<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission file number 1-9627
ZENITH NATIONAL INSURANCE CORP.
[Exact name of registrant as specified in its charter]
DELAWARE 95-2702776
[State or other jurisdiction of [I.R.S. Employer]
incorporation or organization] identification No.]
21255 Califa Street, Woodland Hill, California 91367-5021
[Address of principal executive offices] [Zip Code]
[818] 713-1000
[Registrant's telephone number, including area code]
Not Applicable
[Former name, former address and former fiscal year, if changed
since last report.]
Indicate by check mark whether the registrant [1] has filed all reports required
to be filed by Section 13 or 15[d] of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and [2] has been subject to such filing
requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. At October 31, 1994,
18,956,000 shares of common stock were outstanding, net of 5,069,000 shares of
treasury stock.
Page 1
<PAGE>
PART I FINANCIAL INFORMATION
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
ITEM 1:
<TABLE>
<CAPTION>
Dollars and Shares in Thousands
ASSETS SEPT. 30,1994 DEC. 31,1993
<S> <C> <C>
Investments
Fixed maturities:
At amortized cost (market $408,287 & $438,705) $ 413,904 $ 401,337
At fair value (cost $873,268 & $687,075) 832,356 705,682
Floating rate preferred stocks, at fair value
(cost $18,581 & $30,582) 18,264 31,495
Convertible and non redeemable preferred stocks,
at fair value (cost $8,139 & $11,545) 7,890 11,246
Common stocks, at fair value (cost $24,818 &
$14,485) 25,454 15,575
Mortgage loans on real estate 1,320 4,515
Policy loans 41,314 39,609
Short-term investments (at cost, which
approximates fair value) 101,550 276,841
Other investments 22,048 14,097
----------- -----------
TOTAL INVESTMENTS 1,464,100 1,500,397
Cash 10,513 8,560
Accrued investment income 22,003 21,635
Premiums receivable 79,213 65,421
Receivable from reinsurers and prepaid
reinsurance premiums 56,161 57,426
Deferred policy acquisition costs 109,750 108,416
Federal Income taxes 6,308
Properties and equipment, less accumulated
depreciation 48,682 47,042
Excess of cost over net assets acquired and
purchased intangibles and other asset 24,302 25,225
Land and real estate construction in progress 18,406 7,215
Other assets 12,977 16,453
----------- -----------
TOTAL ASSETS $ 1,852,415 $ 1,857,790
----------- -----------
----------- -----------
LIABILITIES
Policy liabilities and accruals
Unpaid losses and loss expenses $ 506,333 $ 513,270
Future policy benefits for life
insurance contracts 158,689 154,501
Deposits on deferred annuity contracts 568,282 545,956
Policy and contract claims 4,725 5,934
Unearned premiums 128,498 111,896
Policyholders' dividends accrued
and accumulated 33,269 30,378
Other policyholder funds 15,891 16,857
Reserves on loss portfolio transfers 9,767 11,119
Senior notes payable, less unamortized
issue costs of $920 & $1,011 74,080 73,989
Federal income tax 14,255
Other liabilities 35,848 30,170
----------- -----------
TOTAL LIABILITIES 1,535,382 1,508,325
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par - shares
authorized 1,000; issued and outstanding,
none in 1994 and 1993
Common stock, $1 par - shares authorized
50,000; issued 24,024, outstanding 18,955,
1994; issued 23,910, outstanding 18,841,1993 24,024 23,910
Additional paid-in capital 251,194 249,092
Retained earnings 163,066 148,043
Net unrealized appreciation (depreciation)
on investments, net of $3,650 of
deferred tax benefit in 1994 and $7,093
deferred tax expense in 1993 (36,495) 13,176
----------- -----------
401,789 434,221
Less treasury stock at cost (5,069
shares, 1994 and 1993) (84,756) (84,756)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 317,033 349,465
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,852,415 $ 1,857,790
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
Page 2
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
Dollars in thousands, except per share data 1994 1993 1994 1993
<S> <C> <C> <C> <C>
CONSOLIDATED REVENUES:
Property and casualty premium income $ 106,519 $ 103,574 $ 304,991 $ 305,372
Health and life premium income and other policy charges 15,000 16,418 45,727 48,747
Net investment income 25,178 22,872 72,776 70,879
Realized gains (losses) on investments (628) 3,841 1,619 14,497
Real estate sales 7,079 15,852
Income from legal settlement 71 2,441 1,831 2,441
----------- ---------- ---------- ---------
TOTAL REVENUES 153,219 149,146 442,796 441,936
EXPENSES:
Property and casualty losses and loss expenses incurred 71,733 72,073 197,846 208,709
Health and life benefits and other policy credits 19,861 21,206 59,880 64,243
Policy acquisition costs 20,786 18,353 62,847 57,069
Other underwriting and operating expenses 14,328 12,755 42,916 39,498
Policyholders' dividends and participation 3,211 3,476 16,180 12,202
Real estate construction costs 6,421 14,445
Interest expense 1,461 1,601 4,513 5,071
----------- ---------- ---------- ---------
TOTAL EXPENSES 137,801 129,464 398,627 386,792
Income from operations before federal income tax 15,418 19,682 44,169 55,144
Federal income tax 5,318 6,182 14,969 13,944
----------- ---------- ---------- ---------
NET INCOME $ 10,100 $ 13,500 $ 29,200 $ 41,200
----------- ---------- ---------- ---------
----------- ---------- ---------- ---------
EARNINGS PER SHARE:
Net income per share $ 0.53 $ 0.70 $ 1.53 $ 2.13
----------- ---------- ---------- ---------
----------- ---------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of this statement.
Page 3
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
Dollars in thousands ENDED SEPTEMBER 30,
1994 1993
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Premiums collected $ 359,760 $ 373,590
Investment income received 72,720 71,343
Deposits on universal life-type contracts 9,553 16,821
Proceeds from sales of real estate 15,852
Recovery from legal settlement 5,957
Losses & loss adjustment expenses paid (204,299) (203,179)
Health claims paid (22,550) (24,154)
Death and surrender benefits paid (9,888) (9,400)
Underwriting & other operating expenses paid (98,788) (104,077)
Real estate construction costs paid (23,505) (6,152)
Reinsurance premiums paid (18,066) (16,431)
Dividends paid to policyholders (13,589) (10,301)
Special policyholders' dividend - Proposition 103
rollback refund (18,398)
Interest paid (3,858) (3,509)
Interest on deferred annuity contracts (23,991) (25,499)
Income taxes (paid) refunded (24,516) (2,278)
Purchase of trading portfolio investments (5,741)
Proceeds from sales of trading portfolio investments 112,206
---------- ---------
Net cash flows from operating activities 127,257 38,376
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments:
Debt securities Held-to-Maturity (40,039)
Debt and equity securities Available-for-Sale (597,077)
Other debt and equity securities and other investments (9,551) (453,730)
Proceeds from maturities and exchanges of investments:
Debt securities Held-to-Maturity 27,179
Debt and equity securities Available-for-Sale 75,620
Other debt and equity securities and other investments 155,759
Proceeds from sales of investments:
Debt and equity securities Available-for-Sale 233,154
Other debt and equity securities and other investments 4,995 256,717
Capital and other expenditures (5,010) (3,447)
Cash received from note receivable 2,300
Losses and loss adjustment expenses paid under portfolio
transfers (1,352) (1,453)
Net decrease(increase) in short-term investments 176,642 (26,462)
---------- ---------
Net cash flows from investing activities (135,439) (70,316)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid to common stockholders (14,154) (14,243)
Proceeds from exercise of stock options 1,944 6,074
Deposits on deferred annuity contracts 32,315 44,767
Acquisition costs of deferred annuity contracts,
deferred (3,210) (4,639)
Annuitization & return of policyholders' balances on
deferred annuity contracts (30,751) (18,657)
Interest on deferred annuity contracts 23,991 25,499
Purchase of treasury shares (1,462)
---------- ---------
Net cash flows from financing activities 10,135 37,339
---------- ---------
Net increase in cash 1,953 5,399
Cash at beginning of period 8,560 1,856
---------- ---------
Cash at September 30, $ 10,513 $ 7,255
---------- ---------
---------- ---------
</TABLE>
(continued) Page 4
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(continued)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
Dollars in thousands 1994 1993
RECONCILIATION OF NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income $ 29,200 $ 41,200
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation 3,275 3,654
Amortization of intangibles and discount on notes 1,014 1,033
Net amortization of bonds and preferred stocks 110 1,445
Realized gains on investments (1,619) (14,497)
Decrease (increase) in:
Accrued investment income (368) (1,222)
Premiums receivable (13,792) (6,033)
Receivable from reinsurers 1,265 (533)
Deferred policy acquisition costs 1,876 (11,762)
Federal income taxes (9,465) 11,666
Real estate and construction in progress (11,191) (6,152)
Receivable from legal settlement 4,126 (6,741)
Increase (decrease) in:
Unpaid losses and loss expenses (6,937) 8,287
Future policy benefits for life insurance contracts 4,188 13,080
Policy and contract claims (1,209) (2,563)
Unearned premiums 16,602 16,371
Policyholders' dividends accrued and accumulated 2,891 1,759
Special policyholders' dividend - Proposition
103 rollback refund (18,111)
Other policyholder funds (966) 2,375
Net cash from trading portfolio 106,465
Assessments payable 3,022
Other 1,792 2,098
--------- ---------
Net cash flows from operating activities $ 127,257 $ 38,376
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of this statement.
Page 5
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Computation of earnings per share:
Dollars and shares in thousands, except
per share data
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
(A) Net income $ 10,100 $ 13,500 $ 29,200 $ 41,200
-------- -------- ------- -------
-------- -------- ------- -------
(B) Number of shares used in
calculating primary
earnings per share:
Weighted average outstanding
shares during the period 18,935 19,079 18,892 19,022
Additional common shares
issuable under employee
stock options using the
treasury stock method (1) 236 340 199 312
-------- -------- ------- -------
19,171 19,419 19,091 19,334
-------- -------- ------- -------
-------- -------- ------- -------
Net income per share (A)/(B) $ 0.53 $ 0.70 $ 1.53 $ 2.13
-------- -------- ------- -------
-------- -------- ------- -------
(C) Number of fully diluted
shares:
Weighted average outstanding
shares during the period 18,935 19,079 18,892 19,023
Additional common shares
issuable under employee
stock options using the
treasury stock method (2) 236 364 203 348
-------- -------- ------- -------
19,171 19,443 19,095 19,371
-------- -------- ------- -------
-------- -------- ------- -------
Net income per share (A)/(C) $ 0.53 $ 0.69 $ 1.53 $ 2.13
-------- -------- ------- -------
-------- -------- ------- -------
<FN>
(1) Based on the average market price during the period.
(2) Based on the higher of the average market price or price at the end of each
period.
</TABLE>
Note 2. Federal Income Taxes
An allowance of approximately $10.4 million was established at September 30,
1994 for the deferred tax asset associated with unrealized losses on
investments.
Note 3. Interest
<TABLE>
<CAPTION>
Interest incurred was as follows: THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
Dollars in thousands: 1994 1993 1994 1993
<S> <C> <C> <C> <C>
Interest capitalized for
real estate operations $ 328 $ 123 $ 805 $ 207
Interest not related to
real estate operations 1,461 1,601 4,513 5,071
------- ------- ------ -------
Total interest incurred $ 1,789 $ 1,724 $ 5,318 $ 5,278
------- ------- ------ -------
------- ------- ------ -------
</TABLE>
Page 6
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
In the opinion of management, all adjustments necessary for a fair
presentation of the results of operations for the periods presented
(consisting only of normal recurring adjustments) have been included. The
results of operations for an interim period are not necessarily indicative
of the results for an entire year.
On September 7, 1994, the Board of Directors declared a regular quarterly
cash dividend of $.25 per share on the outstanding shares, payable November 14,
1994 to stockholders of record at the close of business on October 31, 1994.
ITEM 2:
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
Results of operations of Zenith's business segments were as follows:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------- ---------------------------------
Dollars in Thousands, Three Months Ended September 30, Nine Months Ended September 30,
except per share data 1994 Per 1993 Per 1994 Per 1993 Per
Share Share Share Share
- - ----------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) after tax and
before realized gains:
Property and Casualty $9,059 $9,031 $24,284 $25,279
Health and Life 2,238 (1,605) 6,382 2,455
Parent (788) 3,105 (2,518) (159)
--------------------------------- ---------------------------------
Total 10,509 $0.55 10,531 $0.54 28,148 $1.47 27,575 $1.42
Realized gains (losses)
on investments after
tax:
Property and Casualty (409) 1,264 931 5,224
Health and Life 1,460 114 7,815
Parent 245 7 586
--------------------------------- ---------------------------------
Total (409) ($0.02) 2,969 0.16 1,052 0.06 13,625 0.71
Net income (loss)
Property and Casualty 8,650 10,295 25,215 30,503
Health and Life 2,238 (145) 6,496 10,270
Parent (788) 3,350 (2,511) 427
--------------------------------- ---------------------------------
Total $10,100 $0.53 $13,500 $0.70 $29,200 $1.53 $41,200 $2.13
--------------------------------- ---------------------------------
--------------------------------- ---------------------------------
</TABLE>
Parent company results include income from legal settlement of $1,190,000, after
taxes, in the nine months ended September 30, 1994 compared to $4,381,000 in the
quarter and nine months ended September 30, 1993.
Following is a discussion of the comparative results of Zenith's business
segments:
Page 7
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations (continued)
PROPERTY AND CASUALTY OPERATIONS:
Premiums earned, underwriting results and combined ratios for the three
months and nine months ended September 30, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
% %
Dollars in Thousands 1994 1993 Increase 1994 1993 Increase
(Decrease) (Decrease)
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums earned
Workers' Compensation $58,907 $63,043 (7%) $166,429 $186,419 (11%)
Automobile and Other
Property & Casualty 37,753 34,825 8% 111,845 101,957 10%
Reinsurance 9,859 5,706 73% 26,717 16,996 57%
--------- --------- --------- ---------
Total $106,519 $103,574 3% $304,991 $305,372
--------- --------- --------- ---------
--------- --------- --------- ---------
Underwriting Income (Loss)
Before Taxes
Workers' Compensation $4,193 $2,729 $13,772 $8,183
Automobile and Other
Property & Casualty (329) (547) (5,617) (4,394)
Reinsurance 168 1,263 681 4,115
--------- --------- --------- ---------
Total $4,032 $3,445 $8,836 $7,904
Combined Ratios
Workers' Compensation 92.9% 95.7% 91.7% 95.6%
Automobile and Other
Property & Casualty 100.9% 101.6% 105.0% 104.3%
Reinsurance 98.3% 77.9% 97.5% 75.8%
Total 96.2% 96.7% 97.1% 97.4%
- - -----------------------------------------------------------------------------------------------------
</TABLE>
Workers' Compensation premiums decreased in the quarter and nine months
ended September 30, 1994 compared to the corresponding periods in 1993
principally because of decreases in California minimum rates in July 1993 and
January 1994 and a decrease in new and renewal surcharge business due to
favorable industry trends, offset in part by increased new business, principally
in the Los Angeles area and Texas. Workers' Compensation underwriting income
increased in the quarter and nine months ended September 30, 1994 compared
to the corresponding periods in 1993 primarily because of favorable loss
frequency and loss development trends, partially offset for the nine months by
$2.8 million of expenses attributable to repairs to Zenith's home office
building and operating costs relating to the Northridge earthquake in January
1994. In September, 1994 the California Insurance Commissioner approved a 16.0%
decrease in the minimum rates for California workers' compensation insurance.
The change is applicable to both the unexpired portion of policies which were in
force on or after January 1, 1994 and to new and renewal policies written on or
after October 1, 1994.
Page 8
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations (continued)
Management believes that this change in minimum rates will cause a decrease
in Zenith's workers' compensation premium revenues in the fourth
quarter of 1994 which will likely cause the company to report a net
underwriting loss in its Workers' Compensation operation for the fourth
quarter of 1994. In 1995, certain elements of the 1993 California workers'
compensation reform legislation become effective and, among other things, Zenith
will charge its own, actuarially determined, rates on new and renewal policies
effective January 1, 1995. These rates have been determined with adequate
margins to earn the company underwriting income consistent with what has been
achieved historically and management believes that such rates, as they become
effective and replace the existing statutory rates during 1995, should return
its Workers' Compensation operation to profitability.
The increases in premiums earned in the Automobile and Other Property and
Casualty and Reinsurance operations in the quarter and nine months ended
September 30, 1994 compared to the corresponding periods in 1993 were
principally attributable to new business and to rate increases for
Farmowners' and Homeowners' policies in the Automobile and Other Property
and Casualty operation. Results of operations in the nine months ended
September 30, 1994 in the Automobile and Other Property and Casualty
operation were adversely affected by $ 2.9 million of losses attributable
to claims arising out of the Northridge earthquake. Results of operations
in the Reinsurance operation were reduced by $3.5 million and $9.3 million
for the quarter and nine months ended September 30, 1994, respectively, of
losses attributable to claims arising out of the Northridge earthquake.
An uncertain political and regulatory environment, both state and federal,
including proposals relating to National Health Insurance and the 1993
workers' compensation legislation in California and other areas; the lack
of economic growth in parts of California; a highly competitive insurance
industry; and the changing environment for controlling medical, legal and
rehabilitation costs, as well as fraud and abuse, are all factors that
continue to impact the environment in which Zenith operates. Although
management is currently unable to predict the effect of any of the
foregoing, these trends and uncertainties could have a material effect on
Zenith's future operations and financial condition.
HEALTH AND LIFE:
Results of operations of the Health and Life segment were relatively
unchanged for the quarter and nine months ended September 30, 1994 compared to
the corresponding periods in 1993 prior to the adverse effect of the special
California Life Insurance Guarantee Association assessment of approximately
$2,800,000, after taxes, that impacted the third quarter and nine months of
1993. The amount of deposits received by CalFarm Life on deferred annuity
contracts fluctuates and continues to be influenced by economic and tax
uncertainties and by competition in the market for such products.
Page 9
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations (continued)
INVESTMENTS:
During the first nine months of 1994, interest rates, which reached
historically low levels in the latter part of 1993, increased with a
corresponding decline in the fair values of fixed maturity investments. At
September 30, 1994, the unrealized loss on fixed maturities identified
as available-for-sale was $40,249,000, before deferred taxes, compared to an
unrealized gain of $18,755,000, before deferred taxes, at December 31,1993. This
change caused a decrease in stockholders' equity of $48,754,000, after deferred
taxes, between December 31, 1993 and September 30, 1994. Stockholders' equity
will continue to be affected by future volatility, if any, in the bond markets.
Results of operations are significantly impacted by investment income,
which was as follows:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------
Investment Income Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
Dollars in Thousands 1994 1993 1994 1993
- - ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Property and Casualty Portfolio (incl. parent)
Pre-tax $9,947 $9,207 $28,196 $28,718
Post-tax 6,696 6,140 19,032 19,700
Health and Life Portfolio
Pre-tax 15,231 13,665 44,580 42,161
Post-tax 9,900 8,598 28,977 27,405
Consolidated
Pre-tax 25,178 22,872 72,776 70,879
Post-tax $16,596 $14,738 $48,009 $47,105
- - ---------------------------------------------------------------------------------------
</TABLE>
The yields on invested assets were as follows:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------
Investment Yields Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
1994 1993 1994 1993
- - ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Property and Casualty Portfolio (incl. parent)
Pre-tax 5.4% 5.2% 5.1% 5.4%
Post-tax 3.6% 3.4% 3.4% 3.7%
Health and Life Portfolio
Pre-tax 7.7% 7.5% 7.7% 7.9%
Post-tax 5.0% 4.7% 5.0% 5.2%
- - ---------------------------------------------------------------------------------------
</TABLE>
Yields were higher in the third quarter of 1994 compared to the corresponding
period in 1993, reflecting the general upward trend in interest rates during
1994.
Page 10
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations (continued)
Zenith maintains a diversified portfolio consisting of common stocks, preferred
stocks, principally investment grade bonds and other investments. The goal is to
maintain safety and liquidity, enhance principal values and achieve increased
rates of return consistent with regulatory constraints.
The distribution of Zenith's consolidated investment portfolio is shown in
the following table:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1994 AT DECEMBER 31,
Dollars in Thousands Carrying Fair Carrying Fair
Value % of Total Value Value % of Total Value
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bonds:
Investment grade
U.S. Government securities $534,734 36.5% $532,977 $442,369 29.4% $443,551
Other 655,617 44.8% 652,680 613,680 40.9% 649,866
Non-investment grade 28,410 1.9% 27,487 17,995 1.2% 17,995
Stocks:
Redeemable preferred:
Investment grade 25,566 1.7% 25,566 30,589 2.0% 30,589
Non-investment grade 1,933 0.1% 1,933 2,386 0.2% 2,386
Other preferred 26,154 1.8% 26,154 42,741 2.9% 42,741
Common 25,454 1.7% 25,454 15,575 1.0% 15,575
Short-term investments
U.S. Government securities 4,072 0.3% 4,072 124,306 8.3% 124,306
Other 97,478 6.7% 97,478 152,535 10.2% 152,535
Other investments 64,682 4.4% 58,221 3.9%
- - --------------------------------------------------------------------------------------------------------------------
Total investments $1,464,100 100.0% $1,500,397 100.0%
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
The carrying value of non-investment grade bonds and preferred stocks owned by
Zenith's property and casualty subsidiaries was 4.9% and 6.2% of statutory
surplus at September 30, 1994 and December 31, 1993, respectively. The carrying
value of non-investment grade bonds owned by Zenith's life insurance subsidiary
was 38.2% and 34.8% of statutory capital and surplus at September 30, 1994 and
December 31, 1993, respectively. The carrying values of non-investment grade
bonds and preferred stocks for these comparisons are based upon values and
ratings used by the Securities Valuation Office of the NAIC. The NAIC may assign
a non-investment grade rating to a security that is rated investment grade by
one or more rating agency.
Page 11
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations (continued)
The change in the carrying value of Zenith's consolidated investment
portfolio during 1994 was as follows:
<TABLE>
<CAPTION>
Dollars in thousands
- - -------------------------------------------------------------------------------
<S> <C> <C>
Carrying Value at December 31,1993 $1,500,397
Purchases at cost 652,408
Maturities and exchanges of investments (102,799)
Proceeds from sales of investments:
Available-for-sale (233,154)
Trading portfolio (112,206)
Held-to-maturity None
Other investments (4,995)
--------
Total proceeds from disposals of investments (350,355)
Realized gains from maturities and exchanges of
investments:
Held-to-maturity 425
Available-for-sale 478
Realized gains from sales of investments:
Available-for-sale 834
Trading portfolio 121
Other investments 475
Realized losses from write-downs of investments (714)
--------
Total realized gains on investments 1,619
Unrealized losses on investments (60,414)
Decrease in short-term investments (176,642)
Net amortization of bonds and preferred stocks
and other changes (114)
- - -------------------------------------------------------------------------------
Carrying Value at September 30, 1994 $1,464,100
- - -------------------------------------------------------------------------------
</TABLE>
REAL ESTATE:
Income before taxes, associated with closings of real estate sales, was $658,000
and $1,407,000 for the quarter and nine months ended September 30, 1994,
respectively and such income is included in the Parent business segment.
LIQUIDITY:
Zenith is principally dependent upon its portfolio of marketable securities and
the investment yields thereon, dividends from its insurance subsidiaries, whose
operations are supported by their own cash flows, and available lines of credit
($50,000,000 at September 30, 1994) to pay its expenses, service debt and pay
any cash dividends which may be declared to its stockholders.
The NAIC is currently reviewing proposed guidelines for determining minimum
statutory reserves for deferred annuity business. Such guidelines, if adopted,
could have a material effect on the statutory surplus of 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.
Page 12
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K
[a] Exhibits
[11] Statement re: computation of per share earnings
Part I, Item 1, Note 1 of the consolidated
financial statements is incorporated
herein by reference
[27] Financial Data Schedule
[b] Reports on Form 8-K
None
Page 13
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ZENITH NATIONAL INSURANCE CORP.
Registrant
Date: November 10, 1994 \Stanley R. Zax\
-------------------------------------
Stanley R. Zax, Chairman of the Board
& President (Principal Executive Officer)
\Fredricka Taubitz\
-------------------------------------
Date: November 10, 1994 Fredricka Taubitz, Executive Vice President
& Chief Financial Officer (Principal
Accounting Officer)
Page 14
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit No Description Page
[11] Statement re: computation of per share earnings 6
incorporated herein by reference to Part I, Item 1,
Note 1 of the consolidated financial statements
[27] Financial Data Schedule
Page 15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<DEBT-HELD-FOR-SALE> 821,480
<DEBT-CARRYING-VALUE> 413,904
<DEBT-MARKET-VALUE> 408,287
<EQUITIES> 51,608
<MORTGAGE> 1,320
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,464,100
<CASH> 10,513
<RECOVER-REINSURE> 79,213
<DEFERRED-ACQUISITION> 109,750
<TOTAL-ASSETS> 1,852,415
<POLICY-LOSSES> 506,333
<UNEARNED-PREMIUMS> 128,498
<POLICY-OTHER> 731,696
<POLICY-HOLDER-FUNDS> 49,160
<NOTES-PAYABLE> 74,080
<COMMON> 24,024
0
0
<OTHER-SE> 293,009
<TOTAL-LIABILITY-AND-EQUITY> 1,825,415
350,718
<INVESTMENT-INCOME> 72,776
<INVESTMENT-GAINS> 1,619
<OTHER-INCOME> 17,683
<BENEFITS> 257,726
<UNDERWRITING-AMORTIZATION> 62,847
<UNDERWRITING-OTHER> 42,916
<INCOME-PRETAX> 44,169
<INCOME-TAX> 14,969
<INCOME-CONTINUING> 29,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,200
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 1.53
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
