance with generally accepted accounting principles
consistently applied (or, as appropriate, in accordance with statutory
accounting practices) and accurately represent the Borrower's financial
condition or, as applicable, the other information disclosed therein. Since the
most recent submission of any such financial statement, information or other
data to the Bank, the Borrower represents and warrants that no material adverse
change in the Borrower's financial condition or operations have occurred which
have not been fully disclosed to the Bank in writing.
3.05 LITIGATION. Except as have been disclosed to the Bank in writing,
there are no actions, suits or proceedings pending or, to the knowledge of the
Borrower, threatened against or affecting the Borrower or the Borrower's
properties before any court or administrative agency which, if determined
adversely to the Borrower, would have a material adverse effect on the
Borrower's financial condition or operations.
3.06 TITLE TO ASSETS; PERMITTED LIENS. The Borrower has title to all of
its assets subject only to security interests, encumbrances, liens or claims of
any third person as follows: (i) liens and security interests securing
indebtedness owed by the Borrower to the Bank; (ii) liens for taxes, assessments
or similar charges either not yet due and payable or being duly contested in
good faith; (iii) liens of mechanics, materialmen, warehousemen or other like
liens arising in the ordinary course of business and securing obligations which
are not delinquent; (iv) liens and security interests which, as of the date of
this Agreement, have been disclosed to and approved by the Bank in writing; (v)
purchase money liens or purchase money security interests upon or in any
property acquired or held by the Borrower in the ordinary course of business to
secure indebtedness outstanding on the date hereof or permitted to be incurred
hereunder; and (vi) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to the
value of the Borrower's assets (collectively "Permitted Liens").
3.07 GOVERNMENTAL APPROVALS. The Borrower has obtained all permits and
approvals from the California Department of Insurance and any other state
regulatory authority that may be required to conduct its business as presently
conducted.
3.08 ERISA. If the Borrower has a pension, profit sharing or retirement
plan subject to the Employee Retirement Income Security Act of 1974, as amended
from time to time, including any rules and regulations promulgated thereunder
("ERISA"), such plan has been and will continue to be funded in accordance with
its terms and otherwise complies with and continues to comply with the
requirements of ERISA.
3.09 TAXES. The Borrower has filed all tax returns required to be filed
and paid all taxes shown thereon to be due, including interest and penalties,
other than taxes which are not currently due or those which are being duly
contested in good faith.
SECTION IV
COVENANTS
The Borrower covenants and agrees that, during the term of this Agreement,
and so long thereafter as the Borrower is indebted to the Bank under this
Agreement, the Borrower shall, unless the Bank otherwise consents in writing:
4.01 PRESERVATION OF EXISTENCE; COMPLIANCE WITH APPLICABLE LAWS. Borrower
shall maintain and preserve its existence and all rights and privileges now
enjoyed; not liquidate or dissolve, merge or consolidate into an entity (which
would be the survivor) and conduct its business in accordance with all
applicable laws, rules and regulations.
4.02 MAINTENANCE OF INSURANCE. Maintain insurance in such amounts and
covering such risks as is usually carried by companies engaged in similar
businesses and owning similar properties in the same general areas in which the
Borrower operates and maintain such other insurance and coverages as may be
required by the Bank.
4.03 PAYMENT OF OBLIGATIONS AND TAXES. Make timely payment of all
assessments and taxes and all of its liabilities and obligations unless the same
are being contested in good faith.
4.04 INSPECTION RIGHTS. At any reasonable time and from time to time
permit the Bank or any representative thereof to examine and make copies of the
pertinent records and visit the properties of the Borrower and to discuss the
business and operations of the Borrower with the President and Chairman of the
Board, Executive Vice President, Vice President Finance, Treasurer, Assistant
Treasurer, or those employees designated by them. If the Borrower now or at any
time hereafter maintains any records (including, but not limited to, computer
generated records and computer programs for the generation of such records) in
the possession
-3-
<PAGE>
of a third party, the Borrower hereby agrees to notify such third party to
permit the Bank free access to such pertinent records at all reasonable times
and to provide the Bank with copies of any pertinent records it may request, all
at the Borrower's expense, the amount of which shall be payable immediately upon
demand.
4.05 REPORTING REQUIREMENTS. Deliver or cause to be delivered to the Bank
in form and detail satisfactory to the Bank:
A. Annual Statements. Not later than 95 days after the end of each of the
fiscal years of Zenith National Insurance Corp., a copy of the audited
consolidated annual financial report of Zenith National Insurance Corp. for such
year.
B. Quarterly Statements. Not later than 50 days after the end of the
first three quarters of each fiscal year of Zenith National Insurance Corp.,
Zenith National Insurance Corp.'s consolidated financial statement as of the end
of such quarter.
C. Triennial Audit. Not later than 30 days after Borrower receives it, a
copy of its triennial audit and the triennial audit of CalFarm Insurance
Company, and ZNAT Insurance Company prepared by the Department of Insurance.
D. Statutory Statements. Not later than 30 days after its submission to
the Department of Insurance, the annual and quarterly statutory statements of
the Borrower, CalFarm Insurance Company and ZNAT Insurance Company.
E. Compliance Certificate. Not later than 50 days after the end of the
first three fiscal quarters and 95 days after the end of each fiscal year of the
Borrower, a certificate signed by the President and Chairman of the Board
stating that the statements set other in Section 2.02A and 2.02B herein are true
as of the date of such certificate.
F. Other Information. Promptly upon the Bank's request, such other
information pertaining to the Borrower as the Bank may reasonable request.
4.06 CORPORATE RATING. Maintain at all times an A.M. Best rating no lower
than B+.
4.07 LIENS AND ENCUMBRANCES. Borrower shall not create, assume or permit
to exist any security interest, encumbrance, mortgage, deed of trust or other
lien (including, but not limited to, a lien of attachment, judgment or
execution) affecting any of the Borrower's properties, nor execute or allow to
be filed any financing statement or continuation thereof affecting any of such
properties, except for Permitted Liens or as otherwise provided in this
Agreement.
4.08 TRANSFER ASSETS. Not sell, contract for sale, transfer, convey,
assign, lease or sublet any of its assets except in the ordinary course of
business as presently conducted by the Borrower and except for real property,
and then, only for full, fair and reasonable consideration.
4.09 CHANGE IN THE NATURE OF BUSINESS. Not make any material change in
its corporate structure or in the nature of its business as existing or
conducted as of the date of this Agreement.
4.10 FINANCIAL CONDITION. Maintain at all times:
A. MAXIMUM TOTAL INDEBTEDNESS. The aggregate debt of the Borrower and its
subsidiaries, including the aggregate available amount of all Letters of Credit
outstanding (plus any unpaid draws paid by the Bank), shall not exceed at any
time the sum of $20,000,000.00.
The term "debt" shall mean, at any date, the aggregate amount of, without
duplication, (a) all obligations of the Borrower for borrowed money from banks,
(b) all obligations of the Borrower evidenced by bonds, debentures, notes or
similar instruments, (c) all obligations of the Borrower to pay the deferred
purchase price of property or services, (d) all capitalized lease obligations of
the Borrower, (e) all obligations or liabilities of others secured by a lien on
any asset of the Borrower, whether or not such obligation or liability is
assumed, and (f) any other obligations or liabilities which are required by
generally accepted accounting principles to be shown as debt on the balance
sheet of the Borrower.
B. MAXIMUM NET PREMIUMS WRITTEN TO POLICYHOLDERS' SURPLUS. The Borrower
and its subsidiaries shall maintain a consolidated ratio of net premiums written
to policyholders' surplus of not more than 3:1.
-4-
<PAGE>
C. MINIMUM CONSOLIDATED POLICYHOLDERS' SURPLUS. The minimum consolidated
statutory policyholders' surplus of the Borrower, CalFarm Insurance Company and
ZNAT Insurance Company shall be no less than $125,000,000.00.
4.11 KEY EMPLOYEE. Continue to employ Stanley R. Zax as its President and
Chairman of the Board.
4.12 NOTICES. Give prompt written notice to the Bank of any and all (i)
Events of Default; (ii) litigation, arbitration or administrative proceedings to
which the Borrower is a defendant and in which the claim or liability exceeds
$15,000,000 and (iii) other matters which have resulted or might result in, a
material adverse change in the financial conditions or business operations of
the Borrower.
4.13 OTHER AGREEMENTS. Except to the extent permitted hereunder, not
commit, do or fail to commit or do any act or thing which constitutes or, with
the giving of notice or lapse of time or both, would constitute an Event of
Default.
4.14 REIMBURSE FEES, ETC. Promptly pay to and reimburse the Bank for all
costs incurred and payments made by the Bank by reason of any future assessment,
reserve, deposit or similar requirement or any surcharge, tax or fee imposed
upon the Bank or as a result of the Bank's compliance with any directive or
requirement of any regulatory authority pertaining or relating to any Letter of
Credit.
SECTION V
EVENTS OF DEFAULT
Any one or more of the following described events shall constitute an event
of default (an "Event of Default") under this Agreement:
5.01 NON-PAYMENT. The Borrower shall fail to pay any payment of principal
or interest or any other sum referred to in this Agreement within five (5)
business days after notice from the Bank that the same is past due.
5.02 PERFORMANCE UNDER THIS AND OTHER AGREEMENTS. The Borrower shall fail
in any material respect to perform or observe any term, covenant or agreement
contained in this Agreement or in any document, instrument or agreement
evidencing or relating to borrowed money owed to the Bank by the Borrower,
including Letter of Credit obligations, and any such failure (exclusive of the
payment of money to the Bank under this Agreement or under any other document,
instrument or agreement evidencing or relating to borrowed money owed to the
Bank by the Borrower, including Letter of Credit obligations, which failure
shall constitute and be an Event of Default if not paid within five (5) business
days after notice from the Bank that the same is past due) shall continue for
more than 30 days after written notice from the Bank to the Borrower of the
existence and character of such Event of Default or should the default require
more than thirty (30) days to correct, the Borrower does not commence corrective
action within the thirty (30) days and actively pursue such corrective action.
5.03 REPRESENTATIONS AND WARRANTIES; FINANCIAL STATEMENTS. Any
representation or warranty made by the Borrower under or in connection with this
Agreement or any financial statement given by the Borrower or any Guarantor
shall prove to have been incorrect in any material respect when made or given or
when deemed to have been made or given.
5.04 INSOLVENCY. The Borrower shall: (i) become insolvent or be unable
to pay its debts as they mature; (ii) make an assignment for the benefit of
creditors or to an agent authorized to liquidate any substantial amount of its
properties or assets; (iii) file a voluntary petition in bankruptcy or seeking
reorganization or to effect a plan or other arrangement with creditors; (iv)
file an answer admitting the material allegations of an involuntary petition
relating to bankruptcy or reorganization or join in any such petition; (v)
become or be adjudicated a bankrupt; (vi) apply for or consent to the
appointment of, or consent that an order be made, appointing any receiver,
custodian or trustee for itself or any of its properties, assets or businesses;
or (vii) any receiver, custodian or trustee shall have been appointed for all or
a substantial part of its properties, assets or businesses and shall not be
discharged within 30 days after the date of such appointment.
5.05 EXECUTION. Any writ of execution or attachment or any judgment lien
shall be issued against any property of the Borrower and shall not be discharged
or bonded against or released within 30 days after the issuance or attachment of
such writ or lien.
-5-
<PAGE>
5.06 SUSPENSION. The Borrower shall voluntarily suspend the transaction
of business or allow to be suspended, terminated, revoked or expired any permit,
license or approval of any governmental body necessary to conduct the Borrower's
business as now conducted.
5.07 CHANGE IN OWNERSHIP. There shall occur a sale, transfer, disposition
or encumbrance (whether voluntary or involuntary), or an agreement shall be
entered into to do so, with respect to more than 10% of the issued and
outstanding capital stock of the Borrower.
SECTION VI
REMEDIES ON DEFAULT
Upon the occurrence of any Event of Default, the Bank may, at its sole
election, without demand and upon only such notice as may be required by law:
6.01 ACCELERATION. Declare any or all of the Borrower's indebtedness
owing to the Bank, whether under this Agreement or under any other document,
instrument or agreement for borrowed money, immediately due and payable, whether
or not otherwise due and payable.
6.02 CEASE EXTENDING CREDIT. Cease issuing Letters of Credit for the
account of the Borrower under this Agreement or under any other agreement now
existing or hereafter entered into between the Borrower and the Bank.
6.03 REQUIRE PAYMENT. Require the Borrower to pay immediately to the
Bank, for application against drawings under any outstanding Letters of Credit,
the outstanding principal amount of any such Letters of Credit which have not
expired. Any portion of the amount so paid to the Bank which is not applied to
satisfy draws under any such Letters of Credit or any other obligations of the
Borrower to the Bank shall be repaid to the Borrower without interest.
6.04 TERMINATION. Terminate this Agreement as to any future obligation of
the Bank without affecting the Borrower's obligations to the Bank or the Bank's
rights and remedies under this Agreement or under any other document, instrument
or agreement for borrowed money.
6.05 NON-EXCLUSIVITY OF REMEDIES. Exercise one or more of the Bank's
rights set forth herein or seek such other rights or pursue such other remedies
as may be provided by law, in equity or in any other agreement now existing or
hereafter entered into between the Borrower and the Bank for borrowed money, or
otherwise.
SECTION VII
MISCELLANEOUS PROVISIONS
7.01 DEFAULT INTEREST RATE. The Borrower shall pay to the Bank interest
on any indebtedness or amount payable under this Agreement and pursuant to the
terms of the Application, from the date that such indebtedness was demanded to
be due until paid in full, at a rate which is 2% in excess of the Bank's
Reference Rate, which is defined as, a variable rate equivalent to an index for
a variable interest rate which is quoted, published or announced from time to
time by Bank as its reference rate (and as to which loans may be made by Bank,
at, below or above such reference rate).
7.02 ACCOUNTING AND OTHER TERMS. All references to financial statements,
assets, liabilities and similar accounting terms not specifically defined in
this Agreement shall mean such financial statements prepared and such terms
determined in accordance with generally accepted accounting principles
consistently applied or in accordance with statutory accounting principles where
appropriate. Except where otherwise specified in this Agreement, all financial
data submitted or to be submitted to the Bank pursuant to this Agreement shall
be prepared in accordance with generally accepted accounting principles
consistently applied or in accordance with statutory accounting principles where
appropriate. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the California Uniform Commercial Code.
7.03 RELIANCE. Each warranty, representation, covenant and agreement
contained in this Agreement shall be conclusively presumed to have been relied
upon by the Bank regardless of any investigation made or information possessed
by the Bank and shall be cumulative and in addition to any other warranties,
representations, covenants or agreements which the Borrower shall now or
hereafter give, or cause to be given, to the Bank.
-6-
<PAGE>
7.04 ATTORNEY'S FEES. In the event of any action in relation to this
Agreement or any document, instrument or agreement executed with respect to,
evidencing or securing the indebtedness hereunder, the prevailing party, in
addition to all other sums to which it may be entitled, shall be entitled to
reasonable attorneys' fees.
7.05 NOTICES. All notices, payments, requests, information and demands
which either party hereto may desire, or may be required to give or make to the
other party shall be given or made to such party by hand delivery or through
deposit in the United States mail, postage prepaid, by overnight courier, or by
Western Union telegram, addressed to the address set forth below such party's
signature to this Agreement or to such other address as may be specified from
time to time in writing by either party to the other.
7.06 WAIVER. Neither the failure nor delay by the Bank in exercising any
right hereunder or under any document, instrument or agreement mentioned herein
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right hereunder or under any document, instrument or agreement mentioned
herein preclude other or further exercise thereof or the exercise of any other
right; nor shall any waiver of any right or default hereunder or under any other
document, instrument or agreement mentioned herein constitute a waiver of any
other right or default or constitute a waiver of any other default of the same
or any other term or provision.
7.07 CONFLICTING PROVISIONS. To the extent that any of the terms or
provisions contained in this Agreement are inconsistent with those contained in
any other document, instrument or agreement executed pursuant hereto, the terms
and provisions contained herein shall control. Otherwise, such provisions shall
be considered cumulative.
7.08 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the Borrower and the Bank and their respective
successors and assigns, except that the Borrower shall not have the right to
assign its rights hereunder or any interest herein without the Bank's prior
written consent. The Bank may sell, assign or grant participations in all or
any portion of its rights and benefits hereunder. The Borrower agrees that, in
connection with any such sale, grant or assignment, the Bank may deliver to the
prospective buyer, participant or assignee financial statements and other
relevant information relating to the Borrower.
7.09 JURISDICTION. This Agreement, the Application, and any documents,
instruments or agreements mentioned or referred to herein shall be governed by
and construed according to the laws of the State of California except as
otherwise specifically provided herein with respect to certain Letters of
Credit.
7.10 HEADINGS. The headings set forth herein are solely for the purpose
of identification and have no legal significance.
7.11 ENTIRE AGREEMENT. This Agreement and any applications for the
Letters of Credit shall constitute the entire and complete understanding of the
parties with respect to the transactions contemplated hereunder. All previous
conversations, memoranda and writings between the parties or pertaining to the
transactions contemplated hereunder that are not
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
-7-
<PAGE>
incorporated or referenced in this Agreement or any applications for the Letters
of Credit are superseded hereby.
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto
as of the date first hereinabove written.
BANK: BORROWER:
SANWA BANK CALIFORNIA ZENITH INSURANCE COMPANY
By: \John C. Hyche\ By: \Stanley R. Zax\
---------------------------------- ------------------------------------
Title: Vice President Title: Chairman of the Board and
----------------------------- President
--------------------------------
Address:
Insurance and Financial Services W8-6
601 S. Figueroa Street 21255 Califa Street
Los Angeles, CA 90017 Woodland Hills, CA 91367
-8-
<PAGE>
EXHIBIT A: ATTACHMENT TO LETTER OF CREDIT APPLICATION (ID-100S)
(Any State Except California & Louisiana)
Applicant : Zenith Insurance Company Amount: ____________________________*
LETTER OF CREDIT WHEN ISSUED TO BE WORDED AS FOLLOWS, QUOTE:
------
Date: _______________________ Sanwa Bank California
International Department #3560
Irrevocable Clean Standby Letter 601 S. Figueroa Street (W6-1)
of Credit No. ________________ Los Angeles, CA 90017
Beneficiary:
________________________________________________________________________*
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
Expiry Date / Place: __________________________________________* / in Los
Angeles at our counters
We have established this clean, irrevocable, and unconditional Standby Letter of
Credit in your favor as beneficiary for drawings up to U.S. $ __________________
_____________________________* , effective immediately. This letter of credit is
issued, presentable and payable at our office at Sanwa Bank California,
International Department #3560, 601 South Figueroa St.(W6-1), Los Angeles,
California 90017 and expires with our close of business on _____________________
____________________________________________________*. Except when the amount
of this letter of credit is increased, this credit can not be modified or
revoked without your consent.
The term "Beneficiary" includes any successor by operation of law of the named
Beneficiary including without limitation any such liquidator, rehabilitator,
receiver or conservator. Drawings by any liquidator, rehabilitator, receiver,
or conservator shall be for the benefit of all the Beneficiary's policyholders.
We hereby undertake with you to honor your sight draft(s) drawn on us under and
in compliance with this credit, indicating our Credit No.___________________,
for all or any part of this credit upon presentation of your draft drawn on us
at our office specified in paragraph one on or before the expiration date hereof
or any automatically extended expiration date when accompanied by this original
Letter of Credit.
Except as expressly stated herein, this undertaking is not subject to any
agreement, requirement, or qualification. The obligation of Sanwa Bank
California under this Credit is the individual obligation of Sanwa Bank
California and is in on way contingent upon reimbursement with respect thereto,
or upon our ability to perfect any lien, security interest or any other
reimbursement.
This Letter of Credit is deemed to be automatically extended without amendment
for one year from the expiration date or any future expiration date, unless
thirty (30) or more days prior to any such expiration date, Sanwa Bank
California notifies you at the above addresses by registered mail, certified
mail, or courier service that this letter of credit will not be renewed for any
such additional period.
This Letter of Credit is subject to and governed by the Laws of the State of
______________________* and the Uniform Customs and Practice for Documentary
Credits ("UCP") of the International Chamber of Commerce in effect on the date
of the issuance hereof and in the event of any conflict the laws of
_______________________* will control. If this credit expires during an
interruption of business as described in Article 19 of UCP 400 or Article 17 of
UCP 500, the Bank hereby specifically agrees to effect payment if this Credit
is drawn against within 30 days after bank's resumption of business.
For identification/information purposes only without affecting the terms of the
Letter of Credit, beneficiary's state of Domicile is ______________________
_________________________________________* . UNQUOTE.
_________________________________ ___________________________________________
Account Officer - Sanwa Bank Authorized Signature - Zenith Insurance
California Company
* Must be completed and in agreement with Application for Standby Letter of
Credit (ID-100S)
-9-
<PAGE>
AGREEMENT OF REINSURANCE
NO. 7832
between
GENERAL REINSURANCE CORPORATION
a Delaware corporation
having its principal offices at
Financial Centre
695 East Main Street P.O. Box 10350
Stamford, Connecticut 06904-2350
(herein referred to as the "Reinsurer")
and
CALFARM INSURANCE COMPANY
Sacramento, California
ZENITH INSURANCE COMPANY
Woodland Hills, California
ZNAT INSURANCE COMPANY
Woodland Hills, California
Their Quota Share Reinsurers
(herein referred to as the "Company")
- - -------------------------------------------------------------------------------
In consideration of the promises set forth in this Agreement, the parties agree
as follows:
ARTICLE I - SCOPE OF AGREEMENT
As a condition precedent to the Reinsurer's obligations under this
Agreement, the Company shall cede to the Reinsurer the business described in
this Agreement, and the Reinsurer shall accept such business as reinsurance
from the Company.
ARTICLE II - PARTIES TO THE AGREEMENT
This Agreement is solely between the Company and the Reinsurer. When more
than one Company is named as a party to this Agreement, the first Company named
shall be the agent of the other companies as to all matters pertaining to this
Agreement. Performance of the obligations of each party under this Agreement
shall be rendered solely to the other party.
<PAGE>
However, if the Company becomes insolvent, the liability of the Reinsurer shall
be modified to the extent set forth in the article entitled INSOLVENCY OF THE
COMPANY. In no instance shall any insured of the Company or any claimant
against an insured of the Company have any rights under this Agreement.
ARTICLE III - LIMIT AND RETENTION
The Reinsurer shall pay to the Company, with respect to each loss event,
95% of the amount of ultimate net loss in excess of the Company Retention of
$5,000,000, but not exceeding the Limit of Liability of the Reinsurer of 95% of
the next $10,000,000 of ultimate net loss with respect to such loss event nor
95% of $20,000,000 with respect to all loss events commencing during the term of
this Agreement.
The Company shall retain for its own account, with respect to each loss
event, the entire amount of the Company Retention plus 5% of the next
$10,000,000 ultimate net loss in excess of the Company Retention.
ARTICLE IV - TERM
This Agreement shall apply to loss events which commence during the period
from September 1, 1993, to August 31, 1994, both dates inclusive, at the place
of the loss event.
This Agreement shall not apply to loss events which commence prior to the
effective date of this Agreement and continue during any part of the term of
this Agreement. However, this Agreement shall apply to loss events which
commence during and continue beyond the term of this Agreement and in the
computation of the liability of the Reinsurer the entire ultimate net loss
resulting from each such loss event shall be included, subject to the
limitations set forth in paragraph (f) of the article entitled DEFINITIONS.
- 2 -
<PAGE>
ARTICLE V - DEFINITIONS
(a) PROPERTY BUSINESS
This term shall mean direct property business written by the Company,
as defined, and classified in its Association Edition of Annual
Statement for Fire and Casualty Companies as:
(1) Fire;
(2) Allied lines (including extended coverage);
(3) Farmowners multiple peril (applicable property and inland marine
lines only);
(4) Homeowners multiple peril (applicable property and inland marine
lines only);
(5) Commercial multiple peril (applicable property lines only);
(6) Blanket personal property;
(7) Inland marine;
(8) Earthquake;
(9) Garagekeepers legal liability (comprehensive only);
on risks located in the United States of America.
(b) COMPANY RETENTION
This term shall mean the amount the Company shall retain for its own
account; however, this requirement shall be satisfied if this amount
is retained by the Company or its affiliated companies under common
management or common ownership.
(c) ULTIMATE NET LOSS
This term shall mean all payments by the Company of claims and losses,
within the limits of liability or amounts of insurance of the policies
of the Company, and adjustment expense, after deduction of salvage and
other recoveries and after deduction of amounts due from all other
reinsurance other than the reinsurance pooling arrangement between
Zenith Insurance Company, CalFarm Insurance Company and ZNAT Insurance
Company,
- 3 -
<PAGE>
whether collectible or not. If the Company becomes insolvent, this
definition shall be modified to the extent set forth in the article
entitled INSOLVENCY OF THE COMPANY.
(d) ADJUSTMENT EXPENSE
This term shall mean expenditures by the Company in the direct defense
of claims and as allocated to an individual claim or loss, other than
for office expenses and for the salaries and expenses of employees of
the Company or of any subsidiary or related or wholly owned company of
the Company, made in connection with the disposition of a claim, loss,
or legal proceeding including investigation, negotiation, and legal
expenses; court costs; statutory penalties; prejudgment interest or
delayed damages; and interest on any judgment or award.
(e) PREJUDGMENT INTEREST OR DELAYED DAMAGES
This term shall mean interest or damages added to a settlement,
verdict, award, or judgment based on the amount of time prior to the
settlement, verdict, award, or judgment whether or not made part of
the settlement, verdict, award, or judgment.
(f) LOSS EVENT
This term shall mean an occurrence or series of occurrences arising
out of one event, provided that only the claims and losses sustained
by the Company during the continuous period of 168 hours selected by
the Company shall be used in the determination of the ultimate net
loss; and only one such continuous period of 168 hours shall apply
with respect to one event.
Additionally, with respect to riot or civil commotion and other causes
of loss resultant therefrom, only claims and losses sustained by the
Company on risks within the limits of one city, town, or village or
immediately adjacent thereto shall be used in the determination of
ultimate net loss.
(g) SUBJECT NET EARNED PREMIUM
This term shall mean the direct premium earned by the Company during
the term of the Agreement on the business reinsured hereunder, after
deduction of return premiums and after deduction of premiums paid for
reinsurance which inures to the benefit of the Reinsurer.
For purposes of this Agreement, subject net earned premium shall be
deemed to be 100% of the premiums on the lines of business reinsured
- 4 -
<PAGE>
hereunder. However, on the following lines, which are the so-called
package policies (only when written on an indivisible premium basis)
subject net earned premium shall be determined as:
(1) 88% of the total homeowners and boatowners policy premiums;
(2) 80% of the total farmowners and commercial multiple peril
policy premiums.
When any of the above policies is written on a divisible premium
basis, the actual premium for the lines of business included in this
Agreement shall be used rather than the percentage stated above.
ARTICLE VI - EXCLUSIONS
This Agreement shall not apply to:
(a) All lines of business not specifically covered hereunder;
(b) Reinsurance assumed by the Company other than reinsurance assumed by
Zenith Insurance Company from CalFarm Insurance Company or ZNAT
Insurance Company; all liability assumed under excess of loss
insurance or reinsurance contracts;
(c) All business excluded by the Pools, Associations and Syndicates
Exclusion Clause attached hereto and made a part hereof,
(d) Policies issued under retrospectively rated plans; policies issued
with a deductible of more than $100,000, provided this exclusion shall
not apply to policies which customarily provide a percentage
deductible on the perils of earthquake or windstorm;
(e) Liability coverages under homeowners, farmowners and commercial
package policies; i.e., comprehensive personal, farm or commercial
liability, medical payments and physical damage to property of others;
(f) All casualty, fidelity, surety, forgery, boiler and machinery,
burglary or glass business or coverages (not applicable to Section I
coverages of multiple peril policies);
(g) The following risks, coverages and kinds of insurance:
(1) Accident and health;
- 5 -
<PAGE>
(2) Animal or livestock mortality policies; however, this exclusion
shall not apply to fowl;
(3) Automobile; however, this exclusion shall not apply with respect
to garagekeepers legal liability coverages;
(4) Aviation;
(5) Commercial hulls or hulls other than outboard motorboat and sail-
boat coverages;
(6) Credit warranty, financial guarantees;
(7) First class or registered mail;
(8) Gas or oil drilling risks;
(9) Growing or standing crops, other than fire insurance; all crop
hail insurance or any other coverages provided in connection
therewith;
(10) Jewelers and furriers block;
(11) Negative film syndicates;
(12) Ocean marine;
(13) Railroad Property;
(h) Flood, surface water, waves, tidal water or tidal waves, overflow of
streams or other bodies of water or spray from any of the
foregoing, all whether driven by wind or not, unless written in
conjunction with the peril of fire of similar amount;
(i) Mortgage impairment insurance and similar kinds of insurance,
howsoever styled, providing coverage to an insured with respect to its
mortgagee interest in property or its owner interest in foreclosed
property;
(j) Difference in conditions insurance and similar kinds of insurance,
howsoever styled;
(k) Consequential, punitive, exemplary or compensatory damages resulting
from an action taken by any policyholder, insured or assignee,
against the Company for alleged or actual bad faith, fraud or
negligence in the settlement of a claim;
- 6 -
<PAGE>
(l) Risks which have a total insurable value of more than $250,000,000;
(m) War risk, bombardment, invasion, insurrection, rebellion, revolution,
military or usurped power, or confiscation by order of any government or
public authority, as excluded under a standard policy containing a standard
war exclusion clause;
(n) Nuclear incident per the Nuclear Incident Exclusion - Physical Damage
Reinsurance (NMA 1119) attached hereto;
(o) Liability of the Company arising from its participation or membership,
whether voluntary or involuntary, in any insolvency fund, including any
guarantee fund, association, pool, plan or other facility which provides
for the assessment of, payment by, or assumption by the Company of a part
or the whole of any claim, debt, charge, fee or other obligations of an
insurer, or its successors or assigns, which has been declared insolvent by
any authority having jurisdiction;
(p) Loss of, damage to, or failure of, or consequential loss resulting
therewith (including but not limited to earnings and extra expense) of
satellites, spacecraft, and launch vehicles, including cargo and freight
carried therein, in all phases of operation (including but not limited to
manufacturing, transit, pre-launch, launch, and in-orbit);
(q) Coverage afforded by ISO Pollutant Clean Up and Removal Additional
Aggregate Limit of Insurance Endorsement CP 04 07 (Ed. 4/86) or as subse-
quently amended or by any similar endorsement affording such coverage;
(r) Pollutant clean up or removal under any commercial property policy or
any inland marine policy written by the Company which does not contain ISO
Changes-Pollutants Endorsement CP 01 86 (Ed. 4/86) or as subsequently
amended; however, this exclusion does not apply to any risk located in a
jurisdiction which has not approved the Insurance Services Office exclusion
or where other regulatory constraints prohibit the Company from attaching
such endorsement. If the Company elects to file an endorsement independent
of ISO, such endorsement will be deemed a suitable substitute provided the
Company has submitted the wording to the Reinsurers and received the
Reinsurers' prior approval.
ARTICLE VII - REINSURANCE PREMIUM
As a condition precedent to the Reinsurer's obligations hereunder, the
Company shall pay to the Reinsurer 2.30% of the subject net earned premium
during the term of the Agree-
- 7 -
<PAGE>
ment, subject to a minimum reinsurance premium of $880,000 and deposit
reinsurance premium of $1,100,000.
ARTICLE VIII - AUTOMATIC REINSTATEMENT
The Limit of Liability of the Reinsurer under this Agreement with respect
to each loss event shall be reduced by an amount equal to the amount of
liability paid by the Reinsurer, but that part of the liability of the Reinsurer
that is so reduced shall be automatically reinstated from the commencement of
the loss event for which payment is made; however, the Limit of Liability of the
Reinsurer with respect to all loss events commencing during the term of this
Agreement shall not exceed the amount set forth in the article entitled LIMIT
AND RETENTION. In consideration of this automatic reinstatement, the Company
shall pay to the Reinsurer for each amount reinstated an additional reinsurance
premium that shall be pro rata of the reinsurance premium set forth in the
article entitled REINSURANCE PREMIUM. The additional reinsurance premium shall
be the product of the reinsurance premium set forth in the article entitled
REINSURANCE PREMIUM, multiplied by the amount of the reinstated Limit of
Liability of the Reinsurer divided by the total Limit of Liability of the
Reinsurer for each loss event irrespective of the time of the commencement of
the loss event.
The reinsurance premium so developed for each amount reinstated shall be in
addition to the reinsurance premium set forth in the article entitled
REINSURANCE PREMIUM.
ARTICLE IX - MANAGEMENT OF CLAIMS AND LOSSES
The Company shall investigate and settle or defend all claims and losses.
When requested by the Reinsurer, the Company shall permit the Reinsurer, at the
expense of the Reinsurer, to be associated with the Company in the defense or
control of any claim, loss, or legal proceeding which involves or is likely to
involve the Reinsurer. All payments of claims or losses by the Company within
the terms and limits of its policies which are within the limits
- 8 -
<PAGE>
set forth in the applicable Agreement shall be binding on the Reinsurer, subject
to the terms of this Agreement.
ARTICLE X - RECOVERIES
The Company shall pay to or credit the Reinsurer with the Reinsurer's
portion of any recovery obtained from salvage, subrogation, or other insurance.
Adjustment expenses for recoveries shall be deducted from the amount recovered.
The Reinsurer shall be subrogated to the rights of the Company to the
extent of its loss payments to the Company. The Company agrees to enforce its
rights of salvage, subrogation, and its rights against insurers or to assign
these rights to the Reinsurer.
Recoveries shall be distributed to the parties in an order inverse to that
in which their liabilities accrued.
ARTICLE XI - ERRORS AND OMISSIONS
The Reinsurer shall not be relieved of liability because of an error or
accidental omission of the Company in reporting any claim or loss or any
business reinsured under this Agreement, provided that the error or omission is
rectified promptly after discovery. The Reinsurer shall be obligated only for
the return of the premium paid for business reported but not reinsured under
this Agreement.
ARTICLE XI - REPORTS AND REMITTANCES
(a) REINSURANCE PREMIUM
On or before the beginning of each calendar quarter, the Company shall
pay to the Reinsurer one quarter of the deposit reinsurance premium
stipulated in the article entitled REINSURANCE PREMIUM.
On or before October 15, 1994, the Company shall render to the Rein-
surer a report of the subject net earned premium by the Company during
the term of this Agreement. The Company shall calculate the
reinsurance
- 9 -
<PAGE>
premium thereon, shall balance such amount against the deposit
reinsurance premium previously paid, and the difference due either
party, subject to the minimum reinsurance premium, shall be remitted
promptly.
(b) CLAIMS AND LOSSES
The Company shall report promptly to the Reinsurer each loss event
which, in the Company's opinion, may involve the reinsurance afforded
by this Agreement. The Company shall advise the Reinsurer of the
estimated amount of ultimate net loss in connection with each loss
event and of any subsequent changes in such estimate.
Upon receipt of a definitive statement of ultimate net loss from the
Company, the Reinsurer shall promptly pay to the Company the
Reinsurer's portion of ultimate net loss. Any subsequent changes in
the amount of ultimate net loss shall be reported by the Company to
the Reinsurer and the amount due either party shall be remitted
promptly.
(c) P.C.S. CATASTROPHE BULLETINS
The Company shall furnish to the Reinsurer, upon request, the
following information with respect to each catastrophe set forth in
the Catastrophe Bulletins published by the Property Claim Services:
(1) The preliminary estimate of the amount recoverable from the
Reinsurer;
(2) The Reinsurer's portion of claims, losses, and adjustment expense
paid less salvage recovered during each calendar quarter;
(3) The Reinsurer's portion of reserves for claims, losses, and
adjustment expense at the end of each calendar quarter.
(d) GENERAL
In addition to the reports required by (a), (b), and (c) above, the
Company shall furnish such other information as may be required by the
Reinsurer for the completion of the Reinsurer's quarterly and annual
statements and internal records.
All reports shall be rendered on forms or in format acceptable to the
Company and the Reinsurer.
- 10-
<PAGE>
ARTICLE XIII - REINSURANCE OVER THIS AGREEMENT
The Company shall advise the Reinsurer of any reinsurance of the Company
that would apply over and beyond the Limit of Liability of the Reinsurer under
this Agreement.
ARTICLE XIV - SPECIAL ACCEPTANCES
Business not within the terms of this Agreement may be submitted to the
Reinsurer for special acceptance and, if accepted by the Reinsurer, shall be
subject to all of the terms of this Agreement except as modified by the special
acceptance.
ARTICLE XV - RESERVES AND TAXES
The Reinsurer shall maintain the required reserves as to the Reinsurer's
portion of unearned premium, claims, losses, and adjustment expense.
The Company shall be liable for all premium taxes on premium ceded to the
Reinsurer under this Agreement. If the Reinsurer is obligated to pay any
premium taxes on this premium, the Company shall reimburse the Reinsurer;
however, the Company shall not be required to pay taxes twice on the same
premium.
ARTICLE XVI - OFFSET
The Company or the Reinsurer may offset any balance, whether on account of
premium, commission, claims or losses, adjustment expense, salvage, or
otherwise, due from one party to the other under this Agreement or under any
other agreement heretofore or hereafter entered into between the Company and the
Reinsurer.
ARTICLE XVII - INSPECTION OF RECORDS
The Company shall allow the Reinsurer to inspect, at reasonable times, the
records of the Company relevant to the business reinsured under this Agreement,
including Company
- 11 -
<PAGE>
files concerning claims, losses, or legal proceedings which involve or are
likely to involve the Reinsurer.
Article XVIII - ARBITRATION
Any unresolved difference of opinion between the Reinsurer and the Company
shall be submitted to arbitration by three arbitrators. One arbitrator shall be
chosen by the Reinsurer, and one shall be chosen by the Company. The third
arbitrator shall be chosen by the other two arbitrators within ten (10) days
after they have been appointed. If the two arbitrators cannot agree upon a third
arbitrator, each arbitrator shall nominate three persons of whom the other shall
reject two. The third arbitrator shall then be chosen by drawing lots. If either
party fails to choose an arbitrator within thirty (30) days after receiving the
written request of the other party to do so, the latter shall choose both
arbitrators, who shall choose the third arbitrator. The arbitrators shall be
impartial and shall be active or retired persons whose principal occupation is
or was as an officer of property and casualty insurance or reinsurance
companies.
The party requesting arbitration (the "Petitioner") shall submit its brief
to the arbitrators within thirty (30) days after notice of the selection of the
third arbitrator. Upon receipt of the Petitioner's brief, the other party (the
"Respondent") shall have thirty (30) days to file a reply brief. On receipt of
the Respondent's brief, the Petitioner shall have twenty (20) days to file a
rebuttal brief. Respondent shall have twenty (20) days from the receipt of
Petitioner's rebuttal brief to file its rebuttal brief. The arbitrators may
extend the time for filing of briefs at the request of either party.
The arbitrators are relieved from judicial formalities and, in addition to
considering the rules of law and the customs and practices of the insurance and
reinsurance business, shall make their award with a view to effecting the intent
of this Agreement. The decision of the majority shall be final and binding upon
the parties. The costs of arbitration, including the fees
- 12 -
<PAGE>
of the arbitrators, shall be shared equally unless the arbitrators decide other-
wise. The arbitration shall be held at the times and places agreed upon by the
arbitrators.
Article XIX - INSOLVENCY OF THE COMPANY
In the event of the insolvency of the Company, the reinsurance proceeds
will be paid to the Company or the liquidator immediately upon demand, with
reasonable provision for verification, on the basis of the amount of the claim
allowed in the insolvency proceeding without diminution by reason of the
inability of the Company to pay all or part of the claim.
The Reinsurer shall be given written notice of the pendency of each claim
against the Company on the policy(ies) reinsured hereunder within a reasonable
time after such claim is filed in the insolvency proceedings. The Reinsurer
shall have the right to investigate each such claim and to interpose, at its own
expense, in the proceeding where such claim is to be adjudicated, any defenses
which it may deem available to the Company or its liquidator. The expense thus
incurred by the Reinsurer shall be chargeable, subject to court approval,
against the insolvent Company as part of the expense of liquidation to the
extent of a proportionate share of the benefit which may accrue to the Company
solely as a result of the defense undertaken by the Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
- 13 -
<PAGE>
executed in duplicate,
this 30th day of August, 1993,
GENERAL REINSURANCE CORPORATION
/s/
Vice President
Attest /s/
and this day of , 19 .
CALFARM INSURANCE COMPANY
ZENITH INSURANCE COMPANY
ZNAT INSURANCE COMPANY
Attest: /s/
- 14 -
Agreement No. 7832
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE -
PHYSICAL DAMAGE - REINSURANCE - USA
(1) This Agreement does not cover any loss or liability accruing to the Company
directly or indirectly and whether as Insurer or Reinsurer, from any Pool of
Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear
Energy risks.
(2) Without in any way restricting the operation of paragraph (1) of this
Clause, this Agreement does not cover any loss or liability accruing to the
Company, directly or indirectly and whether as insurer or Reinsurer, from any
insurance against Physical Damage (including business interruption or
consequential loss arising out of such Physical Damage) to:
(i) Nuclear reactor power plants including all auxiliary
property on the site, or
(ii) Any other nuclear reactor installation, including
laboratories handling radioactive materials in connection
with reactor installations, and "critical facilities" as
such, or
(iii) Installations for fabricating complete fuel elements or for
processing substantial quantities of "special nuclear
material", and for reprocessing, salvaging, chemically
separating, storing or disposing of "spent" nuclear fuel or
waste materials, or
(iv) Installations other than those listed in paragraph (2) (iii)
above using substantial quantities of radioactive isotopes
or other products of nuclear fission.
(3) Without in any way restricting the operations of paragraphs (1) and (2)
hereof, this Agreement does not cover any loss or liability by radioactive
contamination accruing to the Company, directly or indirectly, and whether as
Insurer or Reinsurer, from any insurance on property which is on the same site
as a nuclear reactor power plant or other nuclear installation and which
normally would be insured therewith except that this paragraph (3) shall not
operate:
(a) where the Company does not have knowledge of such nuclear reactor
power plant or nuclear installation, or
(b) where said insurance contains a provision excluding coverage for
damage to property caused by or resulting from radioactive
contamination, however caused. However on and after 1st January
1960 this sub-paragraph (b) shall only apply provided the said
radioactive contamination exclusion provision has been approved
by the Governmental Authority having jurisdiction thereof.
(4) Without in any way restricting the operations of paragraphs (1),(2) and (3)
hereof, this Agreement does not cover any loss or liability by radioactive
contamination accruing to the Company, directly or indirectly, and whether as
Insurer or Reinsurer, when such radioactive contamination is a named hazard
specifically insured against.
(5) It is understood and agreed that this Clause shall not extend to risks
using radioactive isotopes in any form where the nuclear exposure is not
considered by the Company to be the primary hazard.
(6) The term "special nuclear material" shall have the meaning given it in the
Atomic Energy Act of 1954 or by any law amendatory thereof.
(7) The Company to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
Note: Without in any way restricting the operation of paragraph (1) hereof, it
is understood and agreed that:
(a) all policies issued by the Company on or before 31st December
1957 shall be free from the application of the other provisions
of this Clause until expiry date or 31st December 1960 whichever
first occurs whereupon all the provisions of this Clause shall
apply.
(b) with respect to any risk located in Canada policies issued by the
Company on or before 31st December 1958 shall be free from the
application of the other provisions of this Clause until expiry
date or 31st December 1960 whichever first occurs whereupon all
the provisions of this Clause shall apply.
N.M.A. 1119
<PAGE>
POOLS, ASSOCIATIONS, AND SYNDICATES
EXCLUSION CLAUSE
SECTION A
Excluding:
All business derived directly or indirectly from any Pool, Association, or
Syndicate which maintains its own reinsurance facilities.
Any Pool or Scheme (whether voluntary or mandatory) formed after March 1,
1968, for the purpose of insuring Property whether on a country-wide basis
or in respect of designated areas. This exclusion shall not apply to
so-called Automobile Insurance Plans or other Pools formed to provide
coverage for Automobile Physical Damage.
SECTION B
It is agreed that business written by the Company for the same perils,
which is known at the time to be insured by, or in excess of underlying amounts
placed in the following Pools, Associations, or Syndicates, whether by way of
insurance or reinsurance, is excluded hereunder.
Industrial Risk Insurers, Associated Factory Mutuals, Improved Risk
Mutuals.
Any Pool, Association, or Syndicate formed for the purpose of writing Oil,
Gas, or Petro-Chemical Plants and/or Oil or Gas Drilling Pigs.
United States Aircraft Insurance Group, Canadian Aircraft Insurance Group,
Associated Aviation Underwriters, American Aviation Underwriters.
Section B does not apply:
(a) Where the Total Insured Value over all interests of the risk in
question is less than $250,000,000.
(b) To interests traditionally underwritten as Inland Marine or Stock
and/or Contents written on a Blanket basis.
(c) To Contingent Business Interruption, except when the Company is aware
that the key location is known at the time to be insured in any Pool,
Association, or Syndicate named above, other than as provided for under
Section B(a).
<PAGE>
(d) To risks as follows: Offices, Hotels, Apartments, Hospitals,
Educational Establishments, Public Utilities (Other than Railroad
Schedules) and Builders Risks on the classes of risks specified in the
subsection (d) only.
SECTION C
NEVERTHELESS the Reinsurer specifically agrees that liability accruing to
the Company for its participation in: The Florida Residential Property and
Casualty Joint Underwriting Association shall not be excluded or:
(1) The following so-called "Coastal Pools"
ALABAMA INSURANCE UNDERWRITING ASSOCIATION
FLORIDA WINDSTORM UNDERWRITING ASSOCIATION
LOUISIANA INSURANCE UNDERWRITING ASSOCIATION
MISSISSIPPI WINDSTORM UNDERWRITING ASSOCIATION
NORTH CAROLINA INSURANCE UNDERWRITING
ASSOCIATION
SOUTH CAROLINA WINDSTORM AND HAIL
UNDERWRITING ASSOCIATION
TEXAS CATASTROPHE PROPERTY INSURANCE
ASSOCIATION
and
(2) All "Fair Plan" and "Rural Risk Plan" business,
for all perils otherwise protected hereunder shall not be excluded herefrom,
except that this Agreement does not include any increase in such liability
resulting from (1) the inability of any other participant in such "Coastal Pool"
and/or "Fair Plan" and/or "Rural Risk Plan" to meet its liability; or (2) any
claim against such "Coastal Pool" and/or "Fair Plan" and/or "Rural Risk Plan",
or any participant therein, including the Company, whether by way of subrogation
or otherwise, brought by or on behalf of any insolvency fund.
<PAGE>
ENDORSEMENT NO 1
Attached to and made a part of
AGREEMENT NO. 7832
between
GENERAL REINSURANCE CORPORATION
and
CALFARM INSURANCE COMPANY
ZENITH INSURANCE COMPANY
ZNAT INSURANCE COMPANY
IT IS MUTUALLY AGREED that, retroactive to the inception of this Agreement
sub-paragraph (g) of Article V - DEFINITIONS is amended to read as follows:
"(g) SUBJECT NET EARNED PREMIUM
This term shall mean the direct premium earned by the Company during
the term of the Agreement on the business reinsured hereunder, after
deduction of return premiums and after deduction of premiums paid for
reinsurance which inures to the benefit of the Reinsurer.
For purposes of this Agreement, subject net earned premium shall be
deemed to be 100% of the premiums on the lines of business reinsured
hereunder. However, on the following lines, which are the so-called
package policies (only when written on an indivisible premium basis)
subject net earned premium shall be determined as:
(1) 88% of the total homeowners and boatowners policy premiums;
(2) 65% of the total farmowners and commercial multiple peril policy
premiums.
When any of the above policies is written on a divisible premium
basis, the actual premium for the lines of business included in this
Agreement shall be used rather than the percentage stated above."
IN WITNESS WHEREOF, the parties hereto have caused this Endorsement to be
<PAGE>
executed in duplicate,
this 24th day of February , 19 ,
GENERAL REINSURANCE CORPORATION
/s/
Vice President
Attest: /s/
and this 7th day of March ,19
CALFARM INSURANCE COMPANY
ZENITH INSURANCE COMPANY
ZNAT INSURANCE COMPANY
Attest: /s/
- 2 -
Endorsement No. 1
Agreement No. 7832
<PAGE>
AGREEMENT OF REINSURANCE
No. 623-0005
between
AMERICAN RE-INSURANCE COMPANY
(herein referred to as the "Reinsurer")
and
CALFARM INSURANCE COMPANY
Sacramento, California
ZENITH INSURANCE COMPANY
Woodland Hills, California
ZNAT INSURANCE COMPANY
Woodland Hills, California
Their Quota Share Reinsurers
(herein referred to as the "Company")
In consideration of the promises set forth in this Agreement, the parties agree
as follows:
ARTICLE I - SCOPE OF AGREEMENT
As a condition precedent to the Reinsurer's obligations under this
Agreement, the Company shall cede to the Reinsurer the business described in
this Agreement, and the Reinsurer shall accept such business as reinsurance from
the Company.
ARTICLE II - PARTIES TO THE AGREEMENT
This Agreement is solely between the Company and the Reinsurer. When more
than one Company is named as a party to this Agreement, the first Company named
shall be the agent of the other companies as to all matters pertaining to this
Agreement. Performance of the obligations of each party under this Agreement
shall be rendered solely to the other party. However, if the Company becomes
insolvent, the liability of the Reinsurer shall be modified to the extent set
forth in the article entitled INSOLVENCY OF THE COMPANY. In no
<PAGE>
instance shall any insured of the Company or any claimant against an insured of
the Company have any rights under this Agreement.
ARTICLE III - LIMIT AND RETENTION
The Reinsurer shall pay to the Company, with respect to each loss event,
95% of the amount of ultimate net loss in excess of the sum of-
(a) The Company Retention of $5,000,000; and
(b) The Fist Excess Cover of $10,000,000;
but not exceeding the Limit of Liability of the Reinsurer of 95% of the next
$5, 000, 000 of ultimate net loss with respect to such loss event nor 95% of
$10,000,000 with respect to all loss events commencing during the term of this
Agreement.
The Company shall retain net for its own account, with respect to each loss
event, the entire amount of the Company Retention plus 5% of such ultimate net
loss
ARTICLE IV - TERM
This Agreement shall apply to loss events which commence during the period
from September 1, 1993 to August 31, 1994, both dates inclusive, at the place of
the loss event.
This Agreement shall not apply to loss events which commence prior to the
effective date of this Agreement and continue during any part of the term of
this Agreement. However, this Agreement shall apply to loss events which
commence during and continue beyond the term of this Agreement and in the
computation of the liability of the Reinsurer the entire ultimate net loss
resulting from each such loss event shall be included, subject to the
limitations set forth in paragraph (f) of the article entitled DEFINITIONS.
2
<PAGE>
ARTICLE V - DEFINITIONS
(a) Property Business
This term shall mean direct property business written by the Company,
as defined, and classified in its Association Edition of Annual
Statement for Fire and Casualty Companies as:
(1) Fire;
(2) Allied lines (including extended coverage);
(3) Farmowners multiple peril (applicable property and inland marine
lines only);
(4) Homeowners multiple peril (applicable property and inland marine
lines only);
(5) Commercial multiple peril (applicable property lines only);
(6) Blanket personal property;
(7) Inland marine;
(8) Earthquake;
(9) Garagekeepers legal liability (comprehensive only);
on risks located in the United States of America.
(b) COMPANY RETENTION
This term shall mean the amount the Company shall retain for its own
account; however, this requirement shall be satisfied if this amount
is retained by the Company or its affiliated companies under common
management or common ownership.
(c) ULTIMATE NET LOSS
This term shall mean all payments by the Company of claims and losses,
within the limits of liability or amounts of insurance of the policies
of the Company, and adjustment expense, after deduction of salvage and
other recoveries and after deduction of amounts due from all other
reinsurance other than the reinsurance pooling arrangement between
Zenith Insurance Company, CalFarm Insurance Company and ZNAT Insurance
Company,
-3-
<PAGE>
whether collectible or not. If the Company becomes insolvent, this
definition shall be modified to the extent set forth in the article
entitled INSOLVENCY OF THE COMPANY.
(d) ADJUSTMENT EXPENSE
This term shall mean expenditures by the Company in the direct defense
of claims and as allocated to an individual claim or loss, other than
for office expenses and for the salaries and expenses of employees of
the Company or of any subsidiary or related or wholly owned company of
the Company, made in connection with the disposition of a claim, loss,
or legal proceeding including investigation, negotiation, and legal
expenses; court costs, statutory penalties; prejudgment interest or
delayed damages; and interest on any judgment or award.
(e) PREJUDGMENT INTEREST OR DELAYED DAMAGES
This term shall mean interest or damages added to a settlement,
verdict, award, or judgment based on the amount of time prior to the
settlement, verdict, award, or judgment whether or not made part of
the settlement, verdict, award, or judgment.
(f) LOSS EVENT
This term shall mean an occurrence or series of occurrences arising
out of one event, provided that only the claims and losses sustained
by the Company during the continuous period of 168 hours selected by
the Company shall be used in the determination of the ultimate net
loss; and only one such continuous period of 168 hours shall apply
with respect to one event.
Additionally, with respect to riot or civil commotion and other causes
of loss resultant therefrom, only claims and losses sustained by the
Company on risks within the limits of one city, town, or village
immediately adjacent thereto shall be used in the determination of
ultimate net loss.
(g) SUBJECT NET EARNED PREMIUM
This term shall mean the direct premium earned by the Company during
the term of the Agreement on the business reinsured hereunder after
deduction of return premiums and after deduction of premiums paid for
reinsurance which inures to the benefit of the Reinsurer.
For purposes of this Agreement, subject net earned premium shall be
deemed to be 100% of the premiums on the lines of business reinsured
4
<PAGE>
hereunder. However, on the following lines, which are the so-called
package policies (only when written on an indivisible premium basis)
subject net earned premium shall be determined as:
(1) 88% of the total homeowners and boatowners policy premiums;
(2) 80% of the total farmowners and commercial multiple peril policy
premiums.
When any of the above policies is written on a divisible premium basis,
the actual premium for the lines of business included in this Agreement
shall be used rather than the percentage stated above.
ARTICLE VI - EXCLUSIONS
This Agreement shall not apply to:
(a) All lines of business not specifically covered hereunder;
(b) Reinsurance assumed by the Company other than reinsurance assumed
by Zenith Insurance Company from CalFarm Insurance Company or ZNAT
Insurance Company; all liability assumed under excess of loss
insurance or reinsurance contracts;
(c) All business excluded by the Pools, Associations and Syndicates
Exclusion Clause attached hereto and made a part hereof;
(d) Policies issued under retrospectively rated plans; policies issued
with a deductible of more than $100,000, provided this exclusion
shall not apply to policies which customarily provide a percentage
deductible on the perils of earthquake or windstorm;
(e) Liability coverages under homeowners, farmowners and commercial
package policies; i.e., comprehensive personal, farm or commercial
liability, medical payments and physical damage to property of
others;
(f) All casualty, fidelity, surety, forgery, boiler and machinery,
burglary or glass business or coverages (not applicable to Section
I coverages of multiple peril policies);
(g) The following risks, coverages and kinds of insurance:
(1) Accident and health;
- 5 -
<PAGE>
(2) Animal or livestock mortality policies; however, this
exclusion shall not apply to fowl;
(3) Automobile; however, this exclusion shall not apply with
respect to garagekeepers legal liability coverages;
(4) Aviation;
(5) Commercial hulls or hulls other than outboard motorboat and
sailboat coverages;
(6) Credit warranty, financial guarantees;
(7) First class or registered mail;
(8) Gas or oil drilling risks;
(9) Growing or standing crops, other than fire insurance; all
crop hail insurance or any other coverages provided in
connection therewith;
(10) Jewelers and furriers block;
(11) Negative film syndicates;
(12) Ocean marine;
(13) Railroad Property;
(h) Flood, surface water, waves, tidal water or tidal waves, overflow
of streams or other bodies of water or spray from any of the
foregoing, all whether driven by wind or not, unless written in
conjunction with the peril of fire of similar amount;
(i) Mortgage impairment insurance and similar kinds of insurance,
howsoever styled, providing coverage to an insured with respect to
its mortgagee interest in property or its owner interest in
foreclosed property;
(j) Difference in conditions insurance and similar kinds of insurance,
howsoever styled;
(k) Consequential, punitive, exemplary or compensatory damages
resulting from an action taken by any policyholder, insured or
assignee, against the Company for alleged or actual bad faith,
fraud or negligence in the settlement of a claim;
- 6 -
<PAGE>
(l) Risks which have a total insurable value of more than
$250,000,000;
(m) War risk, bombardment, invasion, insurrection, rebellion,
revolution, military or usurped power, or confiscation by order of
any government or public authority, as excluded under a standard
of policy containing a standard war exclusion clause;
(n) Nuclear incident per the Nuclear Incident Exclusion - Physical
Damage Reinsurance (NMA 1119) attached hereto;
(o) Liability of the Company arising from its participation or
membership, whether voluntary or involuntary, in any insolvency
fund, including any guarantee fund, association, pool, plan or
other facility which provides for the assessment of, payment by,
or assumption by the company of a part or the whole of any claim,
debt, charge, fee or other obligations of an insurer, or its
successors or assigns, which has been declared insolvent by any
authority having jurisdiction;
(p) Loss of, damage to, or failure of, or consequential loss resulting
therewith (including but not limited to earnings and extra
expense) of satellites, spacecraft, and launch vehicles, including
cargo and freight carried therein, in all phases of operation
(including but not limited to manufacturing, transit, prelaunch,
launch, and in-orbit);
(q) Coverage afforded by ISO Pollutant Clean Up and Removal Additional
Aggregate Limit of Insurance Endorsement CP 04 07 (Ed. 4/86) or as
subsequently amended or by any similar endorsement affording such
coverage;
(r) Pollutant clean up or removal under any commercial property policy
or any inland marine policy written by the Company which does not
contain ISO Changes-Pollutants Endorsement CP 01 86 (Ed. 4/86) or
as subsequently amended; however, this exclusion does not apply to
any risk located in a jurisdiction which has not approved the
Insurance Services Office exclusion or where other regulatory
constraints prohibit the Company from attaching such endorsement.
If the Company elects to file an endorsement independent of ISO,
such endorsement will be deemed a suitable substitute provided the
company has submitted the wording to the Reinsurers and received
the Reinsurer's prior approval.
ARTICLE VII - REINSURANCE PREMIUM
As a condition precedent to the Reinsurer's obligations hereunder, the
Company shall pay to the Reinsurer .695% of the subject net earned premium
during the term of the Agree-
-7-
<PAGE>
ment, subject to a minimum reinsurance premium of $265,000 and deposit
reinsurance premium of $332,000.
ARTICLE VIII - AUTOMATIC REINSTATEMENT
The Limit of Liability of the Reinsurer under this Agreement with
respect to each loss event shall be reduced by an amount equal to the amount
of liability paid by the Reinsurer, but that part of the liability of the
Reinsurer that is so reduced shall be automatically reinstated from the
commencement of the loss event for which payment is made; however, the Limit
of Liability of the Reinsurer with respect to all loss events commencing
during the term of this Agreement shall not exceed the amount set forth in
the article entitled LIMIT AND RETENTION. In consideration of this
automatic reinstatement, the Company shall pay to the Reinsurer for each
amount reinstated an additional reinsurance premium that shall be pro rata
of the reinsurance premium set forth in the article entitled REINSURANCE
PREMIUM. The additional reinsurance premium shall be the product of the
reinsurance premium set forth in the article entitled REINSURANCE PREMIUM,
multiplied by the amount of the reinstated Limit of Liability of the
Reinsurer divided by the total Limit of Liability of the reinsurer for each
loss event irrespective of the time of the commencement of this loss event.
The reinsurance premium so developed for each amount reinstated shall
be in addition to the reinsurance premium set forth in the article entitled
REINSURANCE PREMIUM.
ARTICLE IX - MANAGEMENT OF CLAIMS AND LOSSES
The Company shall investigate and settle or defend all claims and
losses. When requested by the Reinsurer, the Company shall permit the
Reinsurer, at the expense of the Reinsurer, to be associated with the
Company in the defense or control of any claim, loss, or legal proceeding
which involves or is likely to involve the Reinsurer. All payments of
claims or losses of the Company within the terms and limits of its policies
which are within the limits
- 8 -
<PAGE>
set forth in the applicable Agreement shall be binding on the Reinsurer,
subject to the terms of this Agreement.
ARTICLE X - RECOVERIES
The Company shall pay to or credit the Reinsurer with the Reinsurer's
portion of any recovery obtained from salvage, subrogation, or other
insurance. Adjustment expenses for recoveries shall be deducted from the
amount recovered.
The Reinsurer shall be subrogated to the rights of the Company to the
extent of its loss payments to the Company. The Company agrees to enforce
its rights of salvage, subrogation, and its rights against insurers or to
assign these rights to the Reinsurer.
Recoveries shall be distributed to the parties in an order inverse to
that in which their liabilities accrued.
ARTICLE XI - ERRORS AND OMISSIONS
The Reinsurer shall not be relieved of liability because of an error or
accidental omission of the Company in reporting any claim or loss or any
business reinsured under this Agreement, provided that the error or omission
is rectified promptly after discovery. The Reinsurer shall be obligated
only for the return of the premium paid for business reported but not
reinsured under this Agreement.
ARTICLE XII - REPORTS AND REMITTANCES
(a) REINSURANCE PREMIUM
On or before the beginning of each calendar quarter, the Company
shall pay to the Reinsurer one quarter of the deposit reinsurance
premium stipulated in the article entitled REINSURANCE PREMIUM
On or before October 15, 1994, the Company shall render to the
Reinsurer a report of the subject net earned premium by the
Company during the term of this Agreement. The Company shall
calculate the reinsurance
-9-
<PAGE>
premium thereon, shall balance such amount against the deposit
reinsurance premium previously paid, and the difference due either
party, subject to the minimum reinsurance premium, shall be
remitted promptly.
(b) CLAIMS AND LOSSES
The Company shall report promptly to the Reinsurer each loss event
which, in the Company's opinion, may involve the reinsurance
afforded by this Agreement. The Company shall advise the
Reinsurer of the estimated amount of ultimate net loss in
connection with each loss event and of any subsequent changes in
such estimate.
Upon receipt of a definitive statement of ultimate net loss from
the Company, the Reinsurer shall promptly pay to the Company the
Reinsurer's portion of ultimate net loss. Any subsequent changes
in the amount of ultimate net loss shall be reported by the
Company to the Reinsurer and the amount due either party shall be
remitted promptly.
(c) P.C.S. CATASTROPHE BULLETINS
The Company shall furnish to the Reinsurer, upon request, the
following information with respect to each catastrophe set forth
in the Catastrophe Bulletins published by the Property Claim
Services:
(1) The preliminary estimate of the amount recoverable from the
Reinsurer;
(2) The Reinsurer's portion of claims, losses, and adjustment
expense paid less salvage recovered during each calendar
quarter;
(3) The Reinsurer's portion of reserves for claims, losses, and
adjustment expense at the end of each calendar quarter.
(d) GENERAL
In addition to the reports required by (a), (b), and (c) above,
the Company shall furnish such other information as may be
required by the Reinsurer for the completion of the Reinsurer's
quarterly and annual statements and internal records.
All reports shall be rendered on forms or in format acceptable to the
Company and the Reinsurer.
- 10 -
<PAGE>
ARTICLE XIII - REINSURANCE OVER THIS AGREEMENT
The Company shall advise the Reinsurer of any reinsurance of the
Company that would apply over and beyond the Limit of Liability of the
Reinsurer under this Agreement.
ARTICLE XIV - SPECIAL ACCEPTANCES
Business not within the terms of this Agreement may be submitted to the
Reinsurer for special acceptance and, if accepted by the Reinsurer, shall be
subject to all of the terms of this Agreement except as modified by the
special acceptance.
ARTICLE XV - RESERVES AND TAXES
The Reinsurer shall maintain the required reserves as to the
Reinsurer's portion of unearned premium, claims, losses, and adjustment
expense.
The Company shall be liable for all premium taxes on premium ceded to
the Reinsurer under this Agreement. If the Reinsurer is obligated to pay
any premium taxes on this premium the Company shall reimburse the Reinsurer;
however, the Company shall not be required to pay taxes twice on the same
premium.
ARTICLE XVI - OFFSET
The Company or the Reinsurer may offset any balance, whether on account
of premium, commission, claims or losses, adjustment expense, salvage, or
otherwise, due from one party to the other under this Agreement or under any
other agreement heretofore or hereafter entered into between the Company and
the Reinsurer.
ARTICLE XVII - INSPECTION OF RECORDS
The Company shall allow the Reinsurer to inspect, at reasonable times,
the records of the Company relevant to the business reinsured under this
Agreement, including Company
- 11 -
<PAGE>
files concerning claims, losses, or legal proceedings which involve or are
likely to involve the Reinsurer.
ARTICLE XVIII - ARBITRATION
Any unresolved difference of opinion between the Reinsurer and the
Company shall be submitted to arbitration by three arbitrators. One
arbitrator shall be chosen by the Reinsurer, and one shall be chosen by the
Company. The third arbitrator shall be chosen by the other two arbitrators
within ten (10) days after they have been appointed. If the two arbitrators
cannot agree upon a third arbitrator, each arbitrator shall nominate three
persons of whom the other shall reject two. The third arbitrator shall then
be chosen by drawing lots. If either party fails to choose an arbitrator
within thirty (30) days after receiving the written request of the other
party to do so, the latter shall choose both arbitrators, who shall choose
the third arbitrator. The arbitrators shall be impartial and shall be
active or retired persons whose principal occupation is or was as an officer
of property and casualty insurance or reinsurance companies.
The party requesting arbitration (the "Petitioner") shall submit its
brief to the arbitrators within thirty (30) days after notice of the
selection of the third arbitrator. Upon receipt of the Petitioner's brief,
the other party (the "Respondent") shall have thirty (30) days to file a
reply brief On receipt of the Respondent's brief, the Petitioner shall have
twenty (20) days to file a rebuttal brief. Respondent shall have twenty
(20) days from the receipt of Petitioner's rebuttal brief to file its
rebuttal brief. The arbitrators may extend the time for filing of briefs at
the request of either party.
The arbitrators are relieved from judicial formalities and, in addition
to considering the rules of law and the customs and practices of the
insurance and reinsurance business, shall make their award with a view to
effecting the intent of this Agreement. The decision of the majority shall
be final and binding upon the parties. The costs of arbitration, including
the fees
- 12 -
<PAGE>
of the arbitrators, shall be shared equally unless the arbitrators decide
otherwise. The arbitration shall be held at the times and places agreed
upon by the arbitrators.
ARTICLE XIX - INSOLVENCY OF THE COMPANY
In the event of the insolvency of the Company, the reinsurance proceeds
will be paid to the Company or the liquidator immediately upon demand, with
reasonable provision for verification, on the basis of the amount of the
claim allowed in the insolvency proceeding without diminution by reason of
the inability of the Company to pay all or part of the claim.
The Reinsurer shall be given written notice of the pendency of each
claim against the Company on the policy(ies) reinsured hereunder within a
reasonable time after such claim is filed in the insolvency proceedings.
The Reinsurer shall have the right to investigate each such claim and to
interpose, at its own expense, in the proceeding where such claim is to be
adjudicated, any defenses which it may deem available to the Company or its
liquidator. The expense thus incurred by the Reinsurer shall be chargeable,
subject to court approval, against the insolvent Company as part of the
expense of liquidation to the extent of a proportionate share of the benefit
which may accrue to the Company solely as a result of the defense undertaken
by the Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be
- 13 -
<PAGE>
executed in duplicate,
this 1st day of Sept., 1993
AMERICAN RE-INSURANCE COMPANY
By:_______________________
Stephen C. Pogue
Vice President
ATTEST:
_______________________
Michael E. Shevlin, Vice President
and this 1st day of Sept., 1993
CALFARM INSURANCE COMPANY
ZENITH INSURANCE COMPANY
ZNAT INSURANCE COMPANY
By:______________________
John J. Tickner
ATTEST Senior Vice President
_______________________
-14-
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE -
PHYSICAL DAMAGE - REINSURANCE - USA
(1) This Agreement does not cover any loss or liability accruing to the
Company directly or indirectly and whether as Insurer or Reinsurer, from any
Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or
Nuclear Energy risks.
(2) Without in any way restricting the operation of paragraph (1) of this
Clause, this Agreement does not cover any loss or liability accruing to the
Company, directly or indirectly and whether as Insurer or Reinsurer, from
any insurance against Physical Damage (including business interruption or
consequential loss arising out of such Physical Damage) to:
(i) Nuclear reactor power plants including all auxiliary property
on the site, or
(ii) Any other nuclear reactor installation, including
laboratories handling radioactive materials in connection
with reactor installations, and "critical facilities" as
such, or
(iii) Installations for fabricating complete fuel elements or for
processing substantial quantities of "special nuclear
material", and for reprocessing, salvaging, chemically
separating, storing or disposing of "spent" nuclear fuel or
waste materials, or
(iv) Installations other than those listed in paragraph (2) (iii)
above using substantial quantities of radioactive isotopes or
other products of nuclear fission.
(3) Without in any way restricting the operations of paragraphs (1) and (2)
hereof, this Agreement does not cover any loss or liability by radioactive
contamination accruing to the Company, directly or indirectly, and whether
as Insurer or Reinsurer, from any r,e on property which is on the same site
as a nuclear reactor power plant or other nuclear installation and which
normally would be filed therewith except that this paragraph (3) shall not
operate:
(a) where the Company does not have knowledge of such nuclear
reactor power plant or nuclear installation, or
(b) where said insurance contains a provision excluding coverage
for damage to property caused by or resulting from
radioactive contamination, however caused. However on and
after 1st January 1960 this sub-paragraph (b) shall only
apply provided the said radioactive contamination exclusion
provision has been approved by the Government, Authority
having jurisdiction thereof.
(4) Without in any way restricting the operations of paragraphs (1),(2) and
(3) hereof, this Agreement does not cover any loss or liability by
radioactive contamination accruing to the Company, directly or indirectly,
and whether as Insurer or Reinsurer, when such radioactive contamination is
a named hazard specifically insured against.
(5) It is understood and agreed that this Clause shall not extend to risks
using radioactive isotopes in any form where the nuclear exposure is not
considered by the Company to be the primary hazard.
(6) The term "special nuclear material" shall have the meaning given it in
the Atomic Energy Act of 1954 or by any law amendatory thereof.
(7) The Company to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
Note: Without in any way restricting the operation of paragraph (1) hereof,
it is understood and agreed that:
(a) all policies issued by the Company on or before 31st December
1957 shall be free from the application of the other
provisions of this Clause until expiry date or 31st December
1960 whichever first occurs whereupon all the provisions of
this Clause shall apply.
(b) with respect to any risk located in Canada policies issued by
the Company on or before 31st December 1958 shall be free from
the application of the other provisions of this Clause until
expiry date or 31st December 1960 whichever first occurs
whereupon all the provisions of this Clause shall apply.
<PAGE>
POOLS, ASSOCIATIONS, AND SYNDICATES
EXCLUSION CLAUSE
SECTION A
Excluding:
All business derived directly or indirectly from any Pool, Association,
or Syndicate which maintains its own reinsurance facilities.
Any Pool or Scheme (whether voluntary or mandatory) formed after March
1, 1968, for the purpose of insuring Property whether on a country-wide
basis or in respect of designated areas. This exclusion shall not
apply to so-called Automobile Insurance Plans or other Pools formed to
provide coverage for Automobile Physical Damage.
SECTION B
It is agreed that business written by the Company for the same perils,
which is known at the time to be insured by, or in excess of underlying
amounts placed in the following Pools, Associations, or Syndicates, whether
by way of insurance or reinsurance, is excluded hereunder.
Industrial Risk Insurers, Associated Factory Mutuals, Improved Risk
Mutuals.
Any Pool, Association, or Syndicate formed for the purpose of writing
Oil, Gas, or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs.
United States Aircraft Insurance Group, Canadian Aircraft
Insurance Group, Associated Aviation Underwriters, American Aviation
Underwriters.
Section B does not apply:
(a) Where the Total Insured Value over all interests of the risk in
question is less than $250,000,000.
(b) To interests traditionally underwritten as Inland Marine or Stock
and/or Contents written on a Blanket basis.
(c) To Contingent Business Interruption, except when the Company is
aware that the key location is known at the time to be insured in
any Pool, Association or Syndicate named above, other than as
provided for under Section B(a).
<PAGE>
(d) To risks as follows: Offices, Hotels, Apartments, Hospitals,
Educational Establishments, Public Utilities (Other than Railroad
Schedules) and Builders Risks on the classes of risks specified in
the subsection (d) only.
SECTION C
NEVERTHELESS the Reinsurer specifically agrees that liability accruing
to the Company for its participation in: The Florida Residential Property
and Casualty Joint Underwriting Association shall not be excluded or:
(1) The following so-called "Coastal Pools"
ALABAMA INSURANCE UNDERWRITING ASSOCIATION
FLORIDA WINDSTORM UNDERWRITING ASSOCIATION
LOUISIANA INSURANCE UNDERWRITING ASSOCIATION
MISSISSIPPI WINDSTORM UNDERWRITING ASSOCIATION
NORTH CAROLINA INSURANCE UNDERWRITING
ASSOCIATION
SOUTH CAROLINA WINDSTORM AND HAIL
UNDERWRITING ASSOCIATION
TEXAS CATASTROPHE PROPERTY INSURANCE
ASSOCIATION
and
(2) All "Fair Plan" and "Rural Risk Plan" business,
for all perils otherwise protected hereunder shall not be excluded herefrom,
except that this Agreement does not include any increase in such liability
resulting from (1) the inability of any other participant in such "Coastal
Pool" and/or "Fair Plan" and/or "Rural Risk Plan" to meet its liability; or
(2) any claim against such "Coastal Pool" and/or "Fair Plan" and/or "Rural
Risk Plan", or any participant therein, including the Company, whether by
way of subrogation or otherwise, brought by or on behalf of any insolvency
fund.
<PAGE>
AGREEMENT OF REINSURANCE
No. 0079460
between
EMPLOYERS REINSURANCE CORPORATION
(herein referred to as the "Reinsurer")
and
CALFARM INSURANCE COMPANY
Sacramento, California
ZENITH INSURANCE COMPANY
Woodland Hills, California
ZNAT INSURANCE COMPANY
Woodland Hills, California
Their Quota Share Reinsurers
(herein referred to as the "Company")
-------------------------------------------------------------------------------
In consideration of the promises set forth in this Agreement, the parties agree
as follows:
ARTICLE I - SCOPE OF AGREEMENT
As a condition precedent to the Reinsurer's obligations under this
Agreement, the Company shall cede to the Reinsurer the business described in
this Agreement, and the Reinsurer shall accept such business as reinsurance from
the Company.
ARTICLE II - PARTIES TO THE AGREEMENT
This Agreement is solely between the Company and the Reinsurer. When more
than one Company is named as a party to this Agreement, the first Company named
shall be the agent of the other companies as to all matters pertaining to this
Agreement. Performance of the obligations of each party under this Agreement
shall be rendered solely to the other party. However, if the Company becomes
insolvent, the liability of the Reinsurer shall be modified to the extent set
forth in the article entitled INSOLVENCY OF THE COMPANY. In no
<PAGE>
instance shall any insured of the Company or any claimant against an insured of
the Company have any rights under this Agreement.
ARTICLE III - LIMIT AND RETENTION
The Reinsurer shall pay to the Company, with respect to each loss event,
95% of the amount of ultimate net loss in excess of the sum of:
(a) The Company Retention of $5,000,000; and
(b) The First Excess Cover of $10,000,000; and
(c) The Second Excess Cover of $5,000,000,
but not exceeding the Limit of Liability of the Reinsurer of 95% of the next
$5,000,000 of ultimate net loss with respect to such loss event nor 95% of
$10,000,000 with respect to all loss events commencing during the term of this
Agreement.
The Company shall retain net for its own account, with respect to each loss
event, the entire amount of the Company Retention plus the remaining 5% of such
ultimate net loss.
ARTICLE IV - TERM
This Agreement shall apply to loss events which commence during the period
from September 1, 1993 to August 31, 1994, both dates inclusive, at the place of
the loss event.
This Agreement shall not apply to loss events which commence prior to the
effective date of this Agreement and continue during any part of the term of
this Agreement. However, this Agreement shall apply to loss events which
commence during and continue beyond the term of this Agreement and in the
computation of the liability of the Reinsurer the entire ultimate net loss
resulting from each such loss event shall be included, subject to the
limitations set forth in paragraph (f) of the article entitled DEFINITIONS.
2
<PAGE>
ARTICLE V - DEFINITIONS
(a) PROPERTY BUSINESS
This term shall mean direct property business written by the Company,
as defined, and classified in its Association Edition of Annual
Statement for Fire and Casualty Companies as:
(1) Fire;
(2) Allied lines (including extended coverage);
(3) Farmowners multiple peril (applicable property and inland
marine lines only);
(4) Homeowners multiple peril (applicable property and inland
marine lines only);
(5) Commercial multiple peril (applicable property lines only);
(6) Blanket personal property;
(7) Inland marine;
(8) Earthquake;
(9) Garagekeepers legal liability (comprehensive only);
on risks located in the United States of America.
(b) COMPANY RETENTION
This term shall mean the amount the Company shall retain for its
own account; however, this requirement shall be satisfied if this
amount is retained by the Company or its affiliated companies
under common management or common ownership.
(c) ULTIMATE NET LOSS
This term shall mean all payments by the Company of claims and
losses, within the limits of liability or amounts of insurance of
the policies of the Company, and adjustment expense, after
deduction of salvage and other recoveries and after deduction of
amounts due from all other reinsurance other than the reinsurance
pooling arrangement between Zenith Insurance Company, CalFarm
Insurance Company and ZNAT Insurance Company,
- 3 -
<PAGE>
whether collectible or not. If the Company becomes insolvent, this
definition shall be modified to the extent set forth in the article
entitled INSOLVENCY OF THE COMPANY.
(d) ADJUSTMENT EXPENSE
This term shall mean expenditures by the Company in the direct defense
of claims and as allocated to an individual claim or loss, other
than for office expenses and for the salaries and expenses of
employees of the Company or of any subsidiary or related or wholly
owned company of the Company, made in connection with the disposition
of a claim, loss, or legal proceeding including investigation,
negotiation, and legal expenses; court costs, statutory penalties;
prejudgment interest or delayed damages; and interest on any judgment
or award.
(e) PREJUDGMENT INTEREST OR DELAYED DAMAGES
This term shall mean interest or damages added to a settlement,
verdict, award, or judgment based on the amount of time prior to the
settlement, verdict, award, or judgment whether or not made part of
the settlement, verdict, award, or judgment.
(f) LOSS EVENT
This term shall mean an occurrence or series of occurrences arising
out of one event, provided that only the claims and losses sustained
by the Company during the continuous period of 168 hours selected by
the Company shall be used in the determination of the ultimate net
loss; and only one such continuous period of 168 hours shall apply
with respect to one event.
Additionally, with respect to riot or civil commotion and other causes
of loss resultant therefrom, only claims and losses sustained by the
Company on risks within the limits of one city, town, or village
immediately adjacent thereto shall be used in the determination of
ultimate net loss.
(g) SUBJECT NET EARNED PREMIUM
This term shall mean the direct premium earned by the Company during
the term of the Agreement on the business reinsured hereunder after
deduction of return premiums and after deduction of premiums paid for
reinsurance which inures to the benefit of the Reinsurer.
For purposes of this Agreement, subject net earned premium shall be
deemed to be 100% of the premiums on the lines of business reinsured
4
<PAGE>
hereunder. However, on the following lines, which are the so-called
package policies (only when written on an indivisible premium basis)
subject net earned premium shall be determined as:
(1) 88% of the total homeowners and boatowners policy premiums;
(2) 80% of the total farmowners and commercial multiple peril
policy premiums.
When any of the above policies is written on a divisible premium
basis, the actual premium for the lines of business included in this
Agreement shall be used rather than the percentage stated above.
ARTICLE VI - EXCLUSIONS
This Agreement shall not apply to:
(a) All lines of business not specifically covered hereunder;
(b) Reinsurance assumed by the Company other than reinsurance assumed by
Zenith Insurance Company from CalFarm Insurance Company or ZNAT
Insurance Company; all liability assumed under excess of loss
insurance or reinsurance contracts;
(c) All business excluded by the Pools, Associations and Syndicates
Exclusion Clause attached hereto and made a part hereof;
(d) Policies issued under retrospectively rated plans; policies issued
with a deductible of more than $100,000, provided this exclusion shall
not apply to policies which customarily provide a percentage
deductible on the perils of earthquake or windstorm;
(e) Liability coverages under homeowners, farmowners and commercial
package policies; i.e., comprehensive personal, farm or commercial
liability, medical payments and physical damage to property of others;
(f) All casualty, fidelity, surety, forgery, boiler and machinery,
burglary or glass business or coverages (not applicable to Section I
coverages of multiple peril policies);
(g) The following risks, coverages and kinds of insurance:
(1) Accident and health;
- 5 -
<PAGE>
(2) Animal or livestock mortality policies; however, this exclusion
shall not apply to fowl;
(3) Automobile; however, this exclusion shall not apply with respect
to garagekeepers legal liability coverages;
(4) Aviation;
(5) Commercial hulls or hulls other than outboard motorboat and
sailboat coverages;
(6) Credit warranty, financial guarantees;
(7) First class or registered mail;
(8) Gas or oil drilling risks;
(9) Growing or standing crops, other than fire insurance; all crop
hail insurance or any other coverages provided in connection
therewith;
(10) Jewelers and furriers block;
(11) Negative film syndicates;
(12) Ocean marine;
(13) Railroad Property;
(h) Flood, surface water, waves, tidal water or tidal waves, overflow of
streams or other bodies of water or spray from any of the foregoing,
all whether driven by wind or not, unless written in conjunction with
the peril of fire of similar amount;
(i) Mortgage impairment insurance and similar kinds of insurance,
howsoever styled, providing coverage to an insured with respect to its
mortgagee interest in property or its owner interest in foreclosed
property;
(j) Difference in conditions insurance and similar kinds of insurance,
howsoever styled;
(k) Consequential, punitive, exemplary or compensatory damages resulting
from an action taken by any policyholder, insured or assignee, against
the Company for alleged or actual bad faith, fraud or negligence in
the settlement of a claim;
- 6 -
<PAGE>
(l) Risks which have a total insurable value of more than $250,000,000;
(m) War risk, bombardment, invasion, insurrection, rebellion, revolution,
military or usurped power, or confiscation by order of any government
or public authority, as excluded under a standard of policy containing
a standard war exclusion clause;
(n) Nuclear incident per the Nuclear Incident Exclusion - Physical
Damage - Reinsurance (NMA 1119) attached hereto;
(o) Liability of the Company arising from its participation or membership,
whether voluntary or involuntary, in any insolvency fund, including
any guarantee fund, association, pool, plan or other facility which
provides for the assessment of, payment by, or assumption by the
company of a part or the whole of any claim, debt, charge, fee or
other obligations of an insurer, or its successors or assigns, which
has been declared insolvent by any authority having jurisdiction;
(p) Loss of, damage to, or failure of, or consequential loss resulting
therewith (including but not limited to earnings and extra expense) of
satellites, spacecraft, and launch vehicles, including cargo and
freight carried therein, in all phases of operation (including but not
limited to manufacturing, transit, prelaunch, launch, and in-orbit);
(q) Coverage afforded by ISO Pollutant Clean Up and Removal Additional
Aggregate Limit of Insurance Endorsement CP 04 07 (Ed. 4/86) or as
subsequently amended or by any similar endorsement affording such
coverage;
(r) Pollutant clean up or removal under any commercial property policy or
any inland marine policy written by the Company which does not contain
ISO Changes-Pollutants Endorsement CP 01 86 (Ed. 4/86) or as
subsequently amended; however, this exclusion does not apply to any
risk located in a jurisdiction which has not approved the Insurance
Services Office exclusion or where other regulatory constraints
prohibit the Company from attaching such endorsement. If the Company
elects to file an endorsement independent of ISO, such endorsement
will be deemed a suitable substitute provided the company has
submitted the wording to the Reinsurers and received the Reinsurer's
prior approval.
ARTICLE VII - REINSURANCE PREMIUMS
As a condition precedent to the Reinsurer's obligations hereunder, the
Company shall pay to the Reinsurer .407% of the subject net earned premium
during the term of the Agree-
7
<PAGE>
ment, subject to a minimum reinsurance premium of $175,500 and deposit
reinsurance premium of $195,000.
ARTICLE VIII - AUTOMATIC REINSTATEMENT
The Limit of Liability of the Reinsurer under this Agreement with respect
to each loss event shall be reduced by an amount equal to the amount of
liability paid by the Reinsurer, but that part of the liability of the Reinsurer
that is so reduced shall be automatically reinstated from the commencement of
the loss event for which payment is made; however, the Limit of Liability of the
Reinsurer with respect to all loss events commencing during the term of this
Agreement shall not exceed the amount set forth in the article entitled LIMIT
AND RETENTION. In consideration of this automatic reinstatement, the Company
shall pay to the Reinsurer for each amount reinstated an additional reinsurance
premium that shall be pro rata of the reinsurance premium set forth in the
article entitled REINSURANCE PREMIUM. The additional reinsurance premium shall
be the product of the reinsurance premium set forth in the article entitled
REINSURANCE PREMIUM, multiplied by the amount of the reinstated Limit of
Liability of the Reinsurer divided by the total Limit of Liability of the
reinsurer for each loss event irrespective of the time of the commencement of
this loss event.
The reinsurance premium so developed for each amount reinstated shall be in
addition to the reinsurance premium set forth in the article entitled
REINSURANCE PREMIUM.
ARTICLE IX - MANAGEMENT OF CLAIMS AND LOSSES
The Company shall investigate and settle or defend all claims and losses.
When requested by the Reinsurer, the Company shall permit the Reinsurer, at the
expense of the Reinsurer, to be associated with the Company in the defense or
control of any claim, loss, or legal proceeding which involves or is likely to
involve the Reinsurer. All payments of claims or losses of the Company within
the terms and limits of its policies which are within the limits
8
<PAGE>
set forth in the applicable Agreement shall be binding on the Reinsurer, subject
to the terms of this Agreement.
ARTICLE X - RECOVERIES
The Company shall pay to or credit the Reinsurer with the Reinsurees
portion of any recovery obtained from salvage, subrogation, or other insurance.
Adjustment expenses for recoveries shall be deducted from the amount recovered.
The Reinsurer shall be subrogated to the rights of the Company to the
extent of its loss payments to the Company. The Company agrees to enforce its
rights of salvage, subrogation, and its rights against insurers or to assign
these rights to the Reinsurer.
Recoveries shall be distributed to the parties in an order inverse to that
in which their liabilities accrued.
ARTICLE XI - ERRORS AND OMISSIONS
The Reinsurer shall not be relieved of liability because of an error or
accidental omission of the Company in reporting any claim or loss or any
business reinsured under this Agreement, provided that the error or omission is
rectified promptly after discovery. The Reinsurer shall be obligated only for
the return of the premium paid for business reported but not reinsured under
this Agreement.
ARTICLE XII - REPORTS AND REMITTANCES
(a) REINSURANCE PREMIUM
On or before the beginning of each calendar quarter, the Company shall
pay to the Reinsurer one quarter of the deposit reinsurance premium
stipulated in the article entitled REINSURANCE PREMIUM.
On or before October 15, 1994, the Company shall render to the
Reinsurer a report of the subject net earned premium by the Company
during the term of this Agreement. The Company shall calculate the
reinsurance
- 9 -
<PAGE>
premium thereon, shall balance such amount against the deposit
reinsurance premium previously paid, and the difference due either
party, subject to the minimum reinsurance premium, shall be remitted
promptly.
(b) CLAIMS AND LOSSES
The Company shall report promptly to the Reinsurer each loss event
which, in the Company's opinion, may involve the reinsurance afforded
by this Agreement. The Company shall advise the Reinsurer of the
estimated amount of ultimate net loss in connection with each loss
event and of any subsequent changes in such estimate.
Upon receipt of a definitive statement of ultimate net loss from the
Company, the Reinsurer shall promptly pay to the Company the
Reinsurer's portion of ultimate net loss. Any subsequent changes in
the amount of ultimate net loss shall be reported by the Company to
the Reinsurer and the amount due either party shall be remitted
promptly.
(c) P.C.S. CATASTROPHE BULLETINS
The Company shall furnish to the Reinsurer, upon request, the
following information with respect to each catastrophe set forth in
the Catastrophe Bulletins published by the Property Claim Services:
(1) The preliminary estimate of the amount recoverable from the
Reinsurer;
(2) The Reinsurer's portion of claims, losses, and adjustment expense
paid less salvage recovered during each calendar quarter;
(3) The Reinsurer's portion of reserves for claims, losses, and
adjustment expense at the end of each calendar quarter.
(d) GENERAL
In addition to the reports required by (a), (b), and (c) above, the
Company shall furnish such other information as may be required by the
Reinsurer for the completion of the Reinsurer's quarterly and annual
statements and internal records.
All reports shall be rendered on forms or in format acceptable to the
Company and the Reinsurer.
-10-
<PAGE>
ARTICLE XIII - REINSURANCE OVER THIS AGREEMENT
The Company shall advise the Reinsurer of any reinsurance of the Company
that would apply over and beyond the Limit of Liability of the Reinsurer under
this Agreement.
ARTICLE XIV - SPECIAL ACCEPTANCES
Business not within the terms of this Agreement may be submitted to the
Reinsurer for special acceptance and, if accepted by the Reinsurer, shall be
subject to all of the terms of this Agreement except as modified by the special
acceptance.
ARTICLE XV - RESERVES AND TAXES
The Reinsurer shall maintain the required reserves as to the Reinsurer's
portion of unearned premium, claims, losses, and adjustment expense.
The Company shall be liable for all premium taxes on premium ceded to the
Reinsurer under this Agreement. If the Reinsurer is obligated to pay any
premium taxes on this premium, the Company shall reimburse the Reinsurer;
however, the Company shall not be required to pay taxes twice on the same
premium.
ARTICLE XVI - OFFSET
The Company or the Reinsurer may offset any balance, whether on account of
premium, commission, claims or losses, adjustment expense, salvage, or
otherwise, due from one party to the other under this Agreement or under any
other agreement heretofore or hereafter entered into between the Company and the
Reinsurer.
ARTICLE XVII - INSPECTION OF RECORDS
The Company shall allow the Reinsurer to inspect, at reasonable times,
the records of the Company relevant to the business reinsured under
this Agreement, including Company
- 11 -
<PAGE>
files concerning claims, losses, or legal proceedings which involve or are
likely to involve the Reinsurer.
ARTICLE XVIII - ARBITRATION
Any unresolved difference of opinion between the Reinsurer and the Company
shall be submitted to arbitration by three arbitrators. One arbitrator shall be
chosen by the Reinsurer, and one shall be chosen by the Company. The third
arbitrator shall be chosen by the other two arbitrators within ten (10) days
after they have been appointed. If the two arbitrators cannot agree upon a
third arbitrator, each arbitrator shall nominate three persons of whom the other
shall reject two. The third arbitrator shall then be chosen by drawing lots.
If either party fails to choose an arbitrator within thirty (30) days after
receiving the written request of the other party to do so, the latter shall
choose both arbitrators, who shall choose the third arbitrator. The arbitrators
shall be impartial and shall be active or retired persons whose principal
occupation is or was as an officer of property and casualty insurance or
reinsurance companies.
The party requesting arbitration (the "Petitioner") shall submit its brief
to the arbitrators within thirty (30) days after notice of the selection of the
third arbitrator. Upon receipt of the Petitioner's brief, the other party (the
"Respondent") shall have thirty (30) days to file a reply brief. On receipt of
the Respondent's brief, the Petitioner shall have twenty (20) days to file a
rebuttal brief. Respondent shall have twenty (20) days from the receipt of
Petitioner's rebuttal brief to file its rebuttal brief. The arbitrators may
extend the time for filing of briefs at the request of either party.
The arbitrators are relieved from judicial formalities and, in addition to
considering the rules of law and the customs and practices of the insurance and
reinsurance business, shall make their award with a view to effecting the
intent of this Agreement. The decision of the majority shall be final and
binding upon the parties. The costs of arbitration, including the fees
- 12 -
<PAGE>
of the arbitrators, shall be shared equally unless the arbitrators decide
otherwise. The arbitration shall be held at the times and places agreed upon by
the arbitrators.
ARTICLE XIX - INSOLVENCY OF THE COMPANY
In the event of the insolvency of the Company, the reinsurance proceeds
will be paid to the Company or the liquidator immediately upon demand, with
reasonable provision for verification, on the basis of the amount of the claim
allowed in the insolvency proceeding without diminution by reason of the
inability of the Company to pay all or part of the claim.
The Reinsurer shall be given written notice of the pendency of each claim
against the Company on the policy(ies) reinsured hereunder within a reasonable
time after such claim is filed in the insolvency proceedings. The Reinsurer
shall have the right to investigate each such claim and to interpose, at its own
expense, in the proceeding where such claim is to be adjudicated, any defenses
which it may deem available to the Company or its liquidator. The expense thus
incurred by the Reinsurer shall be chargeable, subject to court approval,
against the insolvent Company as part of the expense of liquidation to the
extent of a proportionate share of the benefit which may accrue to the Company
solely as a result of the defense undertaken by the Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
- 13 -
<PAGE>
executed in duplicate,
this 8th day of March ,1994
EMPLOYERS REINSURANCE CORPORATION
By:______________________________
SECOND VICE PRESIDENT
Attest:
______________________
Vice President
and this 16th day of March, 1994
CALFARM INSURANCE COMPANY
ZENITH INSURANCE COMPANY
ZNAT INSURANCE COMPANY
By:________________________
SR VICE-PRES.
Attest:
______________________
14
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE -
PHYSICAL DAMAGE - REINSURANCE - USA
(1) This Agreement does not cover any loss or liability accruing to the Company
directly or indirectly and whether as Insurer or Reinsurer, from any Pool of
Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear
Energy risks.
(2) Without in any way restricting the operation of paragraph (1) of this
Clause, this Agreement does not cover any loss or liability accruing to the
Company, directly or indirectly and whether as Insurer or Reinsurer, from any
insurance against Physical Damage (including business interruption or
consequential loss arising out of such Physical Damage) to:
(i) Nuclear reactor power plants including all auxiliary property on
the site, or
(ii) Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor
installations, and "critical facilities" as such or
(iii) Installations for fabricating complete fuel elements or for
processing substantial quantities of "special nuclear material",
and for reprocessing, salvaging, chemically separating, storing
or disposing of "spent" nuclear fuel or waste materials, or
(iv) Installations other than those listed in paragraph (2) (iii)
above using substantial quantities of radioactive isotopes or
other products of nuclear fission.
(3) Without in any way restricting the operations of paragraphs (1) and
(2) hereof, this Agreement does not cover any loss or liability by radioactive
contamination accruing to the Company, directly or indirectly, and whether as
Insurer or Reinsurer, from any insurance on property which is on the same site
as a nuclear reactor power plant or other nuclear installation and which
normally would be insured therewith except that this paragraph (3) shall not
operate:
(a) where the Company does not have knowledge of such nuclear
reactor power plant or nuclear installation, or
(b) where said insurance contains a provision excluding coverage
for damage to property caused by or resulting from
radioactive contamination, however caused. However on and
after 1st January 1960 this sub-paragraph (b) shall only
apply provided the said radioactive contamination exclusion
provision has been approved by the Governmental Authority
having jurisdiction thereof.
(4) Without in any way restricting the operations of paragraphs (1),(2) and (3)
hereof, this Agreement does not cover any loss or liability by radioactive
contamination accruing to the Company, directly or indirectly, and whether as
Insurer or Reinsurer, when such radioactive contamination is a named hazard
specifically insured against.
(5) It is understood and agreed that this Clause shall not extend to risks
using radioactive isotopes in any form where the nuclear exposure is not
considered by the Company to be the primary hazard.
(6) The term "special nuclear material" shall have the meaning given it in the
Atomic Energy Act of 1954 or by any law amendatory thereof
(7) The Company to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
Note: Without in any way restricting the operation of paragraph (1) hereof, it
is understood and agreed that:
(a) all policies issued by the Company on or before 31st December
1957 shall be free from the application of the other provisions of
this Clause until expiry date or 31st December 1960 whichever first
occurs whereupon all the provisions of this Clause shall apply.
(b) with respect to any risk located in Canada policies issued by the
Company on or before 31st December 1958 shall be free from the
application of the other provisions of this Clause until expiry date
or 31st December 1960 whichever first occurs whereupon all the
provisions of this Clause shall apply.
<PAGE>
POOLS, ASSOCIATIONS, AND SYNDICATES
EXCLUSION CLAUSE
SECTION A
Excluding:
All business derived directly or indirectly from any Pool, Association, or
Syndicate which maintains its own reinsurance facilities.
Any Pool or Scheme (whether voluntary or mandatory) formed after March 1,
1968, for the purpose of insuring Property whether on a country-wide basis
or in respect of designated areas. This exclusion shall not apply to so-
called Automobile Insurance Plans or other Pools formed to provide
coverage for Automobile Physical Damage.
SECTION B
It is agreed that business written by the Company for the same perils,
which is known at the time to be insured by, or in excess of underlying amounts
placed in the following Pools, Associations, or Syndicates, whether by way of
insurance or reinsurance, is excluded hereunder.
Industrial Risk Insurers, Associated Factory Mutuals, Improved Risk
Mutuals.
Any Pool, Association, or Syndicate formed for the purpose of writing Oil,
Gas, or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs.
United States Aircraft Insurance Group, Canadian Aircraft Insurance Group,
Associated Aviation Underwriters, American Aviation Underwriters.
Section B does not apply:
(a) Where the Total Insured Value over all interests of the risk in
question is less than $250,000,000.
(b) To interests traditionally underwritten as Inland Marine or Stock
and/or Contents written on a Blanket basis.
(c) To Contingent Business Interruption, except when the Company is aware
that the key location is known at the time to be insured in any Pool,
Association, or Syndicate named above, other than as provided for
under Section B(a).
<PAGE>
(d) To risks as follows: Offices, Hotels, Apartments, Hospitals, Educational
Establishments, Public Utilities (Other than Railroad Schedules) and
Builders Risks on the classes of risks specified in the subsection (d)
only.
SECTION C
NEVERTHELESS the Reinsurer specifically agrees that liability accruing
to the Company for its participation in: The Florida Residential Property and
Casualty Joint Underwriting Association shall not be excluded or:
(1) The following so-called "Coastal Pools"
ALABAMA INSURANCE UNDERWRITING ASSOCIATION
FLORIDA WINDSTORM UNDERWRITING ASSOCIATION
LOUISIANA INSURANCE UNDERWRITING ASSOCIATION
MISSISSIPPI WINDSTORM UNDERWRITING ASSOCIATION
NORTH CAROLINA INSURANCE UNDERWRITING
ASSOCIATION
SOUTH CAROLINA WINDSTORM AND HAIL
UNDERWRITING ASSOCIATION
TEXAS CATASTROPHE PROPERTY INSURANCE
ASSOCIATION
and
(2) All "Fair Plan" and "Rural Risk Plan" business,
for all perils otherwise protected hereunder shall not be excluded herefrom,
except that this Agreement does not include any increase in such liability
resulting from (1) the inability of any other participant in such "Coastal Pool"
and/or "Fair Plan" and/or "Rural Risk Plan" to meet its liability; or (2) any
claim against such "Coastal Pool" and/or "Fair Plan" and/or "Rural Risk Plan",
or any participant therein, including the Company, whether by way of subrogation
or otherwise, brought by or on behalf of any insolvency fund.
<PAGE>
EXCESS MAJOR MEDICAL REINSURANCE AGREEMENT
(No. 0076820/Specific and Aggregate Retentions)
January 1, 1993
CALFARM LIFE INSURANCE COMPANY
Sacramento, California
<PAGE>
EXCESS MAJOR MEDICAL REINSURANCE AGREEMENT
(No. 0076820/Specific and Aggregate Retentions)
SCHEDULE
1. Reinsured: CalFarm Life Insurance Company
2. Address: Sacramento, California
3. Effective date: January 1, 1993
4. Liability period:
(a) First: Calendar year 1993
(b) Thereafter: Each calendar year with respect to which this agreement
is renewed in accordance with Article XII
5. Reinsured's policies to which this agreement applies:
(a) Group Health Master Policy No. GH-1000 (Revised 4/93) and certificates
issued thereunder covering members of California County Farm Bureaus
of the California Farm Bureau Federation, but this reinsurance
agreement does not apply to the medicare coverage provided under said
policy.
(b) Group Health Master Policy No. GH-1001 (Revised 9/89) and certificates
issued thereunder covering employees of the California County Farm
Bureau Federation and employees of the California County Farm Bureaus.
(c) Group Health Master Policy No. GH-1100 and certificates issued
thereunder covering employees of employers affiliated with the
California County Farm Bureaus of the California Farm Bureau
Federation.
(d) Group Health Master Policy No. GH-1150 and certificates issued
thereunder covering members of California County Farm Bureaus of the
California Farm Bureau Federation.
<PAGE>
6. Retention each liability period:
(a) Specific retention each person:
The first $120,000 of loss paid by the Reinsured during the liability
period
(b) Aggregate retention all persons: $2,400,000
7. Reinsurance (in excess of specific and aggregate retentions) pertaining to
each person each liability period:
100% of loss paid by the Reinsured during the liability period with respect
to the person in excess of the total amount of loss retained by the
Reinsured with respect to the person under Section A and Section B of
Article II of this agreement
8. Maximum reinsurance limit each person:
An amount equal to the maximum lifetime benefit for the person provided by
the policy less the total amount of the loss pertaining to the person
retained by the Reinsured under Section A and Section B of Article II of
this agreement and under Section A and Section B of Article II of the 1985
medical treaty between the parties hereto, and less the Corporation's
indemnity with respect to the person under the 1985 medical treaty between
the parties hereto, but in no event more than $2,900,000, even though the
person may be covered under more than one policy
9. Reinsurance premium rates:
<TABLE>
<CAPTION>
Monthly Rate
Policy Maximum Each Certificate
-------------- ----------------
<S> <C>
$1,000,000 $3.49
$2,500,000 $3.73
$3,000,000 $3.80
</TABLE>
The agreement of which this Schedule is a part is hereby executed in duplicate
by the parties hereto.
CALFARM LIFE INSURANCE EMPLOYERS REINSURANCE
COMPANY CORPORATION
/s/ SRZ /s/
- - --------------------------------- ---------------------------------
Title: Pres. Title: Second Vice President
/s/ JJT /s/
- - --------------------------------- ---------------------------------
Title: Sr. VP Title: Assistant Secretary
<PAGE>
EXCESS MAJOR MEDICAL REINSURANCE AGREEMENT
EMPLOYERS REINSURANCE CORPORATION
of
Overland Park, Kansas
(herein called the Corporation)
agrees with the Reinsured named in the Schedule made a part hereof, in
consideration of the mutual covenants hereinafter contained, as follows:
ARTICLE I
APPLICATION OF AGREEMENT. This agreement applies to loss paid by the Reinsured
during the liability period(s) of this agreement under its policies specified in
Item 5 of the Schedule in force on or issued by the Reinsured to become
effective on or after the effective date of this agreement (hereinafter called
policies), and retained by the Reinsured after cession of all other reinsurance
whether collectible or not.
The attached Insolvency Clause is hereby made a part of this agreement.
ARTICLE II
RETENTION AND REINSURANCE. SECTION A. SPECIFIC RETENTION EACH PERSON EACH
LIABILITY PERIOD. As respects loss paid by the Reinsured during each liability
period pertaining to each person, the Reinsured shall retain under this
Section A the amount thereof indicated in Item 6(a) of the Schedule. Loss paid
during each liability period pertaining to each person in excess of the amount
specified in Item 6(a) of the Schedule shall be retained by the Reinsured under
Section B of this Article until the retention for Section B is satisfied,
whereupon such loss shall be subject to indemnity under Section C of this
Article.
SECTION B. AGGREGATE RETENTION ALL PERSONS EACH LIABILITY PERIOD. As respects
loss paid by the Reinsured during each liability period pertaining to all
persons in excess of the retention applicable to each liability period for each
person required by Section A of this Article, the Reinsured shall retain under
this Section B the amount thereof indicated in Item 6(b) of the Schedule.
<PAGE>
SECTION C. REINSURANCE. As respects loss paid by the Reinsured during each
liability period pertaining to each person in excess of the retentions required
under Section A and Section B of this Article II, the Corporation hereby agrees
to indemnify the Reinsured against the percentage thereof specified in Item 7 of
the Schedule, subject to the reinsurance limit indicated in Item 8 of the
Schedule with respect to loss paid by the Reinsured during all liability periods
as pertaining to each person.
ARTICLE III
DEFINITIONS. As used in this agreement:
(a) The term "liability period" shall mean a period of time as specified in
Item 4 of the Schedule.
(b) The word "loss" shall mean only such amounts as are actually paid by the
Reinsured for medical benefits afforded under the policies, in settlement
of claims for medical benefits under the policies or in satisfaction of
judgments for medical benefits under the policies; but the word "loss"
shall not include:
(1) claim expenses or salaries paid to employees of the Reinsured;
(2) any amount paid by the Reinsured for:
(i) punitive or exemplary damages, or
(ii) compensatory damages awarded to any person,
arising out of the conduct of the Reinsured in the investigation,
trial or settlement of any claim or failure to pay or delay in payment
of any benefits under any policy; provided that, this subparagraph (2)
shall not apply if the Corporation has, in advance of any such conduct
by the Reinsured, counseled with the Reinsured and concurred in the
Reinsured's course of conduct;
(3) any statutory penalty imposed upon the Reinsured on account of any
unfair trade practice or any unfair claim practice.
(c) The word "person" shall mean any one individual who is entitled to benefits
under the policies.
- 2 -
<PAGE>
ARTICLE IV
REINSURANCE PREMIUM. The reinsurance premium due the Corporation under this
agreement shall be computed in accordance with the reinsurance premium rate(s)
specified in the Schedule. Such reinsurance premium shall not be subject to a
ceding commission to the Reinsured but shall be subject to profit commission as
hereinafter provided in Article V.
ARTICLE V
PROFIT COMMISSION. The Corporation does hereby agree to pay to the Reinsured
50% of the net profit, if any, accruing hereunder to the Corporation, calculated
with respect to each liability period in accordance with the following Schedule.
CREDITS
1. The reinsurance premium earned by the Corporation during the period,
determined in accordance with the rates specified in the Schedule.
2. Unpaid reinsurance losses at the end of the previous period.
CHARGES
1. The amount of losses paid by the Corporation pertaining to the period.
2. Unpaid reinsurance losses at the end of the period.
3. As respects the first period only, the amount of $________________
(carried forward from the 1985 medical treaty between the parties
hereto).
4. The Corporation's basic operating margin equal to 15% of Item 1 of
Credits.
5. The deficit, if any, at the end of the previous period.
The computation of profit commission for each liability period shall be made six
months after the end of the period, provided that, if losses are reported to the
Corporation more than six months after the end of the liability period in which
paid by the Reinsured, the profit commission for that liability period and all
liability periods thereafter shall be recomputed.
"Net profit" means the excess of Credits over Charges for any one liability
period.
- 3 -
<PAGE>
"Deficit" means the excess of Charges over Credits for any one liability period.
"Unpaid reinsurance losses" shall be established in accordance with the
Corporation's current actuarial formula for medical loss reserves.
If the computation for the final liability period produces a deficit which is
wholly or in part due to inadequacy or absence of loss reserves in connection
with any previous liability period, the profit commission for each liability
period will be recomputed, and losses paid shall be a charge to profits in the
liability period during which each accident took place or sickness commenced,
and the Reinsured will refund to the Corporation profit commission previously
paid by reason of such inadequacy or absence of loss reserves.
ARTICLE VI
REPORTING AND ACCOUNTING. Within 20 days after the close of each calendar
month, the Reinsured shall furnish the Corporation with a report (in a form
satisfactory to the Corporation) showing reinsurance premium due the
Corporation. The report shall also contain such other information as may be
required by the Corporation. The reinsurance premium due the Corporation shall
accompany the report.
ARTICLE VII
CLAIMS. The Reinsured agrees that it will cause to be investigated and settled
or defended all claims arising under the policies and that it will give prompt
notice to the Corporation of any event or development which, in the judgment of
the Reinsured, might result in a claim upon the Corporation hereunder, and will
forward promptly to the Corporation copies of such claim documentation as may be
requested by the Corporation.
The Corporation shall have the right, at its own expense, to participate jointly
with the Reinsured in the investigation, adjustment or defense of any claim
which, in the judgment of the Corporation, it is or might become exposed.
The Corporation shall reimburse the Reinsured or its legal representative
promptly for loss against which indemnity is herein provided, upon receipt in
the home office of the Corporation of satisfactory evidence of payment of such
loss.
- 4 -
<PAGE>
Within 35 days after the end of each calendar quarter, the Reinsured shall mail
to the Corporation a summary of the estimated values for the outstanding claims
reinsured by this agreement as of the last day of the quarter.
ARTICLE VIII
INSPECTION OF RECORDS. The Corporation may inspect the records of the Reinsured
pertaining to the policies reinsured hereunder.
ARTICLE IX
PREMIUM TAXES. The Corporation shall be under no obligation to reimburse the
Reinsured for any premium taxes paid by the Reinsured.
ARTICLE X
OFFSET. The Reinsured or the Corporation may offset any balance, whether on
account of premiums, commissions, loss or claim expenses due from one party to
the other under this agreement or under any other reinsurance agreement
heretofore or hereafter entered into between the Reinsured and the Corporation,
whether acting as assuming reinsurer or ceding company.
ARTICLE XI
ASSIGNMENTS AND CHANGES OF INTEREST. No assignment or change of the Reinsured's
interest hereunder, whether voluntary or involuntary and whether by merger or
reinsurance or its entire business with another company or otherwise, shall be
binding upon the Corporation.
ARTICLE XII
TERMINATION. This agreement shall continue in effect until January 1, 1994,
which shall be the termination date.
This agreement may be renewed by amendment executed by both parties.
This agreement does not apply to loss paid by the Reinsured on or after the
termination date of this agreement.
- 5 -
<PAGE>
INSOLVENCY CLAUSE
The ceding insurer and the reinsurer agree that, in the event of the insolvency
of the ceding insurer, as to all reinsurance made, ceded, renewed or otherwise
becoming effective after the effective date of this agreement, the reinsurance
shall be payable by the reinsurer on the basis of the amount of liability of the
ceding insurer under the contract or contracts reinsured without diminution
because of the insolvency of the ceding insurer; furthermore, that such amount
shall be paid directly to the ceding insurer or its liquidator, receiver or
other statutory successor, except as provided by Section 4118 of the Insurance
Law of New York, or except (a) where the contract specifically provides another
payee of such insurance in the event of the insolvency of the ceding insurer,
and 1b) where the reinsurer, with the consent of the direct insured or insureds,
has assumed such policy obligations of the ceding insurer as direct obligations
of the reinsurer to the payees under such policies and in substitution for the
obligations of the ceding insurer to such payee.
It is understood and agreed, however, that the obligations of the ceding company
as set forth in this reinsurance contract, including, among others, the duty to
investigate, settle and defend all claims arising under policies with respect to
which reinsurance is afforded by this agreement, shall remain unimpaired and
unaffected by the insolvency of the ceding insurer and shall be assumed by the
liquidator, receiver or statutory successor of the ceding insurer in the
liquidation or receivership proceeding and that such liquidator, receiver or
statutory successor shall give written notice to the reinsurer of the pendency
of a claim against the ceding insurer on the policy or bond reinsured within a
reasonable time after such claim is filed in the insolvency proceeding and that
during the pendency of such claim the reinsurer may investigate such claim and
interpose, at its own expense, in the proceeding where such claim is to be
adjudicated, any defense or defenses which it may deem available to the ceding
insurer, its liquidator, receiver or statutory successor. The expense thus
incurred by the reinsurer shall be chargeable, subject to court approval,
against the insolvent ceding insurer as part of the expense of liquidation to
the extent of a proportionate share of the benefit which may accrue to the
ceding insurer solely as the result of the defense undertaken or asserted by the
reinsurer.
Where two or more reinsurers are involved in the same claim and a majority in
interest elect to interpose a defense to such claim, the expense shall be
apportioned in accordance with the terms of this reinsurance agreement as though
such expense been incurred by the ceding insurer.
Nothing hereinabove set forth in this insolvency clause shall in anywise change
the relationship or status of the parties hereto, to wit, that of ceding insurer
and reinsurer, nor enlarge the obligations of either party to each other, except
as specifically hereinabove provided, to wit, to pay the statutory successor on
the basis of the amount of liability of the ceding insurer under the contract or
contracts reinsured, rather than on the basis of the actual amount of loss
(dividends) paid by the liquidator, receiver or statutory successor to allowed
claimants, nor, except as hereinabove specifically provided, shall anything in
this insolvency clause in any manner create any obligations or establish any
rights against the reinsurer in favor of any third parties or any persons not
parties to this reinsurance contract.
<PAGE>
EXHIBIT 11
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1992 1991
-------------- -------------- --------------
<S> <C> <C> <C> <C>
(A) Net income................................................. $ 53,200,000 $ 28,700,000 $ 45,901,000
-------------- -------------- --------------
-------------- -------------- --------------
Number of shares used in calculating primary earnings per
share:
Weighted average outstanding shares during the period.... 18,998,000 18,914,000 18,981,000
Additional common shares issuable under employee stock
options using the treasury stock method (Note 1):...... 299,000 4,000
-------------- -------------- --------------
(B) Average outstanding shares................................. 19,297,000 18,918,000 18,981,000
-------------- -------------- --------------
-------------- -------------- --------------
Primary earnings per share
(A) / (B).................................................. $2.76 $1.52 $2.42
Number of shares used in calculating fully diluted earnings
per share:
Weighted average outstanding shares during the period.... 18,998,000 18,914,000 18,981,000
Additional common shares issuable under employee stock
options using the treasury stock method (Note 2):...... 326,000 37,000 1,000
-------------- -------------- --------------
19,324,000 18,951,000 18,982,000
(C) Average outstanding shares.................................
-------------- -------------- --------------
-------------- -------------- --------------
Fully diluted earnings per share
(A) / (C).................................................. $2.75 $1.51 $2.42
<FN>
- - ------------------------
Notes:
(1) Based on the average quarterly market price of each period. Optioned shares
were anti-dilutive in 1991.
(2) Based on the higher of the average market price or price at the end of each
period.
</TABLE>
<PAGE>
The following table presents a reconciliation of changes in liabilities
for property-casualty losses and loss adjustment expenses for the three years
ended December 31, 1993. Additional information relating to reserve development
appears on page 38.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------
(Dollars in thousands) 1993 1992 1991
- - --------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning of year, net of reinsurance
recoverable $ 464,149 $ 440,180 $ 415,645
Incurred claims:
Current year 266,137 269,798 261,766
Prior years 9,071 19,934 3,085
--------- --------- ---------
Total incurred claims 275,208 289,732 264,851
Payments:
Current year (93,824) (88,692) (86,402)
Prior years (176,815) (177,071) (153,914)
--------- --------- ---------
Total payments (270,639) (265,763) (240,316)
--------- --------- ---------
End of year, net of reinsurance 468,718 464,149 440,180
Reinsurance recoverable on unpaid
losses 44,552 32,701
--------- --------- ---------
End of year (1) (2) $ 513,270 $ 496,850 $ 440,180
- - --------------------------------------------------------------------------
<FN>
(1) Statutory reserves are not materially different from GAAP reserves
presented above.
(2) Financial statement reserves are shown gross of reinsurance recoverable
at December 31, 1992 and 1993.
</TABLE>
1
<PAGE>
The following table represents statutory loss and expense development by
accident year.
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------
Incurred loss and loss adjustment expense (1)
Years in which reported at end of year (000 omitted)
losses were ----------------------------------------------------------------
incurred 1988 1989 1990 1991 1992 1993
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Prior to 1988 $1,100,207 $1,096,427 $1,095,266 $1,091,857 $1,090,025 $1,090,537
1988 223,146 219,375 210,856 209,182 211,472 213,905
Cumulative 1,323,353 1,315,802 1,306,122 1,301,039 1,301,497 1,304,442
1989 231,956 234,878 229,121 234,481 238,051
Cumulative 1,547,758 1,541,000 1,530,160 1,535,978 1,542,493
1990 246,088 258,356 269,321 274,281
Cumulative 1,787,088 1,788,516 1,805,299 1,816,774
1991 264,243 267,488 273,817
Cumulative 2,052,759 2,072,787 2,090,591
1992 270,162 261,510
Cumulative 2,342,949 2,352,101
1993 266,316
Ratios:
1988 63.47% 62.39% 59.97% 59.50% 60.15% 60.84%
1989 65.02 65.83 64.22 65.72 66.72
1990 65.94 69.23 72.17 73.50
1991 70.05 70.91 72.59
1992 70.73 68.47
1993 65.23
- - ----------------------------------------------------------------------------------------------
<FN>
(1) This analysis displays the accident year incurred loss and loss adjustment
expense development on a statutory basis for accident years 1988-1993 for all
property-casualty business. Data for 1985-1988 have been restated to reflect
subrogation, previously excluded in the old schedule "O" lines of business. The
total cost for all claims occurring within each annual period is shown first at
the end of that year and then annually thereafter. The total cost includes both
payments made and the estimate of future payments as of each year end. Past
development may not be an accurate indicator of future development since trends
and conditions change.
</TABLE>
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The consolidated results of operations were as follows:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------
(Dollars in thousands) 1993 1992 1991
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income, after tax, excluding health and life $ 25,475 $ 31,402 $ 35,624
Realized gains on investments, after tax 17,932 10,847 10,399
- - ---------------------------------------------------------------------------------------------------
Sub-total 43,407 42,249 46,023
- - ---------------------------------------------------------------------------------------------------
Property and casualty underwriting, after tax:
Income (loss) excluding catastrophes and Proposition 103 8,652 (4,208) 3,015
Catastrophes (1,365) (9,900) (6,930)
- - ---------------------------------------------------------------------------------------------------
Property and casualty underwriting income (loss) excluding
Proposition 103 7,287 (14,108) (3,915)
- - ---------------------------------------------------------------------------------------------------
Health and life income after tax, excluding CLIGA assessment 7,424 8,205 6,913
Interest expense, after tax (4,328) (4,273) (3,584)
Parent expenses, after tax (2,176) (2,126) (2,136)
Other non-recurring items, after tax:
Proposition 103 rollback refund (10,611)
CLIGA assessment (3,328)
Lawsuit settlement 4,914
Cumulative effect of change in accounting for income taxes 10,719
Extraordinary items (1,355) 2,600
- - ---------------------------------------------------------------------------------------------------
Net income $ 53,200 $ 28,700 $ 45,901
- - ---------------------------------------------------------------------------------------------------
</TABLE>
Declining interest rates in the three years ended December 31, 1993 have
reduced investment income. This decline has been offset, in part, by the effect
of realized gains from sales and early redemptions of securities. Reduced
investment income earned in the health and life operation has been offset by the
effect of managing the spread between the interest earned on invested assets and
the interest credited to policyholders. In addition to the impact of fewer
catastrophe losses in 1993, property-casualty underwriting results benefited
from a significant improvement in the results of the Workers' Compensation
operation.
3
<PAGE>
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Premiums earned and underwriting results of Zenith's property-casualty
subsidiaries were as follows:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------
(Dollars in thousands) 1993 1992 1991
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums earned
Workers' Compensation $ 244,661 $ 221,652 $ 208,989
Reinsurance 23,295 18,382 26,347
Automobile and other Property and Casualty 137,945 137,392 140,732
- - ------------------------------------------------------------------------------------------------
Total $ 405,901 $ 377,426 $ 376,068
- - ------------------------------------------------------------------------------------------------
Underwriting income (loss) before taxes
Workers' Compensation $ 11,618 $ (1,495) $ (1,477)
Reinsurance 5,337 (14,002) (7,668)
Automobile and other Property and Casualty
excluding Proposition 103 rollback refund (5,704) (5,124) 692
- - ------------------------------------------------------------------------------------------------
Total excluding Proposition 103 rollback refund 11,251 (20,621) (8,453)
Proposition 103 rollback refund (16,078)
- - ------------------------------------------------------------------------------------------------
Total including Proposition 103 rollback refund $ 11,251 $ (36,699) $ (8,453)
- - ------------------------------------------------------------------------------------------------
Operating ratios
Workers' Compensation
Losses 38.9% 53.6% 56.6%
Loss adjustment expenses 28.5% 21.4% 13.2%
Underwriting expenses 21.7% 24.4% 27.0%
Dividends to policyholders 6.2% 1.3% 3.9%
- - ------------------------------------------------------------------------------------------------
Combined ratio 95.3% 100.7% 100.7%
- - ------------------------------------------------------------------------------------------------
Reinsurance
Losses and loss adjustment expenses 58.7% 149.3% 99.8%
Underwriting expenses 18.4% 26.9% 29.3%
- - ------------------------------------------------------------------------------------------------
Combined ratio 77.1% 176.2% 129.1%
- - ------------------------------------------------------------------------------------------------
Automobile and other Property and Casualty
Losses and loss adjustment expenses 70.1% 70.0% 65.8%
Underwriting expenses 34.0% 33.7% 33.7%
- - ------------------------------------------------------------------------------------------------
Combined ratio excluding Prop. 103 rollback refund 104.1% 103.7% 99.5%
Proposition 103 rollback refund 11.7%
- - ------------------------------------------------------------------------------------------------
Combined ratio including Prop. 103 rollback refund 104.1% 115.4% 99.5%
- - ------------------------------------------------------------------------------------------------
Total combined ratio excluding Prop. 103 rollback refund 97.2% 105.5% 102.2%
Proposition 103 rollback refund 4.2%
- - ------------------------------------------------------------------------------------------------
Total combined ratio including Prop. 103 rollback refund 97.2% 109.7% 102.2%
- - ------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
In general, the profitability of property-casualty insurance underwriting
operations is dependent upon, principally, the adequacy of rates charged to the
insured for insurance protection, the frequency and severity of claims, the
ability of the Company to accurately accrue reported and unreported losses in
the correct period, the level of dividends paid to policyholders, and the
Company's ability to service claims, maintain policies and acquire business
efficiently. The cost of defending claims, particularly claims involving fraud
and abuse, has increased substantially in recent years. Property insurance
exposes Zenith to the risk of significant loss in the event of major adverse
natural phenomena, known in the insurance industry as catastrophes. These
catastrophes may cause significant contemporaneous financial statement losses
since catastrophe losses may not be accrued in advance of the event.
The amount by which losses, measured subsequently by reference to payments
and additional estimates, differ from those originally reported for a period is
known as development. This is favorable when losses ultimately settle for less
than that for which they were reserved or subsequent estimates indicate a basis
for reducing reserves on open claims. The following shows the one year loss
reserve development for loss and loss expenses for the three main lines of
property-casualty business:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
Automobile
Workers' and other
(Dollars in thousands) Compensation Property/Casualty Reinsurance Total
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One year loss
development in
1993 $ 4,704 $ 4,657 $ (290) $ 9,071
1992 13,502 5,177 1,255 19,934
1991 (464) (1,741) 5,290 3,085
- - --------------------------------------------------------------------------------
</TABLE>
Favorable development is shown in brackets in the table above.
Adverse development in 1993 and 1992 was due principally to development of
prior year reserves for loss adjustment expenses which was caused by increased
expenditures on the loss adjustment process, discussed below.
The exposure of the insurance industry to losses arising out of the cost of
pollution damage and savings and loan bankruptcies has been the focus of
attention of a number of interested parties in recent years. Zenith's potential
exposure to losses arising out of pollution clean-up costs began in 1985 when it
commenced the writing of liability coverage under small commercial policies
through CalFarm Insurance and through its reinsurance operation. The policies
written or reinsured by Zenith's subsidiaries contain exclusion clauses for
pollution related losses and such losses are thereby substantially excluded from
all such coverage written by Zenith's subsidiaries. While Zenith has from time
to time received claims for damages resulting from pollution, Zenith believes
that many of these claims will be excluded from coverage and that these claims
will not have a material adverse effect on Zenith's financial condition.
Zenith has also participated, to a limited extent, through assumed
reinsurance, in casualty coverages with some exposure to liability for the costs
of savings and loan bankruptcies. Such participation is limited and although
Zenith has been advised of some claims related thereto, the ultimate outcome is
not expected to have a material adverse effect on Zenith's financial condition.
An uncertain political and regulatory environment, both state and federal,
including proposals relating to national health insurance and the possibilities
of initiatives impacting auto insurance and other areas; the lack of economic
growth in 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 create a challenging operating
environment in the property-casualty industry. Also, lower interest rates reduce
investment income while increasing the market value of certain securities.
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.
On January 17, 1994 an earthquake centered in Northridge, California caused
widespread property damage throughout the Los Angeles area, including damage to
Zenith's corporate offices. The risk of earthquakes in California is taken into
consideration in determining rates for insurance and reinsurance and earthquake
insurance is characterized by a high retention
5
<PAGE>
of risk by policyholders. Accordingly, even though estimates of the damage
caused by the Northridge earthquake run as high as $30 billion, insured losses
are not expected to exceed $3 billion. Zenith anticipates that it will suffer
some losses as a result of the Northridge earthquake which will be reported in
the first quarter of 1994.
WORKERS' COMPENSATION
Underwriting results improved considerably in 1993 compared to 1992 and 1991
principally because of favorable changes in loss frequency trends. Loss
adjustment expenses increased from $27,634,000 to $47,376,000 to $69,625,000 or,
as a percentage of earned premiums, increased from 13.2% to 21.4% to 28.5% from
1991 to 1992 to 1993. Loss adjustment expenses include the expenses of
servicing, analyzing, investigating and defending claims. These increased
expenditures on the loss adjustment process were undertaken with a view to
decreasing the total outlay for losses, particularly cases involving fraud and
abuse. Management believes that these actions have had, and will continue to
have, a favorable effect on the results of the Workers' Compensation operation.
Premiums charged for workers' compensation insurance in the State of
California are based on, and until December 31, 1994 will continue to be based
on, minimum rates set by the California Insurance Commissioner (the
"Commissioner"). These minimum rates are applied in conjunction with an
experience modification factor, risk-based surcharges and a dividend plan to
arrive at the net cost of insurance to the policyholder. Minimum rates have been
adjusted as follows: January 1, 1991 +3.9%; January 1, 1992 +1.2%; July 1, 1992
+6.7%; July 16, 1993 -7.0%; and January 1, 1994 -12.7%. These changes have
consistently fallen short of the increases that were recommended by the Workers'
Compensation Rating Bureau during this time, however, the recommendations did
not anticipate the recent favorable changes in loss frequency trends. In the
event that rates as constituted after January 1, 1994 prove to be inadequate,
the profitability of Zenith's Workers' Compensation operations may be adversely
affected. Earned premiums increased during the three years ended December 31,
1993 principally because of an increase in premiums attributable to policies
written with surcharges and, to a lesser extent, premiums attributable to
policies written in Texas, an operation which Zenith commenced in 1992. Premiums
written on non-standard policies were $54,945,000 in 1993 compared to
$42,971,000 in 1992 and $15,048,000 in 1991. Premiums written in Texas in 1993
were $10,174,000 compared to $3,925,000 in 1992.
In July, 1993, certain significant workers' compensation legislation was
signed into law in California. Among other things, the new laws will affect the
California workers' compensation industry as follows:
Rating -- Minimum rates were reduced by 7% from those in effect on July 16,
1993. Effective January 1, 1995, the minimum rate law will be abolished and
companies will charge their own, actuarially determined rates.
Benefits -- Maximum weekly benefits for temporary disability will be
increased on July 1, 1994, July 1, 1995 and July 1, 1996, from the current level
of $336 to $490 on July 1, 1996. Maximum weekly benefits for permanent
disability will be subject to increases on these same dates. Permanent partial
disability weekly benefits will increase from a maximum of $148 to $230 with the
greatest increases in cases where disability ratings exceed 70%. Death benefits
will be increased on July 1, 1994 and again on July 1, 1996. At July 1, 1996,
death benefits will amount to $125,000, $145,000 and $160,000 for a worker with
one, two and three total dependents, respectively.
Cost containment -- Major changes
will provide a tougher standard for compensability of stress claims, limit the
number of medical-legal evaluations, limit post termination claims, provide
certain managed care flexibility, limit medical self-referrals where there is a
financial interest and provide limits on vocational rehabilitation costs.
Management is unable to predict the impact that the above legislative
changes will have on its business. Historically, analysis and estimates of the
impact of legislative changes have been difficult to predict with any reasonable
degree of accuracy.
6
<PAGE>
AUTOMOBILE AND OTHER PROPERTY AND CASUALTY
Results of operations during 1993 and 1992 were adversely affected by
unfavorable weather and fire related losses. Such losses in 1993 included $1.6
million (of which $1.0 million was assumed from the California Fair Plan,
described below) related to the Southern California brush fires in the fall.
Results of operations in 1992 were reduced when Zenith's subsidiaries
refunded approximately $14 million, with interest of approximately $4.6 million,
to certain affected policyholders to settle the rollback contingency under
Proposition 103. The net cost of the refund after reinsurance reduced
underwriting income in the Automobile and Other Property and Casualty operation
in 1992 by $16.1 million or $10.6 million ($.56 per share) after tax. As part of
the agreement, the California Department of Insurance (the "Department") gave
final approval to all of the Company's rate applications on affected lines of
business subsequent to the rollback period and approved certain rate increases
on farmowners and homeowners policies effective July 1, 1993. Rates were
increased effective July 1, 1993, by 8% for farmowners' policies and by 15.4%
for homeowners' policies. Rate increases, if requested, beyond those subject to
such agreement are subject to prior approval by the Department. Management is
unable to predict whether any such requests for future rate increases, if any,
will be granted by the Department but failure by the Department to act upon such
requests will adversely affect the adequacy of such rates and the profitability
of operations in the lines of business so affected.
CalFarm is required to participate in involuntary market plans, including
the California Automobile Assigned Risk Plan ("CAARP"), the Commercial
Automobile Insurance Procedure ("CAIP") and the California Fair Plan. CAARP,
CAIP and the California Fair Plan are organizations that were established by
statute in California but are serviced by the insurance industry. These
organizations provide private passenger automobile coverage for bodily injury
and property damage, commercial automobile coverage and property coverage to
risks that would not otherwise be accepted in the ordinary course of business by
private insurance carriers. Participation in these organizations by private
carriers in California is mandatory. CAARP, CAIP and the California Fair Plan
together result in additional involuntary assumptions of insurance premiums and
losses which resulted in underwriting losses before taxes of approximately $1.6
million in 1993, $1.4 million in 1992, and $2.5 million in 1991.
REINSURANCE
Reinsurance is an insurance transaction between two insurance companies, in
which one company buys protection from losses sustained under its own insurance
policies which exceed the level it can prudently sustain.
Zenith's current participation in the reinsurance market is highly selective
and is limited principally to participation in the reinsurance of large
individual property losses and the accumulation of losses caused by
catastrophes. Events in recent years have served to increase the premiums paid
for such reinsurance and to increase the amount of such risk retained by
insurers and reinsurers. These developments have created a market which
management believes presents reasonable, acceptable opportunities to produce
favorable underwriting results. However, Zenith's assumed reinsurance business
is written with a view to limiting the company's exposure to losses from any one
event to a maximum of approximately 5% of stockholders' equity.
Underwriting results in 1993 were impacted favorably by the absence of the
type of large catastrophe losses that were characteristic of earlier years. Even
though 1993 was punctuated by certain notable property catastrophe losses, for
the most part, these events did not, individually, cause significant losses to
Zenith because of the higher retention of risk by insurers and reinsurers
referred to above. In 1992, losses of approximately $9.8 million were sustained
in conjunction with Hurricanes "Andrew" and "Iniki". In addition to these
losses, the results of the Reinsurance operation in 1992 were adversely affected
by other large, worldwide property losses. In 1991, catastrophe losses incurred
by the Reinsurance operation amounted to approximately $10.0 million and were
attributable primarily to adverse development of losses associated with
Hurricane "Hugo", the 1990 European
7
<PAGE>
windstorms, the Exxon Valdez oil spill and the Phillips Petroleum disaster and,
to a lesser extent, 1991 losses attributable to typhoon damage in Japan and the
Oakland Fire.
During 1993, substantial new capital was drawn into the reinsurance market
in the form of new companies which were formed to write, among other things,
property reinsurance and in the form of new capital subscriptions to Lloyd's
underwriting entities in London, some of which capital was subscribed by
corporations for the first time. Although such new capital does not appear to
have significantly impacted reinsurance premium rates for 1994, management is
unable to predict what impact, if any, such a substantial increase in capital
will have on Zenith's assumed reinsurance business in the future.
FEDERAL INCOME TAXES
In 1992, Zenith adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS No. 109") under which deferred income tax
assets and liabilities are established, at the currently enacted statutory rate
to reflect temporary differences between the financial statement values of
assets and liabilities and their respective tax values. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amounts
expected to be realized. The provision for deferred tax in the consolidated
statement of operations represents the change for the period in the net deferred
tax asset or liability. In addition, SFAS No. 109 sets forth the standard for
the recognition of the tax benefit of a capital or operating loss and no longer
requires the presentation of such tax benefit as an extraordinary item when such
loss carryforward is utilized. At December 31, 1993 Zenith did not establish a
valuation reserve since it believes that all of its deferred tax assets are
fully realizable. In particular, deferred tax assets which arise from
differences between insurance reserves on a tax and book basis are fully
realizable because of the historical profitability of Zenith's property and
casualty and health and life operations. Zenith had previously established a
valuation allowance for deferred tax assets which were related to future capital
loss deductions since management believed that future capital gains could not be
predicted with sufficient certainty to satisfy the criteria for asset
recognition under SFAS 109. During 1993 and 1992 realized gains were recognized
and these capital loss tax benefits were realized and the related valuation
allowance was reduced to zero.
In August, 1993, the Revenue Reconciliation Act of 1993 ("the Act") was
enacted. Among other provisions, the Act provides for an increase of 1% in the
rate of income tax on corporations effective January 1, 1993, an increase in
limitations on the deductibility of certain business expenses, an increase in
the cost of payroll taxes and increases in the marginal tax rates of higher
income individuals.
The increase in personal tax rates may impact the savings behavior of
individuals through the reduction of disposable income and/or by the enhancement
of tax deferred savings vehicles such as deferred annuities. Management is
currently unable to predict the effect of the changes in personal taxation
contained in the Act on its operations.
INVESTMENTS
Fluctuations in interest rates impact investment income, realized and
unrealized capital gains, the market value of investments and stockholders'
equity. During the last several years, interest rates have declined and reached
relatively low levels by recent historical measures. Subsequent to year end,
interest rates have risen providing opportunities for increased investment
income due to Zenith's larger cash and short-term investment position, while at
the same time reducing the market value of investments and stockholders' equity.
Since fluctuations in interest rates are probably the norm, management is unable
to predict the impact on Zenith's operations or balance sheet of such changes at
any point in time.
Effective December 31, 1993, Zenith implemented Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115") which sets forth rules for the accounting
treatment of investments. Among other provisions, SFAS No. 115 sets forth
criteria for the classification of debt securities among three categories. These
criteria include the existence of a "positive intent" and ability to hold a debt
security to maturity for such a security to be
8
<PAGE>
classified as "held-to-maturity" and to be accounted for at amortized cost.
Investments classified as "available-for-sale" are reported at fair value with
unrealized gains and losses reported as a separate component of stockholders'
equity and investments classified as "trading securities" are reported at fair
value with unrealized gains and losses included in earnings. The effect of
implementing SFAS No. 115 was an increase in stockholders' equity of
$12,163,000, net of deferred taxes, from the change in carrying value of
Zenith's securities identified as "available-for-sale."
Zenith maintains a diversified investment portfolio consisting of common
stock, preferred stock, investment grade and non-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 allocation amongst these types of securities is
adjusted from time to time based on market conditions, credit conditions, tax
policy and other factors. The distribution of Zenith's consolidated investment
portfolio is shown in the table below:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------
At December 31, 1993 1992
- - -----------------------------------------------------------------------------------------------------------
Carrying % of Fair Carrying % of Fair
(Dollars in thousands) value total value value total value
<S> <C> <C> <C> <C> <C> <C>
- - -----------------------------------------------------------------------------------------------------------
Bonds:
Investment grade:
U.S. Government securities $ 442,369 29.4% $ 443,551 $ 383,913 27.9% $ 387,862
Other 613,680 40.9% 649,866 626,515 45.6% 656,703
Non-investment grade 17,995 1.2% 17,995 23,463 1.7% 22,565
Stocks:
Redeemable preferred:
Investment grade 30,589 2.0% 30,589 53,786 3.9% 52,565
Non-investment grade 2,386 0.2% 2,386 1,758 0.1% 1,847
Other preferred 42,741 2.9% 42,741 47,259 3.4% 47,259
Common 15,575 1.0% 15,575 29,656 2.2% 29,656
Short-term investments:
U.S. Government securities 124,306 8.3% 124,306 19,977 1.5% 19,977
Other 152,535 10.2% 152,535 138,721 10.1% 138,721
Other investments 58,221 3.9% 50,048 3.6%
- - -----------------------------------------------------------------------------------------------------------
Total investments $ 1,500,397 100.0% $ 1,375,096 100.0%
- - -----------------------------------------------------------------------------------------------------------
</TABLE>
The carrying value of non-investment grade bonds and preferred stocks owned
by Zenith's property-casualty subsidiaries was 6.2% and 6.5% of statutory
surplus at December 31, 1993 and 1992, respectively. The carrying value of
non-investment grade bonds owned by Zenith's life insurance subsidiary was 34.8%
and 56.2% of statutory surplus at December 31, 1993 and 1992, respectively.
Carrying values of non-investment grade bonds and preferred stocks for this
comparison are based upon values and ratings used by the Securities Valuation
Office of the National Association of Insurance Commissioners ("NAIC"). The NAIC
may assign a non-investment grade rating to a security that is rated investment
grade by one or more rating agency.
9
<PAGE>
The change in the GAAP carrying value of Zenith's consolidated investment
portfolio in 1993 and 1992 was as follows:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------
(Dollars in thousands) 1993 1992
- - --------------------------------------------------------------------------------------------------
<S> <C> <C>
Carrying value at beginning of year $ 1,375,096 $ 1,201,826
Purchases at cost 620,044 638,854
Maturities and exchanges of fixed maturities (196,611) (124,158)
Proceeds from sales of fixed maturity investments:
Held for investment (11,528) (248,591)
Held for sale (224,729) (41,735)
Trading portfolio (140,764)
Proceeds from sales of other investments (78,275) (64,596)
Realized gains from sales of investments:
Held for investment 370 8,623
Held for sale 5,948 1,184
Other investments 9,591 3,193
Realized gains from maturities and exchanges of investments:
Held for investment 4,737
Held for sale 399
Realized losses from writedowns of investments (2,153)
Unrealized gains on investments 20,937 11,405
Increase (decrease) in short-term investments 116,953 (6,683)
Net amortization of bonds and preferred stocks and other changes (1,771) (2,073)
- - --------------------------------------------------------------------------------------------------
Carrying value at end of year $ 1,500,397 $ 1,375,096
- - --------------------------------------------------------------------------------------------------
</TABLE>
The information concerning the activity in Zenith's investment portfolio
described in the table above is presented for periods prior to the
implementation of SFAS No. 115.
In 1992, proceeds from sales of fixed maturities held for investment include
$76,622,000 from the sale of municipal bonds, of which $45,341,000 related to
municipal bonds that would otherwise have matured within two years of the date
of sale. In addition, the proceeds from sales of fixed maturities held for
investment include $17,596,000 related to sales of taxable bonds that would
otherwise have matured within two years of the date of sale. Such sales of
tax-exempt and other bonds with short maturities were made to take advantage of
prices at the short end of the yield curve, particularly for tax-exempt
securities, and to utilize tax loss carry forwards.
During the three years ended December 31, 1993, investment income was as
follows:
<TABLE>
<CAPTION>
- - ---------------------------------------------------
Investment income
(Dollars in
thousands) 1993 1992 1991
<S> <C> <C> <C>
- - ---------------------------------------------------
Property and
Casualty
portfolio (incl.
Parent)
Before tax $ 37,135 $ 43,128 $ 46,127
After tax 25,475 31,402 35,624
Health and Life
portfolio
Before tax 55,339 53,486 49,558
After tax 35,970 35,301 32,708
Consolidated
Before tax 92,474 96,614 95,685
After tax 61,445 66,703 68,332
- - ---------------------------------------------------
</TABLE>
10
<PAGE>
The yields on invested assets for the three years ended December 31, 1993
were as follows:
<TABLE>
<CAPTION>
- - ---------------------------------------------------
Investment yields 1993 1992 1991
- - ---------------------------------------------------
<S> <C> <C> <C>
Property and
Casualty
Portfolio (incl.
Parent)
Before tax 5.1% 6.2% 7.2%
After tax 3.5% 4.5% 5.6%
Health and Life
Portfolio
Before tax 7.7% 8.6% 9.4%
After tax 5.0% 5.7% 6.2%
- - ---------------------------------------------------
</TABLE>
The decrease in yields was attributable to a general decrease in interest
rates, shorter average maturities and higher average quality of invested assets
during the three years ended December 31, 1993. The profitability of
property-casualty and health and life operations is partially dependent upon
Zenith's ability to generate investment income from its cash flows. The
reduction in yields from 1991 to 1993 has reduced the profitability of the
property-casualty operations and future profitability will be similarly related
to the level of such yields. The profitability of the health and life operation
is also dependent upon the spread between interest earned on invested assets and
interest credited to policyholders as discussed below under "Health and Life."
Realized gains on investments for the three years ended December 31, 1993
were as follows:
<TABLE>
<CAPTION>
- - ----------------------------------------------------
Realized gains
(Dollars in
thousands) 1993 1992 1991
- - ----------------------------------------------------
<S> <C> <C> <C>
Before tax $ 21,045 $ 10,847 $ 12,999
After tax 17,932 10,847 10,399
- - ----------------------------------------------------
</TABLE>
Taxes on net realized gains during the three years ended December 31, 1993
were reduced by the benefit associated with losses carried forward from 1990,
however, in 1991 such tax benefit was recorded as an extraordinary item.
HEALTH AND LIFE
Results of the Health and Life operations for the three years ended December
31, 1993 were as follows:
<TABLE>
<CAPTION>
- - -------------------------------------------------
(Dollars in
thousands) 1993 1992 1991
- - -------------------------------------------------
<S> <C> <C> <C>
Premium income
and other
policy charges $ 63,921 $ 64,448 $ 61,556
Income before
tax and before
realized gains
on investments 6,623 12,124 10,513
Income after
taxes 12,932 10,354 8,325
Invested
assets at
December 31, 767,337 682,896 570,872
Deposits on
deferred annuity
contracts at
December 31, 545,956 485,096 391,194
Stockholder's
equity at
December 31, 124,610 103,944 87,738
- - -------------------------------------------------
</TABLE>
Results of the Health and Life operation for 1993 were relatively unchanged
compared to 1992 and 1991, prior to the retroactive assessment from the
California Life Insurance Guarantee Association ("CLIGA"). CLIGA was established
by the California Life Insurance Guarantee Association Act effective January 1,
1991 to protect life insurance and annuity policyholders against impairment or
insolvency of life insurance companies by creating an association of insurers to
pay benefits and continue coverage. CLIGA assesses member insurers separately
for each impairment or insolvency based on each insurer's proportion of its
premium to the total premiums in California for the three years prior to
impairment or insolvency. In December 1991, CalFarm Life was first notified of
the insolvency of Executive Life Insurance Company ("Executive Life"). In March
1992, CalFarm Life received the first assessment for Executive Life, based on a
premium definition that excluded "annuity and fund deposits". This resulted in
an immaterial assessment for CalFarm Life. In
11
<PAGE>
August 1993, CLIGA retroactively adjusted prior and future years' assessments to
include "annuity and fund deposits" as premiums. Based on this new definition,
CalFarm Life received its first revised assessment and paid $1,277,000 in
September 1993. Using this assessment, information contained in the
court-approved plan to sell the assets of Executive Life, and data provided by
the National Organization of Life and Health Insurance Guarantee Associations,
CalFarm Life has estimated its liability for the Executive Life and other
liquidations not yet billed to be approximately $3,843,000. The total estimated
assessment of $5,120,000 is reflected in the 1993 results.
Results of the health operations continue to benefit from CalFarm Life's
mutually beneficial, long-standing relationship with the California Farm Bureau
Federation (the "Farm Bureau"). Prior to July 1, 1993 health premiums were
written under two group health insurance programs sponsored by the Farm Bureau.
Effective July 1, 1993, one of the Farm Bureau plans was discontinued by CalFarm
Life. Insureds under this plan were offered membership in the remaining Farm
Bureau sponsored plan. Health premium accounted for approximately 81%, 81% and
82% of the Health, Life and Annuity premium income in 1993, 1992, and 1991,
respectively. Health premium rates were on average 10% higher in 1993 over 1992
to cover escalating costs of health care and increased utilization. It is not
possible to predict the impact of the Clinton Administration's health care
reform bill or possible state law changes on CalFarm Life's business until
definitive legislation, if any, emerges. CalFarm Life's performance has not been
adversely affected by AIDS claims, however, any significant proliferation of
AIDS claims could impact future premium rates.
CalFarm Life's deposits from Universal Life contracts were approximately $19
million in 1993 compared to approximately $13 million in 1992 and approximately
$11 million in 1991. The costs of acquiring the new universal life business,
primarily commission, policy issue and underwriting expenses, are the primary
cause of the increase in deferred policy acquisition costs between 1992 and
1993. The profitability of this business is significantly dependent on
continuing periodic premium payments. Higher than expected lapse and mortality
rates will affect operating income in the period in which they occur.
CalFarm Life continued its marketing program of tax sheltered annuity
products during 1993, specifically those designed for school teachers and
administrators. The Company's annuity products are designed to provide profits
from the investment spread earned on invested assets. The investment spread is
the amount by which the investment yield on invested assets exceeds the interest
credited to policyholders. During 1993, CalFarm Life continued to increase the
interest rate spreads, which improved current operating results. In addition,
CalFarm Life's ability to maximize profits on its annuity business is determined
by policy and premium persistency; the efficiency of operations; and the
limiting of its risks of defaults on its investment portfolio.
CalFarm Life received deposits on fixed annuities of approximately $56
million in 1993, of which approximately $50 million were tax qualified compared
to approximately $83 million in 1992, of which approximately $75 million were
tax-qualified annuities and approximately $80 million in 1991, of which
approximately $72 million were tax-qualified annuities. These deposits were the
primary cause of the increase in investments and investment income between 1991,
1992 and 1993. The amount of deposits received in 1993 by CalFarm Life on
deferred annuity contracts was influenced by economic and tax uncertainties and
by competition in the market for such products. CalFarm Life's annuity products
are primarily sold to school teachers and recent budgetary actions with respect
to education, in addition to the weak California economy, may continue to impact
sales in the future. However, recent increases in personal rates of income tax
may increase the desire to accumulate retirement income on a tax deferred basis.
CalFarm Life minimizes the effect of inflation and interest rate
fluctuations through the design of its interest sensitive life insurance and
annuity products. A significant
12
<PAGE>
pricing component of these products includes an annual inflation rate adjustment
factor for administrative expenses. In addition, products with mortality risk
contain mortality and expense margins which can be used to offset negative
economic trends. Interest rate margins are reviewed continuously by management
and adjusted based on financial and economic conditions. Interest rates credited
to interest sensitive life insurance products are guaranteed for the first 12
months from the date of issue and interest rates credited to annuity products
are guaranteed for 12 month periods. Reduced investment yields on CalFarm Life's
investment portfolio (discussed under "Investments") did not materially affect
the profitability of its fixed deferred annuities and life insurance contracts
because of the Company's ability to manage the spread between the interest
earned on investments and the interest credited to policyholder funds, and
dividends to policyholders. Effective October 1, 1993, the guaranteed interest
rates were decreased on new business to 4% on Universal Life contracts and 3% on
Single Premium Whole Life and annuity contracts. CalFarm Life has the
flexibility to decrease credited interest rates, but not below the guaranteed
policy minimum interest rates that range from 3% to 6%. All products include
surrender charges to minimize any negative financial impact upon termination.
The acceptability of CalFarm Life to its policyholders and agents is
influenced by among other things, the ratings given to it by rating agencies
such as A.M. Best Company and Weiss Research, Inc. One of the factors considered
in the rating process is adequacy of statutory capital and surplus in relation
to policyholder obligations. CalFarm Life's risk based capital percentage is
375% which is higher than the NAIC's guidelines.
REAL ESTATE
Results of operations have not yet been impacted by Zenith's real estate
operation which commenced in the second quarter of 1993 through a newly formed
subsidiary. Approximately $7.2 million was expended through December 31, 1993 to
acquire and develop land in Las Vegas, Nevada for private residences. Management
anticipates that a total commitment of approximately $12 million will be made
toward such development before sales of these residences begin, possibly by the
end of the first quarter of 1994.
LIQUIDITY AND INFLATION
Zenith's property-casualty insurance operations and health and life
insurance operations create liquidity because insurance premiums are generally
collected prior to disbursements for claims and benefits. These net cash flows,
as set forth on page 55 in the Consolidated Financial Statements, are invested
as described in "investments" above. Zenith plans to match the expected payout
pattern of its liabilities with a suitable maturity profile of its investment
portfolio. Net cash flows from operations were $56,599,000, $53,929,000 and
$68,966,000, for 1993, 1992 and 1991, respectively. Net cash flows from
operations in 1993 include the payment of approximately $16,000,000, net of
reinsurance, for Proposition 103 rollback refunds. Zenith maintains cash and
short-term investments which amounted to $285,401,000 and $160,554,000 at
December 31, 1993 and 1992, respectively. These balances, or "short-term
liquidity," are supplemented by lines of credit available to Zenith of up to
$50,000,000, of which $50,000,000 was available at December 31, 1993.
Zenith's principal liquidity requirements in the long-term and the
short-term are the funds needed to pay its expenses, service its outstanding
debt, and pay any cash dividends which may be declared to its stockholders. To
meet these requirements, Zenith is principally dependent upon its lines of
credit and dividends from Zenith Insurance and CalFarm Life. In the opinion of
management, Zenith's sources of liquidity are sufficient to fund its short-term
and long-term requirements for liquidity. The insurance subsidiaries are subject
to California insurance regulations which restrict their ability to distribute
dividends. The California Insurance Code has been amended effective January 1,
1994 to revise the method of calculating the maximum dividends payable
13
<PAGE>
by the subsidiaries without prior approval of the Department. Such dividend
capabilities are set forth in Note 12 to the Consolidated Financial Statements.
Such restrictions have not had, and under current regulations are not expected
to have, a material adverse impact on Zenith. Zenith received dividends from its
subsidiaries amounting to $25,000,000 in 1993, $15,000,000 in 1992, and
$33,000,000 in 1991. Maximum dividend capability, without prior approval of the
Department, of Zenith's subsidiaries in 1994 is $46,893,000.
Risk-based capital guidelines issued by the NAIC in 1993 for
property-casualty and life insurance companies are not expected to have any
material adverse consequences for Zenith's insurance subsidiaries.
On May 4, 1992 Zenith completed its offering of 9% Senior Notes due 2002,
which were issued at par. The net proceeds of the offering were $73,787,000,
part of which were used to repay in full Zenith's previously outstanding bank
borrowings and to redeem Zenith's previously outstanding 10 1/4% Senior Notes
due 1994. The remainder of the proceeds have been used and are available for
working capital and other general corporate purposes, including repurchases of
common stock of Zenith. The premium to call the 10 1/4% Senior Notes and the
unamortized discount thereon reduced net income in 1992 by $1,355,000 after tax
($.07 per share).
Workers' compensation insurers are required to have securities on deposit
for the protection of policyholders in accordance with regulations of the
California Department of Insurance. At December 31, 1993, investments carried at
$314,400,000 (market value of $313,700,000) were on deposit to comply with such
regulations.
At December 31, 1993, Zenith was authorized to purchase up to 809,000
additional shares of Zenith common stock pursuant to its share repurchase
program. These purchases, which are made at prevailing market prices, are
discretionary and can be adequately funded from Zenith's existing sources of
liquidity.
Inflation rates impact the financial statements and operating results in
several areas. Fluctuations in inflation rates impact the market value of the
investment portfolio and yields on new investments. Inflation also impacts the
portion of the loss reserves that relates to hospital and medical expenses and
property claims and loss adjustment expenses, but not the portion of loss
reserves that relates to workers' compensation indemnity payments for lost wages
due to statutorily defined fixed payments. Adjustments for inflationary impacts
are implicitly included as part of Zenith's subsidiaries' continuous review of
property-casualty reserve estimates. Actuarial account of increased costs is
considered in setting adequate rates, and this is particularly important in the
health insurance area where hospital and medical inflation rates have exceeded
general inflation rates. Workers' compensation premium income is determined
primarily by applying a rate to payrolls, and as inflation increases, average
wage rates are generally adjusted resulting in decreases in premium rates.
Operating expenses, including payrolls, are impacted to a certain degree by the
inflation rate.
Social inflation affects the loss reserves for other property-casualty
liability claims for which settlements are determined in court proceedings.
Inflation and fluctuations in interest rates
also impact our interest sensitive life insurance
products, however, policy provisions for termination charges act to partially
reduce such negative impact. See "Health and Life" above.
14
<PAGE>
FIVE-YEAR RECORD
Zenith National Insurance Corp. and Subsidiaries
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------
Year ended December 31, Note 1993 1992
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consolidated revenues $ 585,782,000 $ 549,335,000
- - -------------------------------------------------------------------------------------------------------------------
Property and Casualty underwriting
Net premiums earned 405,901,000 377,426,000
Underwriting income (loss)
Before Proposition 103 rollback refund, dividends to policyholders and
taxes 6 26,426,000 (17,667,000)
Before Proposition 103 rollback refund and taxes 6 11,251,000 (20,621,000)
Before taxes 1 11,251,000 (36,699,000)
After taxes, before Proposition 103 rollback refund 6 7,287,000 (14,108,000)
After taxes 5 7,287,000 (24,719,000)
Per share .38 (1.31)
- - -------------------------------------------------------------------------------------------------------------------
Health and Life
Premium income and other policy charges 63,921,000 64,448,000
Investment income
Before taxes 55,339,000 53,486,000
After taxes 35,970,000 35,301,000
Tax rate on investment income 35.0% 34%
Income after taxes, before realized gains (losses) 3 4,096,000 8,205,000
Per share .21 .43
Realized gains (losses)
Before taxes 7,050,000 910,000
After taxes 8 8,836,000 2,149,000
Per share .46 .11
Income (loss) after taxes 12,932,000 10,354,000
Per share .67 .55
- - -------------------------------------------------------------------------------------------------------------------
Investments, excluding Health and Life
Investment income
Before taxes 37,135,000 43,128,000
After taxes 25,475,000 31,402,000
After taxes, net of interest expense 4 21,147,000 27,129,000
Per share 1.10 1.43
Tax rate on investment income 31.4% 27.2%
Average yield on investment income
Before taxes 5.1% 6.2%
After taxes 3.5% 4.5%
Realized gains (losses)
Before taxes 13,995,000 9,937,000
After taxes 9,096,000 8,698,000
Per share .47 .46
- - -------------------------------------------------------------------------------------------------------------------
Income after taxes, before realized gains (losses) 4, 5, 6, 7, 9 33,682,000 19,100,000
Net income (loss) 2, 4, 5, 7 53,200,000 28,700,000
- - -------------------------------------------------------------------------------------------------------------------
Earnings per common share
Net income (loss) 2, 4, 5, 7 2.76 1.52
Cash dividends per share to common stockholders 1.00 1.00
Weighted average common shares outstanding 19,297,000 18,918,000
- - -------------------------------------------------------------------------------------------------------------------
Financial Condition
Total assets 1,857,790,000 1,703,553,000
Investments 1,500,397,000 1,375,096,000
Senior notes and bank debt 73,989,000 73,868,000
Total stockholders' equity 349,465,000 301,598,000
Stockholders' equity per share 18.55 16.03
Return on average equity 16.3% 9.7%
- - -------------------------------------------------------------------------------------------------------------------
Insurance statistics (GAAP)
Property and Casualty
Paid loss and loss expense ratio 66.7% 70.4%
Loss and loss expense ratio 67.8% 76.8%
Underwriting expense ratio 25.7% 27.9%
Policyholder dividends ratio 6 3.7% 0.8%
Combined ratio before Proposition 103 rollback refund 6 97.2% 105.5%
Combined ratio after Proposition 103 rollback refund 97.2% 109.7%
Net premiums earned-to-surplus ratio 1.5 1.5
Loss and loss expense reserves-to-surplus ratio (net of reinsurance) 1.7 1.8
Health and Life
Life insurance in force, net of reinsurance 2,523,153,000 2,663,669,000
- - -------------------------------------------------------------------------------------------------------------------
<FN>
(1) Excludes parent company operating expenses of $3,478,000, $3,222,000,
$3,236,000, $3,277,000 and $2,925,000 or $2,176,000, $2,126,000, $2,136,000,
$2,163,000, and $1,930,000, net of tax for 1993, 1992, 1991, 1990 and 1989,
respectively.
(2) Debt redemption costs of $1,355,000, net of $698,000 of tax benefit, (or
$.07 per share) were recognized as an extraordinary item in 1992. The tax
benefit of $2,600,000 (or $.14 per share) associated with capital losses carried
forward was recognized as an extraordinary item in 1991.
(3) Income is net of income taxes of $2,527,000, in 1993, $3,919,000 in 1992,
$3,600,000 in 1991, $3,199,000 in 1990 and $3,350,000 in 1989.
(4) Includes holding company's interest expense of $6,658,000, in 1993,
$6,472,000 in 1992, $5,430,000 in 1991, $3,847,000 in 1990 and $3,377,000 in
1989.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1991 1990 1989
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consolidated revenues $ 546,308,000 $ 468,328,000 $ 483,886,000
- - -------------------------------------------------------------------------------------------------------------------
Property and Casualty underwriting
Net premiums earned 376,068,000 373,043,000 356,957,000
Underwriting income (loss)
Before Proposition 103 rollback refund, dividends to policyholders and
taxes (295,000) 25,065,000 29,072,000
Before Proposition 103 rollback refund and taxes (8,453,000) (2,083,000) 4,987,000
Before taxes (8,453,000) (2,083,000) 4,987,000
After taxes, before Proposition 103 rollback refund (3,915,000) 148,000 4,816,000
After taxes (3,915,000) 148,000 4,816,000
Per share (.21) .01 .23
- - -------------------------------------------------------------------------------------------------------------------
Health and Life
Premium income and other policy charges 61,556,000 57,848,000 56,259,000
Investment income
Before taxes 49,558,000 40,283,000 30,174,000
After taxes 32,708,000 26,587,000 19,915,000
Tax rate on investment income 34% 34% 34%
Income after taxes, before realized gains (losses) 6,913,000 6,198,000 6,454,000
Per share .36 .31 .31
Realized gains (losses)
Before taxes 2,162,000 (21,578,000) (6,934,000)
After taxes 1,412,000 (21,409,000) (4,875,000)
Per share .07 (1.09) (.23)
Income (loss) after taxes 8,325,000 (15,211,000) 1,579,000
Per share .44 (.77) .08
- - -------------------------------------------------------------------------------------------------------------------
Investments, excluding Health and Life
Investment income
Before taxes 46,127,000 49,693,000 47,728,000
After taxes 35,624,000 39,744,000 39,045,000
After taxes, net of interest expense 32,040,000 37,205,000 36,816,000
Per share 1.69 1.89 1.77
Tax rate on investment income 22.8% 20.0% 18.2%
Average yield on investment income
Before taxes 7.2% 8.0% 8.3%
After taxes 5.6% 6.4% 6.8%
Realized gains (losses)
Before taxes 10,837,000 (30,961,000) (298,000)
After taxes 8,987,000 (29,135,000) (196,000)
Per share .47 (1.48) (.01)
- - -------------------------------------------------------------------------------------------------------------------
Income after taxes, before realized gains (losses) 32,902,000 41,388,000 46,156,000
Net income (loss) 45,901,000 (9,156,000) 41,085,000
- - -------------------------------------------------------------------------------------------------------------------
Earnings per common share
Net income (loss) 2.42 (.47) 1.98
Cash dividends per share to common stockholders 1.00 .90 .83
Weighted average common shares outstanding 18,981,000 19,685,000 20,785,000
- - -------------------------------------------------------------------------------------------------------------------
Financial Condition
Total assets 1,477,571,000 1,327,332,000 1,182,286,000
Investments 1,201,826,000 1,063,073,000 938,365,000
Senior notes and bank debt 49,799,000 53,642,000 26,692,000
Total stockholders' equity 281,234,000 241,295,000 298,868,000
Stockholders' equity per share 14.93 12.62 14.74
Return on average equity 17.3% (3.3%) 13.7%
- - -------------------------------------------------------------------------------------------------------------------
Insurance statistics (GAAP)
Property and Casualty
Paid loss and loss expense ratio 63.9% 54.0% 51.6%
Loss and loss expense ratio 70.4% 64.1% 62.7%
Underwriting expense ratio 29.6% 29.2% 29.2%
Policyholder dividends ratio 2.2% 7.3% 6.7%
Combined ratio before Proposition 103 rollback refund 102.2% 100.6% 98.6%
Combined ratio after Proposition 103 rollback refund 102.2% 100.6% 98.6%
Net premiums earned-to-surplus ratio 1.6 1.8 1.5
Loss and loss expense reserves-to-surplus ratio (net of reinsurance) 1.8 2.0 1.6
Health and Life
Life insurance in force, net of reinsurance 2,438,036,000 2,233,081,000 2,115,700,000
- - -------------------------------------------------------------------------------------------------------------------
<FN>
(5) After benefit for "fresh start" of $531,000 ($.03 per share) in 1991,
$1,803,000 ($.09 per share) in 1990 and $1,561,000 ($.08 per share) in 1989.
(6) Excludes Proposition 103 rollback refund of $16,078,000, net of
reinsurance, before tax or $10,611,000 ($.56 per share) after tax in 1992.
(7) Net income in 1992 includes increase of $10,719,000 for the cumulative
effect of adoption of SFAS No. 109, Accounting for Income Taxes. Income, after
taxes, before realized gains (losses) excludes such item.
(8) Reflects tax benefit of $1,786,000 and $1,239,000 in 1993 and 1992,
respectively for utilization of capital losses carried forward in Zenith's
consolidated federal income tax return.
(9) Excludes $1,586,000 or $0.08 per share for net effect of legal settlement
and CLIGA assessment in 1993.
</TABLE>
16
<PAGE>
PROPERTY AND CASUALTY LOSS DEVELOPMENT
Zenith National Insurance Corp. and Subsidiaries
The table that follows shows analysis of development of loss and loss
adjustment expense liabilities as originally estimated on a GAAP basis at
December 31 of each year presented.
The accounting policies used to estimate these liabilities are described in Note
1 to the consolidated financial statements. Amounts represent all
property-casualty operations including CalFarm Insurance losses since its
acquisition June 4, 1985. Statutory reserves are not materially different from
GAAP reserves presented in this table.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1993 1992 1991 1990
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Liability for unpaid loss and loss adjustment expenses(1) $468,718,000 $464,149,000 $440,180,000 $415,645,000
- - ------------------------------------------------------------------------------------------------------------------------
Paid net of reinsurance (cumulative) as of:
One year later 176,815,000 177,071,000 153,914,000
Two years later 283,706,000 256,176,000
Three years later 314,957,000
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
- - -------------------------------------------------------------------------------------------------------------------------
Liability net of reinsurance reestimated as of:
One year later (2) 473,220,000 460,114,000 418,730,000
Two years later 477,877,000 433,604,000
Three years later 445,074,000
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
- - -------------------------------------------------------------------------------------------------------------------------
Favorable (deficient) development $ 9,071,000 $(37,697,000 ) $(29,429,000)
- - -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The analysis above presents the development of Zenith's balance sheet
liabilities for 1983 through 1993. The first line shows the liability for loss
and loss adjustment expense as estimated at the end of each calendar year. The
first section shows the actual payments of losses and expenses that relate to
each year end liability as they are paid during subsequent annual periods. The
second section includes revised estimates of unpaid amounts as well as the
payments. The final line shows the favorable or deficient developments of the
original estimates through 1993. Since conditions and trends that have affected
loss and loss adjustment expense development in the past may not occur in the
future in exactly the same manner, if at all, future results may not be reliably
predicted by extrapolation of the data presented.
(1) Net of receivable from reinsurers on unpaid losses and loss adjustment
expenses of $44,552,000 in 1993 and $32,701,000 in 1992.
(2) Net of re-estimated receivable from reinsurers of $55,055,000.
17
<PAGE>
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1989 1988 1987 1986 1985 1984 1983
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid loss and loss
adjustment expenses(1) $377,891,000 $337,979,000 $286,844,000 $217,161,000 $153,483,000 $113,567,000 $89,526,000
- - ---------------------------------------------------------------------------------------------------------------------------------
Paid net of reinsurance (cumulative) as of:
One year later 121,051,000 108,423,000 98,802,000 83,511,000 70,725,000 50,376,000 37,032,000
Two years later 196,578,000 169,332,000 152,609,000 128,998,000 107,104,000 82,783,000 61,902,000
Three years later 250,078,000 206,412,000 182,843,000 156,705,000 127,532,000 98,991,000 76,073,000
Four years later 281,409,000 235,720,000 200,753,000 172,261,000 139,188,000 107,850,000 83,194,000
Five years later 254,062,000 218,712,000 181,708,000 146,031,000 114,529,000 88,053,000
Six years later 230,337,000 193,759,000 150,892,000 118,206,000 91,979,000
Seven years later 201,313,000 154,879,000 121,377,000 94,110,000
Eight years later 158,339,000 123,546,000 95,967,000
Nine years later 126,046,000 97,498,000
Ten years later 99,246,000
- - ---------------------------------------------------------------------------------------------------------------------------------
Liability net of reinsurance reestimated
as of:
One year later 372,542,000 331,770,000 286,389,000 213,884,000 154,027,000 126,553,000 92,847,000
Two year later 362,718,000 322,632,000 282,865,000 219,691,000 156,736,000 125,900,000 99,197,000
Three year later 365,901,000 318,052,000 281,937,000 221,401,000 160,791,000 124,876,000 99,886,000
Four year later 372,429,000 315,548,000 278,664,000 222,532,000 164,164,000 127,532,000 98,674,000
Five year later 318,506,000 273,723,000 222,122,000 164,090,000 129,793,000 100,268,000
Six year later 274,248,000 223,622,000 164,685,000 129,714,000 101,700,000
Seven year later 226,059,000 166,594,000 129,956,000 101,676,000
Eight year later 169,008,000 131,289,000 102,058,000
Nine year later 133,723,000 103,230,000
Ten year later 105,185,000
- - ---------------------------------------------------------------------------------------------------------------------------------
Favorable (deficient) development $ 5,462,000 $19,473,000 $12,596,000 $(8,898,000)$(15,525,000)$(20,156,000)$(15,659,000)
- - ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
CONSOLIDATED BALANCE SHEET
Zenith National Insurance Corp. and Subsidiaries
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------------
December 31, Note 1993 1992
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Investments
Fixed maturities:
At amortized cost (fair value $438,705,000, 1993, $1,063,235,000, 1992) $ 401,337,000 $1,031,128,000
At fair value (cost $687,075,000, 1993, $58,296,000, 1992) 705,682,000 58,307,000
Floating rate preferred stocks, at fair value (cost $30,582,000, 1993 and
$34,743,000, 1992) 31,495,000 32,923,000
Convertible and non-redeemable preferred stocks, at fair value (cost $11,545,000,
1993
and $14,096,000, 1992) 11,246,000 14,336,000
Common stocks, at fair value (cost $14,485,000, 1993 and $28,755,000, 1992) 15,575,000 29,656,000
Mortgage loans on real estate 4,515,000 4,960,000
Policy loans 39,609,000 34,308,000
Short-term investments (at cost, which approximates market) 276,841,000 158,698,000
Other investments 14,097,000 10,780,000
- - -------------------------------------------------------------------------------------------------------------------------------
Total investments 1, 2 1,500,397,000 1,375,096,000
Cash 8,560,000 1,856,000
Accrued investment income 21,635,000 22,490,000
Premiums receivable, less allowance for doubtful accounts of $887,000, 1993
and $400,000, 1992 59,188,000 58,381,000
Premium notes receivable, collateralized by letters of credit 1,647,000 1,858,000
Receivable from reinsurers and prepaid reinsurance premiums 57,426,000 47,189,000
Earned but unbilled premiums receivable 4,586,000 6,880,000
Deferred policy acquisition costs 108,416,000 91,019,000
Properties and equipment, less accumulated depreciation 3 47,042,000 48,443,000
Federal income taxes 7 6,987,000
Purchased intangibles and other assets 1 23,216,000 24,382,000
Excess of cost over net assets acquired 1 2,009,000 2,009,000
Other assets 23,668,000 16,963,000
- - -------------------------------------------------------------------------------------------------------------------------------
Total assets $1,857,790,000 $1,703,553,000
- - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
19
<PAGE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------------
December 31, Note 1993 1992
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Liabilities
Policy liabilities and accruals
Unpaid losses and loss expenses $ 513,270,000 $ 496,850,000
Future policy benefits for life insurance contracts 4 154,501,000 138,686,000
Deposits on deferred annuity contracts 545,956,000 485,096,000
Policy and contract claims 5,934,000 7,041,000
Unearned premiums 111,896,000 101,799,000
Policyholders' dividends accrued and accumulated 30,378,000 28,304,000
Other policyholder funds 16,857,000 14,401,000
Reserves on loss portfolio transfers 11,119,000 12,792,000
Senior notes payable, less unamortized issue costs
of $1,011,000, 1993 and $1,132,000, 1992 6 73,989,000 73,868,000
Federal income taxes 7 14,255,000
Special policyholders' dividend--Proposition 103 rollback refund 9 18,111,000
Other liabilities 30,170,000 25,007,000
- - -------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,508,325,000 1,401,955,000
- - -------------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities 9
Stockholders' equity
Preferred stock, $1 par--shares authorized 1,000,000; issued and outstanding,
none in 1993 and 1992
Common stock, $1 par--shares authorized 50,000,000; issued 23,910,000, outstanding
18,841,000, 1993; issued 23,562,000, outstanding 18,813,000, 1992 10 23,910,000 23,562,000
Additional paid-in capital 249,092,000 242,226,000
Retained earnings 148,043,000 113,867,000
Net unrealized appreciation (depreciation) on investments, net of $7,093,000
deferred taxes in 1993 1, 2 13,176,000 (668,000)
- - -------------------------------------------------------------------------------------------------------------------------------
434,221,000 378,987,000
Less treasury stock at cost (5,069,000 shares, 1993 and 4,749,000 shares, 1992) 10 (84,756,000) (77,389,000)
- - -------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 349,465,000 301,598,000
- - -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,857,790,000 $1,703,553,000
- - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
Zenith National Insurance Corp. and Subsidiaries
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------
Year ended December 31, Note 1993 1992 1991
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consolidated revenues:
Property and casualty premium income 8 $405,901,000 $377,426,000 $376,068,000
Health and life premium income and other policy charges 63,921,000 64,448,000 61,556,000
Net investment income 2 92,474,000 96,614,000 95,685,000
Realized gains on investments 2 21,045,000 10,847,000 12,999,000
Other income, net 9 2,441,000
- - -----------------------------------------------------------------------------------------------------------------------
Total revenues 585,782,000 549,335,000 546,308,000
- - -----------------------------------------------------------------------------------------------------------------------
Expenses:
Property and casualty losses and loss expenses incurred 8 275,208,000 289,732,000 264,851,000
Health and life benefits and other policy credits 84,448,000 85,493,000 79,924,000
Policy acquisition costs 73,942,000 71,787,000 76,183,000
Other underwriting and operating expenses 55,152,000 55,200,000 57,287,000
Policyholders' dividends and participation 16,895,000 4,867,000 10,113,000
Special policyholders' dividend--Proposition 103 rollback refund 9 16,078,000
Interest expense 5, 6 6,658,000 6,472,000 5,430,000
- - -----------------------------------------------------------------------------------------------------------------------
Total expenses 512,303,000 529,629,000 493,788,000
- - -----------------------------------------------------------------------------------------------------------------------
Income from operations before federal income taxes,
extraordinary items and cumulative effect of accounting change 73,479,000 19,706,000 52,520,000
Federal income taxes 7 20,279,000 370,000 9,219,000
- - -----------------------------------------------------------------------------------------------------------------------
Net income before extraordinary items and cumulative effect of
accounting change 53,200,000 19,336,000 43,301,000
Extraordinary item--debt retirement cost,
net of tax benefit of $698,000 6 (1,355,000)
Extraordinary item--tax benefit associated with utilization
of capital losses carried forward 7 2,600,000
Cumulative effect of change in accounting for income taxes 1, 7 10,719,000
- - -----------------------------------------------------------------------------------------------------------------------
Net income $ 53,200,000 $ 28,700,000 $ 45,901,000
- - -----------------------------------------------------------------------------------------------------------------------
Earnings per share:
Net income before extraordinary items and cumulative effect
of accounting change $ 2.76 $ 1.02 $ 2.28
Extraordinary items (.07) .14
Cumulative effect of change in accounting for income taxes .57
- - -----------------------------------------------------------------------------------------------------------------------
Net income per common share 11 $ 2.76 $ 1.52 $ 2.42
- - -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
21
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
Zenith National Insurance Corp. and Subsidiaries
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1993 1992 1991
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Premiums collected $ 492,758,000 $ 459,247,000 $ 461,330,000
Deposits on universal life type contracts 21,142,000 14,761,000 12,084,000
Investment income received 95,324,000 98,192,000 94,692,000
Losses and loss adjustment expenses paid (270,854,000) (266,345,000) (244,799,000)
Health claims paid (31,305,000) (33,597,000) (31,996,000)
Death and surrender benefits paid (11,659,000) (11,655,000) (10,588,000)
Underwriting and other operating expenses paid (131,082,000) (130,458,000) (132,837,000)
Real estate construction costs paid (7,285,000)
Reinsurance premiums paid (21,429,000) (22,797,000) (22,765,000)
Dividends paid to policyholders (14,720,000) (10,307,000) (19,008,000)
Special policyholders' dividend--Proposition 103 rollback refund (18,447,000)
Interest paid (6,914,000) (6,073,000) (5,128,000)
Interest on deferred annuity contracts (33,752,000) (33,593,000) (29,014,000)
Income taxes paid (5,178,000) (3,446,000) (3,005,000)
- - ------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 56,599,000 53,929,000 68,966,000
- - ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of invested assets (620,044,000) (638,854,000) (1,009,210,000)
Proceeds from sales of invested assets 651,907,000 479,080,000 842,752,000
Capital expenditures (3,568,000) (4,168,000) (3,347,000)
Cash received under portfolio transfers 7,628,000 174,000
Losses and adjustment expenses paid under portfolio transfers (1,656,000) (2,187,000) (3,267,000)
Net change in short-term investments (116,953,000) 6,683,000 57,756,000
Other -- principally cash received (advanced) through notes
receivable 2,309,000 128,000 (2,910,000)
- - ------------------------------------------------------------------------------------------------------------------
Net cash flows from investing activities (88,005,000) (151,690,000) (118,052,000)
- - ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Cash received from bank line of credit 1,000,000 6,350,000 32,300,000
Cash paid on bank line of credit (1,000,000) (40,150,000) (36,600,000)
Cash dividends paid to common stockholders (19,018,000) (18,927,000) (19,012,000)
Proceeds from exercise of stock options 6,261,000 4,526,000 599,000
Deposits on deferred annuity contracts 56,764,000 83,600,000 80,203,000
Acquisition costs of deferred annuity contracts, deferred (5,925,000) (9,104,000) (9,104,000)
Annuitization and return of policyholders' balances on deferred
annuity contracts (26,357,000) (20,279,000) (18,280,000)
Retirement of Senior Notes payable 1994 (17,740,000)
Net proceeds from issuance of Senior Notes payable 2002 73,787,000
Interest on deferred annuity contracts 33,752,000 33,593,000 29,014,000
Purchase of treasury shares (7,367,000) (5,686,000) (4,954,000)
- - ------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities 38,110,000 89,970,000 54,166,000
- - ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 6,704,000 (7,791,000) 5,080,000
Cash at beginning of year 1,856,000 9,647,000 4,567,000
- - ------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 8,560,000 $ 1,856,000 $ 9,647,000
- - ------------------------------------------------------------------------------------------------------------------
Reconciliation of net income to net cash flows from operating
activities:
Net income $ 53,200,000 $ 28,700,000 $ 45,901,000
Adjustments to reconcile net income to net cash flows from operating
activities:
Depreciation 4,978,000 4,855,000 4,832,000
Amortization of intangibles and costs on notes payable 1,286,000 2,969,000 1,575,000
Net amortization of bonds and preferred stocks 1,683,000 1,885,000 269,000
Realized gains on investments (21,045,000) (10,847,000) (12,999,000)
Decrease (increase) in:
Accrued investment income 855,000 (542,000) (1,484,000)
Premiums receivable 1,698,000 3,634,000 5,340,000
Receivable from reinsurers (10,237,000) (41,384,000) (4,301,000)
Deferred policy acquisition costs (11,472,000) (5,305,000) (3,602,000)
Increase (decrease) in:
Unpaid losses and loss expenses 16,420,000 56,670,000 24,535,000
Future policy benefits for life insurance contracts 15,815,000 12,917,000 9,637,000
Policy and contract claims (1,107,000) (168,000) (150,000)
Unearned premiums 10,097,000 6,220,000 5,116,000
Policyholders' dividends accrued and accumulated (16,037,000) 13,349,000 (9,113,000)
Other policyholder funds 2,456,000 (176,000) 2,234,000
Federal income taxes 15,101,000 (14,493,000) 3,614,000
Other (7,092,000) (4,355,000) (2,438,000)
- - ------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities $ 56,599,000 $ 53,929,000 $ 68,966,000
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
22
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Zenith National Insurance Corp. and Subsidiaries
<TABLE>
<CAPTION>aa
- - ---------------------------------------------------------------------------------------------------------------------------
Preferred Common
Three years ended December 31, 1993 Note stock $1 par stock $1 par
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1990 $23,215,000
Net income for 1991
Net unrealized appreciation on investments in equity securities 2
Exercise of 44,000 stock options 10 44,000
Tax benefit on options exercised in 1991
Purchase of 336,000 treasury shares at cost
Cash dividends declared to common stockholders ($1.00 per share,
paid quarterly)
- - ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1991 23,259,000
Net income for 1992
Net unrealized appreciation on investments 2
Exercise of 303,000 stock options 10 303,000
Tax benefit on options exercised in 1992
Purchase of 323,000 treasury shares at cost
Cash dividends declared to common stockholders ($1.00 per share,
paid quarterly)
- - ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992 23,562,000
Net income for 1993
Net unrealized appreciation on investments, net of deferred taxes of $543,000 1,2
Cumulative effect of change in accounting for investments, net of deferred taxes
of $6,550,000 1
Exercise of 348,000 stock options 10 348,000
Tax benefit on options exercised in 1993
Purchase of 320,000 treasury shares at cost
Cash dividends declared to common stockholders ($1.00 per share,
paid quarterly)
- - ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 $23,910,000
- - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
23
<PAGE>
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
Additional Net unrealized appreciation
paid-in Retained (depreciation) on Treasury
Three years ended December 31, 1993 capital earnings investments stock Total
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1990 $237,095,000 $ 77,128,000 $ (29,394,000) $ (66,749,000) $ 241,295,000
Net income for 1991 45,901,000 45,901,000
Net unrealized appreciation on investments in
equity securities 17,321,000 17,321,000
Exercise of 44,000 stock options 555,000 599,000
Tax benefit on options exercised in 1991 48,000 48,000
Purchase of 336,000 treasury shares at cost (4,954,000) (4,954,000)
Cash dividends declared to common stockholders
($1.00 per share, paid quarterly) (18,976,000) (18,976,000)
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1991 237,698,000 104,053,000 (12,073,000) (71,703,000) 281,234,000
Net income for 1992 28,700,000 28,700,000
Net unrealized appreciation on investments 11,405,000 11,405,000
Exercise of 303,000 stock options 4,223,000 4,526,000
Tax benefit on options exercised in 1992 305,000 305,000
Purchase of 323,000 treasury shares at cost (5,686,000) (5,686,000)
Cash dividends declared to common stockholders
($1.00 per share, paid quarterly) (18,886,000) (18,886,000)
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992 242,226,000 113,867,000 (668,000) (77,389,000) 301,598,000
Net income for 1993 53,200,000 53,200,000
Net unrealized appreciation on investments, net
of deferred taxes of $543,000 1,681,000 1,681,000
Cumulative effect of change in accounting for
investments, net of deferred taxes of
$6,550,000 12,163,000 12,163,000
Exercise of 348,000 stock options 5,913,000 6,261,000
Tax benefit on options exercised in 1993 953,000 953,000
Purchase of 320,000 treasury shares at cost (7,367,000) (7,367,000)
Cash dividends declared to common stockholders
($1.00) per share, paid quarterly) (19,024,000) (19,024,000)
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 $249,092,000 $ 148,043,000 $ 13,176,000 $ (84,756,000) $ 349,465,000
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Zenith National Insurance Corp. and Subsidiaries
NOTE 1--SUMMARY OF ACCOUNTING POLICIES,
OPERATIONS AND PRINCIPLES OF CONSOLIDATION
Zenith National Insurance Corp. ("Zenith") is engaged through its wholly-
owned insurance subsidiaries, Zenith Insurance Company ("Zenith Insurance"),
CalFarm Insurance Company ("CalFarm Insurance"), ZNAT Insurance Company
("ZNAT"), and CalFarm Life Insurance Company ("CalFarm Life"), in the business
of writing workers' compensation insurance primarily in California; reinsurance;
annuities; health and life insurance coverages; and auto, homeowners, farmowners
and other coverages primarily in the rural areas of California. Zenith also
conducts real estate operations, developing private residences for sale in Las
Vegas, Nevada, through its wholly owned subsidiary, Perma-Bilt, a Nevada
Corporation ("Perma-Bilt").
The financial statements have been prepared in accordance with generally
accepted accounting principles and include Zenith and its subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments ("SFAS No. 107"), requires disclosure of fair
value information about most financial instruments, both on and off the balance
sheet, if it is practicable to estimate. SFAS No. 107 excludes certain financial
instruments, such as certain insurance contracts, and all non-financial
instruments from its disclosure requirements. A financial instrument is defined
as a contractual obligation that ultimately ends with the delivery of cash or an
ownership interest in an entity. Disclosures, included in these notes, regarding
the fair value of financial instruments have been derived using external market
sources, estimates using present value or other valuation techniques.
INVESTMENTS AND CHANGE IN ACCOUNTING PRINCIPLE
At December 31, 1993 Zenith adopted Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("SFAS No. 115"); prior periods have not been restated. SFAS No. 115
requires investments in debt and equity securities to be identified to three
categories as follows: Held-to-maturity -- those securities, which by their
terms must be redeemed by the issuing company, that the enterprise has the
positive intent and ability to hold to maturity, are reported at amortized cost.
Trading
securities -- those securities that are held principally for the purpose of
selling them in the near term and are reported at fair value with unrealized
gains and losses included in earnings. Available-for-sale -- those securities
not classified as either held-to-maturity or trading securities and are reported
at fair value with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity. The cumulative effect
of such adoption has been reported separately in the consolidated statement of
stockholders' equity and was insignificant to the consolidated statement of
operations.
Prior to the implementation of SFAS No. 115, and since September 1992,
investments in fixed maturities which might, under certain circumstances, be
sold prior to their dates of maturity were classified as investments "held for
sale" and such portfolio was recorded at the lower of cost or market value.
Unrealized losses, net of deferred taxes, on such investments, if any, were
recorded as a charge directly to stockholders' equity. In addition, Zenith
identified certain investments in fixed maturities held for trading purposes.
Such investments were recorded at market value and unrealized gains or losses on
such investments, net of deferred taxes, were credited or charged directly to
stockholders' equity.
25
<PAGE>
Mortgage loans on real estate are carried at amortized cost. Policy loans
and other investments are stated at cost. Although the policy loans generally
have no stated maturity, the majority of these loans have interest rates that
fluctuate directly with credited interest rates on related deferred annuity
contracts and, accordingly, the carrying value approximates fair value.
When, in the opinion of management, a decline in market value of investments
is considered to be "other than temporary," such investments are written down to
their net realizable value. The determination of "other than temporary"
includes, in addition to consideration of other relevant factors, a presumption
that if the market value is below cost, by a significant amount for a period of
time, a writedown is necessary.
The market value of investments was supplied by the Merrill Lynch pricing
service, with the exception of 50 items whose values were obtained from other
brokers making a market in the investment, the Bloomberg and Quotron financial
news services, and analytical pricing methods for issues for which there is no
market. These market values are considered fair value.
The cost of securities sold is determined by the "identified certificate"
method. Short-term investments include, certificates of deposit, commercial
paper and U.S. Treasury securities with maturities of less than one year at the
time of purchase. For these short-term investments, the carrying amount is a
reasonable estimate of fair value.
FEDERAL INCOME TAXES AND CHANGE IN ACCOUNTING PRINCIPLE
The federal income tax provision for 1993 and 1992 was prepared in
accordance with Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes ("SFAS No. 109"), adopted in 1992 effective from the beginning
of 1992 and prior periods have not been restated. The cumulative effect of such
adoption was $10,719,000 in 1992 and is reported in the consolidated statement
of operations. This standard replaced the deferred method of accounting for
deferred income taxes with the liability method, in which deferred assets and
liabilities are established for temporary differences between the financial
statement values of assets and liabilities and their tax bases. The effects of
temporary differences are set forth in Note 7.
RECOGNITION OF PROPERTY AND CASUALTY REVENUE AND EXPENSE
Property and casualty premiums are earned on a pro rata basis over the terms
of the policies. Premiums applicable to the unexpired terms of policies in force
are recorded as unearned premiums. Premiums earned reflect an estimate for
earned but unbilled audit premiums. Workers' compensation insurance premiums are
based upon the payroll of the insured.
An estimated provision for workers' compensation policyholders' dividends is
accrued as the related premiums are earned. Such dividends do not become a fixed
liability unless and until declared by the Board of Directors.
Zenith Insurance and CalFarm Insurance make provision for the settlement of
all incurred claims, both reported and unreported. The liabilities for unpaid
losses and loss expenses are estimates for the eventual costs of claims incurred
but not settled, less estimates of salvage and subrogation. Estimates for
reported claims are primarily determined by evaluation of individual reported
claims. Estimates for claims incurred but not reported are based on Zenith
Insurance's and CalFarm Insurance's experience with respect to the probable
number and nature of such claims. The methods for making such estimates and for
establishing the resulting liabilities are continually reviewed and updated and
any adjustments resulting therefrom are reflected in earnings currently.
RECOGNITION OF REVENUE AND BENEFITS FOR DEFERRED ANNUITY CONTRACTS
Revenues earned from deferred annuity contracts represent amounts assessed
against contract balances during the period, principally for surrenders.
Deposits on deferred annuities represent the amounts received plus credited
interest, less applicable administrative fees. Interest credited rates ranged
from 3.25% to 8.25% in 1993 except for indexed deferred annuity contracts where
rates ranged from 4.5% to 5.5% in 1993.
The fair value of Zenith's liabilities for deposits on deferred annuity
contracts is based on amounts received plus credited interest rates adjusted on
the contract anniversary date to current market rates for these instruments,
less applicable fees, which approximates the carrying amount reported in the
consolidated balance sheet.
26
<PAGE>
RECOGNITION OF REVENUE AND BENEFITS FOR UNIVERSAL LIFE, SINGLE PREMIUM LIFE, AND
OTHER INTEREST-SENSITIVE LIFE CONTRACTS
Revenues from universal life, single premium life, and other
interest-sensitive life contracts represent amounts assessed against policy
account balances during the period for mortality charges, surrender charges and
policy administration charges earned.
Future policy benefits for universal life, single premium life and other
interest-sensitive life contracts represent policyholder account balances
consisting of the premiums received plus credited interest, less policyholder
assessments. Amounts included in expense represent benefits in excess of
policyholder account balances. Interest credited rates ranged from 3.75% to 7.0%
in 1993.
RECOGNITION OF REVENUE AND RELATED BENEFITS AND EXPENSES FOR TRADITIONAL LIFE
CONTRACTS AND HEALTH CONTRACTS
Revenues from traditional life insurance contracts represent premiums which
are recognized as income when due. Health insurance premiums are recognized as
income over the related contract period.
Benefits and expenses are associated with earned premiums so as to result in
recognition of profits over the life of the contracts. This association is
accomplished through the provision for future policy benefits and the deferral
and amortization of policy acquisition costs for traditional life contracts and
through the policy and contract liability for health contracts.
Future policy benefits for traditional life contracts have been computed
using primarily the net level premium reserve method based upon estimated future
investment yield, mortality, morbidity and withdrawals.
REINSURANCE
In accordance with general industry practices, Zenith's insurance
subsidiaries annually purchase reinsurance to protect against liabilities in
excess of certain limits on insurance risks they have underwritten. Such
arrangements are known, in the industry, as "excess of loss" protection. The
purpose of such reinsurance is to protect Zenith from the impact of large,
unforseen losses and such reinsurance reduces the magnitude of sudden and
unpredictable changes in net income and the capitalization of insurance
operations.
The ceding of reinsurance does not discharge the original insurer from
primary liability to its policyholder. Balances due from reinsurers on unpaid
losses, including an estimate of such recoverables related to revenues for
incurred but not reported losses are reported as assets and are included in
receivable from reinsurers. Earned premiums are stated in the consolidated
financial statements after deduction of amounts ceded to reinsurers.
Approximately 61% of amounts recoverable from reinsurers at December 31, 1993
are attributable to reinsurance arrangements with one large United States
reinsurance company. No amounts due from reinsurers have been written off as
uncollectible in the three years ended December 31, 1993.
DEFERRED POLICY ACQUISITION COSTS
Property and Casualty Insurance -- Policy acquisition costs, consisting of
commissions, premium taxes and certain other underwriting costs, are deferred
and amortized as the related premiums are earned.
Life Insurance -- The costs of acquiring new business, principally
commission and certain policy issuance and underwriting expenses, have been
deferred to the extent that such costs are recoverable from future revenues.
Costs deferred on deferred annuities, universal life, single premium life and
other interest-sensitive contracts are amortized in relationship to the present
value of expected future gross profits. Costs deferred on traditional life
policies are amortized over the premium paying period of the contracts in
proportion to future anticipated premiums. The assumptions underlying this
amortization schedule are continually reviewed and updated and any adjustments
resulting therefrom are reflected in earnings currently.
REAL ESTATE OPERATIONS
Land and land development costs, including costs of acquisition and
development, property taxes and related interest are capitalized and recognized
pro rata against sales of completed units.
27
<PAGE>
PROPERTIES AND EQUIPMENT
Properties and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated principally on a straight-line basis using the
following useful lives: buildings, 10 to 40 years; furniture, fixture and
equipment, 3 to 10 years.
Expenditures for maintenance and repairs are charged to operations as
incurred. Additions and improvements to buildings and other fixed assets are
capitalized and depreciated. Upon disposition, the asset cost and related
depreciation are removed from the accounts and the resulting gain or loss is
included in income.
PURCHASED INTANGIBLES AND OTHER ASSETS
Purchased intangibles and other assets represent the total amount of the
cost in excess of net tangible assets acquired through the CalFarm acquisition.
This amount has been assigned to various intangibles and other amortizable
assets and the assigned values are being amortized actuarially, or on a
straight-line basis over 25 years. Amortization expense for 1993, 1992 and 1991
was $1,166,000, $1,147,000, and $1,118,000, respectively, and accumulated
amortization was $12,318,000 at December 31, 1993 and $11,152,000 at December
31, 1992.
EXCESS OF COST OVER NET ASSETS ACQUIRED
The excess of cost over net assets acquired of $2,009,000 represents the
unamortized excess of cost over underlying net tangible assets of companies
acquired prior to 1970, which is considered to have continuing value, and is not
being amortized.
RECLASSIFICATIONS
Certain 1992 and 1991 amounts have been reclassified to conform to the 1993
presentation.
NOTE 2--INVESTMENTS
The amortized cost and fair values of investments held-to-maturity,
available-for-sale and trading securities were as follows:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------
(Dollars in Gross Gross
thousands) Amortized unrealized unrealized Fair
December 31, 1993 cost gains (losses) value
- - --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity
U.S. Treasury
securities $ 248 $ 7 $ 255
Corporate debt
securities 340,931 36,532 $ (347) 377,116
Mortgage backed
securities 60,158 1,176 61,334
- - --------------------------------------------------------------------
Total, held-
to-maturity $ 401,337 $ 37,715 $ (347) $ 438,705
- - --------------------------------------------------------------------
- - --------------------------------------------------------------------
(Dollars in Gross Gross
thousands) Amortized unrealized unrealized Fair
December 31, 1993 cost gains (losses) value
- - --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale
U.S. Treasury
securities $ 215,945 $ 444 $ (509) $ 215,880
Foreign government
debt securities 5,612 79 5,691
Corporate debt
securities 262,003 19,287 (894) 280,396
Mortgage backed
securities 58,446 598 (8) 59,036
Redeemable
preferred stocks 33,217 753 (995) 32,975
Equity securities 48,827 1,861 (347) 50,341
Short-term
investments 276,841 276,841
- - --------------------------------------------------------------------
Total,
available-
for-sale $ 900,891 $ 23,022 $ (2,753) $ 921,160
- - --------------------------------------------------------------------
Trading securities
U.S. Treasury
securities $ 107,747 $ 27 $ (140) $ 107,634
Corporate debt
securities 4,105 57 (92) 4,070
Equity securities 7,785 228 (38) 7,975
- - --------------------------------------------------------------------
Total, trading
securities $ 119,637 $ 312 $ (270) $ 119,679
- - --------------------------------------------------------------------
</TABLE>
Fixed maturity investments at December 31, 1993, are due as follows:
<TABLE>
<CAPTION>
- - -------------------------------------------------------
(Dollars in thousands) Amortized Fair
December 31, 1993 cost value
- - -------------------------------------------------------
<S> <C> <C>
Held-to-maturity:
Due in one year or less $ 8,495 $ 8,977
Due after one year through
five years 78,499 85,879
Due after five years through
ten years 151,725 164,829
Due after ten years 162,618 179,020
- - -------------------------------------------------------
Total $ 401,337 $ 438,705
- - -------------------------------------------------------
Available-for-sale:
Due in one year or less $ 368,538 $ 368,994
Due after one year through
five years 286,188 290,121
Due after five years through
ten years 112,205 118,641
Due after ten years 85,133 93,063
- - -------------------------------------------------------
Total $ 852,064 $ 870,819
- - -------------------------------------------------------
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Mortgage-backed securities are shown as being due at
their average expected maturity dates. Redeemable preferred stocks with sinking
fund redemption periods are shown as being due at the mid-point of the sinking
fund period.
28
<PAGE>
The amortized cost and market values of investments in fixed maturities and
short-term investments were as follows:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------
(Dollars in
thousands) Gross Gross
December 31, Amortized unrealized unrealized Market
1992 cost gains (losses) value
- - ------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S.
Treasury
securities and
obligations
of U.S.
government
corporations
and agencies:
Held for
investment $ 256,927 $ 2,570 $ (501) $ 258,996
Held for sale 71,601 1,908 (6) 73,503
Trading
portfolio 55,374 94 (105) 55,363
Short-term
investments 19,977 19,977
- - --------------------------------------------------------------
Total $ 403,879 $ 4,572 $ (612) $ 407,839
- - --------------------------------------------------------------
Obligations of
states and
political
subdivisions:
Held for
investment $ 1,339 $ 1,339
Corporate
securities:
Held for
investment $ 654,497 $ 31,506 $ (2,743) $ 683,260
Held for sale 46,764 1,099 (1,726) 46,137
Trading
portfolio 2,922 22 2,944
Short-term
investments 138,721 138,721
- - --------------------------------------------------------------
Total $ 842,904 $ 32,627 $ (4,469) $ 871,062
- - --------------------------------------------------------------
Total:
Held for
investment $ 912,763 $ 34,076 $ (3,244) $ 943,595
Held for sale 118,365 3,007 (1,732) 119,640
Trading
portfolio 58,296 116 (105) 58,307
Short-term
investments 158,698 158,698
- - --------------------------------------------------------------
Total $1,248,122 $ 37,199 $ (5,081) $1,280,240
- - --------------------------------------------------------------
</TABLE>
Proceeds from sales of fixed maturities were $377,021,000, $290,326,000 and
$754,548,000 during 1993, 1992 and 1991, respectively. Gross gains of
$14,189,000 and gross losses of $588,000 were realized on such sales in 1993.
Gross gains of $11,949,000 and gross losses of $2,142,000 were realized on such
sales in 1992. Gross gains of $17,221,000 and gross losses of $4,258,000 were
realized on such sales in 1991.
Gross unrealized appreciation and gross
unrealized depreciation were:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------
(Dollars in thousands)
December 31, 1993 1992
- - ---------------------------------------------------------
<S> <C> <C>
Fixed maturities
Unrealized appreciation $ 21,161 $ 116
Unrealized (depreciation) (2,406) (105)
- - ---------------------------------------------------------
Net unrealized appreciation $ 18,755 $ 11
- - ---------------------------------------------------------
Equity securities
Unrealized appreciation $ 1,861 $ 3,320
Unrealized (depreciation) (347) (3,999)
- - ---------------------------------------------------------
Net unrealized appreciation
(depreciation) $ 1,514 $ (679)
- - ---------------------------------------------------------
Total $ 20,269 $ (668)
- - ---------------------------------------------------------
</TABLE>
Net realized gains (losses) on investments and net unrealized appreciation
(depreciation) on total investments before taxes are summarized as follows:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------
(Dollars in thousands) Fixed Equity
Year Ended December 31, maturities securities Total
- - -----------------------------------------------------------------
<S> <C> <C> <C>
1993
Net realized investment
gains:
Held for investment $ 5,107
Held for sale 6,347
Trading portfolio 2,147
-----------
Total net realized
investment gains 13,601 $ 7,444 $ 21,045
Net unrealized
appreciation
(depreciation) during
the year:
Held for investment 6,536
Held for sale 17,480
Trading portfolio (159)
-----------
Total net unrealized
appreciation during
the year 23,857 2,383 26,240
- - -----------------------------------------------------------------
Total $ 37,458 $ 9,827 $ 47,285
- - -----------------------------------------------------------------
1992
Net realized investment
gains (losses):
Held for investment $ 8,488
Held for sale (111)
Short-term investments
162
-----------
Total net realized
investment gains 8,539 $ 2,308 $ 10,847
Net unrealized
appreciation
(depreciation) during
the year:
Held for investment 4,071
Held for sale (940)
Trading portfolio 11
-----------
Total net unrealized
appreciation during
the year 3,142 11,394 14,536
- - -----------------------------------------------------------------
Total $ 11,681 $ 13,702 $ 25,383
- - -----------------------------------------------------------------
1991
Net realized investment
gains $ 9,812 $ 3,187 $ 12,999
Net unrealized
appreciation during
the year 78,250 17,321 95,571
- - -----------------------------------------------------------------
Total $ 88,062 $ 20,508 $ 108,570
- - -----------------------------------------------------------------
</TABLE>
29
<PAGE>
Investment income is summarized as follows:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------
(Dollars in thousands)
Year ended December 31, 1993 1992 1991
- - ----------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities
Bonds $ 79,384 $ 78,197 $ 68,462
Redeemable
preferred stocks 3,205 6,382 10,515
Equity securities
Floating rate
preferred stocks 2,181 2,972 4,183
Convertible and
nonredeemable
preferred stocks 715 1,155 1,058
Common stocks 325 486 680
Mortgage loans on
real estate 572 980 973
Policy loans 2,562 2,129 1,733
Short-term investments 6,775 5,023 8,445
Notes receivable 101 195 425
Other 1,454 3,163 3,238
- - ----------------------------------------------------------------
97,274 100,682 99,712
Less investment expenses 4,800 4,068 4,027
- - ----------------------------------------------------------------
Net investment income $ 92,474 $ 96,614 $ 95,685
- - ----------------------------------------------------------------
</TABLE>
Investments carried at $314,400,000 at December 31, 1993 and $302,400,000 at
December 31, 1992 (market value $313,700,000 and $304,800,000, respectively) are
on deposit with regulatory authorities in compliance with insurance company
regulations.
Zenith maintains a diversified investment portfolio as described in
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations. There were no securities in the investment portfolio
which exceeded 10% of stockholders' equity at either December 31, 1993 or 1992.
As of December 31, 1993, Zenith and its subsidiaries own $11,613,000 of
securities in Reliance Insurance Company, its parent and affiliates. Reliance
Insurance Company is a major stockholder of Zenith.
NOTE 3--PROPERTIES AND EQUIPMENT
Properties and equipment consists of the following:
<TABLE>
<CAPTION>
- - ------------------------------------------------------
(Dollars in thousands)
December 31, 1993 1992
- - ------------------------------------------------------
<S> <C> <C>
Land $ 14,836 $ 14,836
Buildings 32,360 31,060
Furniture, fixtures and
equipment 32,450 30,204
- - ------------------------------------------------------
79,646 76,100
Less accumulated depreciation 32,604 27,657
- - ------------------------------------------------------
Total $ 47,042 $ 48,443
- - ------------------------------------------------------
</TABLE>
NOTE 4--FUTURE POLICY BENEFITS
Future policy benefits and life insurance in force consist of:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------
Life Future Interest
(Dollars in thousands) Insurance policy rate
December 31, in force benefits assumptions
- - --------------------------------------------------------------------
<S> <C> <C> <C>
1993
Universal life contracts $ 2,151,874 $ 88,165 7.0%
Traditional life
contracts 750,750 48,969 9.9%
Other 73,554 17,367 7.9%
- - --------------------------------------------------------------------
1992
Universal life contracts $ 1,799,056 $ 74,076 7.3%
Traditional life
contracts 796,722 47,755 9.6%
Other 355,871 16,855 8.6%
- - --------------------------------------------------------------------
</TABLE>
Reinsurance recoverable on future policy benefits amounting to $730,000 and
$686,000 at December 31, 1993 and 1992, respectively, is recorded as an asset.
Traditional life and group life mortality assumptions are based upon
multiples, ranging from 70% to 120%, applied to the 1967-70 Select and Ultimate
Mortality Tables. Individual and group accident and health morbidity assumptions
are based upon CalFarm Life experience. Withdrawal assumptions are based upon
either CalFarm Life experience or industry tables modified, where appropriate,
for CalFarm Life experience.
Mortality, morbidity and withdrawal assumptions for other lines of insurance
(including paid up and reinsurance assumed) are calculated using various
statutory assumptions.
Assumptions with regard to interest rates, mortality, morbidity and
withdrawals for reinsurance ceded approximate the assumptions used in
calculating the related direct reserves.
For deferred annuity contracts, universal life, single premium life, and
other interest-sensitive life insurance contracts, it is assumed that the earned
interest rate would exceed the rate credited to account values by the amount of
the target interest spreads established for each product.
NOTE 5--PAYABLE TO BANKS
Zenith has lines of credit available of $50 million. As of December 31, 1993
and 1992, there were no outstanding balances on these unsecured lines of credit.
Interest on funds borrowed through one of these lines of credit is payable at
the banks' prime rate, less .55%, and at a published prime or a fixed rate
chosen by Zenith on the other line of credit. Zenith Insurance has a line of
credit available of $3 million to enable it to issue letters of credit in favor
of ceding companies in certain states where such ceding companies would not
otherwise be allowed to take credit for reinsurance ceded to Zenith Insurance.
30
<PAGE>
Under these agreements certain restrictive covenants apply including the
maintenance of a specific level of net worth for Zenith and its insurance
subsidiaries.
The weighted average interest rate for 1993, 1992 and 1991 was 5.5%, 6.2%
and 8.2%, respectively. At December 31, 1993 and 1992 the prime interest rate
was 6%.
NOTE 6--SENIOR NOTES PAYABLE
$75,000,000 of 9% Senior Notes due 2002 (the "9% Notes") were issued at par
in May 1992. Interest on the notes is payable semi-annually. The notes are
general unsecured obligations of Zenith. Issue costs of $1,213,000 are being
amortized over the term of the notes and $121,000 and $81,000 of such costs were
amortized during 1993 and 1992, respectively. Covenants contained in the
indenture include restrictions on the ability of Zenith and its subsidiaries to
incur secured debt and the right of holders of the 9% Notes to require Zenith to
repurchase the 9% Notes upon a decline in the rating of the 9% Notes within
ninety days after the occurrence of certain events. Those events are: (a) a
person or group becomes the beneficial owner of more than 50% of Zenith common
stock; (b) 10% or more of Zenith common stock is acquired by Zenith within any
twelve month period; or (c) the sum of the fair market value of distributions
(other than regular dividends or distributions of capital stock) and the
consideration for purchases of Zenith common stock by Zenith during a 12 month
period is thirty percent or more of the fair market value of outstanding Zenith
common stock. The fair value at December 31, 1993 of the 9% Notes is $86,250,000
based on a price published by a rating agency.
In June 1992, Zenith called its previously outstanding 10 1/4% Senior Notes
due 1994 utilizing a portion of the proceeds of the 9% Notes. The premium to
call the 10 1/4% Senior Notes and the unamortized discount thereon reduced net
income in 1992 by $1,355,000, net of a tax benefit of $698,000.
NOTE 7--FEDERAL INCOME TAXES
The components of the provision (benefit) for taxes on income from
operations are:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------
(Dollars in thousands)
Year Ended December 31, 1993 1992 1991
- - -------------------------------------------------------------
<S> <C> <C> <C>
Current $ 11,982 $ 5,146 $ 5,707
Deferred 8,297 (4,776) 912
Charge in lieu of taxes 2,600
- - -------------------------------------------------------------
Total federal income taxes $ 20,279 $ 370 $ 9,219
- - -------------------------------------------------------------
</TABLE>
The charge in lieu of taxes in 1991 represents the additional taxes that
would have been incurred without the capital loss carryforward, the benefit of
which was reflected as an extraordinary item.
The difference between the statutory federal income tax rate (35% in 1993
and 34% in 1992 and 1991) and Zenith's effective tax rate on income from
operations, as reflected in the financial statements, is explained as follows:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------
(Dollars in thousands)
Year ended December 31, 1993 1992 1991
- - ------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income
tax: $ 25,718 $ 6,700 $ 17,857
Increase (reduction) in taxes:
Dividend received
deduction (1,537) (2,577) (3,841)
Tax exempt interest (812) (2,159)
"Fresh start" benefits (902)
Proration of dividend
exclusion and tax
exempt interest to loss
reserves 204 449 812
Rate differential
associated with AMT (1,820)
Utilization of AMT
credit carryforward (775)
Tax benefit of capital
loss carryforward (4,253) (3,688)
Other 147 298 47
- - ------------------------------------------------------------
Total federal income
taxes $ 20,279 $ 370 $ 9,219
- - ------------------------------------------------------------
</TABLE>
In 1992 Zenith adopted SFAS No. 109 retroactive to the beginning of 1992
(see Note 1). The cumulative effect of such adoption was an increase in income
of $10,719,000 from the adjustment of deferred taxes at the beginning of the
year, net of a valuation allowance of $11,947,000. The effect on the provision
for federal income taxes in 1992 increased net income by $881,000. In addition,
the tax effect of purchased life insurance reserves was reclassified to deferred
taxes.
In 1993 and 1992, deferred taxes are provided based upon temporary
differences between the tax and book basis of assets and liabilities. The
components of the net deferred tax assets and liabilities were as follows:
31
<PAGE>
<TABLE>
<CAPTION>
- - --------------------------------------------------------------
Deferred tax
assets
(Dollars in thousands) (liabilities)
--------------------
Year ended December 31, 1993 1992
- - --------------------------------------------------------------
<S> <C> <C>
Differences between the tax basis and
book basis of investments $ (7,725) $ 2,286
Earned but unbilled premiums receivable (1,605) (2,160)
Deferred policy acquisition costs (36,586) (29,943)
Purchased intangibles (15,601) (14,835)
Properties and equipment (2,597) (2,576)
Capital loss carryover 1,346
AMT credit carryover 2,381
Property and casualty loss reserve
discount 25,727 23,790
Difference in computing life policy
reserves 17,044 12,745
Limitation on deduction for unearned
premiums 7,243 6,344
Policyholders' dividends accrued 7,464 6,318
Accrued cost of Proposition 103 rollback
refund 5,468
Other (3,023) (947)
- - --------------------------------------------------------------
(9,659) 10,217
Valuation allowance (4,484)
- - --------------------------------------------------------------
Net deferred tax asset (liability) $ (9,659) $ 5,733
- - --------------------------------------------------------------
</TABLE>
Property and casualty loss reserves are not discounted for book purposes,
however the Tax Reform Act of 1986 requires property and casualty loss reserves
to be discounted for tax purposes.
In 1991 deferred taxes are the result of timing differences in the
recognition of revenue and expense for tax and financial statement purposes. The
sources of timing differences, and tax effect of each are:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------
(Dollars in thousands)
Year ended December 31, 1991
- - ------------------------------------------------------------
<S> <C>
Deferred policy acquisition costs $ 4,092
Undeclared policyholders' dividends accrued and
accumulated 2,610
Discount on loss and loss expense reserves (2,219)
Amortization of purchased intangibles 2,148
Difference in computing policy reserves (3,474)
Subrogation receivable (25)
Amortization of January 1, 1987 unearned premium
reduction (1,024)
Market discount not recognized for tax purposes
currently 655
Depreciation 160
Effect of AMT (1,038)
Other (973)
- - ------------------------------------------------------------
Total deferred tax $ 912
- - ------------------------------------------------------------
</TABLE>
Current taxes receivable (payable) and deferred taxes were as follows:
<TABLE>
<CAPTION>
- - --------------------------------------------------------
(Dollars in thousands)
Year Ended December 31, 1993 1992
- - --------------------------------------------------------
<S> <C> <C>
Current taxes $ (4,596) $ 1,254
Deferred taxes (9,659) 5,733
- - --------------------------------------------------------
Federal income taxes $ (14,255) $ 6,987
- - --------------------------------------------------------
</TABLE>
Zenith files a consolidated federal income tax return. As California
insurance companies, Zenith's subsidiaries pay premium taxes to the State of
California on gross premiums written in lieu of state income or franchise tax.
The tax rate was 2.35% in 1993 and 1992.
The policyholders' surplus account of CalFarm Life which permitted a
deferral of tax became taxable in 1986 as a result of an election to adjust the
tax basis of assets under Internal Revenue Code Section 338. Accordingly,
CalFarm Life does not have a policyholders' surplus account.
NOTE 8--REINSURANCE
Reinsurance transactions reflected in the financial statements are as
follows:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------
(Dollars in thousands) 1993 1992 1991
- - ----------------------------------------------------------
<S> <C> <C> <C>
Ceded reinsurance netted
against earned premiums
for the year $ 22,457 $ 22,231 $ 21,498
Ceded reinsurance netted
against property and
casualty losses and
loss adjustment
expenses incurred 38,716 11,350 18,986
Net assumed reinsurance
included in earned
premiums for the year 26,094 19,357 27,531
- - ----------------------------------------------------------
</TABLE>
Zenith Insurance has an assumed reinsurance agreement with Reliance
Insurance Company, a major stockholder of Zenith. Three of Zenith's directors
are also directors of Reliance Insurance Company. Reimbursed estimated costs
paid to Reliance relating to this arrangement amounted to $578,000, $420,000 and
$211,000 for 1993, 1992 and 1991, respectively. Zenith's reinsurance
arrangements provide protection against claims in excess of between $200,000 and
$700,000 per occurrence depending upon the type of coverage. Zenith's
catastrophe reinsurance provides protection against aggregate losses per event
on property and workers' compensation coverages with limits ranging from
$20,000,000 to $100,000,000. Assumed reinsurance business is not covered by such
catastrophe reinsurance.
NOTE 9--COMMITMENTS AND CONTINGENT
LIABILITIES
Zenith and its subsidiaries lease space for some of its offices expiring
through 2002, equipment on leases expiring through 1996 and automobiles on two
through five year leases. The minimum rentals on these operating leases as of
December 31, 1993 are as follows:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------
(Dollars in
thousands)
Year Equipment Auto fleet Offices Total
- - -------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 $ 66 $ 731 $ 3,687 $ 4,484
1995 37 301 3,133 3,471
1996 20 49 2,347 2,416
1997 1,072 1,072
1998 and
thereafter 5,789 5,789
- - -------------------------------------------------------------
Total $ 123 $ 1,081 $ 16,028 $ 17,232
- - -------------------------------------------------------------
</TABLE>
32
<PAGE>
Rental expenses for 1993, 1992, and 1991 amounted to $5,717,000, $4,774,000
and $4,009,000, respectively.
Zenith and its subsidiaries are involved in certain litigation. In the
opinion of management and legal counsel, such litigation is either without merit
or the ultimate liability, if any, will not have a material effect on the
consolidated financial condition of Zenith.
RESOLUTION OF CONTINGENCIES SURROUNDING CERTAIN LITIGATION AND OTHER MATTERS
Other income in the amount of $2,441,000 recognized in 1993 relates to
certain events which were resolved in 1993 associated with the non-investment
grade securities market and Zenith's related write-downs of investments in 1990.
Zenith settled litigation which will result in the receipt of approximately
$7,561,000. Also, the California Life Insurance Guarantee Association ("CLIGA")
assessed CalFarm Life approximately $5,120,000 for its share of the cost
associated with the failure of Executive Life Insurance Company.
RESOLUTION OF CONTINGENCIES SURROUNDING PROPOSITION 103
In January 1993, Zenith entered into discussions with the California
Department of Insurance (the "Department") to resolve the rollback refund issue
with respect to its subsidiaries. In this context, and without admitting that
Zenith would owe any refunds or that its rates would require a refund under a
correct application of the California Supreme Court's directive of May 1989,
management came to the conclusion that in the best interests of Zenith's
stockholders and customers, a fair settlement would be better than the continued
uncertainty and the costs and risks associated with the litigation of this
issue.
Accordingly, on January 27, 1993, Zenith announced that it had reached an
agreement with the Department to resolve Zenith's Proposition 103 rollback
refund contingency. During 1993, under the agreement, Zenith's subsidiaries
refunded to each holder of an affected policy issued or renewed during the
rollback period an amount equal to approximately 9.5% of the premium paid plus
interest from May 8, 1989 to the date of payment. The net cost of the refund,
after reinsurance, reduced income in 1992 by $16,078,000 before income taxes.
NOTE 10--COMMON STOCK
Under an employee non-qualified stock option plan adopted by the Board of
Directors in 1978, as amended, options are issued to officers and key employees
for the purchase of Zenith's common stock at 100% of the market price at the
date of grant. The options expire between five and ten years after the date of
grant or three months after termination of employment. Zenith makes no charges
to earnings in connection with stock options.
Additional information with respect to stock options is as follows:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------
Option Price
Number ----------------------------
Options of shares Per share Total
- - ---------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at
December 31, 1991 1,720,000 $11.94-$ 21.02 $ 30,638,000
Granted 335,000 17.13-17.44 5,781,000
Exercised 303,000 11.94-19.09 4,527,000
Expired or cancelled 367,000 17.84-20.11 6,947,000
----------- ------------
Outstanding at
December 31, 1992 1,385,000 11.94-21.02 24,945,000
Granted 332,000 22.56-28.19 8,198,000
Exercised 348,000 11.94-19.81 6,261,000
Expired or cancelled 65,000 11.94-19.81 1,137,000
----------- ------------
Outstanding at
December 31, 1993 1,304,000 $11.94-$ 28.19 $ 25,745,000
- - ---------------------------------------------------------------
</TABLE>
The 1,304,000 outstanding options are exercisable: 1994, 895,000; 1995,
173,000; 1996, 153,000; and 83,000, 1997.
At December 31, 1993, 1992 and 1991, respectively, 454,000, 721,000 and
689,000 shares were available to be granted. At December 31, 1993 and 1992,
respectively, 704,000 and 912,000 options could have been exercised. In 1991,
43,000 options were exercised for a total amount of $598,000 with an option
price of $13.38-15.13 per share.
At December 31, 1993 Zenith had authority from its Board of Directors to
purchase 809,000 additional treasury shares at prevailing market prices.
NOTE 11--EARNINGS PER COMMON SHARE
Earnings per common share are computed on the basis of the weighted average
of common shares outstanding. The number of shares used in 1993, 1992 and 1991
in the computation of earnings per common share was 19,297,000, 18,918,000 and
18,981,000, respectively.
NOTE 12--DIVIDEND RESTRICTIONS
Under insurance company regulations of the State of California, the maximum
dividends that may be paid to Zenith by its insurance company subsidiaries
during any 12 month period without prior approval of the Department of Insurance
is limited to the greater of 10% of statutory surplus as regards policyholders
at the preceding December 31,
33
<PAGE>
or 100% of net income for the preceding year for Zenith Insurance, and the
greater of 10% of statutory surplus as regards policyholders at the preceding
December 31, or statutory net gain from operations for the preceding year for
CalFarm Life. In addition, any such dividend must be paid out of earned surplus.
Zenith Insurance's stockholder's equity and CalFarm Life's stockholder's equity
in accordance with generally accepted accounting principles amounted to
$279,117,000 and $124,610,000, respectively, as of December 31, 1993 of which
Zenith Insurance and CalFarm Life could pay $40,969,000 and $5,924,000,
respectively, in 1994, to Zenith in dividends without prior approval, leaving a
restricted balance of $238,148,000 and $118,686,000, respectively. In addition,
in 1994, $1,117,000 can be paid to Zenith Insurance by its insurance
subsidiaries which would be available for dividend payments to Zenith in the
following year.
NOTE 13--STATUTORY FINANCIAL DATA
Capital stock and surplus and net income on a statutory basis as reported to
regulatory authorities were as follows:
<TABLE>
<CAPTION>
- - --------------------------------------------------
(Dollars in thousands)
Year ended
December 31, 1993 1992 1991
- - --------------------------------------------------
<S> <C> <C> <C>
Capital stock and
surplus:
Property and
casualty,
consolidated $ 228,097 $ 203,479 $ 186,806
Life insurance 59,241 54,769 45,247
Net income:
Property and
casualty,
consolidated 49,698 7,562 35,984
Life insurance 4,966 8,253 10,434
- - --------------------------------------------------
</TABLE>
NOTE 14--UNAUDITED QUARTERLY FINANCIAL
DATA
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------
(Dollars in thousands
except per share data)
Year ended March June September December
December 31, 1993 31 30 30 31
- - -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premium income and
other policy
charges $ 113,935 $ 120,192 $ 119,992 $ 115,703
Net investment
income 24,324 23,683 22,872 21,595
Realized gains on
investments 4,997 5,659 3,841 6,548
Other income, net 2,441
Net income 12,600 15,100 13,500 12,000
Net income per
share .66 .78 .70 .63
- - -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------
(Dollars in thousands
except per share data)
Year ended March June September December
December 31, 1992 31 30 30 31
- - ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premium income
and other policy
charges $ 104,877 $ 108,068 $ 111,686 $ 117,243
Net investment income 23,646 24,707 24,923 23,338
Realized gains on
investments 1,845 3,266 4,527 1,209
Income (loss) from
operations before
income taxes,
extraordinary
item and cumulative
effect of
accounting change 11,647 12,139 1,702 (5,782)
Extraordinary
item--debt
retirement cost (1,355)
Cumulative effect of
accounting
change 10,719
Net income (loss) 19,644 7,818 2,734 (1,496)
Net income (loss)
per share 1.04 .41 .14 (.08)
- - ---------------------------------------------------------------------
</TABLE>
Quarterly data for 1992 have been restated for the adoption of SFAS No. 109,
retroactive to January 1, 1992 and to present debt retirement costs in the
second quarter as an extraordinary item.
In the fourth quarter of 1992 Zenith recognized $16,078,000 of expense
associated with Proposition 103 rollback refunds (see Note 9).
NOTE 15--SEGMENT INFORMATION
Zenith's operations are conducted through three business segments. These
segments and their respective operations are as follows:
PARENT
Zenith is a holding company owning directly or indirectly all of the capital
stock of certain California insurance and insurance related companies. In 1993,
Zenith commenced a real estate operation through a newly formed subsidiary.
PROPERTY AND CASUALTY OPERATIONS
Zenith's property and casualty insurance operations offer multiple product
line insurance and reinsurance. Investments and related income of the property
and casualty insurance companies are available for payment of claims and
benefits and have not been identified with individual product lines.
HEALTH AND LIFE INSURANCE OPERATIONS
Zenith's life insurance operations offer individual and group life, annuity
and accident and health policies. Identifiable assets for the health and life
insurance segment are those assets which are used in the life insurance company.
34
<PAGE>
The following table is a summary of results by major segments:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------
(Dollars in thousands except per share data)
Year ended December 31 1993 1992 1991
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Property and Casualty
Net written premiums $ 415,947 $ 378,178 $ 380,408
Net earned premiums 405,901 377,426 376,068
Investment income 36,643 42,276 45,727
Underwriting income (loss) before Proposition 103 rollback
refund(1)(8) 11,251 (20,621) (8,453)
Underwriting income (loss)(1) 11,251 (36,699) (8,453)
Income after taxes and before realized gains and Proposition 103
rollback refund(3)(8) 32,425 16,674 31,400
Income after taxes and before realized gains(3) 32,425 6,063 31,400
Income after taxes 40,939 16,208 41,841
Identifiable assets 946,219 912,928 815,255
- - ------------------------------------------------------------------------------------------------------
Health and Life
Premium income and other policy charges(2) 63,921 64,448 61,556
Investment income 55,339 53,486 49,558
Income after taxes and before realized gains(3) 4,096 8,205 6,913
Income after taxes 12,932 10,354 8,325
Identifiable assets 897,157 789,664 669,434
- - ------------------------------------------------------------------------------------------------------
Parent
Investment income 492 852 400
(Loss) after taxes and before realized gains (losses) (3) (1,253) (5,779) (5,411)
(Loss) after taxes (671) (7,226) (6,865)
Identifiable assets 32,409 22,928 9,226
- - ------------------------------------------------------------------------------------------------------
Consolidated total
Premium income and other policy charges 469,822 441,874 437,624
Investment income 92,474 96,614 95,685
Underwriting income (loss) before Proposition 103 rollback
refund(1)(8) 11,251 (20,621) (8,453)
Underwriting income (loss)(1)(8) 11,251 (36,699) (8,453)
Income after taxes and before realized gains and Proposition 103
rollback refund(4)(3)(8) 33,682 19,100 32,902
Per share 1.75 1.01 1.73
Income after taxes and before realized gains(3) 35,268 8,489 32,902
Income after taxes 53,200 19,336 43,301
Net income(5)(6) 53,200 28,700 45,901
Per share 2.76 1.52 2.42
Total assets(7) $1,857,790 $1,703,553 $1,477,571
- - ------------------------------------------------------------------------------------------------------
<FN>
(1) After policyholders' dividends of $15,175,000, $2,954,000 and $8,158,000 for
1993, 1992 and 1991, respectively.
(2) Of total health and life premium income and other policy charges, 62%, 62%
and 63% for 1993, 1992 and 1991, respectively, is represented by one group
health plan.
(3) Realized gains on investments after taxes were as follows:
1993 1992 1991
----------------------------------
Property and Casualty $ 8,514 $ 10,145 $ 10,441
Health and Life 8,836 2,149 1,412
Parent 582 (1,447) (1,454)
----------------------------------
Consolidated Total $ 17,932 $ 10,847 $ 10,399
Realized gains in the Health and Life segment reflect $1,786,000, and
$1,239,000 tax benefit for capital loss carryover utilized in the
consolidated federal income tax return in 1993 and 1992, respectively.
(4) In 1993, excludes $1,586,000 for net effect of legal settlement and CLIGA
assessment.
(5) Net income in 1992 includes an extraordinary item of $1,355,000, net of tax
benefit, for debt redemption costs and in 1991 includes $2,600,000 for the
tax benefit associated with utilization of capital losses carried forward
from prior years.
(6) Net income in 1992 includes $10,719,000 for the cumulative effect of the
change in accounting for income taxes.
(7) Reflects elimination entry of $17,995,000, $21,967,000 and $16,344,000 in
1993, 1992 and 1991, respectively.
(8) Proposition 103 rollback refund in 1992 was $16,078,000, net of reinsurance,
or $10,611,000 ($.56 per share) after tax.
</TABLE>
35
<PAGE>
INDEPENDENT
ACCOUNTANT'S
To the Stockholders and Board of Directors REPORT
of Zenith National Insurance Corp.
We have audited the accompanying consolidated balance sheet of Zenith
National Insurance Corp. and subsidiaries as of December 31, 1993 and 1992, and
the related consolidated statements of operations, cash flows, and stockholders'
equity for each of the three years in the period ended December 31, 1993. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Zenith
National Insurance Corp. and subsidiaries as of December 31, 1993 and 1992, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for investments as of December 31,
1993.
Coopers & Lybrand
Los Angeles, California
February 17, 1994
CalFarm
36 TheZenith
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF ZENITH
Set forth below are the names of certain subsidiaries of Zenith. Certain
subsidiaries, which considered in the aggregate would not constitute a
significant subsidiary, are omitted from the listing below.
<TABLE>
<CAPTION>
JURISDICTION OF
NAME ORGANIZATION
- - ----------------------------------------------------------------- ---------------------------
<S> <C>
Zenith Insurance Company California
CalFarm Insurance Company California
ZNAT Insurance Company California
CalFarm Life Insurance Company California
CalFarm Insurance Agency California
Zenith Star Insurance Company Texas
Perma-Bilt, a Nevada Corporation Nevada
</TABLE>
<PAGE>
IN ACCORDANCE WITH RULE 202 OF REGULATION S-T, THIS EXHIBIT 28 IS BEING FILED IN
PAPER PURSUANT TO A CONTINUING HARDSHIP EXEMPTION.
<PAGE>
Exhibit 99.1
___________________
Financial Statements
Required by Form 11-K in accordance with
Rule 15d-21 under the Securities
Exchange Act of 1934
___________________
For the Fiscal Year Ended December 31, 1993
of
The Zenith Investment Partnership
401(k) Plan
ZENITH NATIONAL INSURANCE CORP.
-------------------------------
The principal executive offices of Zenith National
Insurance Corp. are located at 21255 Califa Street,
Woodland Hills, California 91367-5021.
<PAGE>
ITEM 1. NOT APPLICABLE
- - -------
ITEM 2. NOT APPLICABLE
- - -------
ITEM 3. NOT APPLICABLE
- - -------
ITEM 4. FINANCIAL STATEMENTS AND SCHEDULES
- - ------- PREPARED IN ACCORDANCE WITH THE FINANCIAL
REPORTING REQUIREMENTS OF ERISA
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants................................2
Statement of Net Assets Available for
Benefits As Of December 31, 1993
and 1992.........................................................3
Statement of Changes in Net Assets
Available for Benefits For Years
Ended December 31, 1993 and 1992.................................4
Notes to Financial Statements....................................5
Supplemental Schedules:
Item 27a - Schedule of Assets Held For
Investment As Of December 31, 1993..............................12
Item 27d - Schedule of Reportable
Transactions For The Year
Ended December 31, 1993.........................................13
</TABLE>
1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
______________
To the Administrative Committee of
The Zenith Investment Partnership
401(k) Plan
We have audited the accompanying statement of net assets available for benefits
of The Zenith Investment Partnership 401(k) Plan (the "Plan") as of December 31,
1993 and 1992 and the related statement of changes in net assets available for
benefits for the years then ended. These financial statements are the
responsibility of the Plan's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of The Zenith
Investment Partnership 401(k) Plan as of December 31, 1993 and 1992 and the
changes in net assets available for benefits for the years then ended in
conformity with generally accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of the Plan,
listed in the index on page 1, are presented for purposes of additional analysis
and are not a required part of the basic financial statements, but are
supplementary information required by the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974. The supplemental schedules have been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion are fairly stated in all material respects, in relation to the
basic financial statements taken as a whole.
COOPERS & LYBRAND
Los Angeles, California
June 10, 1994
2
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
AS OF DECEMBER 31, 1993 AND 1992
____________________
<TABLE>
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
Assets:
Investments:
Zenith National Insurance Corp.
Common stock, at market (296,037
shares, $5,461,841 cost for 1993
and 251,048 shares, $4,103,033 cost
for 1992) $ 6,623,915 $4,958,198
Short-term investment fund 5,508,150 4,180,168
Invested cash 346,581 47,162
----------- ----------
Total investments 12,478,646 9,185,528
Contributions receivable - participant 73,809
Contributions receivable - employer 20,934
Accrued investment income 14,755 11,628
----------- ----------
Total assets 12,493,401 9,291,899
----------- ----------
Liabilities:
Accrued withdrawals 140,795
Amount due broker 47,168
----------
Total liabilities 187,963
----------- ----------
Net assets available for benefits $12,493,401 $9,103,936
=========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1992
__________________
<TABLE>
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
Additions:
Contributions:
Employer $ 654,639 $ 568,726
Participants 2,494,364 2,138,291
----------- ----------
Total contributions 3,149,003 2,707,017
----------- ----------
Rollovers from other plans 25,685 53,679
----------- ----------
Investment income:
Dividends 425,380 342,294
Net appreciation
in fair value of investment in
Zenith National Insurance Corp.
common stock 478,673 716,795
----------- ----------
Total investment income 904,053 1,059,089
----------- ----------
Total additions 4,078,741 3,819,785
----------- ----------
Deductions:
Withdrawals by participants 689,276 764,926
----------- ----------
Net additions 3,389,465 3,054,859
Net assets available for benefits:
Beginning of year 9,103,936 6,049,077
----------- ----------
End of year $12,493,401 $9,103,936
=========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
____________
1. THE PLAN:
The following is a general description of The Zenith Investment Partnership
401(k) Plan (the "Plan").
GENERAL
The Plan is a qualified stock bonus plan offered to all eligible employees
of Zenith National Insurance Corp. ("ZNIC") and its affiliates ("the
Company"), who are age twenty-one or older as of the enrollment dates. The
Plan is subject to the provisions of the Employee Retirement Income
Security Act of 1974 ("ERISA") and Section 401(a) and Section 401(k) of the
Internal Revenue Code of 1986, as amended ("IRC"). At December 31, 1993
and December 31, 1992 there were, respectively, 1,004 and 863 participants
in the Plan. Of those participants, 825 and 726 in 1993 and 628 and 471 in
1992 elected to invest, either wholly or partially, in the Short-Term
Investment Fund and Company Stock Fund, respectively.
CONTRIBUTIONS
Participants may elect to contribute between 1% to 12% of their basic
compensation up to a maximum of $8,994 for 1993 and $8,728 for 1992 (Salary
Reduction Contributions). The maximum is adjusted each year for increases
in the cost of living as provided in applicable regulations. This annual
amount is an aggregate limitation that applies to all of an individual's
Salary Reduction Contributions and similar contributions under other plans.
The Company contributes 33-1/3% of the participant's "matched" contribution
amount (matched contributions are defined as the first 6% of each
participant's monthly contributions). The Company's contribution is
invested exclusively in the common stock of ZNIC ("Company Stock").
5
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS, CONTINUED
________________
1. THE PLAN, CONTINUED:
The Salary Reduction Contributions, made on behalf of each participant, are
paid to the Trustee on or immediately after the last day of each month, and
are subsequently deposited to the investment funds as directed by the
participant.
PARTICIPANT ACCOUNTS
Each participant's account is credited with: (1) the participant's
contributions, (2) participant rollover contributions from non-Company
plans, (3) the related Company matching contributions, and (4) fund
earnings. These accounts are summarized in the accompanying financial
statements as net assets available for benefits.
VESTING
Each participant has an immediate, fully vested right to receive all Salary
Reduction Contributions, all Company matching contributions made prior to
January 1, 1991, and earnings thereon, upon termination from the Company,
or upon separation caused by death of the participant. All Company
matching contributions made after January 1, 1991 are subject to a five
year graduated vesting schedule with respect to participants who became
employed by the Company on or after April 1, 1988.
However, irrespective of the vesting schedule, a participant is fully
vested upon his death, disability or attainment of Normal Retirement Age.
WITHDRAWALS PRIOR TO TERMINATION OF EMPLOYMENT
Except in limited circumstances, withdrawals may not be made by a
participant while employed by the Company. Hardship withdrawals of a
participant's Salary Reduction Contributions are permitted where a
participant has an immediate and heavy financial need
6
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS, CONTINUED
__________________
1. THE PLAN, CONTINUED:
(as determined under Section 401(k)(2)(B)(IV) of the IRC) and that need
cannot be satisfied from other resources of the participant. In addition,
any participant who is 59-1/2 years old may only withdraw his Salary
Reduction Contributions.
INVESTMENTS
Each participant directs that Salary Reduction Contributions for his
benefit and any earnings thereon be invested in one or both of the
following funds:
a. A Short-Term Investment Fund which invests in a no-load
diversified open-end management investment company whose objective is
maximum current income consistent with liquidity and the maintenance
of a portfolio of high quality, short-term "money-market" instruments;
or
b. A Company Stock Fund which invests solely in Company
stock.
The Company's contributions and any earnings thereon will be invested in
the Company Stock Fund and are not subject to participant direction until
such participant reaches age fifty-five (55).
PAYMENT OF BENEFITS
Upon termination of employment, if a distribution is made, a participant
(1) receives cash with respect to his interest in the Short-Term Investment
Fund and (2) may elect to receive cash or shares of Company Stock plus cash
in lieu of any fractional shares, with respect to his interest in the
Company Stock Fund.
EXPENSES
Expenses in connection with the purchase or sale of stock or other
securities are charged to the fund for which such purchase or sale is made.
The Trust Agreement stipulates that expenses incurred by the Trustee in the
performance
7
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS, CONTINUED
__________________
1. THE PLAN, CONTINUED:
of its duties shall be paid from the Trust Fund unless paid by the Company
at its sole discretion. During 1993 and 1992, the Company elected to pay
the Trustee's expenses in excess of the interest earned during the year on
temporary invested cash. The total Trustee expenses for 1993 and 1992 were
$24,197 and $18,523, of which $959 and $1,136 respectively, were offset by
income on unallocated cash temporarily invested. The balances of $23,238
and $17,387 were paid by the Company. In addition, certain administrative
expenses such as accounting, legal and recordkeeping fees, were paid by the
Company during 1993 and 1992.
TERMINATION
While the Company has not expressed an intent to terminate the Plan, it may
do so at any time. Upon such termination, each participant shall be fully
(100%) vested in his account balances, determined as of the date of such
termination.
ADMINISTRATION
The Plan is administered by an Administrative Committee appointed by the
Board of Directors of ZNIC.
The Committee has responsibility for administration of the Plan, including
supervision of the collection of contributions, delivery of such
contributions to the trustee, and maintenance of necessary records.
The Trustee is City National Bank, Beverly Hills, California. The
Trustee's responsibilities include receipt of Plan contributions,
investment and maintenance of trust assets in the available funds, and
distributions under the Plan of such amounts as the Committee shall direct
from time to time.
RECLASSIFICATIONS
Certain amounts in the 1992 financial statements have been reclassified to
conform to the 1993 presentation.
8
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS, CONTINUED
___________________
1. THE PLAN, CONTINUED:
PLAN AMENDMENTS
A plan amendment was adopted by the Board of Directors of ZNIC on March 17,
1994 with an effective date of March 31, 1994. The amendment provides that
after March 31, 1994 no future additions to any Participant Matched
Contributions or Unmatched Contributions Account are to be invested in
Company Stock, except that dividends on shares of Company Stock comprising
March 31, 1994 balances shall continue to be added to such accounts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INVESTMENTS
Investments are stated at fair value.
The value ("net asset value") of a share of the no-load diversified open-
end management investment company ("Management Company") in which the
Short-Term Investment Fund invests is determined by adding the value of all
securities and other assets in the Management Company's portfolio,
deducting the Management Company's liabilities and dividing by the number
of shares outstanding. The Management Company intends to use its best
efforts to maintain a constant net asset value of $1 per share.
The value of the Company Stock is determined using the December 31, 1993
and 1992 closing price on the New York Stock Exchange.
Purchases and sales of securities are reflected on a trade date basis (the
date when the order to buy or sell is executed). Gains or losses on sales
of securities are computed on an average cost basis.
Dividend income is accrued on the ex-dividend date.
The net appreciation (depreciation) in the fair value of the Plan's
investments disclosed in the Statement of Changes in Net Assets Available
For Benefits consists of realized gains or losses and unrealized
appreciation (depreciation) on investments.
9
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS, CONTINUED
_________________
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
CONTRIBUTIONS
Company and participant contributions are recorded in the period that a
participant's payroll deduction is made.
3. TAX STATUS:
The Plan was designed to qualify under Sections 401(a) and 401(k) of the
IRC such that the Trust is exempt from federal income taxes under Section
501(a) of the IRC. The Plan has received a favorable determination letter
from the Internal Revenue Service as to the above.
4. NET ASSET ALLOCATION:
As of December 31, 1993 net assets available for plan benefits of the
Company Stock Fund and Short-Term Investment Fund were $6,840,593 and
$5,652,808, respectively, and as of December 31, 1992 were $5,007,424 and
$4,237,307, respectively.
5. FEDERAL INCOME TAXES APPLICABLE TO PARTICIPANTS:
The income tax rules affecting Plan participation are complex, subject to
interpretation by the Secretary of the Treasury and subject to change. A
general summary of the Federal tax consequences of participation in the
Plan
10
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS, CONTINUED
___________________
5. FEDERAL INCOME TAXES, CONTINUED:
follows. An expanded discussion of tax consequences is available in the
prospectus dated June 26, 1988, as amended March 18, 1994 related to the
Plan.
In general, 401(k) Company and Salary Reduction Contributions are not
subject to tax when made. In addition, earnings and gains on a
participant's account are not subject to tax when credited.
Generally, distributions from the Plan are subject to tax in the year
received from the Plan. However, under certain circumstances, a
distribution, or part thereof, may not be taxed if rolled over to an
Individual Retirement Account or other qualified plan. If taxable, a
distribution may be eligible for special tax treatment under the IRC.
In addition to regular taxes, most distributions received before a
participant is age 59-1/2 will be subject to a 10% additional tax. Under
limited circumstances, distributions in excess of IRC determined limits
will be subject to a 15% excise tax.
11
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
ITEM 27A SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
AS OF DECEMBER 31, 1993
___________
<TABLE>
<CAPTION>
Current
Description Cost Value
- - ----------- ---- -------
<S> <C> <C>
Zenith National Insurance Corp.
Common Stock, 296,037 shares,
$296,037 par value $5,461,841 $6,623,915
Merrill Lynch Institutional Fund
5,508,150 shares,
$5,508,150 par value 5,508,150 5,508,150
City National Bank Money Market
Investment Account
346,581 shares,
$346,581 par value 346,581 346,581
</TABLE>
12
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
ITEM 27D SCHEDULE OF REPORTABLE TRANSACTIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
___________________________________________
<TABLE>
<CAPTION>
Current value of Asset Net Gain
Description Purchase Price Selling Price Cost on Transaction Date or (Loss)
- - ----------- -------------- ------------- ---- ---------------------- ---------
<S> <C> <C> <C> <C> <C>
Purchases:
Zenith National
Insurance Corp.
common stock $1,841,532 $1,841,532
Merrill Lynch
Institutional Fund 1,649,647 1,649,647
City National Bank
Money Market
Investment Account 3,533,933 3,533,933
Sales:
Zenith National
Insurance Corp.
common stock $654,488 $482,724 654,488 $171,764
Merrill Lynch
Institutional Fund 321,665 321,665 321,665 -0-
City National Bank
Money Market
Investment Account 3,234,514 3,234,514 3,234,514 -0-
</TABLE>
13
