<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, 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 October 31, 1995,
17,774,000 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 SEPT. 30, 1995 DEC. 31, 1994
<S> <C> <C>
ASSETS
Investments
Fixed maturities:
At amortized cost (fair value $127,516) $ 125,275
At fair value (cost $471,464 & $573,694) 471,229 $ 546,120
Floating rate preferred stocks, at fair value (cost $14,614 & $19,618) 13,523 18,506
Convertible and non redeemable preferred stocks, at fair value
(cost $8,293 & $8,684) 9,403 8,153
Common stocks, at fair value (cost $21,815 & $19,628) 25,231 19,355
Short-term investments (at cost, which approximates fair value) 68,379 97,400
Other investments 24,886 19,496
-------------- -------------
TOTAL INVESTMENTS 737,926 709,030
Cash 8,070 5,358
Accrued investment income 7,984 8,665
Premiums receivable 83,318 66,912
Receivable from reinsurers and prepaid reinsurance premiums 58,723 58,613
Federal income tax 15,860 31,270
Deferred policy acquisition costs 22,159 18,506
Properties and equipment, less accumulated depreciation 48,721 48,581
Excess of cost over net assets acquired and purchased intangibles and other assets 9,194 9,559
Other assets 31,314 32,809
Net assets of discontinued operations held for sale 119,033 104,372
-------------- -------------
TOTAL ASSETS $ 1,142,302 $ 1,093,675
-------------- -------------
-------------- -------------
LIABILITIES
Policy liabilities and accruals
Unpaid losses and loss expenses $ 505,378 $ 510,406
Unearned premiums 139,391 121,825
Policyholders' dividends accrued and accumulated 14,142 20,522
Other policyholder funds 12,025 14,605
Reserves on loss portfolio transfers 9,173 9,972
Senior notes payable, less unamortized issue costs of $798 & $889 74,202 74,111
Payable to banks 32,395 2,471
Other liabilities 29,065 29,903
-------------- -------------
TOTAL LIABILITIES 815,771 783,815
-------------- -------------
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 24,180 outstanding 17,762,
1995; issued 24,034, outstanding 18,950, 1994 24,180 24,034
Additional paid-in capital 253,969 251,363
Retained earnings 158,794 167,025
Net unrealized appreciation (depreciation) on investments, net of deferred tax
expense (benefit) of $895 & ($3,969) 1,663 (47,460)
-------------- -------------
438,606 394,962
Less treasury stock at cost (6,418 shares 1995 & 5,084 shares 1994) (112,075) (85,102)
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 326,531 309,860
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,142,302 $ 1,093,675
-------------- -------------
-------------- -------------
</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 1995 1994 1995 1994
<S> <C> <C> <C> <C>
CONSOLIDATED REVENUES:
Property and casualty premium income $ 108,401 $ 115,653 $ 321,899 $ 333,070
Net investment income 11,510 10,450 34,750 29,738
Realized gains (losses) on investments 1,548 (628) 2,727 1,452
Real estate sales 8,859 7,079 28,952 15,852
Income from legal settlement 71 1,831
---------- ---------- ---------- ----------
Total revenues 130,318 132,625 388,328 381,943
EXPENSES:
Property and casualty losses and loss expenses incurred 78,711 79,080 233,936 220,293
Policy acquisition costs 20,536 18,803 57,559 57,590
Other underwriting and operating expenses 10,805 11,639 34,064 34,251
Policyholders' dividends and participation 1,489 2,867 4,166 15,077
Real estate construction costs 8,406 6,421 27,170 14,445
Interest expense 1,897 1,461 4,984 4,513
---------- ---------- ---------- ----------
Total expenses 121,844 120,271 361,879 346,169
Income from continuing operations before federal income tax 8,474 12,354 26,449 35,774
Federal income tax 2,474 4,250 8,580 12,030
---------- ---------- ---------- ----------
Income from continuing operations 6,000 8,104 17,869 23,744
DISCONTINUED OPERATIONS:
Income from life and annuity operations of CalFarm Life (less
income tax of $645, $1,067, $3,463, & $2,939) 1,200 1,996 6,431 5,456
Estimated loss on disposal of CalFarm Life, including estimated
income tax expense of $5,600 (19,000) (19,000)
---------- ---------- ---------- ----------
Income (loss) from discontinued operations (17,800) 1,996 (12,569) 5,456
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (11,800) $ 10,100 $ 5,300 $ 29,200
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS PER SHARE:
Income from continuing operations per share 0.34 0.42 0.97 1.24
Income (loss) from discontinued operations per share (1.00) 0.11 (0.68) 0.29
---------- ---------- ---------- ----------
Net income (loss) per share $ (0.66) $ 0.53 $ 0.29 $ 1.53
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</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>
NINE MONTHS
ENDED SEPTEMBER 30,
Dollars in Thousands 1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Premiums collected $ 339,075 $ 352,399
Investment income received 34,767 29,198
Proceeds from sales of real estate 28,953 15,852
Recovery from legal settlement 5,957
Losses & loss adjustment expenses paid (240,382) (226,849)
Underwriting & other operating expenses paid (93,223) (89,401)
Real estate construction costs paid (27,490) (23,505)
Reinsurance premiums paid (16,274) (17,241)
Dividends paid to policyholders (9,683) (12,345)
Interest paid (3,523) (3,858)
Income taxes paid (2,143) (21,899)
--------- ---------
Net cash from continuing operating activities, excluding trading portfolio 10,077 8,308
Net cash from sales of trading portfolio investments 2,138 4,903
--------- ---------
Net cash from continuing operating activities, including trading portfolio 12,215 13,211
Net cash from discontinued operating activities, including trading portfolio 10,046 113,875
--------- ---------
Net cash flows from operating activities 22,261 127,086
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments:
Debt securities Held-to-Maturity (131,785)
Debt and equity securities Available-for-Sale (99,297) (425,435)
Other investments (12,663) (4,985)
Proceeds from maturities and exchanges of investments:
Debt securities Held-to-Maturity 2,089
Debt and equity securities Available-for-Sale 13,567 70,157
Other investments 2,021
Proceeds from sales of investments:
Debt and equity securities Available-for-Sale 195,074 233,154
Other investments 5,042 1,800
Capital and other expenditures (3,904) (5,010)
Losses and loss adjustment expenses paid under portfolio transfers (1,326) (1,352)
Net decrease in short-term investments 30,691 133,483
Net cash used in investing activities of discontinued operations (19,277) (137,251)
--------- ---------
Net cash flows from investing activities (19,768) (135,439)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash advanced from bank line of credit 34,500
Cash repaid on bank line of credit (6,750)
Cash advanced from bank construction loans 23,232
Cash repaid on bank construction loans (21,058)
Cash dividends paid to common stockholders (13,830) (14,154)
Proceeds from exercise of stock options 2,507 1,944
Purchase of treasury shares (26,973)
Net cash provided by financing activities of discontinued operations 8,591 22,345
--------- ---------
Net cash flows from financing activities 219 10,135
--------- ---------
Net increase in cash 2,712 1,782
Cash at beginning of period 5,358 6,808
--------- ---------
Cash at September 30, $ 8,070 $ 8,590
--------- ---------
--------- ---------
</TABLE>
(continued)
Page 4
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(continued)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
1995 1994
(Dollars in Thousands)
<S> <C> <C>
RECONCILIATION OF INCOME FROM CONTINUING OPERATIONS
TO NET CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 17,869 $ 23,744
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 3,612 3,732
Net amortization (accretion) of bonds and preferred
stocks (353) (973)
Realized gains on investments (2,727) (1,452)
Net cash from trading portfolio 2,138 4,903
Decrease (increase) in:
Accrued investment income 681 231
Premiums receivable (16,406) (13,804)
Receivable from reinsurers (110) 741
Deferred policy acquisition costs (3,653) (2,226)
Federal income taxes 6,437 (9,787)
Real estate and construction in progress 480 (11,191)
Receivable from legal settlement 4,126
Increase (decrease) in:
Unpaid losses and loss expenses (4,459) (6,937)
Future policy benefits for life insurance contracts (163) 76
Policy and contract claims (406) (289)
Unearned premiums 17,566 16,592
Policyholders' dividends accrued and accumulated (6,380) 3,032
Other policyholder funds (2,580) (1,007)
Other 669 3,700
Net cash from discontinued operating activities,
including trading portfolio 10,046 113,875
-------- --------
Net cash flows from operating activities $ 22,261 $127,086
-------- --------
-------- --------
</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,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
(A) Net income (loss) $(11,800) $10,100 $ 5,300 $ 29,200
-------- ------- ------- --------
-------- ------- ------- --------
(B) Number of shares used in calculating
primary earnings per share:
Weighted average outstanding shares
during the period 17,733 18,935 18,433 18,892
Additional common shares issuable under
employee stock options using the
treasury stock method (1) 119 236 102 199
-------- ------- ------- --------
17,852 19,171 18,535 19,091
-------- ------- ------- --------
-------- ------- ------- --------
Net income (loss) per share (A)/(B) $ (0.66) $ 0.53 $ 0.29 $ 1.53
-------- ------- ------- --------
-------- ------- ------- --------
(C) Number of fully diluted shares:
Weighted average outstanding shares
during the period 17,733 18,935 18,433 18,892
Additional common shares issuable under
employee stock options using the
treasury stock method (2) 172 236 122 203
-------- ------- ------- --------
17,905 19,171 18,555 19,095
-------- ------- ------- --------
-------- ------- ------- --------
Net income (loss) per share (A)/(C) $ (0.66) $ 0.53 $ 0.29 $ 1.53
-------- ------- ------- --------
-------- ------- ------- --------
</TABLE>
(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.
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
in the second quarter of 1995. These securities were tendered in the third
quarter of 1995, resulting in a realized gain of $972,000, before tax,
$559,000 of which is included in discontinued operations.
Page 6
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONTINUED
Note 3. Contingencies Surrounding Estimates of Liabilities for Unpaid
Property and Casualty Losses and Loss Expenses
On July 5, 1995, Zenith's new workers' compensation computer system became
operational. 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 continued to observe
certain unusual claim reserving trends and patterns in the third quarter of
1995, possibly related to disruption of normal work flows due to
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 $290,633,000
of consolidated reserves for unpaid property and casualty losses and loss
adjustment expenses of $505,378,000) at September 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.
Note 4. Recently Issued Accounting Standard
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123"). SFAS No. 123 establishes a fair value based
method of accounting for stock-based compensation plans and is effective for
fiscal years beginning after December 15, 1995. Zenith has not yet
quantified the impact of SFAS No. 123, nor has it
determined how or when it will implement SFAS No. 123.
Note 5. Discontinued Operations
During the third quarter of 1995, Zenith reached an agreement to sell its
wholly-owned subsidiary, CalFarm Life Insurance Company ("CalFarm Life"), to
a subsidiary of SunAmerica, Inc. for approximately $120 million in cash, with
Zenith retaining CalFarm Life's group health insurance business. The
transaction is expected to be completed in the fourth quarter of 1995, at
which time the proceeds will be available for use in continuing operations.
The life insurance and annuity business of CalFarm Life has been accounted
for as a discontinued operation, and the consolidated financial statements
for prior periods contained herein have been restated accordingly. Health
insurance operations are included in the property and casualty business
segment.
Revenues of the discontinued operation for the three and nine month periods
ended September 30, 1995 were $22,213,000 and $66,826,000, respectively, and
were $20,592,000 and $60,852,000 for the three and nine month periods ended
September 30, 1994, respectively.
continued...
Page 7
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONTINUED
Note 5. Discontinued Operations (Continued)
Summary information with respect to net assets of discontinued life and annuity
operations is set forth below:
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31,
1995 1994
<S> <C> <C>
Dollars in thousands
ASSETS:
Investments $ 796,566 $ 753,959
Cash 669 1,756
Accrued investment income 15,804 13,764
Receivable from reinsurers 455 260
Deferred policy acquisition costs 89,268 90,553
Excess of cost over net assets acquired and purchased intangibles 13,610 14,337
Other assets 509 459
--------- ---------
TOTAL ASSETS 916,881 875,088
LIABILITIES:
Future policy benefits for life insurance contracts 161,962 157,890
Deposits on deferred annuity contracts 578,686 569,484
Policy and contract claims 1,313 1,979
Policyholder dividends accrued and accumulated 9,561 9,649
Other policyholder funds 1,514 1,394
Federal income tax 23,080 23,633
Other liabilities 8,332 6,687
--------- ---------
TOTAL LIABILITIES 784,448 770,716
--------- ---------
Net assets before provision for loss on disposal 132,433 104,372
Reserve for estimated loss on sale of CalFarm Life, including
estimated tax on disposal (19,000)
--------- ---------
Net assets of discontinued operations $ 113,433 $ 104,372
--------- ---------
--------- ---------
Net assets of discontinued operations, excluding estimated
tax on disposal $ 119,033
Estimated income tax on disposal, included in consolidated
Federal income tax (5,600)
---------
Net assets of discontinued operations $ 113,433
---------
---------
</TABLE>
Page 8
<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 14, 1995, the Board of Directors declared a regular quarterly cash
dividend of $.25 per share on the outstanding shares, payable November 15, 1995
to stockholders of record at the close of business on October 31, 1995.
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the third quarter of 1995, Zenith signed a definitive agreement to sell its
wholly-owned subsidiary, CalFarm Life Insurance Company ("CalFarm Life"), to a
subsidiary of SunAmerica Inc. for approximately $120 million in cash, with
Zenith retaining the group health insurance business written by CalFarm Life.
An estimated loss of $19 million associated with the sale has been recorded in
the third quarter of 1995, and the transaction is expected to be completed in
the fourth quarter of 1995. The results of operations and net assets of CalFarm
Life's annuity and life insurance business are included as "discontinued
operations" in the accompanying consolidated financial statements.
The comparative results of continuing operations are set forth in the table
below, followed by a discussion of the significant changes.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Three Months ended Nine Months ended
September 30, September 30,
Dollars in Thousands 1995 1994 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income, after tax $ 7,691 $ 7,024 $23,220 $20,035
Realized gains (losses) on investments, after tax 1,007 (407) 1,773 944
- -------------------------------------------------------------------------------------------
Sub-total 8,698 6,617 24,993 20,979
- -------------------------------------------------------------------------------------------
Property and Casualty, after tax:
Underwriting income (loss) (1,084) 4,716 341 15,310
Catastrophe losses (325) (2,340) (4,160) (9,750)
- -------------------------------------------------------------------------------------------
Property and casualty underwriting income (loss) (1,409) 2,376 (3,819) 5,560
- -------------------------------------------------------------------------------------------
Income from real estate operations, after tax 295 427 1,158 914
Other income, after tax 46 1,190
Interest expense, after tax (1,234) (949) (3,240) (2,933)
Parent expenses, after tax (350) (413) (1,223) (1,966)
- -------------------------------------------------------------------------------------------
Income from continuing operations $ 6,000 $ 8,104 $17,869 $23,744
- -------------------------------------------------------------------------------------------
</TABLE>
Page 9
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART 1 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
nine months ended September 30, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Three Months ended Sept. 30, Nine Months ended Sept. 30
% %
Dollars in Thousands 1995 1994 Increase 1995 1994 Increase
(Decrease) (Decrease)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums Earned
Workers' Compensation $ 48,784 $ 58,907 (17%) $147,413 $166,429 (11%)
Other Property & Casualty (1) 48,137 46,887 3% 143,187 139,924 2%
Reinsurance 11,480 9,859 16% 31,299 26,717 17%
-------- -------- -------- --------
Total $108,401 $115,653 (6%) $321,899 $333,070 (3%)
-------- -------- -------- --------
-------- -------- -------- --------
Underwriting Income (Loss) Before Taxes
Workers' Compensation $ (4,999) $4,193 $(10,332) $ 13,772
Other Property & Casualty (1) (845) (461) (6,451) (5,569)
Reinsurance 3,244 168 10,839 681
-------- -------- -------- --------
Total $ (2,600) $3,900 $ (5,944) $ 8,884
Combined Ratios
Workers' Compensation 110.2% 92.9% 107.0% 91.7%
Other Property & Casualty (1) 101.8% 101.0% 104.5% 104.0%
Reinsurance 71.7% 98.3% 65.4% 97.5%
Total 102.4% 96.6% 101.8% 97.3%
(1) Includes group health insurance
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Reduced Workers' Compensation premiums earned for the quarter and nine
months ended September 30, 1995 compared to the corresponding periods in 1994
reflect the continuing 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 was written in the nine months ended September 30, 1995.
Notwithstanding these reductions, the number of policies in force increased
during 1995 principally as a result of continuing expansion outside
California primarily in Texas, with additional operations in Arkansas,
Illinois and Utah. The number of policies in force outside California
increased from 2,000 at December 31, 1994 to 3,300 at September 30, 1995. In
California, the umber of policies in force remained fairly constant during
1995 at approximately 21,500.
Underwriting results in the Workers' Compensation operation declined in the
quarter and nine months ended September 30, 1995 compared to the
corresponding periods in 1994 because of an increase in losses incurred on
reduced premium income offset, in part, by a decrease in
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)
policyholder 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, amoung other things, to enhance data processing in existing operations
and to support expansion of operations into new states. 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 about
100%. Management plans to make the necessary adjustments to reduce expenses,
implement a rate increase of about 8% in California effective January 1, 1996
and continue the expansion of workers' compensation operations outside
California.
Catastrophe losses incurred from the Northridge earthquake negatively impacted
underwriting results in all property and casualty lines in the nine month period
ended September 30, 1994 and in the Reinsurance operation in the three months
ended September 30, 1994. Underwriting results for the nine months ended
September 30, 1995 in the Other Property and Casualty operation were reduced by
catastrophe losses associated with wind and rain storm damage in California
during the first quarter. Reinsurance underwriting results in the third quarter
of 1995 were impacted slightly by incurred losses from storm damage resulting
from hurricanes in the Caribbean.
INVESTMENTS:
Fluctuations in interest rates continue to impact stockholders' equity due to
changes in the market value of fixed maturity securities. At September 30, 1995,
the unrealized loss on fixed maturities, including those held for discontinued
operations, was $0.8 million, before deferred taxes, compared to an unrealized
loss of $49.7 million, before deferred taxes, at December 31, 1994. This change
resulted in an increase in stockholders' equity of $45.8 million, after deferred
taxes, between December 31, 1994 and September 30, 1995. Stockholders' equity
will continue to be affected by future volatility, if any, in the bond markets.
Investment income, set forth in the following table, increased in the three and
nine months ended September 30, 1995 compared to the corresponding periods in
1994 due to increased yields. The average life of the portfolio increased from
3.6 years at December 31, 1994 to 4.7 years at September 30, 1995.
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)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
Dollars in thousands 1995 1994 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income
Pre-tax $11,510 $10,450 $34,750 $29,738
Post-tax 7,691 7,024 23,220 20,035
- -------------------------------------------------------------------------------
</TABLE>
The yields on invested assets, which vary with the general level of interest
rates, were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
Dollars in thousands 1995 1994 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income
Pre-tax 6.1% 5.5% 6.1% 5.2%
Post-tax 4.1% 3.7% 4.1% 3.5%
- -------------------------------------------------------------------------------
</TABLE>
At September 30, 1995 and December 31, 1994, 95.9% and 98.1%, respectively, of
the consolidated carrying values of investments in debt securities were rated
investment grade.
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,
including assets of discontinued operations $1,462,989
Purchases at cost 308,067
Maturities and exchanges of investments (51,788)
Proceeds from sales of investments
Available-for-sale (214,423)
Trading portfolio (1,902)
Other investments (5,043)
--------
Total proceeds from disposals of
investments (221,368)
Realized gains from maturities and exchanges of
investments:
Held-to-maturity 139
Available-for-sale 726
Realized gains (losses) from sales of investments:
Available-for-sale 3,485
Trading portfolio 926
Other investments (210)
Realized losses from writedown of investments (132)
--------
Total realized gains on investments 4,934
Unrealized gains on investments 53,987
Decrease in short-term investments (20,859)
Net amortization of bonds and preferred stock and
other charges (1,470)
Transfer to net assets of discontinued operations
held for sale (796,566)
- -------------------------------------------------------------------------------
Carrying Value at September 30, 1995 of assets of
continuing operations $ 737,926
- -------------------------------------------------------------------------------
</TABLE>
Page 12
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY:
Zenith is principally dependent upon its portfolio of marketable securities and
the investment yields thereon, dividends from its insurance subsidiaries, whose
operations are supported by their own cash flows, and available lines of credit
($22,250,000 at September 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. The repurchase was made with cash from borrowings under Zenith's
bank lines of credit. Proceeds from the sale of CalFarm Life Insurance Company
of $120 million, less closing costs, are expected to be received in the fourth
quarter of 1995 and will then be available to repay bank lines of credit and
for use in continuing operations.
Page 13
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
[a] Exhibits
[2.1] Stock Acquisition Agreement, dated as of September 19,
1995, between Anchor National Life Insurance Company and
Zenith National Insurance Corp. (Incorporated herein by
reference to Exhibit 2.1 to Zenith's Report on Form 8-K dated
October 6, 1995.)
[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.)
[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 14
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ZENITH NATIONAL INSURANCE CORP.
Registrant
Date: November 14, 1995 \Stanley R. Zax\
-------------------------------------
Stanley R. Zax, Chairman of the Board
& President (Principal Executive Officer)
\Fredricka Taubitz\
------------------------------------------
Date: November 14, 1995 Fredricka Taubitz, Executive Vice President
& Chief Financial Officer (Principal
Accounting Officer)
Page 15
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
[2.1] Stock Acquisition Agreement, dated as of September 19,
1995, between Anchor National Life Insurance Company
and Zenith National Insurance Corp. (Incorporated herein
by reference to Exhibit 2.1 to Zenith's Report on Form
8-K dated October 6, 1995.)
[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.)
[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 16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 539,608
<DEBT-CARRYING-VALUE> 125,275
<DEBT-MARKET-VALUE> 127,516
<EQUITIES> 48,157
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 737,926
<CASH> 8,070
<RECOVER-REINSURE> 58,723
<DEFERRED-ACQUISITION> 22,159
<TOTAL-ASSETS> 1,142,302
<POLICY-LOSSES> 505,378
<UNEARNED-PREMIUMS> 139,391
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 12,025
<NOTES-PAYABLE> 106,597
<COMMON> 24,180
0
0
<OTHER-SE> 302,351
<TOTAL-LIABILITY-AND-EQUITY> 1,142,302
321,899
<INVESTMENT-INCOME> 34,750
<INVESTMENT-GAINS> 2,727
<OTHER-INCOME> 28,952
<BENEFITS> 233,936
<UNDERWRITING-AMORTIZATION> 57,559
<UNDERWRITING-OTHER> 34,064
<INCOME-PRETAX> 26,449
<INCOME-TAX> 8,580
<INCOME-CONTINUING> 17,869
<DISCONTINUED> (12,569)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,300
<EPS-PRIMARY> 0.29
<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>
