<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 March 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission file number 1-9627
ZENITH NATIONAL INSURANCE CORP.
[Exact name of registrant as specified in its charter]
DELAWARE 95-2702776
[State or other jurisdiction of [I.R.S. Employer
incorporation or organization] identification No.]
21255 Califa Street, Woodland Hills, California 91367-5021
[Address of principal executive offices] [Zip Code]
[818] 713-1000
[Registrant's telephone number, including area code]
Not Applicable
[Former name, former address and former fiscal year, if changed
since last report.]
Indicate by check mark whether the registrant [1] has filed all reports
required to be filed by Section 13 or 15[d] of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and [2] has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. At April 30, 1995,
18,682,000 shares of common stock were outstanding, net of 5,370,000 shares
of treasury stock.
Page 1
<PAGE>
PART I FINANCIAL INFORMATION
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
ITEM 1:
Dollars and Shares in Thousands
MAR. 31, 1995 DEC. 31, 1994
------------- -------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities:
At amortized cost (fair value $442,199 & $400,964) $ 439,103 $ 410,989
At fair value (cost $821,934 & $864,133) 795,560 813,640
Floating rate preferred stocks, at fair value (cost $19,618 & $19,618) 18,116 18,506
Convertible and non redeemable preferred stocks, at fair value
(cost $12,434 & $8,684) 13,047 8,153
Common stocks, at fair value (cost $27,635 & $19,628) 28,564 19,355
Mortgage loans on real estate 3,473 3,503
Policy loans 42,419 41,753
Short-term investments (at cost, which approximates fair value) 125,457 127,594
Other investments 25,835 19,496
------------- -------------
Total Investments 1,491,574 1,462,989
Cash 7,553 7,114
Accrued investment income 23,221 22,429
Premiums receivable 71,830 66,898
Receivable from reinsurers and prepaid reinsurance premiums 62,834 58,873
Federal income tax 4,583 7,637
Deferred policy acquisition costs 109,393 109,059
Properties and equipment, less accumulated depreciation 48,577 48,581
Excess of cost over net assets acquired and purchased intangibles and other assets 23,530 23,896
Other assets 34,293 33,282
TOTAL ASSETS ------------- -------------
$1,877,388 $1,840,758
------------- -------------
------------- -------------
LIABILITIES
Policy liabilities and accruals
Unpaid losses and loss expenses $ 501,265 $ 504,379
Future policy benefits for life insurance contracts 161,144 159,842
Deposits on deferred annuity contracts 573,456 569,484
Policy and contract claims 5,914 6,054
Unearned premiums 128,347 121,867
Policyholders' dividends accrued and accumulated 29,733 30,171
Other policyholder funds 16,031 15,999
Reserves on loss portfolio transfers 9,919 9,972
Senior notes payable, less unamortized issue costs of $859 & $889 74,141 74,111
Payable to banks 3,850 2,471
Other liabilities 37,788 36,548
------------- -------------
TOTAL LIABILITIES 1,541,588 1,530,898
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par - shares authorized 1,000; issued and outstanding,
none in 1995 and 1994
Common stock, $1 par - shares authorized 50,000; issued 24,052, outstanding
18,845, 1995; issued 24,034, outstanding 18,950, 1994 24,052 24,034
Additional paid-in capital 251,651 251,363
Retained earnings 169,211 167,025
Net unrealized depreciation on investments, net of deferred
tax benefit of $4,263 & $3,969 (21,387) (47,460)
------------- -------------
423,527 394,962
Less treasury stock at cost (5,207 shares 1995 & 5,084 shares 1994) (87,727) (85,102)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 335,800 309,860
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,877,388 $1,840,758
------------- -------------
------------- -------------
The accompanying notes are an integral part of this statement.
</TABLE>
Page 2
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
1995 1994
--------- ---------
(Dollars in Thousands,
except per share data)
----------------------
<S> <C> <C>
CONSOLIDATED REVENUES:
Property and casualty premium income $ 98,389 $ 97,871
Health and life premium income and other policy charges 14,843 15,422
Net investment income 26,670 23,143
Realized gains on investments 840 1,816
Real estate sales 8,820
--------- ---------
Total Revenues 149,562 138,252
EXPENSES:
Property and casualty losses and loss expenses incurred 71,454 59,456
Health and life benefits and other policy credits 19,927 19,650
Policy acquisition costs 20,757 19,492
Other underwriting and operating expenses 14,767 16,850
Policyholders' dividends and participation 2,762 8,848
Real estate construction and operating costs 8,053
Interest expense 1,559 1,572
--------- ---------
Total Expenses 139,279 125,868
--------- ---------
Net income before federal income tax 10,283 12,384
Federal income tax 3,383 4,184
--------- ---------
NET INCOME $ 6,900 $ 8,200
--------- ---------
--------- ---------
EARNINGS PER SHARE:
Net Income per share $ 0.36 $ 0.43
--------- ---------
--------- ---------
The accompanying notes are an integral part of this statement.
</TABLE>
Page 3
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
Dollars in thousands 1995 1994
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Premiums collected $117,348 $ 116,293
Investment income received 25,743 24,002
Deposits on universal life type contracts 3,224 3,571
Proceeds from sales of real estate 8,820
Losses & loss adjustment expenses paid (77,441) (66,144)
Health claims paid (7,124) (7,703)
Death and surrender benefits paid (4,153) (4,084)
Underwriting & other operating expenses paid (34,529) (31,055)
Real estate construction costs paid (9,472) (4,030)
Reinsurance premiums paid (6,260) (6,401)
Dividends paid to policyholders (3,262) (3,343)
Interest paid (244) (26)
Interest on deferred annuity contracts (7,481) (7,954)
Income taxes paid (4,801)
-------- ---------
Net cash flows from operating activities, excluding cash from trading portfolio 5,169 8,325
Net cash from sales (purchases) of trading portfolio investments (677) 106,675
-------- ---------
Net cash flows from operating activities, including cash from trading portfolio 4,492 115,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments:
Debt securities Held-to-Maturity (34,512) (15,286)
Debt and equity securities Available-for-Sale (76,092) (429,941)
Other investments (10,835) (7,488)
Proceeds from maturities and exchanges of investments:
Debt securities Held-to-Maturity 6,320 16,734
Debt and equity securities Available-for-Sale 1,906 51,136
Other investments 34 3,320
Proceeds from sales of investments:
Debt and equity securities Available-for-Sale 105,966 170,951
Other investments 3,519 1,239
Capital and other expenditures (1,151) (2,683)
Net decrease in short-term investments 2,757 92,682
-------- ---------
Net cash flows from investing activities (2,088) (119,336)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash advanced from bank line of credit 6,500
Cash repaid on bank line of credit (6,500)
Cash advanced from bank construction loans 7,338
Cash repaid on bank construction loans (5,959)
Cash dividends paid to common stockholders (4,737) (4,709)
Proceeds from exercise of stock options 273 420
Deposits on deferred annuity contracts 7,522 10,774
Acquisition costs of deferred annuity contracts, deferred (676) (1,015)
Annuitization & return of policyholders' balances on deferred annuity contracts (10,582) (8,958)
Interest on deferred annuity contracts 7,481 7,954
Purchase of treasury shares (2,625)
-------- ---------
Net cash flows from financing activities (1,965) 4,466
-------- ---------
Net increase in cash 439 130
Cash at beginning of period 7,114 8,560
-------- ---------
Cash at March 31, $ 7,553 $ 8,690
-------- ---------
-------- ---------
(continued)
</TABLE>
Page 4
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(continued)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
1995 1994
-------- --------
(Dollars in Thousands)
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income .................................................... $ 6,900 $ 8,200
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization ................................. 1,472 1,571
Net accretion of bonds and preferred stocks ................... 193 (433)
Realized gains on investments ................................. (840) (1,816)
Net cash from trading portfolio ............................... (677) 106,675
Decrease (increase) in:
Accrued investment income ................................... (792) 1,223
Premiums receivable ......................................... (4,932) (6,653)
Receivable from reinsurers .................................. (3,961) 136
Deferred policy acquisition costs ........................... 373 331
Federal income taxes ........................................ 3,383 (617)
Increase (decrease) in:
Unpaid losses and loss expenses ............................. (3,114) (6,357)
Future policy benefits for life insurance contracts ......... 1,302 890
Policy and contract claims .................................. (140) (646)
Unearned premiums ........................................... 6,480 7,439
Policyholders' dividends accrued and accumulated ............ (438) 5,850
Other policyholder funds .................................... 32 (561)
Other ....................................................... (332) (232)
------- -------
Net cash flows from operating activities .................. $ 4,492 $115,000
------- -------
------- -------
</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:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C> <C>
(A) Net income .................................................. $ 6,900,000 $ 8,200,000
---------- ----------
---------- ----------
(B) Number of shares used in calculating
primary earnings per share:
Weighted average outstanding shares
during the period ......................................... 18,884,000 18,853,000
Additional common shares issuable under
employee stock options using the
treasury stock method (1) ................................. 101,000 182,000
---------- ----------
$18,985,000 $19,035,000
---------- ----------
---------- ----------
Net income per share (A)/(B) .................................... $ 0.36 $ 0.43
---------- ----------
---------- ----------
(C) Number of fully diluted shares:
Weighted average outstanding shares
during the period ......................................... 18,884,000 18,853,000
Additional common shares issuable under
employee stock options using the
treasury stock method (2) ................................. 101,000 182,000
---------- ----------
18,985,000 19,035,000
---------- ----------
---------- ----------
Net income per share (A)/(C) $ 0.36 $ 0.43
---------- ----------
---------- ----------
<FN>
(1) Based on the average market price during the period.
(2) Based on the higher of the average market price or price at the end of each period.
</TABLE>
Note 2. Federal Income Taxes
The valuation allowance for the deferred tax asset associated with unrealized
losses on investments was approximately $4.7 million at March 31, 1995 compared
to $14.0 million at December 31, 1994.
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 March 1, 1995, the Board of Directors declared a regular
quarterly cash dividend of $.25 per share on the outstanding
shares, payable May 12, 1995 to stockholders of record at
the close of business on April 28, 1995.
ITEM 2:
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
The comparative results of operations are set forth in the
table below, followed by a discussion of the significant
changes.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Three months ended March 31,
Dollars in thousands 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Investment income, after tax, excluding health
and life $ 7,215 $ 5,889
Realized gains on investments, after tax 546 1,180
- -------------------------------------------------------------------------------
Sub-total 7,761 7,069
- -------------------------------------------------------------------------------
Property and Casualty, after tax:
Underwriting income 1,757 6,856
Catastrophe losses (3,835) (5,915)
- -------------------------------------------------------------------------------
Property and casualty underwriting income (loss) (2,078) 941
- -------------------------------------------------------------------------------
Health and life income, after tax 2,270 1,970
Income from real estate operations, after tax 499
Interest expense, after tax (1,013) (1,021)
Parent expenses, after tax (539) (759)
- -------------------------------------------------------------------------------
Net income $ 6,900 $ 8,200
- -------------------------------------------------------------------------------
</TABLE>
Page 7
<PAGE>
PROPERTY AND CASUALTY OPERATIONS:
Premiums earned, underwriting results and combined ratios
for the three months ended March 31, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
%
Three Months Ended March 31, Increase
Dollars in Thousands 1995 1994 (Decrease)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums earned
Workers' Compensation $50,701 $52,968 (4%)
Automobile and Other Property & Casualty 38,749 36,525 6%
Reinsurance 8,939 8,378 7%
------------- -------------
Total $98,389 $97,871 1%
------------- -------------
------------- -------------
Underwriting Income (Loss) Before Taxes
Workers' Compensation ($1,294) $5,219
Automobile and Other Property & Casualty (5,675) (2,098)
Reinsurance 3,755 (1,557)
------------- -------------
Total ($3,214) $1,564
------------- -------------
------------- -------------
Combined Ratios
Workers' Compensation 102.6% 90.1%
Automobile and Other Property & Casualty 114.6% 105.7%
Reinsurance 58.0% 118.6%
Total 103.3% 98.4%
- ----------------------------------------------------------------------------------------
</TABLE>
Underwriting results of the Workers' Compensation operation
decreased in the first quarter of 1995 compared to the
corresponding period in 1994 principally because of an
increase in losses and loss adjustment expenses offset, in
part, by a decrease in dividends to policyholders. Losses
from wind and rain storm damage in the first quarter of
1995, amounting to $5.7 million, had a more significant
impact on the underwriting results of the Automobile and
Other Property and Casualty operation than the losses
from the Northridge earthquake, amounting to $2.3
million, in the first quarter of 1994. Underwriting
results in the Reinsurance operation improved on the
absence of major catastrophes in the first quarter of
1995 compared to the corresponding period in 1994 in
which losses of $4.8 million were sustained from claims
associated with the Northridge earthquake.
Approximately 80% of Zenith's workers' compensation business
is written in California where open rating commenced
effective January 1, 1995. Intense competition among
insurers has arisen and at the end of the first quarter,
Zenith had more policies in force than at the end of the
Page 8
<PAGE>
prior year, but the associated premiums were lower. The
future profitability of Zenith's California Workers'
Compensation operation will be dependent upon, among other
things, Zenith's ability to compete in an open rating
environment and its ability to control costs, including
medical, indemnity and loss adjustment expenses.
INVESTMENTS:
Fluctuations in interest rates continue to impact
stockholders' equity due to changes in the market value of
fixed maturity securities. At March 31, 1995, the
unrealized loss on fixed maturities identified as Available-
for-Sale was $25.8 million, before deferred taxes, compared
to a loss of $49.7 million, before deferred taxes, at
December 31, 1994. This change resulted in an increase in
stockholders' equity of $24.8 million, after deferred taxes,
between December 31, 1994 and March 31, 1995. Stockholders'
equity will continue to be affected by future volatility, if
any, in the bond markets.
Investment income increased in the quarter ended March 31,
1995 compared to the same period in 1994 due to increased
yields, which is demonstrated as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Investment Income Three Months Ended March 31,
Dollars in Thousands 1995 1994
- ----------------------------------------------------------
<S> <C> <C>
Property and Casualty
Portfolio (incl. parent)
Pre-tax $10,785 $ 8,712
Post-tax 7,215 5,889
Health and Life Portfolio
Pre-tax 15,885 14,431
Post-tax 10,325 9,380
Consolidated
Pre-tax 26,670 23,143
Post-tax $17,540 $15,269
- ----------------------------------------------------------
</TABLE>
Page 9
<PAGE>
The yields on invested assets, which vary with the general
level of interest rates, were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Investment Yields Three Months Ended March 31,
1995 1994
- ----------------------------------------------------------
<S> <C> <C>
Property and Casualty
Portfolio (incl. parent)
Pre-tax 5.8% 4.7%
Post-tax 3.9% 3.2%
Health and Life Portfolio
Pre-tax 7.9% 7.5%
Post-tax 5.1% 4.9%
</TABLE>
At March 31, 1995 and December 31, 1994, 96.4% and 97.9%, respectively, of
the consolidated carrying values of investments in bonds were rated
investment grade. At March 31, 1995, the average maturity of the property
and casualty portfolio was 4.1 years, compared to 3.7 years at December 31,
1994.
The change in the carrying value of Zenith's consolidated investment
portfolio during 1995 was as follows:
<TABLE>
<CAPTION>
Dollars in thousands
- -------------------------------------------------------------------------------
<S> <C> <C>
Carrying Value at December 31, 1994 $1,462,989
Purchases at cost 122,116
Maturities and exchanges of investments (8,260)
Proceeds from sales of fixed maturity investments:
Available-for-sale (105,966)
Held-to-maturity None
Proceeds from sales of other investments (3,519)
-----------
Total proceeds from disposals of investments (109,485)
Realized gains from maturities and exchanges of investments:
Held-to-maturity 53
Realized gains (losses) from sales of investments:
Available-for-sale 944
Other investments (157)
-----------
Total realized gains on investments 840
Unrealized gains on investments 25,779
Decrease in short-term investments (2,757)
Net accretion of bonds and preferred 352
stocks and other changes
- -------------------------------------------------------------------------------
Carrying Value at March 31, 1995 $1,491,574
- -------------------------------------------------------------------------------
</TABLE>
Page 10
<PAGE>
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 March 31, 1995) to pay its
expenses, service debt and pay any cash dividends which may
be declared to its stockholders. In the first quarter of
1995, Zenith's subsidiary, Zenith Insurance Company, paid a
dividend of $10.0 million to Zenith. After adjusting for
the effects of the cash flows from sales of assets from the
trading portfolio in 1994, cash flow from operations
decreased in the three months ended March 31, 1995 compared
to the corresponding period in 1994 by approximately $3.2
million. The decline was primarily due to increased
payments for losses and loss adjustment expenses, which was
partially offset by a decrease in income tax paid and
improved cash flow from real estate operations, which had
not begun to sell homes in the first quarter of 1994.
Page 11
<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 Part I, Item 1, Note 1 of the
of per share earnings consolidated financial statements
is incorporated herein by reference
[27] Financial Data Schedule
[b] Reports on Form 8-K
None
Page 12
<PAGE>
ZENITH NATIONAL INSURANCE CORP.
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
/s/ Stanley R. Zax
Date: May 12, 1995 ------------------------------------------
Stanley R. Zax, Chairman of the Board
& President (Principal Executive Officer)
/s/ Fredricka Taubitz
Date: May 12, 1995 -------------------------------------------
Fredricka Taubitz, Executive Vice President
& Chief Financial Officer
(Principal Accounting Officer)
Page 13
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<S> <C> <C>
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
</TABLE>
Page 14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 909,977
<DEBT-CARRYING-VALUE> 439,103
<DEBT-MARKET-VALUE> 442,199
<EQUITIES> 59,727
<MORTGAGE> 3,473
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,491,574
<CASH> 7,553
<RECOVER-REINSURE> 62,834
<DEFERRED-ACQUISITION> 109,393
<TOTAL-ASSETS> 1,877,388
<POLICY-LOSSES> 501,265
<UNEARNED-PREMIUMS> 128,347
<POLICY-OTHER> 740,514
<POLICY-HOLDER-FUNDS> 16,031
<NOTES-PAYABLE> 77,991
<COMMON> 24,052
0
0
<OTHER-SE> 311,748
<TOTAL-LIABILITY-AND-EQUITY> 1,877,388
113,232
<INVESTMENT-INCOME> 26,670
<INVESTMENT-GAINS> 840
<OTHER-INCOME> 8,820
<BENEFITS> 91,381
<UNDERWRITING-AMORTIZATION> 20,757
<UNDERWRITING-OTHER> 14,767
<INCOME-PRETAX> 10,283
<INCOME-TAX> 3,383
<INCOME-CONTINUING> 6,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,900
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
