<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 1995,
17,688,000 shares of common stock were outstanding, net of 6,418,000 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 JUN. 30, 1995 DEC. 31, 1994
<S> <C> <C>
ASSETS
Investments
Fixed maturities:
At amortized cost (fair value $579,801 & $400,964) $ 553,813 $ 410,989
At fair value (cost $753,657 & $864,133) 756,644 813,640
Floating rate preferred stocks, at fair value (cost $19,618 & $19,618) 18,557 18,506
Convertible and non redeemable preferred stocks, at fair value
(cost $8,501 & 8,684) 9,379 8,153
Common stocks, at fair value (cost $25,907 & $19,628) 28,427 19,355
Mortgage loans on real estate 3,446 3,503
Policy loans 43,135 41,753
Short-term investments (at cost, which approximates fair value) 85,152 127,594
Other investments 24,504 19,496
---------- ----------
TOTAL INVESTMENTS 1,523,057 1,462,989
Cash 8,123 7,114
Accrued investment income 23,413 22,429
Premiums receivable 76,063 66,898
Receivable from reinsurers and prepaid reinsurance premiums 65,540 58,873
Federal income tax 7,637
Deferred policy acquisition costs 109,672 109,059
Properties and equipment, less accumulated depreciation 48,943 48,581
Excess of cost over net assets acquired and purchased intangibles and
other assets 23,126 23,896
Other assets 32,229 33,282
---------- ----------
TOTAL ASSETS $1,910,166 $1,840,758
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals
Unpaid losses and loss expenses $ 502,204 $ 504,379
Future policy benefits for life insurance contracts 162,179 159,842
Deposits on deferred annuity contracts 576,210 569,484
Policy and contract claims 6,838 6,054
Unearned premiums 131,134 121,867
Policyholders' dividends accrued and accumulated 26,063 30,171
Other policyholder funds 14,573 15,999
Reserves on loss portfolio transfers 9,560 9,972
Senior notes payable, less unamortized issue costs of $830 & $889 74,171 74,111
Payable to banks 10,417 2,471
Federal income tax 1,439
Other liabilities 32,240 36,548
---------- ----------
TOTAL LIABILITIES 1,547,028 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 24,104,
outstanding 18,694, 1995; issued 24,034, outstanding 18,950, 1994 24,104 24,034
Additional paid-in capital 252,576 251,363
Retained earnings 174,784 167,025
Net unrealized appreciation (depreciation) on investments, net of deferred
tax expense (benefit) of $1,901 & ($3,969) 3,531 (47,460)
---------- ----------
454,995 394,962
Less treasury stock at cost (5,410 shares 1995 & 5,084 shares 1994) (91,857) (85,102)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 363,138 309,860
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,910,166 $1,840,758
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
Page 2
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
Dollars in thousands, except per share data 1995 1994 1995 1994
<S> <C> <C> <C> <C>
CONSOLIDATED REVENUES:
Property and casualty premium income $ 97,945 $100,601 $196,334 $198,472
Health and life premium income and other policy charges 14,305 15,305 29,148 30,727
Net investment income 27,531 24,455 54,201 47,598
Realized gains on investments 2,007 431 2,847 2,247
Real estate sales 11,273 8,773 20,093 8,773
Income from legal settlement 1,760 1,760
-------- -------- -------- --------
Total revenues 153,061 151,325 302,623 289,577
EXPENSES:
Property and casualty losses and loss expenses incurred 69,969 66,657 141,423 126,113
Health and life benefits and other policy credits 19,950 20,369 39,877 40,019
Policy acquisition costs 19,888 22,569 40,645 42,061
Other underwriting and operating expenses 14,617 11,738 29,384 28,588
Policyholders' dividends and participation 658 4,121 3,420 12,969
Real estate construction costs 10,711 8,024 18,764 8,024
Interest expense 1,528 1,480 3,087 3,052
-------- -------- -------- --------
Total expenses 137,321 134,958 276,600 260,826
Income from operations before federal income tax 15,740 16,367 26,023 28,751
Federal income tax 5,540 5,467 8,923 9,651
-------- ------- -------- --------
NET INCOME $ 10,200 $ 10,900 $ 17,100 $ 19,100
-------- -------- -------- --------
-------- -------- -------- --------
EARNINGS PER SHARE:
Net income per share $ 0.54 $ 0.57 $ 0.91 $ 1.00
-------- -------- -------- --------
-------- -------- -------- --------
</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>
SIX MONTHS
ENDED JUNE 30,
Dollars in thousands 1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Premiums collected $ 230,044 $ 236,652
Investment income received 53,203 47,817
Deposits on universal life type contracts 6,636 6,653
Proceeds from sales of real estate 20,093 8,773
Recovery from legal settlement 5,886
Losses & loss adjustment expenses paid (148,791) (132,595)
Health claims paid (15,305) (15,659)
Death and surrender benefits paid (7,462) (6,719)
Underwriting & other operating expenses paid (70,516) (75,169)
Real estate construction costs paid (19,104) (4,536)
Reinsurance premiums paid (12,397) (11,951)
Dividends paid to policyholders (7,120) (10,094)
Interest paid (3,274) (3,448)
Interest on deferred annuity contracts (15,257) (16,021)
Income taxes paid (5,600) (17,600)
---------- ---------
Net cash flows from operating activities, excluding cash from
trading portfolio 5,150 11,989
Net cash from sales of trading portfolio investments 1,414 106,465
---------- ---------
Net cash flows from operating activities, including cash from
trading portfolio 6,564 118,454
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investments:
Debt securities Held-to-Maturity (158,014) (15,286)
Debt and equity securities Available-for-Sale (87,824) (553,029)
Other investments (13,117) (8,431)
Proceeds from maturities and exchanges of investments:
Debt securities Held-to-Maturity 7,629 22,440
Debt and equity securities Available-for-Sale 23,599 65,500
Other investments 2,245 3,371
Proceeds from sales of investments:
Debt and equity securities Available-for-Sale 175,970 226,972
Other investments 4,360 1,229
Capital and other expenditures (3,175) (4,990)
Net decrease in short-term investments 43,477 138,482
---------- ---------
Net cash flows from investing activities (4,850) (123,742)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash advanced from bank line of credit 13,500
Cash repaid on bank line of credit (6,500)
Cash advanced from bank construction loans 14,840
Cash repaid on bank construction loans (13,894)
Cash dividends paid to common stockholders (9,406) (9,427)
Proceeds from exercise of stock options 1,166 1,196
Deposits on deferred annuity contracts 16,261 22,046
Acquisition costs of deferred annuity contracts, deferred (1,415) (2,088)
Annuitization & return of policyholders' balances on deferred
annuity contracts (23,759) (18,990)
Interest on deferred annuity contracts 15,257 16,021
Purchase of treasury shares (6,755)
---------- ---------
Net cash flows from financing activities (705) 8,758
---------- ---------
Net increase in cash 1,009 3,470
Cash at beginning of period 7,114 8,560
---------- ---------
Cash at June 30, $ 8,123 $ 12,030
---------- ---------
---------- ---------
</TABLE>
(continued)
Page 4
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(CONTINUED)
<TABLE>
SIX MONTHS
ENDED JUNE 30,
1995 1994
(Dollars in Thousands)
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $17,100 $19,100
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 3,093 2,893
Net accretion of bonds and preferred stocks (119) (212)
Realized gains on investments (2,847) (2,247)
Net cash from trading portfolio 1,414 106,465
Decrease (increase) in:
Accrued investment income (984) 295
Premiums receivable (9,165) (11,910)
Receivable from reinsurers (6,667) 1,734
Deferred policy acquisition costs 802 (13)
Federal income taxes 3,323 (8,280)
Increase (decrease) in:
Unpaid losses and loss expenses (2,175) (7,813)
Future policy benefits for life insurance contracts 2,337 2,459
Policy and contract claims 784 (820)
Unearned premiums 9,267 15,627
Policyholders' dividends accrued and accumulated (4,108) 3,990
Other policyholder funds (1,426) (642)
Other (4,065) (2,172)
-------- --------
Net cash flows from operating activities $ 6,564 $118,454
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of this statement.
Page 5
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Computation of earnings per share:
Dollars and shares in thousands, except
per share data
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
(A) Net income $10,200 $10,900 $17,100 $19,100
------- ------- ------- -------
------- ------- ------- -------
(B) Number of shares used in calculating
primary earnings per share:
Weighted average outstanding shares
during the period 18,681 18,886 18,783 18,870
Additional common shares issuable under
employee stock options using the
treasury stock method (1) 85 180 93 181
------- ------- ------- -------
18,766 19,066 18,876 19,051
------- ------- ------- -------
------- ------- ------- -------
Net income per share (A)/(B) $ 0.54 $ 0.57 $ 0.91 $ 1.00
------- ------- ------- -------
------- ------- ------- -------
(C) Number of fully diluted shares:
Weighted average outstanding shares
during the period 18,681 18,886 18,783 18,870
Additional common shares issuable under
employee stock options using the
treasury stock method (2) 93 191 97 186
------- ------- ------- -------
18,774 19,077 18,880 19,056
------- ------- ------- -------
------- ------- ------- -------
Net income per share (A)/(C) $ 0.54 $ 0.57 $ 0.91 $ 1.00
------- ------- ------- -------
------- ------- ------- -------
<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. Investments
At June 30, 1995, Zenith owned certain debt securities in ITT Corporation
("ITT") with an amortized cost of $7,302,000 and a market value of
$8,089,000. In June of 1995, Zenith received information from ITT and other
sources concerning the proposed treatment of its debt securities, including
those owned by Zenith, in connection with a plan of reorganization of ITT
into three new companies. Management concluded from this information that a
significant deterioration in creditworthiness, as described in Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities, would occur with respect to its investments in
ITT debt securities upon consummation of the reorganization. Accordingly,
these securities were transferred from the held-to-maturity portfolio to the
available-for-sale portfolio and unrealized appreciation on these securities
amounting to $787,000 was recorded as an adjustment to stockholders' equity
at June 30, 1995.
Note 3. Subsequent Events
On July 12, 1995, the Company repurchased one million shares of its common
stock at a cost of $20,050,000.
Page 6
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Continued
Note 4. Contingencies Surrounding Estimates of Liabilities for Unpaid
Property Casualty Losses and Loss Expenses
In the second quarter of 1995, Zenith commenced implementation of a new
workers' compensation computer system which became fully operational
effective July 5, 1995. In addition to enhancing data processing, the new
system is designed, among other things, to improve work flow in the workers'
compensation claims handling process. Management observed certain unusual
deviations from normally observed claim reserving trends and patterns in the
second quarter of 1995, possibly related to disruption of normal work flows
in anticipation of the implementation of the new system. Work flows in the
future may continue to be impacted as training and optimization of the new
system continues. Management believes that its estimate for liabilities for
unpaid workers' compensation losses and loss adjustment expenses (amounting
to $290,858,000 out of consolidated reserves for unpaid property and casualty
losses and loss adjustment expenses of $502,204,000) at June 30, 1995
included in these consolidated financial statements is adequate. However,
subsequent re-interpretation of currently available data or any new
information that becomes available may change the estimate of such
liabilities in future periods and such changes, if any, will be reflected in
the financial statements of the period in which they occur.
Page 7
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
In the opinion of management, all adjustments necessary for
a fair presentation of the results of operations for the
periods presented (consisting only of normal recurring
adjustments) have been included. The results of operations
for an interim period are not necessarily indicative of the
results for an entire year.
On May 24, 1995, the Board of Directors declared a regular
quarterly cash dividend of $.25 per share on the outstanding
shares, payable August 16, 1995 to stockholders of record at
the close of business on July 31, 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 Six months ended
June 30, June 30,
Dollars in thousands 1995 1994 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income, after tax,
excluding health and life $7,670 $6,447 $14,885 $12,336
Realized gains on investments,
after tax 1,305 281 1,851 1,461
- -----------------------------------------------------------------------------
Sub-total 8,975 6,728 16,736 13,797
- -----------------------------------------------------------------------------
Property and Casualty, after tax:
Underwriting income (loss) (96) 2,929 1,661 7,055
Catastrophe losses (805) (3,835) (3,990)
- -----------------------------------------------------------------------------
Property and casualty underwriting
income (loss) (96) 2,124 (2,174) 3,065
- -----------------------------------------------------------------------------
Health and life income, after tax 2,284 2,174 4,554 4,144
Income from real estate operations,
after tax 364 487 863 487
Other income, after tax 1,144 1,144
Interest expense, after tax (993) (962) (2,006) (1,984)
Parent expenses, after tax (334) (795) (873) (1,553)
- -----------------------------------------------------------------------------
Total $10,200 $10,900 $17,100 $19,100
- -----------------------------------------------------------------------------
</TABLE>
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)
PROPERTY AND CASUALTY OPERATIONS:
Premiums earned, underwriting results and combined ratios
for the three and six months ended June 30, 1995 and 1994
were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
% %
Dollars in Thousands 1995 1994 Increase 1995 1994 Increase
(Decrease) (Decrease)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums Earned
Workers' Compensation $47,928 $54,554 (12%) $98,629 $107,522 (8%)
Automobile and Other
Property & Casualty 39,137 37,567 4% 77,886 74,092 5%
Reinsurance 10,880 8,480 28% 19,819 16,858 18%
-------- -------- -------- --------
Total $97,945 $100,601 (3%) $196,334 $198,472 (1%)
-------- -------- -------- --------
-------- -------- -------- --------
Underwriting Income (Loss)
Before Taxes
Workers' Compensation ($4,039) $4,360 ($5,333) $9,579
Automobile and Other
Property & Casualty 433 (3,190) (5,242) (5,288)
Reinsurance 3,840 2,070 7,595 513
-------- -------- -------- --------
Total $234 $3,240 ($2,980) $4,804
Combined Ratios
Workers' Compensation 108.4% 92.0% 105.4% 91.1%
Automobile and Other
Property & Casualty 98.9% 108.5% 106.7% 107.1%
Reinsurance 64.7% 75.6% 61.7% 97.0%
Total 99.8% 96.8% 101.5% 97.6%
- --------------------------------------------------------------------------------------
</TABLE>
Reduced Workers' Compensation premiums earned for the quarter
and six months ended June 30, 1995 compared to the corresponding
periods in 1994 reflect the impact of rate decreases mandated in
1994 and the effect of intense competition stemming from open
rating in 1995 in California, wherein approximately 80% of Zenith's
workers' compensation business is written. Expansion continues
outside California primarily in Texas, with additional operations
in Arkansas, Illinois and Utah. Nothwithstanding the reduction in
premiums, the total number of workers' compensation policies in
force at June 30, 1995 increased to 24,500 from 23,100 at
December 31, 1994 and from 21,200 at June 30,1994.
Underwriting results in the Workers' Compensation operation declined
in the quarter and six months ended June 30, 1995 compared to the
corresponding periods in 1994 because of an increase in losses and
loss adjustment expenses offset, in part, by a decrease in policyholder
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)
dividends. Also, operating expenses in the Workers'
Compensation operation have not declined commensurately with
premium rate reductions due, in part, to a substantial
investment in a new Workers' Compensation computer system
designed, among other things, to enhance data processing in
existing operations and to support expansion of operations
into new states. Expenses, before tax, associated with the
new system were approximately $5.1 million in the first six
months of 1995 and $2.1 million in the second quarter of
1995 compared to $2.2 million and $1.3 million for the
corresponding periods in 1994. Underwriting results for 1995
policies in California will most likely continue to be unfavorable
at currently prevailing premium rates and expense levels,
compared to Zenith's long-term historical results and its
operating goal of a combined ratio of 100%. Management is
focused on making the necessary adjustments to expense levels
to achieve this goal in California as soon as possible.
Losses incurred from the Northridge earthquake negatively
impacted underwriting results in all property and casualty
lines in the three and six month period ended June 30, 1994.
Underwriting results in only the Automobile and Other
Property and Casualty operation were reduced by catastrophe
losses associated with wind and rain storm damage in
California in the first quarter of 1995. Underwriting
results in the second quarter of 1995 were unaffected by
catastrophe losses.
Investments:
Fluctuations in interest rates continue to impact
stockholders' equity due to changes in the market value of
fixed maturity securities. At June 30, 1995, the unrealized
gain on fixed maturities identified as Available-for-Sale
was $3.2 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 $48.4 million, after deferred taxes, between
December 31, 1994 and June 30, 1995. Stockholders' equity
will continue to be affected by future volatility, if any,
in the bond markets.
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)
Investment income, set forth in the table below, increased
in the three and six months ended June 30, 1995 compared to
the corresponding periods in 1994 due to increased yields.
The average life of the property and casualty portfolio
increased from 3.7 years at December 31, 1994 to 5.1 years
at June 30, 1995.
<TABLE>
- -----------------------------------------------------------------
Three Months Six Months
Investment Income Ended June 30, Ended June 30,
Dollars in thousands 1995 1994 1995 1994
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Property and Casualty Portfolio
(incl. parent)
Pre-tax $11,465 $9,537 $22,250 $18,249
Post-tax 7,670 6,447 14,885 12,336
Health and Life Portfolio
Pre-tax 16,066 14,918 31,951 29,349
Post-tax 10,443 9,697 20,768 19,077
Consolidated
Pre-tax 27,531 24,455 54,201 47,598
Post-tax $18,113 $16,144 $35,653 $31,413
- -----------------------------------------------------------------
</TABLE>
The yields on invested assets, which vary with the general
level of interest rates, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Three Months Six Months
Investment Yields Ended June 30, Ended June 30,
1995 1994 1995 1994
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Property and Casualty Portfolio
(incl. parent)
Pre-tax 6.3% 5.2% 6.1% 5.0%
Post-tax 4.2% 3.5% 4.1% 3.3%
Health and Life Portfolio
Pre-tax 8.0% 7.7% 7.9% 7.6%
Post-tax 5.2% 5.0% 5.2% 5.0%
- -----------------------------------------------------------------
</TABLE>
At June 30, 1995 and December 31, 1994, 95.7% and 97.8%,
respectively, of the consolidated carrying values of
investments in debt securities were rated investment grade.
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 1995 was as follows:
<TABLE>
<CAPTION>
Dollars in thousands
- ----------------------------------------------------------------------------
<S> <C> <C>
Carrying Value at December 31, 1994 $1,462,989
Purchases at cost 259,632
Maturities and exchanges of investments (33,473)
Proceeds from sales of investments:
Available-for-sale (175,970)
Trading portfolio (2,091)
Held-to-maturity None
Other investments (4,360)
---------
Total proceeds from disposals of
investments (182,421)
Realized gains from maturities and exchanges of investments:
Held-to-maturity 53
Available-for-sale 34
Realized gains (losses) from sales of investments:
Available-for-sale 2,209
Trading portfolio (61)
Other investments 744
Realized losses from writedown of investments (132)
---------
Total realized gains on investments 2,847
Unrealized gains on investments 56,861
Decrease in short-term investments (43,477)
Net accretion of bonds and preferred stocks and
other changes 99
- ----------------------------------------------------------------------------
Carrying Value at June 30, 1995 $1,523,057
- ----------------------------------------------------------------------------
</TABLE>
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 ($43,000,000 at June 30, 1995) to pay its
expenses, service debt and pay any cash dividends which may
be declared to its stockholders. On July 12, 1995, Zenith
purchased one million shares of its common stock at a cost
of $20,050,000. Funds for the repurchase were acquired
through borrowings under Zenith's bank lines of credit,
reducing the funds available for borrowing to $23,000,000
at July 12, 1995 and resulting in an increase in bank
indebtedness of $20,000,000.
Page 12
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Stockholders' Meeting of Zenith was held on May 24, 1995. The
only matter presented to a vote of the Stockholders was the election of
Directors. The tabulation of votes for the nominees, all of whom were
elected, is as follows:
<TABLE>
<CAPTION>
Director Votes for Votes Withheld
- -------- --------- --------------
<S> <C> <C>
George E. Bello 15,861,730 44,414
Max M. Kampelman 15,861,067 45,077
Jack M. Ostrow 15,861,067 45,077
William Steele Sessions 15,861,747 44,397
Harvey L. Silbert 15,861,067 45,077
Robert M. Steinberg 15,861,730 44,414
Saul P. Steinberg 15,861,767 44,377
Gerald Tsai, Jr. 15,862,167 43,977
Stanley R. Zax 15,860,472 45,672
</TABLE>
There were no votes cast against any Director, no abstentions and no broker
non-votes.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
[a] Exhibits
[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.)
[10] Revolving Note Agreement, dated July 1, 1995, between Zenith and
City National Bank
[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: AUGUST 11, 1995 \Stanley R. Zax\
-----------------------------------------
Stanley R. Zax, Chairman of the Board
& President (Principal Executive Officer)
DATE: AUGUST 11, 1995 \Fredricka Taubitz\
-------------------------------------------
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
- ----------- ----------- ----
[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.)
[10] Revolving Note Agreement, dated July 1, 1995, between
Zenith and City National Bank
[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>
EXHIBIT 10
REVOLVING NOTE
$20,000,000.00 Beverly Hills, California
July 1, 1995
On July 1, 1996 ("Termination Date"), 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 United States Dollars and in immediately available funds,
the principal sum of TWENTY MILLION DOLLARS ($20,000,000.00) ("Revolving
Credit Commitment") or so much thereof as may be advanced and then
outstanding, plus interest on the unpaid balance, until fully repaid, at a
rate computed on the basis of a 360-day year, actual days elapsed, at the
rates, times and in accordance with the terms set forth in the INTEREST RATE
PROVISIONS attached hereto and by this reference made a part hereof as though
fully set forth herein at length.
Anything herein to the contrary notwithstanding, all principal and
interest remaining unpaid on the Termination Date, shall be immediately due
and payable.
As provided herein, all or any portion of the principal balance of
this Note may be borrowed, repaid and reborrowed from time to time prior to
the Termination Date, provided at the time of any borrowing no Event of
Default (as hereinafter defined) exists, and provided further that the total
borrowings outstanding at any one time shall not exceed the Revolving Credit
Commitment. Each borrowing and repayment shall be noted in the books and
records of CNB. The excess of borrowing over repayments shall evidence the
principal balance due hereon from time to time and at any time. Borrowing
hereunder shall be conclusively presumed to have been made to or for the
benefit of Borrower when noted in such books and records.
Interest accruing on this Note shall be payable quarterly, in
arrears, on the first (1st) day of each January, April, July, and October,
commencing October 1, 1995.
Borrower shall pay CNB a commitment fee equal to $25,000.00, payable
in four (4) equal consecutive quarterly installments of $6,250.00 each,
payable on the first (1st) day of each January, April, July and October,
commencing October 1, 1995.
Borrower shall pay CNB an unused facility fee equal to one-eighth of
one percent per annum (0.125%) applied on a daily basis to the unused portion
of the Revolving Credit Commitment, payable quarterly, in arrears, on the
first (1st) day of each January, April, July and October, commencing October
1, 1995.
The occurrence of any of the following with respect to Borrower
shall constitute an "Event of Default" hereunder:
1. Failure to make any payment of principal or interest when due
under this Note, when such failure continues for ten (10) days
after notice from CNB that Borrower is in default hereunder if
payment is not made;
1
<PAGE>
2. Filing of a petition by or against Borrower under any provisions
of the BANKRUPTCY CODE;
3. Appointment of a receiver or an assignee for the benefit of
Borrower's creditors;
4. 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
materially false or misleading;
6. Any material default in the payment or performance of any
material obligation, or any material default under any
material provisions of any material contract or instrument
pursuant to which Borrower has incurred any material obligation
for borrowed money, any material purchase obligation or
any other material 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 this Note, any
letter agreement 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. Borrower agrees to
pay all costs and expenses, including reasonable attorneys' fees, expended or
incurred by CNB (or allocable to CNB'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 the Overdue Rate set forth in the Interest Rate Provisions and
continuing thereafter until paid or cured, if curing is permitted.
This Note and all matters relating thereto, shall be governed by the
laws of the State of California.
ZENITH NATIONAL INSURANCE CORP., a
Delaware corporation
By: /s/ FREDRICKA TAUBITZ
------------------------------------
FREDRICKA TAUBITZ, Executive Vice
President and Chief Financial Officer
2
<PAGE>
INTEREST RATE PROVISION
The terms and provisions herein set forth shall control and determine
the rate, calculation and payment of interest under that $20,000,000.00
Revolving Note ("Note"), dated July 1, 1995, executed by ZENITH NATIONAL
INSURANCE CORP., a Delaware corporation ("Borrower"), in favor of CITY
NATIONAL BANK, a national banking association ("CNB").
1. DEFINITIONS. Except as otherwise defined herein or in the Note, the
following definitions apply:
1.1 "BUSINESS DAY" shall mean a day that CNB's Head Office is open and
conducts a substantial portion of its business.
1.2 "EUROCURRENCY RESERVE REQUIREMENT" shall mean for a LIBOR Loan for
the Interest Period therefor, the aggregate (without duplication) of the
rates (expressed as a decimal) of reserves (including, without limitation,
any basic, marginal, supplemental, or emergency reserves) that are required
to be maintained by banks during the Interest Period under any regulations of
the Board of Governors of the Federal Reserve System, or any other
governmental authority having jurisdiction with respect thereto, applicable
to funding based on so-called "Eurocurrency Liabilities", including
Regulation D (12 CFR 224).
1.3 "INTEREST PERIOD" shall mean, as to any LIBOR Loan, (a) the period
commencing on the date the LIBOR Loan is made (including the date a Prime
Loan is converted to a LIBOR Loan, or a LIBOR Loan is renewed as a LIBOR
Loan, which, in the latter case, shall be the last day of the expiring
Interest Period) and ending one (1), two (2), three (3) or six (6) months
thereafter, as selected by the Borrower in its irrevocable Notice of
Borrowing/Interest Selection; provided, however, (y) any Interest Period that
would end on a day not a Business Day, shall extend to the next Business Day;
and (z) no Interest Period may extend beyond the Termination Date.
1.4 "LIBOR BASE RATE" shall mean the British Banker's Association
definition of the London InterBank Offered Rates as made available by
Telerate Monitor on Telerate Screen 3750, or such other information service
available to CNB, for the applicable Interest Period for the LIBOR Loan
selected by Borrower in its irrevocable Notice of Borrowing/Interest
Selection, and as quoted by CNB on the Business Day Borrower requests a LIBOR
Loan.
1.5 "LIBOR INTEREST RATE" shall mean, for each Libor Loan, the rate per
year (rounded upward to the nearest one-sixteenth (1/16th) of one percent
(0.0625%), if necessary) determined by CNB to be the quotient of (a) the
LIBOR Base Rate divided by (b) one minus the Eurocurrency Reserve Requirement
for the Interest Period; which is expressed by the following formula:
LIBOR Base Rate
------------------------------------
1 - Eurocurrency Reserve Requirement
1.6 "LIBOR LOAN" shall mean a Loan which bears interest in relation to
the LIBOR Interest Rate.
1
<PAGE>
1.7 "LOAN(S)" shall mean the principal balance outstanding on the Note,
and any LIBOR Loan and/or any Prime Loan made thereunder, as the case may be.
1.8 "NOTICE OF BORROWING/INTEREST SELECTION" or "NOTICE" shall mean
that Notice of Borrowing/Interest Selection attached hereto as Exhibit "A".
1.9 "PRIME LOAN" shall mean a Loan which bears interest in relation to
the Prime Rate.
1.10 "PRIME RATE" shall mean the rate most recently announced by CNB at
its principal office in Beverly Hills, California, as its "Prime Rate." Any
change in the Prime Rate will be effective on the date such change is
announced.
2. RATE OF INTEREST. Subject to Section 2.1, below, each Loan shall bear
interest on the unpaid principal amount therefrom the date of disbursement
through maturity (whether by acceleration or otherwise), at a rate equal to,
at the Borrower's option as indicated on Borrower's Notice of
Borrowing/Interest Selection, either (a) for a LIBOR Loan, the sum of the
LIBOR Interest Rate plus THREE-QUARTERS OF ONE percent (0.75%) per year, or
(b) for a Prime Loan, the sum of the Prime Rate, as it shall exist from time
to time, minus FIFTY-FIVE HUNDREDTHS OF ONE percent (0.55%) per year, in all
cases computed on the basis of a 360 day year, actual days elapsed. A Loan
shall be a Prime Loan any time it is not a LIBOR Loan.
2.1 OVERDUE INTEREST. Notwithstanding anything to the contrary
contained in the Note, upon the occurrence of an Event of Default, and the
acceleration of all sums of principal or interest to be due and payable, (and
without constituting a waiver of the Event of Default), the interest rate on
the unpaid principal balance shall be increased to a rate ("Overdue Rate")
equal to two percent (2.0%) per year higher than the interest rate as
determined in paragraph 2, above, provided, however, for the purposes of this
paragraph, a LIBOR Loan shall be treated as a Prime Loan upon the end of an
Interest Period. Interest at the Overdue Rate shall be calculated on a 360
day basis, actual days elapsed, on the outstanding principal balance and
interest at said Overdue Rate shall be due and owing, and shall accrue and be
payable from the date that all sums of principal or interest are due and
payable due to the occurrence of the Event of Default, to and including the
date which is the earlier of the date of payment in full of the amount owing
under the Note, or the date of Borrower's cure of such event (but only if
such cure is permitted).
3. PAYMENT OF INTEREST. Interest on the Loans shall accrue daily and be
payable (a) quarterly, in arrears, on the first (1st) day of each January,
April, July, and October, commencing October 1, 1995; and (b) on the maturity
of the Note (whether accelerated or otherwise).
4. NOTICE OF BORROWING AND INTEREST SELECTION. Borrower may, on the date
of the Note, or from time to time thereafter, request that a Loan be a LIBOR
Loan (including conversion of a Prime Loan to a LIBOR Loan, or continuation
of a LIBOR Loan as a LIBOR Loan upon the expiration of the Interest Period)
or a Prime Loan by delivering to CNB, with respect to a LIBOR Loan, no
earlier than two (2) Business Days before the LIBOR Loan is to be made, and
with respect to a LIBOR Loan or Prime Loan, no later than one o'clock (1:00)
p.m., Pacific Time, on the day the Loan is to be made, its irrevocable
written Notice of Borrowing/Interest Selection. The Notice shall designate
(a) the date of the Loan, (b) the principal amount of the Loan, (c) whether
the Loan will be a LIBOR Loan or a Prime Loan, and (d) if a LIBOR Loan, the
Interest Period. The
2
<PAGE>
Notice shall be delivered to CNB at 400 N. ROXBURY DR., BEVERLY HILLS, CA,
90210, ATTENTION: ERICH BOLLINGER, COMMERCIAL LOANS, or by telephone
facsimile to CNB at (310) 888-6146, or such other address or facsimile number
as CNB advises Borrower in writing. The Notice will not be effective until
actually received by CNB as herein provided. If Borrower fails to select a
LIBOR Loan in accordance herewith, any Loan made shall be a Prime Loan, and
any outstanding LIBOR Loan shall be deemed a Prime Loan upon expiration of
the Interest Period.
5. AVAILABILITY OF LIBOR LOANS. Notwithstanding anything herein to the
contrary, each LIBOR Loan shall be in the minimum amount of $500,000.00 and,
thereafter, in increments of $250,000.00. Borrower may not have more than
five (5) LIBOR Loans outstanding at any one time under the Revolving Credit
Commitment. Borrower may have Prime Loans and LIBOR Loans outstanding
simultaneously.
6. PREPAYMENT OF PRINCIPAL. Borrower may prepay the principal amount
outstanding on a Prime Loan at any time and in any amount without a
prepayment fee. Borrower may prepay the full outstanding principal balance
on a LIBOR Loan prior to the end of the Interest Period ("LIBOR Prepayment"),
provided, however, that any LIBOR Prepayment is subject to Borrower's
concurrent payment of a prepayment fee ("LIBOR Prepayment Fee") in the amount
determined by the LIBOR Prepayment Fee Formula set forth below. Borrower may
not make a partial principal prepayment on a LIBOR Loan.
6.1 Borrower must deliver to CNB written notice of its intention to
make a LIBOR Prepayment at least two (2) Business Days prior to the intended
payment date specifying the amount and date of the LIBOR Prepayment.
6.2 LIBOR Prepayment Fee Formula. Each LIBOR Prepayment shall be
accompanied by a LIBOR Prepayment Fee equal to the amount, if any, by which
(a) the additional interest which would have been earned by CNB on the LIBOR
Loan had it not been paid until the last day of the Interest Period, exceeds
(b) the interest which would have been recoverable by CNB placing the amount
of the LIBOR Loan on deposit in the LIBOR market for a period starting on the
date on which it was prepaid and ending on the last day of the applicable
Interest Period.
7. SUSPENSION OF LIBOR LOANS. In the event (a) CNB shall, on any Business
Day, be unable to determine the LIBOR Base Rate applicable for a new,
continued, or converted LIBOR Loan for any reason, or (b) any law,
regulation, or governmental order, rule or determination, shall make it
unlawful for CNB to make a LIBOR Loan, Borrower's right to select LIBOR Loans
shall be suspended until CNB is again able to determine the LIBOR Base Rate
or make LIBOR Loans, as the case may be, and during such suspension time, new
Loans and LIBOR Loans whose Interest Period terminate, may only be Prime
Loans.
3
<PAGE>
EXHIBIT A
NOTICE OF BORROWING/INTEREST SELECTION
This Notice of Borrowing/Interest Selection ("Notice") is executed and
delivered by ZENITH NATIONAL INSURANCE CORP., a Delaware corporation
("Borrower"), to CITY NATIONAL BANK, a national banking association ("CNB"),
pursuant to that Revolving Note ("Note") dated July 1, 1995, executed by
Borrower in favor of CNB. Any terms not defined herein shall have the
meanings defined in the Note or the Interest Rate Provision.
1. REQUEST FOR A LOAN. Borrower requests a Loan under the Note as follows:
1.1 Interest Selection- State "LIBOR" or "Prime": __________________
1.2 Principal Amount of Loan: $__________________ [IF LIBOR LOAN,
MINIMUM OF $500,000 AND INCREMENTS OF $250,000]
1.3 LIBOR Loan- Effective Date of Interest Period: _______________, 19___
1.4 LIBOR Loan - Interest Period: ___ month(s) [1, 2, 3 or 6 months only]
2. CONVERSION TO LIBOR LOAN. Borrower requests conversion of the
outstanding Prime Loan to a LIBOR Loan.
2.1 Effective Date of Conversion: ________________________, 19___
2.2 Principal Amount of Conversion: $_____________________ [MINIMUM OF
$500,000 AND INCREMENTS OF $250,000]
2.3 Interest Period: _______ month(s) [1, 2, 3 or 6 months only]
3. RENEWAL OF LIBOR LOAN. Borrower requests renewing an outstanding LIBOR
Loan as follows:
3.1 Principal Amount of Renewal of LIBOR Loan: $______________[INCREMENTS
of $__________________] (Amount of LIBOR Loan not renewed as a LIBOR
Loan will be a Prime Loan)
3.2 Date of Renewal: _________________________, 19___ [LAST DATE OF
CURRENT INTEREST PERIOD]
3.3 Interest Period: ________ month(s) [1, 2, 3 or 6 months only]
4. CONVERSION TO PRIME LOAN. LIBOR Loans shall automatically convert to a
Prime Loan at the end of an Interest Period if CNB fails to timely receive a
Notice for an outstanding LIBOR Loan.
5. WARRANTY. In connection with the advance/conversion/renewal of the
Loans requested herein, Borrower hereby represents and warrants to CNB that,
as of the date of the such advance/conversion/renewal of the Loan requested
herein, no Event of Default has occurred and is continuing. (If the
foregoing statement is not true and correct, attach a statement specifying in
detail the circumstances thereof and the actions Borrower is taking or
proposes to take with respect thereto.)
This Notice is executed on _______________________, 19___, by an
authorized officer of Borrower, on behalf of Borrower.
"Borrower" ZENITH NATIONAL INSURANCE CORP. a
Delaware corporation
By: _________________________________
Its: _________________________________
<TABLE> <S> <C>
<PAGE>
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 831,660
<DEBT-CARRYING-VALUE> 553,813
<DEBT-MARKET-VALUE> 579,801
<EQUITIES> 56,363
<MORTGAGE> 3,446
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,523,057
<CASH> 8,123
<RECOVER-REINSURE> 65,540
<DEFERRED-ACQUISITION> 109,672
<TOTAL-ASSETS> 1,910,166
<POLICY-LOSSES> 502,204
<UNEARNED-PREMIUMS> 131,134
<POLICY-OTHER> 745,227
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0
0
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225,482
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