<PAGE>
THE ZENITH
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Form 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM .............. TO ..............
COMMISSION FILE NUMBER 1-9627
ZENITH NATIONAL INSURANCE CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-2702776
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION
OR ORGANIZATION)
</TABLE>
<TABLE>
<S> <C>
21255 CALIFA STREET, WOODLAND HILLS, 91367-5021
CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 713-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
---------------------------------------- --------------------------------------
<S> <C>
Common Stock, $1.00 Par Value New York Stock Exchange
(TITLE OF CLASS)
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on March 27, 1996 was approximately
$227,866,000 (based on the closing sale price of such stock on such date).
At March 27, 1996, 17,657,004 shares of Common Stock were outstanding, net
of 6,671,190 shares of treasury stock.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Annual Report to Stockholders for fiscal year ended
December 31, 1995 -- Part I and Part II.
(2) Portions of the Proxy Statement in connection with the 1996 Annual
Meeting of Stockholders -- Part III.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Zenith National Insurance Corp. ("Zenith"), a Delaware corporation
incorporated in 1971, is a holding company. Zenith is engaged through its
wholly-owned insurance subsidiaries, Zenith Insurance Company ("Zenith
Insurance"), CalFarm Insurance Company ("CalFarm Insurance"), ZNAT Insurance
Company ("ZNAT Insurance") and Zenith Star Insurance Company ("Zenith Star"), in
the property-casualty insurance business. The average combined ratio for the 10
years ended December 31, 1995 of Zenith's property-casualty operations was
100.4%. In 1993, Zenith commenced real estate operations, developing private
residences for sale in Las Vegas, Nevada, through its wholly-owned subsidiary,
Perma-Bilt, a Nevada Corporation ("Perma-Bilt"). In 1995, Zenith sold 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 previously written by
CalFarm Life. The results of operations and net assets of CalFarm Life's life
and annuity business are included in Zenith's consolidated financial statements
as discontinued operations and results of the health insurance operation are
included in Other Property-Casualty results which have been restated. Net income
in 1995 includes a loss of $19.5 million associated with the sale of CalFarm
Life.
The 1995 edition of Best's Key Rating Guide ("Best's") gives Zenith
Insurance, CalFarm Insurance, ZNAT Insurance and Zenith Star, collectively,
ratings of A+ (superior). Standard & Poor's Corporation ("S&P") has rated the
claims-paying ability of Zenith Insurance, CalFarm Insurance, ZNAT Insurance and
Zenith Star AA- (excellent). Best's ratings and S&P's ratings of claims-paying
ability are based upon factors of concern to policyholders and insurance agents
and are not directed toward the protection of investors.
At December 31, 1995, Zenith and its subsidiaries had approximately 1,400
employees.
The principal executive offices of Zenith are located at 21255 Califa
Street, Woodland Hills, California 91367-5021, telephone (818) 713-1000.
GLOSSARY OF SELECTED INSURANCE TERMS
The following terms when used herein have the following meanings:
<TABLE>
<S> <C>
Assume To receive from a ceding company all or a portion
of a risk in consideration of receipt of a
premium.
Cede To transfer to a reinsurer all or a portion of a
risk in consideration of payment of a premium.
Combined ratio The sum of underwriting expenses, net incurred
losses, loss adjustment expenses and
policyholders' dividends, expressed as a
percentage of net premiums earned. The combined
ratio is the key measure of underwriting
profitability used in the property and casualty
insurance business.
Development The amount by which losses, measured subsequently
by reference to payments and additional estimates,
differ from those originally reported for a
period. Development is favorable when losses
ultimately settle for less than levels at which
they were reserved or subsequent estimates
indicate a basis for reserve decreases on open
claims. Development is unfavorable when losses
ultimately settle for more than levels at which
they were reserved or subsequent estimates
indicate a basis for reserve increases on open
claims.
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
Excess of loss reinsurance A form of reinsurance in which the reinsurer pays
all or a specified percentage of a loss caused by
a particular occurrence or event in excess of a
fixed amount and up to a stipulated limit.
Incurred but not reported Claims relating to insured events that have
claims occurred but have not yet been reported to the
insurer or reinsurer.
Loss adjustment expenses The expenses of investigating and settling claims,
including legal and other fees, and general
expenses of administering the claims adjustment
process.
Net premiums earned The portion of net premiums written applicable to
the expired period of policies.
Participating policy A policy upon which dividends may be paid after
expiration.
Policyholders' surplus or The amount remaining after all liabilities are
statutory capital subtracted from all admitted assets, as determined
in accordance with statutory accounting practices.
This amount is regarded as financial protection to
policyholders in the event an insurance company
suffers unexpected or catastrophic losses.
Reinsurance A transaction in which an original insurer, or
cedant, remits a portion of the premium to a
reinsurer, or assuming company, as payment for the
reinsurer's assumption of a portion of the risk.
Reserves or loss reserves The balance sheet liability representing estimates
of amounts needed to pay reported and unreported
claims and related loss adjustment expenses
(stated without reduction for reinsurance ceded
after 1992).
Retrocession A reinsurance of reinsurance assumed.
Statutory accounting Accounting principles prescribed or permitted by
practices the states' departments of insurance. In general,
statutory accounting practices address
policyholder protection and solvency and are more
conservative in presentation of earnings, surplus
and assets than generally accepted accounting
principles.
Treaty A contract of reinsurance.
Underwriting The process whereby an insurer reviews
applications submitted for insurance coverage and
determines whether it will accept all or part, and
at what premium, of the coverage being requested.
Underwriting expenses The aggregate of policy acquisition costs and the
portion of administrative, general and other
expenses attributable to the underwriting process
as they are accrued and expensed.
</TABLE>
DESCRIPTION OF THE BUSINESS
Zenith and its subsidiaries conduct business principally in the property and
casualty insurance industry. Property-casualty operations are comprised of:
Workers' Compensation (46% of 1995 consolidated net premiums earned); other
property-casualty principally automobile, homeowners, farmowners, commercial
coverages and health insurance (44% of 1995 consolidated net premiums earned);
and reinsurance (10% of 1995 consolidated net premiums earned). Results of such
operations for the three years ended December 31, 1995 are set forth in the
table on page 29 of the 1995 Annual Report to Stockholders, which table is
hereby incorporated by reference. The earnings of Zenith's property and casualty
operations are supplemented by the generation of investment income discussed
under "Investments."
2
<PAGE>
Zenith also conducts real estate operations through a wholly-owned
subsidiary that develops land and constructs private residences for sale in Las
Vegas, Nevada. Zenith's business segments are described in Note 15 -- "Segment
Information" on page 54 of the 1995 Annual Report to Stockholders, which note is
hereby incorporated by reference.
PROPERTY AND CASUALTY -- WORKERS' COMPENSATION INSURANCE
Workers' compensation insurance provides coverage for the statutorily
prescribed benefits that employers are required to pay to their employees
injured in the course of employment. The standard workers' compensation policy
issued by Zenith Insurance provides payments for, among other things, temporary
or permanent disability benefits, death benefits, medical and hospital expenses
and expenses of vocational rehabilitation. The benefits payable and the duration
of such benefits are set by statute, and vary with the nature and severity of
the injury or disease and the wages, occupation and age of the employee.
Historically, Zenith's workers' compensation business was produced exclusively
in California with minor incidental coverages out of state for its larger
policyholders. In 1992, Zenith began workers' compensation operations in the
Texas workers' compensation market. Since then, Zenith has further expanded its
national workers' compensation operations. Net premiums earned in 1995 by state
are set forth in the table below:
<TABLE>
<CAPTION>
1995 PREMIUMS EARNED %
----------------------- ---------
<S> <C> <C>
California.................... $ 159,356,000 78.4%
Texas......................... 32,298,000 15.9
Arkansas...................... 8,584,000 4.2
Other......................... 3,014,000 1.5
----------------------- ---------
$ 203,252,000 100.0%
----------------------- ---------
----------------------- ---------
</TABLE>
Zenith's managed care efforts, return to work strategies, safety and health,
fraud and litigation efforts resulted in the lowest workers' compensation loss
ratio in the United States. According to A.M. Best, Zenith's 5 year loss ratio
of 45.9% through 1994 (latest available statistics) was the lowest loss ratio of
the top 50 insurers. During the past 10 years, the Zenith's workers compensation
combined ratio was 99.2%.
Zenith Insurance is licensed to conduct business in 30 states and the
District of Columbia and has applications pending throughout most of the nation.
Zenith's goal is to be a specialist risk-oriented national workers' compensation
insurer. National results for workers' compensation insurers in recent years
have been favorable by recent historic standards and Zenith's non-California
underwriting results in 1995 were more favorable than its California results.
However, increased competition, nationally, is expected to follow from these
favorable trends and management intends to progress cautiously with its national
expansion.
Competition, regulation, rate adequacy and the feasibility of containing the
elements of the cost of claims are among the key factors in determining the
favorability of a given workers' compensation market. Regulation is principally
a matter for state legislatures. In California, workers' compensation
legislation was enacted in 1993 which, together with private initiatives
undertaken by Zenith and other insurers, produced significant improvements in a
theretofore runaway claims cost environment. However, the California Insurance
Commissioner reduced minimum rates on three separate occasions in 1993 and 1994
in response. Rates were deregulated effective January 1, 1995 and thereafter
insurance companies file and use their own, actuarially determined, rates in
California for workers' compensation insurance. The rates filed and used by
Zenith in California are determined to provide a margin for underwriting
profits. Zenith increased its California rates by 8% effective January 1, 1996.
Future profitability of Zenith's workers' compensation operation will be
dependent upon its ability to compete in an open rating environment in
California, the outlook for economic growth in California and Zenith's
continuing efforts to control medical and indemnity costs through return to work
and managed care strategies. At present, competition is intense and Zenith is
quoting on large numbers of policies focused on achieving the goal of a combined
ratio of 100%.
3
<PAGE>
Generally, premiums for workers' compensation insurance policies are a
function of the applicable premium rate, which includes the insured employer's
experience modification factor (where applicable) and the amount of the insured
employer's payroll. Payrolls may be affected significantly by changes in
employment and wage levels. A deposit premium is paid at the beginning of the
policy period, periodic installments are paid during the period and the final
amount of the premium is generally determined as of the end of the policy period
after the policyholder's payroll records are audited. Additional policy features
may be added to enhance the outcome for the policyholder in the event of
favorable claims experience. Predominant among such features has been,
historically, the participating policy in which a dividend has been paid after
policy expiration. With the advent of open rating in California and an emphasis
on, among other things, overall pricing at inception, dividends decreased
significantly in 1995 and are likely to become relatively insignificant in the
future as an element in workers' compensation insurance.
Zenith is continuing to market integrated workers' compensation, health and
disability insurance products ("24-Hour Coverage") in alliances with selected
health insurers, health maintenance organizations and UNUM Corporation, the
nation's largest disability insurance company. The policies are sold on an
integrated basis in California under the name "SinglePoint." At this time, it is
too early for management to predict the likely outcome of 24-Hour Coverage on
the future results of its operations.
PROPERTY AND CASUALTY -- OTHER
Zenith, through CalFarm Insurance, offers a comprehensive line of property
and casualty insurance, including automobile, farmowners, commercial multiple
peril packages and homeowners coverage. Additionally, CalFarm Insurance has
assumed the group health insurance business that was previously written by
CalFarm Life. Automobile insurance includes coverage for automobile bodily
injury, property damage and physical damage. Automobile bodily injury and
property damage insurance provide coverage for third party liability, bodily
injury and property damage arising from the ownership, maintenance or use of an
automobile. Automobile physical damage coverage insures against physical loss of
the insured's own vehicle. Farmowners and homeowners insurance includes coverage
for direct physical damage to real and personal property, loss of personal
property by theft and legal liability for injury to others and damage to
property of others. Commercial multiple peril insures businesses against
property damage and general liability. Health insurance premiums are written
under a program sponsored by the California Farm Bureau Federation (the "Farm
Bureau"). During the past 10 years, the combined ratio of Zenith's Other
Property-Casualty operation was 101.9%.
Automobile insurance (both commercial and personal) is the largest line of
CalFarm Insurance's business, representing 15% of Zenith's property and casualty
premiums earned in 1995. CalFarm Insurance insured approximately 21,000 personal
automobiles and 68,000 commercial and farm vehicles in 1995. Farmowners business
is the second largest line of CalFarm Insurance's business, representing
approximately 11% of Zenith's property and casualty premiums earned in 1995.
Zenith's Other Property and Casualty operations are subject to the
regulatory provisions of California Initiative Proposition 103 ("Proposition
103"). The principal effects of Proposition 103 on Zenith's Automobile and Other
Property and Casualty business are as follows: rates must be approved by the
Insurance Commissioner prior to use; rates on personal automobile policies must
be offered to "good drivers" (as defined) at a discount of at least 20% from
rates otherwise charged and an insurer cannot refuse to sell a "good driver"
policy to a qualified applicant; personal automobile insurance policies cannot
be cancelled or non-renewed except for non-payment of premium, fraud or material
misrepresentation, or a substantial increase in hazard; and personal automobile
insurance rates must be based on the following factors in decreasing order of
importance: driving record, number of miles driven, number of years of driving
experience, and other factors which may be adopted by the Insurance
Commissioner.
4
<PAGE>
PROPERTY AND CASUALTY -- REINSURANCE ASSUMED
Zenith Insurance is selectively underwriting a book of assumed reinsurance.
Reinsurance contracts, or treaties, come in a variety of forms, but the
principal arrangements are either proportional in nature, in which the assuming
company shares pro-rata in the premiums and losses of the cedant, or
arrangements under which the assuming company pays losses in excess of a certain
limit in return for a premium, usually determined as a percentage of the
cedant's primary insurance premiums. Zenith operates its reinsurance activity as
a participant in treaties in which, typically, the reinsurance coverage is
syndicated to a number of assuming companies. Depending upon market conditions
and other factors, the volume of premiums written fluctuates from year to year.
Zenith's current participation in the reinsurance market emphasizes the
reinsurance of large individual property risks and property catastrophe
reinsurance. By diversifying its geographical spread, Zenith's assumed
reinsurance business is written so as to limit the company's exposure to losses
from any one event in a worst-case scenario to a maximum of approximately 5% of
consolidated stockholders' equity.
An important element in the pricing of reinsurance is the supply of
reinsurance capacity (i.e. capital) relative to demand. In recent years, new
capital has been made available to provide world-wide reinsurance capacity. Most
notably, such capital has been contributed by new companies in Bermuda and by
contributions to Lloyd's syndicates by corporations with limited liability.
Zenith has observed decreases in catastrophe reinsurance rates for 1996 and
premium income in 1996 may be reduced compared to 1995.
During the past 10 years, the combined ratio of Zenith's Reinsurance
operation was 100.3%
Commencing January 1, 1995 Zenith Insurance became a corporate underwriting
member of Lloyd's through a 100% wholly-owned subsidiary, ZIC Lloyd's
Underwriting Limited ("ZIC Lloyd's"). ZIC Lloyd's has committed funds of $5
million to support the underwriting of a certain syndicate. All of the funds
committed by ZIC Lloyd's are available to satisfy claims in the event of
underwriting losses by the syndicate.
PARENT
Zenith is a holding company owning directly or indirectly all of the capital
stock of certain property and casualty insurance and insurance-related
companies. In 1993, Zenith commenced a real estate operation through a
newly-formed subsidiary, Perma-Bilt, for the purpose of building private
residences in Las Vegas, Nevada. In 1995, Perma-Bilt closed and delivered 240
homes at an average selling price of $132,000, compared to 228 homes the prior
year. Revenues in 1995 were $31,736,000 and pre-tax income was $2,075,000
compared to $30,220,000 of sales and $2,189,000 of pre-tax income, respectively,
the previous year. Land presently owned at a cost of about $10,142,000 will
support the construction and sale of an estimated 926 homes over the next
several years. Increased interest rates may impact the rate of home sales, but
Zenith is confident that the land it has acquired is strategically located and
will have long-term value. Perma-Bilt continues to search for additional land
for development or resale.
In 1995, Zenith sold CalFarm Life for approximately $120,000,000 in cash,
with Zenith retaining the health insurance business previously written by
CalFarm Life. After repaying outstanding bank lines of credit, Zenith had cash
and short-term investments of approximately $80,000,000 at December 31, 1995.
Zenith is continuing its stock repurchase plan and searching for suitable
investments.
LOSS AND LOSS EXPENSE RESERVES AND CLAIMS, AND LOSS DEVELOPMENTS
Zenith's property and casualty insurance subsidiaries (the "P&C Companies")
maintain reserves for the payment of losses and for the expenses of settling
both reported and unreported claims that have been incurred under their
insurance policies and reinsurance contracts. The amount of such reserves, as
related to reported claims, is based upon periodic case-by-case evaluation and
judgment by the P&C Companies' claims departments, with actuarial review. The
estimate of unreported claims arising from accidents which have not yet been
reported to the P&C Companies, commonly known in the industry as "incurred but
not reported," is based upon the
5
<PAGE>
P&C Companies' experience and statistical information with respect to the
probable number and nature of such claims. The P&C Companies monitor these
factors and revise their reserves as they deem appropriate. Reserves are based
on estimates and no assurance can be given that the ultimate liability will not
be more or less than such estimates.
Reference is made to "Property -- Casualty Loss Development" on pages 38 and
39, the table setting forth statutory loss and loss adjustment expense
development by accident year on page 9 and the table setting forth the
reconciliation of changes in the liabilities for losses and loss adjustment
expenses included in Note 13 -- "Loss and Loss Adjustment Expense Reserves" on
page 53 of the 1995 Annual Report to Stockholders, all of which are hereby
incorporated by reference. These tables show the development of loss and loss
adjustment expense liabilities as originally estimated under generally accepted
accounting principles at December 31 of each year presented, as well as the
development of statutory incurred loss and loss adjustment expense by accident
year. The accounting methods used to estimate these liabilities are described in
Note 1 of the Notes to Consolidated Financial Statements of Zenith as set forth
on pages 46 through 48 of the 1995 Annual Report to Stockholders which note is
hereby incorporated by reference. The one year loss and loss adjustment expense
reserve development for Zenith's three main lines of business is set forth in
the table on page 30 of the 1995 Annual Report to Stockholders which table is
hereby incorporated by reference.
WORKERS' COMPENSATION
Zenith's Workers' Compensation reserves, on the average, are paid within
approximately 2.5 years. Zenith regards the timely settlement of its Workers'
Compensation claims as important to its profitability and makes use of
compromises and releases for claim settlements to expedite this process.
Zenith Insurance maintains five regional offices in California and offices
outside of California in Texas, Arkansas and Illinois, each of which is fully
staffed to conduct all workers' compensation claims operations, including review
of initial reports of work injury, assignment of appropriate field investigation
and determination of whether subrogation should be pursued. Workers'
Compensation claims operations are supported by computer systems that provide
immediate access to policy coverage verification and claims records and enables
Zenith Insurance to detail claims payment histories and policy loss experience
reports.
Legislative reform of the California workers' compensation system was
enacted in 1993. In addition, Zenith undertook significant additional
expenditures on the loss adjustment process in recent years with a view to
mitigating the effect of adverse claim trends, particularly the effect of fraud
and abuse.
On July 5, 1995, Zenith's new client-server based computer system became
operational, replacing its previous mainframe computer for workers' compensation
operations. 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 and to support expansion outside of California.
Management observed certain unusual claim reserving trends and patterns in 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 $297,354,000 of total reserves for unpaid losses and loss
adjustment expenses of $517,552,000) at December 31, 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.
OTHER PROPERTY AND CASUALTY
Automobile and Other Property and Casualty loss reserves are paid, on the
average, within approximately 3.5 years.
6
<PAGE>
Property insurance coverages and CalFarm's concentration of business in
California expose Zenith to catastrophe losses from events in California.
Reinsurance ceded by CalFarm Insurance protects against losses in excess of
$5,000,000 from any one event -- see "Reinsurance Ceded" on page 8. In 1995,
CalFarm sustained losses of $10,700,000 in conjunction with three major
California storms. Losses attributable to the Northridge earthquake in 1994 were
$3,200,000, of which $800,000 was assessed by the California Fair Plan. Losses
in 1993 included $1,600,000, of which $1,000,000 was assessed by the California
Fair Plan, attributable to the Southern California brush fires.
Liability policies written by CalFarm Insurance contain exclusion clauses
for damages resulting from pollution, and such losses are thereby substantially
excluded from coverage. Although such claims have been received by CalFarm
Insurance, management believes that such claims will not have a material adverse
effect on Zenith's consolidated financial condition either individually or in
the aggregate.
CalFarm Insurance maintains four claims and legal offices in California to
conduct all claims operations of the other property and casualty business. All
claims operations of CalFarm Insurance are supervised by its home office claims
department. Health claims is a separate operation located in the home office.
REINSURANCE ASSUMED
Zenith expects that, on the average, its Reinsurance reserves will be paid
in approximately 4.0 years.
Zenith's Reinsurance reserves constitute approximately 20% of its total
reserves, net of ceded reinsurance, for property and casualty unpaid losses and
loss adjustment expenses at December 31, 1995, reflecting the longer average
life of such reserves relative to Zenith's other principal lines of business. In
addition to information supplied by ceding companies, Zenith makes use of
industry experience in arriving at estimates of ultimate losses for certain
reinsurance assumed arrangements.
Losses attributable to catastrophes were $2,500,000 in 1995, principally
from Hurricane "Marilyn" and $9,300,000 in 1994 from the Northridge Earthquake.
Zenith Insurance has participated, to a limited extent, in the reinsurance
arrangements of ceding companies that have written both directors' and officers'
liability coverage ("D & O") policies and professional indemnity policies,
including such coverage written for practicing certified public accountants.
Actions alleging negligence against directors, officers or accountants by
parties suffering financial losses in savings and loan failures give rise to
claims under D & O policies or professional indemnity policies which, in turn,
give rise to claims against Zenith Insurance. Such claims have not had, and are
not expected to have in the future, a material adverse effect on Zenith's
consolidated financial condition.
INVESTMENTS
Investment policies of Zenith and its insurance subsidiaries are established
by their respective Boards of Directors, taking into consideration state
regulatory restrictions with respect to investments in connection with reserve
obligations as well as the nature and amount of various kinds of investments.
(See "Business -- Regulation.") Zenith's principal investment goal is to
maintain safety and liquidity, enhance principal values and achieve increased
rates of return consistent with regulatory constraints. The allocation amongst
various types of securities is adjusted from time to time based on market
conditions, credit conditions, tax policy, fluctuations in interest rates and
other factors (see "Investments" under Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations on pages 32 and 33 of
Zenith's 1995 Annual Report to Stockholders which is hereby incorporated by
reference). At December 31, 1995 the investment portfolios of Zenith and the P&C
Companies consisted primarily of taxable bonds and short-term investments
supplemented by smaller portfolios of redeemable and other preferred stocks and
common stocks. The average life of the consolidated portfolio was 3.9 years at
7
<PAGE>
December 31, 1995. Investment income by segment is set forth in Note 15 --
"Segment Information" on page 54 of the 1995 Annual Report to Stockholders which
note is hereby incorporated by reference.
Stockholders' equity will fluctuate as interest rates fluctuate due to the
implementation of Statement of Financial Accounting Standards No. 115 --
Accounting for Investments in Certain Debt and Equity Securities. In accordance
with its provisions, Zenith has identified certain securities, amounting to
approximately 90% of the investments in debt securities at December 31, 1995, as
available-for-sale. In 1995 stockholders' equity increased by $53.4 million, net
of deferred tax expense, as a result of changes in the fair values of such
investments.
REINSURANCE CEDED
In accordance with general industry practices, Zenith's insurance
subsidiaries annually purchase excess of loss reinsurance. Reinsurance makes the
assuming reinsurer liable to the ceding company to the extent of the
reinsurance. It does not, however, discharge the ceding company from its primary
liability to its policyholders in the event that the reinsurer is unable to meet
its obligations under such reinsurance treaty. Historically, no material costs
have been incurred by Zenith or its subsidiaries from uncollected reinsurance.
The purpose of such reinsurance is to protect Zenith from the impact of large,
unforseen losses and such reinsurance reduces the magnitude of sudden and
unpredictable changes in net income and the capitalization of insurance
operations. Zenith monitors the financial condition of its reinsurers and does
not believe that it is exposed to any material credit risk through its ceded
reinsurance arrangements. Zenith believes that its ceded reinsurance
arrangements are adequate and consistent with industry practice.
Reinsurance premiums ceded by Zenith's insurance subsidiaries amounted to
$21,112,000, $21,521,000 and $22,301,000 in 1995, 1994 and 1993, respectively or
4.9%, 4.9%, and 4.8% of earned premiums in 1995, 1994 and 1993, respectively.
Reinsurance reserves amounted to $54,429,000, $47,696,000 and $44,919,000 in
1995, 1994 and 1993, respectively, or 10.5%, 9.3% and 8.6% of gross reserves for
unpaid losses and loss adjustment expenses in 1995, 1994 and 1993, respectively.
Each insurance subsidiary maintains separate reinsurance arrangements, which
during 1995 were as follows:
Zenith Insurance -- Workers' Compensation reinsurance covered all claims
between $550,000 and $100,000,000 per occurrence. The coverage from $550,000 to
$5,000,000 is placed with General Reinsurance Corporation, the coverage from
$5,000,000 to $10,000,000 with Employers Reinsurance Corporation and the
remaining three layers from $10,000,000 to $60,000,000 primarily with Prudential
Reinsurance Company, NAC Reinsurance Corporation, Transatlantic Reinsurance
Company, The St. Paul Companies and the London reinsurance market (primarily
Lloyds' syndicates and certain United Kingdom reinsurance companies).
Catastrophe reinsurance covers an additional $40,000,000 in excess of
$60,000,000 and is placed with Northwestern National Life Insurance Company,
Cigna Reinsurance Company and Pinehurst Accident Reinsurance Group. Zenith's
Reinsurance division did not purchase any reinsurance protection on its assumed
business in the three years ended December 31, 1995. However, Zenith's exposure
to losses from assumed reinsurance is limited by the terms upon which it is
written to a maximum probable loss from any one event of approximately 5% of
Zenith's consolidated stockholders' equity.
CalFarm Insurance -- For personal and commercial property lines of business,
reinsurance is maintained for claims in excess of $350,000 up to $4,000,000 per
occurrence. On liability coverages for both personal and commercial lines,
reinsurance covers losses up to $5,000,000 per occurrence, subject to a
retention of $500,000. This reinsurance coverage is all placed with General
Reinsurance Corporation. CalFarm Insurance has property catastrophe reinsurance
that provides for recovery of 95% of $35,000,000, excess of a retention of
$5,000,000, for which the principal reinsurers are General Reinsurance
Corporation and Centre Cat. Ltd. CalFarm also maintains reinsurance agreements
with Employers Reinsurance Corporation and Duncanson & Holt for excess risks on
its accident and health contracts. Employers Reinsurance Corporation provides
coverage
8
<PAGE>
for aggregate losses in excess of $2,000,000 on those individual health policy
claims that exceed $120,000 for each insured in each calendar year. Duncanson &
Holt provides coverage on group health policy claims that exceed $100,000 in
each calendar year subject to a lifetime maximum of $3 million for any
individual.
CalFarm Insurance participates in a quota share contract whereby it retains
20% of the first $1,000,000 on most umbrella risks (comprehensive coverage in
excess of primary policy limits) underwritten, with the remainder of up to
$10,000,000 for commercial lines and up to $5,000,000 for personal lines ceded
to General Reinsurance Corporation. Facultative reinsurance is placed on
property coverage in excess of $4,000,000 on all property lines, and on umbrella
limits in excess of $10,000,000 for commercial lines and $5,000,000 for personal
lines. Facultative reinsurance is used on fewer than 5% of CalFarm Insurance's
policies. Facultative coverage is placed primarily with General Reinsurance
Corporation. Other companies used are Employers Reinsurance Corporation, Munich
American Reinsurance Company and other reinsurers rated A+ by A.M. Best Company.
Pooling Agreement -- Zenith Insurance, CalFarm Insurance, ZNAT Insurance and
Zenith Star are parties to a pooling agreement. Under the agreement, the results
of underwriting operations are ceded (the risks are transferred) to Zenith
Insurance and are then reapportioned, or retro-ceded (the risks are transferred
back), to those three companies in the following proportions: Zenith Insurance,
79.5%; CalFarm Insurance, 18%; ZNAT Insurance, 2%; and Zenith Star, 0.5%.
Transactions pursuant to the pooling agreement are eliminated on consolidation
and have no impact on Zenith's Consolidated Financial Statements.
MARKETING AND STAFF
Zenith Insurance's workers' compensation business is produced by
approximately 700 independent licensed insurance agents and brokers throughout
California, Texas and other areas in which Zenith conducts workers' compensation
operations. The CalFarm agents referred to below also sell workers'
compensation. Zenith Insurance's assumed reinsurance premiums are generated
nationally by brokers and reinsurance intermediaries.
CalFarm Insurance, through its affiliate CalFarm Insurance Agency, maintains
a sales force of approximately 190 agents who sell insurance products
exclusively for CalFarm Insurance, primarily in rural and suburban areas. These
agents operate out of 116 offices throughout the State of California, including
31 offices shared with the Farm Bureau. In addition, in certain areas,
independent agents market CalFarm Insurance products.
Applications for insurance submitted by all agents and brokers are evaluated
by professional underwriters based upon numerous factors, including underwriting
criteria and standards, geographic areas of underwriting concentration,
actuarial judgments of rate adequacy, economic considerations, and review of
known data on the particular risk. Zenith's insurance subsidiaries, as opposed
to their agents and brokers, retain authority over underwriting, claims
processing, safety engineering and auditing.
CALIFORNIA FARM BUREAU FEDERATION
The Farm Bureau was formed to provide its members with a variety of
agriculture-related services, including property and casualty insurance. The
Farm Bureau is California's largest general farm organization, and represents
more than 69,000 member families in 58 counties. The Farm Bureau continues to
work actively to encourage its membership to place their insurance with CalFarm
Insurance. Farm Bureau membership is a prerequisite to the purchase of
farmowners, automobile and health insurance from CalFarm Insurance. Of the
estimated 69,000 member families, approximately 63% are insured by CalFarm
Insurance. The business of CalFarm Insurance is closely tied to the California
farm economy, however over 41% of Farm Bureau members (and CalFarm Insurance
insureds) are non-farmers and over 59% of CalFarm Insurance premium volume is
generated by non-farm business. Total revenues in CalFarm Insurance attributable
to sales that were sponsored by the Farm Bureau constituted approximately 27%,
25% and 26% of Zenith's total consolidated revenues for the years 1995, 1994 and
1993, respectively. The agreement of CalFarm
9
<PAGE>
Insurance with the Farm Bureau, which is subject to cancellation by either party
on six months' notice, requires annual payments to the Farm Bureau of $240,000
plus 2% of the gross written premium under the Farm Bureau group health
insurance program. Pursuant to such provisions, total payments to the Farm
Bureau were approximately $1 million in each of 1995, 1994 and 1993.
Zenith believes that its relationship with the Farm Bureau is mutually
beneficial. CalFarm Insurance benefits from the use of the CalFarm name and the
Farm Bureau membership lists, and its ability to sell products to Farm Bureau
members is enhanced by the Farm Bureau relationship. The Farm Bureau benefits
since Farm Bureau membership is required to obtain automobile, farmowners and
health insurance policies from CalFarm Insurance, which generates membership and
revenues for the Farm Bureau. If the relationship between CalFarm Insurance and
the Farm Bureau were terminated, Zenith believes that it could retain a
significant amount of the business it currently has with Farm Bureau members
because of the quality and tailored features of the products it offers in what
it regards as its "niche market" and the long-term relationships established
between its agents and these policyholders. In the event of such termination,
however, Zenith expects that there would be an increased risk of nonrenewal of
existing insurance coverage as well as a possible adverse effect on new policy
revenues, but it cannot estimate the financial impact of any such termination.
Zenith anticipates the continuation of a close working relationship with the
Farm Bureau and the promotion among its membership of the purchase of insurance
products from CalFarm Insurance as an attractive feature of Farm Bureau
membership.
COMPETITION
Competition in the insurance business is based upon price, product design
and quality of service. The insurance industry is highly competitive and
competition is particularly intense in the California workers' compensation
market which was deregulated with respect to prices in 1995. Zenith's
subsidiaries compete not only with other stock companies, but with mutual
companies, and other underwriting organizations such as the State Compensation
Insurance Fund. Competition also exists from self-insurance and captive
insurers. Over the years there has been increased competition from
direct-writing companies and, in the property and casualty field, from
affiliates of large life insurance companies. Many companies in competition with
Zenith's subsidiaries have been in business for a much longer time, have a
larger volume of business, are more widely known, and/or possess substantially
greater financial resources.
REGULATION
STATES' DEPARTMENTS OF INSURANCE
Insurance companies are primarily subject to regulation and supervision by
the Department of Insurance in the state in which they are domiciled and, to a
lesser extent, other states in which they conduct business. Zenith's insurance
subsidiaries are primarily subject to regulation and supervision by the
California Department of Insurance, except for Zenith Star which is primarily
subject to regulation and supervision in the State of Texas. These states have
broad regulatory, supervisory and administrative powers. Such powers relate,
among other things, to the granting and revocation of licenses to transact
business; the licensing of agents; the standards of solvency to be met and
maintained; the nature of and limitations on investments; approval of policy
forms and rates; periodic examination of the affairs of insurance companies; and
the form and content of required financial statements.
In California, Zenith Insurance, CalFarm Insurance and ZNAT Insurance are
required, with respect to their workers' compensation line of business, to
maintain on deposit investments meeting specified standards that have an
aggregate market value equal to the companies' loss reserves. For this purpose,
loss reserves are defined as the current estimate of reported and unreported
claims plus a statutory formula reserve based on a minimum of 65% of earned
premiums for the latest three years.
Detailed annual and quarterly reports must be filed by Zenith's insurance
subsidiaries with the California and Texas Departments of Insurance, and with
other states in which they are licensed to
10
<PAGE>
transact business, and their businesses and accounts are subject to periodic
examination by such agencies, usually at three year intervals. Zenith Insurance,
CalFarm Insurance and ZNAT Insurance, were examined by the California Department
of Insurance as of December 31, 1993, and the report on such examination
contained no material findings. Zenith Star was examined by the Texas Department
of Insurance as of June 30, 1995 and the results of such examination contained
no material findings.
THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS
The National Association of Insurance Commissioners ("NAIC") is a group
formed by state Insurance Commissioners to discuss issues and formulate policy
with respect to regulation, reporting and accounting of insurance companies.
Although the NAIC has no legislative authority and insurance companies are at
all times subject to the laws of their respective domiciliary states, and to a
lesser extent other states in which they conduct business, the NAIC is
influential in determining the form in which such laws are enacted. In
particular, the Model Insurance Laws, Regulations and Guidelines of the NAIC
(the "Model Laws") have been promulgated by the NAIC as a minimum standard by
which state regulatory systems and regulations are measured. Adoption of state
laws which provide for substantially similar regulations to those described in
the Model Laws is a requirement for the accreditation by the NAIC.
The NAIC has adopted model regulations to require insurers to maintain
minimum levels of capital based on their investments and operations, known as
"risk based capital" ("RBC") requirements. Such requirements were adopted by
California for property and casualty insurers in 1994. Zenith has not
experienced any adverse effects of such requirements because of the strong
capitalization of its insurance operations. At December 31, 1995, adjusted
capital under the RBC regulations was 377% of the RBC control, or required,
level of capital under the regulations for the Zenith Insurance Group
(consisting of Zenith Insurance, CalFarm Insurance, ZNAT Insurance and Zenith
Star).
The NAIC Insurance Regulatory Information System ("IRIS") was developed to
assist insurance departments in overseeing the financial condition of insurance
companies. Annually, IRIS key financial ratios (11 ratios for property and
casualty companies) are calculated from data supplied in annual statutory
statements of insurance companies. These ratios are reviewed by experienced
financial examiners of the NAIC to select those companies that merit highest
priority in the allocation of the regulators' resources. The 1995 IRIS results
for the Zenith Insurance Group showed no results outside the "normal range" for
such ratios, as such range is determined by the NAIC.
INSURANCE HOLDING COMPANY SYSTEM REGULATORY ACT
Zenith's insurance subsidiaries are also subject to the California and Texas
Insurance Holding Company System Regulatory Acts ("Holding Company Acts"), which
contain certain reporting requirements, including the requirement that such
subsidiaries file information relating to capital structure, ownership,
financial condition and general business operation, and limit dividend payments
and material transactions by Zenith's insurance subsidiaries. See "Liquidity and
Inflation" under "Management's Discussion and Analysis of Consolidated Financial
Condition and Result of Operations" on pages 33 and 34 of Zenith's 1995 Annual
Report to Stockholders, which is hereby incorporated by reference.
OTHER REGULATION
Property and casualty insurance coverage is subject to certain regulation as
described herein under "Property and Casualty -- Other" under which Zenith's
other property and casualty rates are subject to prior approval by the
California Department of Insurance. The provisions of Proposition 103 do not
apply to Workers' Compensation, Health insurance or Reinsurance, which combined
to account for 64% of Zenith's property and casualty earned premiums in 1995.
11
<PAGE>
ITEM 2. PROPERTIES
Zenith Insurance owns a 120,000 square foot office facility in Woodland
Hills, California which, since November of 1987, has been the corporate home
office of Zenith, Zenith Insurance, and ZNAT Insurance.
In addition, Zenith Insurance and CalFarm Insurance, in the regular conduct
of their business, lease offices in various cities. See Note 8 of the Notes to
Consolidated Financial Statements of Zenith on pages 51 and 52 of the 1995
Annual Report to Stockholders, which note is hereby incorporated by reference.
CalFarm Insurance owns its home office building (and surrounding property of
approximately 4 acres) in Sacramento, California, consisting of 133,000 square
feet. Approximately 20% of the building is leased to the Farm Bureau and its
affiliates.
ITEM 3. LEGAL PROCEEDINGS
Zenith and its subsidiaries are involved in certain litigation. In the
opinion of management, after consultation with legal counsel, such litigation in
which Zenith is a defendant is either without merit or the ultimate liability,
if any, will not have a material adverse effect on the consolidated financial
condition of Zenith.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Zenith's Common Stock, par value $1.00 per share, is traded on the New York
Stock Exchange. The table below sets forth the high and low sales prices of the
Common Stock for each quarterly period during the last two fiscal years.
<TABLE>
<CAPTION>
QUARTER 1995 1994
- ------------------------------------------------------------ ------- -------
<S> <C> <C>
First
High...................................................... 22 3/4 24 1/4
Low....................................................... 19 3/8 20 3/4
Second
High...................................................... 22 25 1/2
Low....................................................... 20 20 5/8
Third
High...................................................... 24 1/4 27 3/8
Low....................................................... 20 22
Fourth
High...................................................... 24 5/8 24 1/2
Low....................................................... 20 20 3/4
</TABLE>
As of March 27, 1996, there were 420 holders of record of Zenith Common
Stock.
The table below sets forth information with respect to the amount and
frequency of dividends declared on Zenith Common Stock. Based upon Zenith's
financial condition, it is currently expected that cash dividends will continue
to be paid in the future.
<TABLE>
<CAPTION>
DATE OF DECLARATION TYPE AND AMOUNT OF RECORD DATE FOR
BY ZENITH BOARD DIVIDEND PAYMENT PAYMENT DATE
- ------------------------------------ ----------------------- --------------------- ------------------------
<S> <C> <C> <C>
December 9, 1993.................... $.25 cash per share January 31, 1994 February 14, 1994
March 17, 1994...................... $.25 cash per share April 29, 1994 May 13, 1994
May 25, 1994........................ $.25 cash per share July 29, 1994 August 12, 1994
September 7, 1994................... $.25 cash per share October 31, 1994 November 14, 1994
December 6, 1994.................... $.25 cash per share January 31, 1995 February 15, 1995
March 1, 1995....................... $.25 cash per share April 28, 1995 May 12, 1995
May 24, 1995........................ $.25 cash per share July 31, 1995 August 16, 1995
September 14, 1995.................. $.25 cash per share October 31, 1995 November 15, 1995
November 30, 1995................... $.25 cash per share January 31, 1996 February 15, 1996
</TABLE>
The Holding Company Acts limit the ability of Zenith Insurance to pay
dividends to Zenith, and of CalFarm Insurance, ZNAT Insurance and Zenith Star to
pay dividends to Zenith Insurance, by providing that the California or Texas
Department of Insurance must approve any dividend that, together with all other
such dividends paid during the preceding twelve months, exceeds the greater of:
(a) 10% of the paying company's statutory surplus as regards policyholders at
the preceding December 31; or (b) 100% of the net income for the preceding year.
In addition, any such dividend must be paid from policyholders' surplus
attributable to accumulated earnings. During 1995, Zenith Insurance paid
dividends of $10,000,000 to Zenith. During 1996, Zenith Insurance will be able
to pay $22,301,000 in dividends to Zenith without prior approval. In addition,
in 1996, CalFarm Insurance, ZNAT Insurance and Zenith Star, together, can pay
$6,459,000 to Zenith Insurance which would be available to Zenith in 1997.
ITEM 6. SELECTED FINANCIAL DATA.
The five-year summary of selected financial information and accompanying
notes, included in Zenith's 1995 Annual Report to Stockholders on pages 36 and
37, is hereby incorporated by reference.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
"Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations," included in Zenith's 1995 Annual Report to
Stockholders on pages 28 to 34 is hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to pages 38 and 39 of Zenith's 1995 Annual Report to
Stockholders for information setting forth the loss and loss adjustment expense
liability development for 1985 through 1995 and page 9 of Zenith's 1995 Annual
Report to Stockholders for incurred loss and loss adjustment expense development
for 1990 through 1995, and to the consolidated financial statements and notes
thereto on pages 40 to 54 of Zenith's 1995 Annual Report to Stockholders, all of
which are hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
14
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the captions "Compliance with Section 16(a)
of the Securities Exchange Act of 1934" and "Election of Directors" in the Proxy
Statement in connection with Zenith's 1996 Annual Meeting of Stockholders (the
"Proxy Statement") is hereby incorporated by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
OFFICER
NAME AGE POSITION TERM SINCE
- ----------------- --- ---------------------------------------- ------ -------
<S> <C> <C> <C> <C>
Stanley R. Zax 58 Chairman of the Board, President (1) Annual 1977
Fredricka Taubitz 52 Executive Vice President and Annual 1985
Chief Financial Officer (1)
James P. Ross 49 Senior Vice President and Actuary (1) Annual 1978
John J. Tickner 57 Senior Vice President and Secretary (1) Annual 1985
Keith E. Trotman 59 Senior Vice President (2) Annual 1988
Philip R. Hunt 53 Senior Vice President (2) Annual 1988
</TABLE>
- ------------------------
(1) Officer of Zenith and subsidiaries.
(2) Officer of subsidiaries only.
Each of the executive officers has, for more than five years, occupied an
executive position with Zenith or a subsidiary of Zenith.
There are no family relationships between any of the executive officers and
there are no arrangements or understandings pursuant to which any of them were
selected as officers.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the headings "Directors' Compensation,"
"Summary Compensation Table," "Option/SAR Grants in Last Fiscal Year," and
"Aggregated Option/SAR Exercises in Last Fiscal Year And Fiscal Year End
Option/SAR Values," "Employment Agreements and Termination of Employment and
Change in Control Arrangements," and "Compensation Committee Interlocks and
Insider Participation" in the Proxy Statement is hereby incorporated by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is hereby incorporated
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth in footnote 3 to the table set forth under the
caption "Election of Directors" and under the heading, "Investment in Delta Life
Corporation" in the Proxy Statement is hereby incorporated by reference.
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of the report:
1. FINANCIAL STATEMENTS
Independent Accountant's Report
Financial Statements and notes thereto incorporated by reference
from the 1995 Annual Report to Stockholders in Item 8 of Part II
above:
Consolidated Financial Statements of Zenith National Insurance
Corp. and Subsidiaries:
Consolidated Balance Sheet as of December 31, 1995 and 1994
Consolidated Statement of Operations for the years ended
December 31, 1995, 1994 and 1993
Consolidated Statement of Cash Flows for the years ended
December 31, 1995, 1994 and 1993
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Table setting forth incurred loss and loss adjustment expense
development on a statutory basis on page 9 of the 1995 Annual
Report to Stockholders
2.FINANCIAL STATEMENT SCHEDULES
Zenith National Insurance Corp. and Subsidiaries
As of December 31, 1995.
I -- Summary of Investments -- Other Than Investments in Related
Parties
For the years ended December 31, 1995, 1994 and 1993.
III -- Supplementary Insurance Information
IV -- Reinsurance
Zenith National Insurance Corp.
As of December 31, 1995 and 1994 and for the years ended December
31, 1995, 1994 and 1993.
II -- Condensed Financial Information of Registrant
Property and Casualty Loss Developments on pages 38 and 39 and on page 9
of the 1995 Annual Report to Stockholders.
Schedules other than those listed above are omitted since they are not
applicable, not required, or the information required to be set forth
therein is included in the consolidated financial statements, or in
notes thereto.
16
<PAGE>
3. EXHIBITS
The Exhibits listed below are filed in a separate Exhibit Volume to this
Report.
<TABLE>
<S> <C> <C>
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.)
2.2 Amendment No. 1 to Stock Acquisition Agreement dated as of December 27, 1995, by and
among Anchor National Life Insurance Company, SunAmerica 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 January 9, 1996.)
3.1 Certificate of Incorporation of Zenith as in effect immediately prior to November 22,
1985. (Incorporated herein by reference to Exhibit 3 to Zenith's Amendment on Form 8,
date of amendment October 10, 1985, to Zenith's Current Report on Form 8-K, date of
report July 26, 1985). Certificate of Amendment to Certificate of Incorporation of
Zenith, effective November 22, 1985. (Incorporated herein by reference to Zenith's
Current Report on Form 8-K, date of report November 22, 1985).
3.2 By-Laws of Zenith, as currently in effect. (Incorporated herein by reference to Exhibit
3.2 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1988.)
4.1 Indenture dated as of May 1, 1992 entered into between Zenith and Norwest Bank
Minnesota, National Association, as trustee, pursuant to which Zenith issued its 9%
Senior Notes due May 1, 2002. (Incorporated herein by reference to Exhibit 4 to Zenith's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1992.)
10.1 Purchase Agreement, dated as of February 4, 1981, among Reliance Insurance Company,
Zenith, the Selling Stockholders referred to therein, and Eugene V. Klein, Daniel
Schwartz and Harvey L. Silbert as agents for the Selling Stockholders. (Incorporated
herein by reference to the exhibit to the Schedule 13D filed by Reliance Financial
Services Corporation on March 9, 1981 with respect to the common stock of Zenith).
10.2 Asset and Liability Assumption Agreement, dated as of June 4, 1985, between Zenith
Insurance and the Insurance Commissioner of the State of California (the
"Commissioner"). (Incorporated herein by reference to Exhibit 1 to Zenith's Current
Report on Form 8-K, date of report July 26, 1985).
10.3 Memorandum and Agreement of Closing dated as of July 26, 1985, among Zenith Insurance,
Zenith and the Commissioner (Incorporated herein by reference to Exhibit 10.6 to
Zenith's Annual Report on Form 10-K for the year ended December 31, 1985), together with
the following exhibits:
(a) Exhibit A -- Grant Deed, dated July 25, 1985, by the Commissioner in favor of Zenith
Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual
Report on Form 10-K for the year ended December 31, 1985).
(b) Exhibit B -- Bill of Sale, dated as of July 26, 1985, by the Commissioner in favor
of Zenith Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's
Annual Report on Form 10-K for the year ended December 31, 1985).
(c) Exhibit C -- Assignment of Assets and Assumption of Liabilities, dated as of July
26, 1985, between the Commissioner and Zenith Insurance. (Incorporated herein by
reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended
December 31, 1985).
</TABLE>
17
<PAGE>
<TABLE>
<S> <C> <C>
(d) Exhibit D -- Noncompetition Agreement, dated as of July 26, 1985, between the
Commissioner and Zenith Insurance. (Incorporated herein by reference to Exhibit 28.3
to Zenith's Current Report on Form 8-K, date of report July 26, 1985).
(e) Exhibit E -- First Assignment Separate from Certificate, dated July 26, 1985, by the
Commissioner in favor of Zenith. (Incorporated herein by reference to Exhibit 10.6
to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985).
(f) Exhibit F -- Engagement and Reimbursement Agreement, dated as of July 26, 1985,
between Zenith Insurance and the Commissioner. (Incorporated herein by reference to
Exhibit 28.2 to Zenith's Current Report on Form 8-K, date of report July 26, 1985).
*10.4 Zenith's Non-Qualified Stock Option Plan, as in effect immediately prior to December 6,
1985. (Incorporated herein by reference to Zenith's Registration Statement on Form S-8
(SEC File No. 2-97962)).
*10.5 Zenith's Amended and Restated Non-Qualified Stock Option Plan, adopted by Zenith's Board
of Directors on December 6, 1985. (Incorporated herein by reference to Zenith's
Registration Statement on Form S-8
(SEC File No. 33-8948)).
*10.6 Employment Agreement, dated February 8, 1995, between Zenith and Fredricka Taubitz.
(Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K
for the year ended December 31, 1994).
*10.7 Employment Agreement, dated February 16, 1995, between Zenith and John J. Tickner.
(Incorporated herein by reference to Exhibit 10.7 to Zenith's Annual Report on Form 10-K
for the year ended December 31, 1994).
*10.8 Employment Agreement, dated February 2, 1995, between Zenith and Stanley R. Zax.
(Incorporated herein by reference to Exhibit 10.8 to Zenith's Annual Report on Form 10-K
for the year ended December 31, 1994).
*10.9 Stock Option Agreement, dated as of May 19, 1987, between Zenith and Stanley R. Zax.
(Incorporated herein by reference to Exhibit 10.15 to Zenith's Annual Report on Form
10-K for the year ended December 31, 1987).
10.10 Credit Agreement, dated as of December 14, 1994, between Zenith and Sanwa Bank of
California. (Incorporated herein by reference to Exhibit 10.10 to Zenith's Annual Report
on Form 10K for the year ended December 31, 1994.)
10.11 Amendment dated as of December 28, 1995 to Credit Agreement, dated as of December 14,
1994, between Zenith and Sanwa Bank of California.
10.12 Revolving Note Agreement, dated July 1, 1995, between Zenith and City National Bank.
(Incorporated herein by reference to Exhibit 10 to Zenith's Quarterly Report on Form 10Q
for the quarter ended June 30, 1995.)
10.13 Agreement of Reinsurance #8051 between General Reinsurance Corporation and Zenith
Insurance Company, ZNAT Insurance Company, Zenith Star Insurance Company and CalFarm
Insurance Company, dated as of May 22, 1995.
10.14 Workers' Compensation and Employers' Liability Reinsurance Agreement between Zenith
Insurance Company and Employers Reinsurance Corporation, effective January 1, 1986.
(Incorporated herein by reference to Exhibit 10.14 to Zenith's Annual Report on Form 10K
for the year ended December 31, 1991.)
10.15 Agreement of Reinsurance No. 7276 between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of February 5, 1988. (Incorporated herein by reference
to Exhibit 10.15 to Zenith's Annual Report on Form 10K for the year ended December 31,
1991.)
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C>
10.16 Agreement of Reinsurance No. B226 between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference
to Exhibit 10.16 to Zenith's Annual Report on Form 10K for the year ended December 31,
1991.)
10.17 Agreement of Reinsurance No. B197-A between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference
to Exhibit 10.17 to Zenith's Annual Report on Form 10K for the year ended December 31,
1991.)
10.18 Agreement of Reinsurance No. B196-A between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference
to Exhibit 10.18 to Zenith's Annual Report on Form 10K for the year ended December 31,
1991.)
10.19 Agreement of Reinsurance No. 7832 between General Reinsurance Corporation and CalFarm
Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993.
(Incorporated herein by reference to Exhibit 10.21 to Zenith's Annual Report on Form 10K
for the year ended December 31, 1993.)
10.20 Agreement of Reinsurance No. 623-0005 between American Re-Insurance Company and CalFarm
Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993.
(Incorporated herein by reference to Exhibit 10.22 to Zenith's Annual Report on Form 10K
for the year ended December 31, 1993.)
10.21 Agreement of Reinsurance No. 0079460 between Employers Reinsurance Corporation and
CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993.
(Incorporated herein by reference to Exhibit 10.23 to Zenith's Annual Report on Form 10K
for the year ended December 31, 1993.)
10.22 Life, Disability and Accidental Death Facultive Reinsurance Agreement between CalFarm
Insurance Company and Occidental Life Insurance Company of California, effective April
1, 1971. (Incorporated herein by reference to Exhibit 10.21 to Zenith's Annual Report on
Form 10K for the year ended December 31, 1991.)
11 Computation of Earnings Per Share for the three (3) years ended
December 31, 1995
13 Zenith's Annual Report to Stockholders for the year ended
December 31, 1995, but only to the extent such report is expressly incorporated by
reference herein, and such report is not otherwise to be deemed "filed" as a part of
this Annual Report on Form 10-K.
21 Subsidiaries of Zenith.
23 Consent of Coopers & Lybrand L.L.P., dated March 29, 1996. (Incorporated herein by
reference to page F-1 of this Annual Report on Form 10-K).
27 Financial Data Schedule
28 Property and Casualty Loss Statistics.
99.1 Information required by rule 15d-21 under the Securities Exchange Act of 1934 for the
year ended December 31, 1995 for the Zenith Investment Partnership 401(k) Plan (to be
filed by amendment on Form 10-K/A within 180 days of December 31, 1995).
</TABLE>
- ------------------------
*Management contract or compensatory plan or arrangement
(b) REPORTS ON FORM 8-K
The registrant filed a Form 8K Current Report dated on October 6, 1995 in
connection with the sale of CalFarm Life Insurance Company.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 29, 1996.
ZENITH NATIONAL INSURANCE CORP.
By STANLEY R. ZAX
------------------------------------
Stanley R. Zax
Chairman of the Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, on March 29, 1996.
<TABLE>
<C> <S>
STANLEY R. ZAX Chairman of the Board, President and
- --------------------------------------------- Director (Principal Executive Officer)
Stanley R. Zax
GEORGE E. BELLO Director
- ---------------------------------------------
George E. Bello
MAX M. KAMPELMAN Director
- ---------------------------------------------
Max M. Kampelman
JACK M. OSTROW Director
- ---------------------------------------------
Jack M. Ostrow
WILLIAM S. SESSIONS Director
- ---------------------------------------------
William S. Sessions
HARVEY L. SILBERT Director
- ---------------------------------------------
Harvey L. Silbert
ROBERT M. STEINBERG Director
- ---------------------------------------------
Robert M. Steinberg
SAUL P. STEINBERG Director
- ---------------------------------------------
Saul P. Steinberg
GERALD TSAI, JR. Director
- ---------------------------------------------
Gerald Tsai, Jr.
FREDRICKA TAUBITZ Executive Vice President and Chief Financial
- --------------------------------------------- Officer (Principal Financial and Accounting
Fredricka Taubitz Officer)
</TABLE>
20
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANT
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (File Nos. 33-8948 and 33-22219) of our report dated February 14, 1996
on our audits of the consolidated financial statements and financial statement
schedules of Zenith National Insurance Corp. and subsidiaries as of December 31,
1995 and 1994, and for each of the three years in the period ended December 31,
1995, which is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
March 29, 1996
F-1
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
To the Stockholders and Board of Directors
of Zenith National Insurance Corp.
We have audited the consolidated financial statements of Zenith National
Insurance Corp. and subsidiaries as of December 31, 1995 and 1994, and for each
of the three years in the period ended December 31, 1995, which financial
statements are included on pages 40 through 54 of the Company's 1995 Annual
Report to Stockholders and incorporated by reference herein. We have also
audited the financial statement schedules listed in the index on page 16 of this
Form 10-K. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Zenith National
Insurance Corp. and subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for investments as of December 31, 1993.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
February 14, 1996
F-2
<PAGE>
SCHEDULE I -- SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN RELATED PARTIES
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
COLUMN D
COLUMN C ---------------
COLUMN A COLUMN B ---------- AMOUNT AT WHICH
- -------------------------------------------------- ---------- FAIR SHOWN IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
- -------------------------------------------------- ---------- ---------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities
Bonds:
United States Government and government
agencies and authorities.................... $ 358,590 $ 359,669 $ 358,527
Public utilities.............................. 4,931 4,869 4,869
Industrial and miscellaneous.................. 229,226 239,612 239,612
Redeemable preferred stocks..................... 19,849 20,492 20,492
---------- ---------- ---------------
Total fixed maturities.................... 612,596 624,642 623,500
---------- ---------- ---------------
Equity securities
Floating rate preferred stocks.................. 14,614 13,588 13,588
Convertible and nonredeemable preferred
stocks........................................ 250 281 281
Common stocks, industrial....................... 18,937 22,656 22,656
---------- ---------- ---------------
Total equity securities................... 33,801 36,525 36,525
---------- ---------- ---------------
Short-term investments............................ 137,083 137,083 137,083
Other investments................................. 38,106 38,106 38,106
---------- ---------- ---------------
Total investments......................... $ 821,586 $ 836,356 $ 835,214
---------- ---------- ---------------
---------- ---------- ---------------
</TABLE>
F-3
<PAGE>
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ZENITH NATIONAL INSURANCE CORP.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
(DOLLARS AND SHARES IN THOUSANDS) 1995 1994
-------- --------
<S> <C> <C>
Investments
Common stocks, at market (cost $668, 1995 and $606, 1994)............................... $ 709 $ 424
Short-term investments (at cost which approximates market).............................. 84,678 2,129
Cash...................................................................................... 996 2,334
Investment in subsidiaries (Note A)....................................................... 318,620 268,951
Investment in discontinued operations (Note B)............................................ 104,372
Federal income taxes receivable (Note A).................................................. 764
Other assets.............................................................................. 12,116 14,974
-------- --------
Total assets...................................................................... $417,119 $393,948
-------- --------
-------- --------
LIABILITIES
Senior notes payable, less unamortized discount of $768, 1995 and $889, 1994.............. $ 74,232 $ 74,111
Cash dividends payable to stockholders.................................................... 4,455 4,736
Federal income taxes payable (Note A)..................................................... 4,676
Other liabilities......................................................................... 3,324 5,241
-------- --------
Total liabilities................................................................. 86,687 84,088
-------- --------
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 24,310, outstanding 17,784, 1995;
issued 24,034, outstanding 18,950, 1994................................................. 24,310 24,034
Additional paid-in capital................................................................ 256,083 251,363
Retained earnings......................................................................... 155,634 167,025
Net unrealized appreciation (depreciation) on investments, net of $4,752 deferred tax
expense in 1995 and $3,969 deferred tax benefit in 1994................................. 8,825 (47,460)
-------- --------
444,852 394,962
Less treasury stock at cost (6,526 shares, 1995 and 5,084 shares, 1994)................... (114,420) (85,102)
-------- --------
Total stockholders' equity........................................................ 330,432 309,860
-------- --------
Total liabilities and stockholders' equity........................................ $417,119 $393,948
-------- --------
-------- --------
</TABLE>
See notes to condensed financial information.
F-4
<PAGE>
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ZENITH NATIONAL INSURANCE CORP.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
(DOLLARS IN THOUSANDS) 1995 1994 1993
------------ ------------- -------------
<S> <C> <C> <C>
Investment income............................................................... $ 219 $ 457 $ 492
Realized gains on investments................................................... 43 11 895
Income from legal settlement.................................................... 1,910 7,561
------------ ------------- -------------
Total revenue................................................................... 262 2,378 8,948
Operating expense............................................................... 1,863 4,059 3,478
Interest expense................................................................ 6,960 5,937 6,658
------------ ------------- -------------
Loss from continuing operations before federal income tax benefit and equity in
net income of subsidiaries.................................................... (8,561) (7,618) (1,188)
Federal income tax benefit...................................................... 3,123 2,678 516
------------ ------------- -------------
Loss from continuing operations before equity in income from continuing
operations of subsidiaries.................................................... (5,438) (4,940) (672)
Equity in income from continuing operations of subsidiaries (Note A)............ 25,160 34,738 42,849
------------ ------------- -------------
Income from continuing operations............................................... 19,722 29,798 42,177
Income (loss) from discontinued operations (Note B)............................. (13,122) 8,102 11,023
------------ ------------- -------------
Net income...................................................................... $ 6,600 $ 37,900 $ 53,200
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
See notes to condensed financial information.
F-5
<PAGE>
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ZENITH NATIONAL INSURANCE CORP.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
(AMOUNTS IN THOUSANDS) 1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Investment income received.................................................... $ 193 $ 477 $ 485
Recovery from lawsuit settlement.............................................. 6,036 4,094
Operating expenses paid....................................................... (1,455) (4,099) (3,309)
Interest paid................................................................. (6,596) (5,842) (6,552)
Income taxes (paid) refunded.................................................. 3,571 (1,471) 8,524
------------- ------------- -------------
Net cash flows from continuing operating activities......................... (4,287) (4,899) 3,242
Net cash flow from expenses of discontinued operations........................ (2,274)
------------- ------------- -------------
Net cash flows from operating activities.................................... (6,561) (4,899) 3,242
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments:
Other debt and equity securities and other investments...................... 4,243
Net change in short-term investments.......................................... (82,549) 12,867 (7,264)
Cash received from note receivable............................................ 2,300
Proceeds from the sale of CalFarm Life........................................ 120,000
------------- ------------- -------------
Net cash flows from investing activities.................................... 37,451 12,867 (721)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received from bank line of credit........................................ 43,400 2,100 1,000
Cash paid on bank line of credit.............................................. (43,400) (2,100) (1,000)
Cash dividends paid to common stockholders.................................... (18,273) (18,894) (19,018)
Proceeds from exercise of stock options....................................... 4,405 2,093 6,261
Purchase of treasury shares................................................... (29,318) (346) (7,367)
Dividends received from subsidiaries.......................................... 10,500 15,000 25,000
Capital contribution to subsidiary............................................ (250)
Net cash from (to) subsidiary................................................. 458 (5,356) (7,538)
------------- ------------- -------------
Net cash flows from financing activities.................................... (32,228) (7,503) (2,912)
Net increase (decrease) in cash................................................. (1,338) 465 (391)
Cash at beginning of year....................................................... 2,334 1,869 2,260
------------- ------------- -------------
Cash at end of year............................................................. $ 996 $ 2,334 $ 1,869
------------- ------------- -------------
------------- ------------- -------------
RECONCILIATION OF INCOME FROM CONTINUING OPERATIONS TO NET CASH FLOWS FROM
OPERATING ACTIVITIES:
Income from continuing operations............................................. $ 19,722 $ 29,798 $ 42,177
Income from continuing operations of subsidiaries............................. (25,160) (34,738) (42,849)
Cash flow from expenses of discontinued operations............................ (2,274)
Federal income taxes.......................................................... 511 (4,149) 8,007
Decrease (increase) in receivable from lawsuit settlement..................... 3,467 (3,467)
Other......................................................................... 640 723 (626)
------------- ------------- -------------
Net cash flow from operating activities..................................... $ (6,561) $ (4,899) $ 3,242
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to condensed financial information.
F-6
<PAGE>
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ZENITH NATIONAL INSURANCE CORP.
NOTES TO CONDENSED FINANCIAL INFORMATION
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
Zenith National Insurance Corp. (Zenith) and subsidiaries.
A. Investment In Subsidiaries:
Zenith owns, directly or indirectly, 100% of the outstanding stock of
Zenith Insurance Company, CalFarm Insurance Company, ZNAT Insurance Company,
Zenith Star Insurance Company and Perma-Bilt, a Nevada Corporation. These
investments are included in the financial statements on the equity basis of
accounting. Temporary advances in the ordinary course of business are
included in other assets. The excess of cost over net assets acquired of
$2,009,000 represents the unamortized excess of cost over underlying net
tangible assets of companies acquired prior to 1970, which is considered to
have continuing value.
Zenith files a consolidated federal income tax return. The equity in the
income from continuing operations of subsidiaries of $25,160,000 in 1995,
$34,738,000 in 1994 and $42,849,000 in 1993 is net of a provision for
federal income tax expense of $12,823,000 in 1995, $17,986,000 in 1994 and
$20,825,000 in 1993. Zenith has formulated tax allocation procedures with
its subsidiaries and the 1995, 1994 and 1993 condensed financial information
reflect Zenith's portion of the consolidated taxes.
Zenith Insurance Company paid dividends to Zenith of $10,000,000 in
1995, $15,000,000 in 1994 and $25,000,000 in 1993. CalFarm Life Insurance
paid a dividend to Zenith of $500,000 prior to its sale in the fourth
quarter of 1995.
B. Discontinued Operations:
During the fourth quarter of 1995, Zenith completed the sale of its
wholly-owned subsidiary, CalFarm Life Insurance Company ("CalFarm Life"), to
a subsidiary of SunAmerica Inc. for approximately $120 million in cash. The
group health insurance business of CalFarm Life was retained by Zenith. The
sale resulted in a loss of approximately $19.5 million, after tax, which was
recognized by Zenith principally in the third quarter of 1995. The life and
annuity operations of CalFarm Life are presented as discontinued operations
and prior-year financial statements have been restated. Zenith's investment
attributable to discontinued operations at December 31, 1994 has been
presented separately from its investment in continuing operating activities.
The unrealized loss associated with investments classified as
available-for-sale in the life and annuity operation at December 31, 1994
was $22,539,000 net of deferred taxes. After tax income for the discontinued
operation from the measurement date to the disposal date was $3,960,000.
F-7
<PAGE>
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COLUMN C
-----------
FUTURE COLUMN E
COLUMN B POLICY -----------
----------- BENEFITS, OTHER COLUMN G
DEFERRED LOSSES, COLUMN D POLICY COLUMN F -----------
COLUMN A POLICY CLAIMS ----------- CLAIMS AND ----------- NET
- ------------------------------ ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT
SEGMENT COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME
- ------------------------------ ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
1995
- ------------------------------
Property and Casualty
Workers' compensation....... $ 5,001 $ 262,738 $ 28,644 $ 203,252
Other property/casualty..... 13,802 107,995 78,760 192,276
Reinsurance................. 1,536 92,390 12,187 41,985
----------- ----------- ----------- ----------- ----------- -----------
20,339 463,123 119,591 437,513 $ 45,931
Reinsurance ceded............. 54,429
Registrant.................... 219
----------- ----------- ----------- ----------- ----------- -----------
Total....................... $ 20,339 $ 517,552 $ 119,591 $ -- $ 437,513 $ 46,150
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
1994
- ------------------------------
Property and Casualty
Workers' compensation....... $ 4,430 $ 264,665 $ 34,123 $ 216,030
Other property/casualty..... 12,598 101,615 77,211 186,661
Reinsurance................. 1,478 96,430 10,491 36,138
----------- ----------- ----------- ----------- ----------- -----------
18,506 462,710 121,825 438,829 $ 39,611
Reinsurance ceded............. 47,696
Registrant.................... 457
----------- ----------- ----------- ----------- ----------- -----------
Total....................... $ 18,506 $ 510,406 $ 121,825 $ -- $ 438,829 $ 40,068
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
1993
- ------------------------------
Property and Casualty
Workers' compensation....... $ 4,264 $ 286,452 $ 32,109 $ 244,661
Other property/casualty..... 11,704 93,199 72,855 179,314
Reinsurance................. 1,048 94,848 6,889 23,295
----------- ----------- ----------- ----------- ----------- -----------
17,016 474,499 111,853 447,270 $ 38,817
Reinsurance ceded............. 44,919 10
Registrant.................... 492
----------- ----------- ----------- ----------- ----------- -----------
Total....................... $ 17,016 $ 519,418 $ 111,863 $ -- $ 447,270 $ 39,309
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
COLUMN H COLUMN I
----------- -----------
BENEFITS, AMORTIZATION COLUMN J
CLAIMS, OF DEFERRED ----------- COLUMN K
COLUMN A LOSSES AND POLICY OTHER -----------
- ------------------------------ SETTLEMENT ACQUISITION OPERATING PREMIUMS
SEGMENT EXPENSES COSTS EXPENSES WRITTEN
- ------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
1995
- ------------------------------
Property and Casualty
Workers' compensation....... $ 153,692 $ 36,358 $ 22,090 $ 197,773
Other property/casualty..... 149,797 39,621 14,865 198,676
Reinsurance................. 22,100 5,867 1,063 43,433
----------- ----------- ----------- -----------
325,589 81,846 38,018 439,882
Reinsurance ceded.............
Registrant.................... 1,863
----------- ----------- ----------- -----------
Total....................... $ 325,589 $ 81,846 $ 39,881 $ 439,882
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
1994
- ------------------------------
Property and Casualty
Workers' compensation....... $ 129,352 $ 32,336 $ 24,779 $ 218,044
Other property/casualty..... 138,925 38,782 15,920 190,922
Reinsurance................. 25,571 6,135 110 39,674
----------- ----------- ----------- -----------
293,848 77,253 40,809 448,640
Reinsurance ceded.............
Registrant.................... 4,059
----------- ----------- ----------- -----------
Total....................... $ 293,848 $ 77,253 $ 44,868 $ 448,640
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
1993
- ------------------------------
Property and Casualty
Workers' compensation....... $ 164,815 $ 33,317 $ 19,736 $ 245,917
Other property/casualty..... 128,051 36,345 20,393 183,876
Reinsurance................. 13,678 3,384 896 26,807
----------- ----------- ----------- -----------
306,544 73,046 41,025 456,600
Reinsurance ceded.............
Registrant.................... 3,478
----------- ----------- ----------- -----------
Total....................... $ 306,544 $ 73,046 $ 44,503 $ 456,600
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
F-8
<PAGE>
SCHEDULE IV -- REINSURANCE
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COLUMN F
COLUMN C COLUMN D ----------
COLUMN B ------------ ----------- PERCENTAGE
COLUMN A -------------- CEDED TO ASSUMED COLUMN E OF AMOUNT
- ------------------------------------------------------- GROSS OTHER FROM OTHER -------------- ASSUMED
(AMOUNTS IN THOUSANDS) AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET
-------------- ------------ ----------- -------------- ----------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1995
Premiums earned........................................ $ 413,258 $ 21,112 $ 45,367 $ 437,513 10.4%
-------------- ------------ ----------- -------------- ----------
-------------- ------------ ----------- -------------- ----------
DECEMBER 31, 1994
Premiums earned........................................ $ 422,563 $ 21,521 $ 37,787 $ 438,829 8.6%
-------------- ------------ ----------- -------------- ----------
-------------- ------------ ----------- -------------- ----------
DECEMBER 31, 1993
Premiums earned........................................ $ 443,477 $ 22,301 $ 26,094 $ 447,270 5.8%
-------------- ------------ ----------- -------------- ----------
-------------- ------------ ----------- -------------- ----------
</TABLE>
F-9
<PAGE>
THE ZENITH
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
------------------------
ZENITH NATIONAL INSURANCE CORP.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT LIST
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------
<S> <C> <C>
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.)
2.2 Amendment No. 1 to Stock Acquisition Agreement dated as of December 27, 1995, by and
among Anchor National Life Insurance Company, SunAmerica 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 January 9, 1996.)
3.1 Certificate of Incorporation of Zenith as in effect immediately prior to November 22,
1985. (Incorporated herein by reference to Exhibit 3 to Zenith's Amendment on Form 8,
date of amendment October 10, 1985, to Zenith's Current Report on Form 8-K, date of
report July 26, 1985). Certificate of Amendment to Certificate of Incorporation of
Zenith, effective November 22, 1985. (Incorporated herein by reference to Zenith's
Current Report on Form 8-K, date of report November 22, 1985).
3.2 By-Laws of Zenith, as currently in effect. (Incorporated herein by reference to
Exhibit 3.2 to Zenith's Annual Report on Form 10-K for the year ended December 31,
1988.)
4.1 Indenture dated as of May 1, 1992 entered into between Zenith and Norwest Bank
Minnesota, National Association, as trustee, pursuant to which Zenith issued its 9%
Senior Notes due May 1, 2002. (Incorporated herein by reference to Exhibit 4 to
Zenith's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992.)
10.1 Purchase Agreement, dated as of February 4, 1981, among Reliance Insurance Company,
Zenith, the Selling Stockholders referred to therein, and Eugene V. Klein, Daniel
Schwartz and Harvey L. Silbert as agents for the Selling Stockholders. (Incorporated
herein by reference to the exhibit to the Schedule 13D filed by Reliance Financial
Services Corporation on March 9, 1981 with respect to the common stock of Zenith).
10.2 Asset and Liability Assumption Agreement, dated as of June 4, 1985, between Zenith
Insurance and the Insurance Commissioner of the State of California (the
"Commissioner"). (Incorporated herein by reference to Exhibit 1 to Zenith's Current
Report on Form 8-K, date of report July 26, 1985).
10.3 Memorandum and Agreement of Closing dated as of July 26, 1985, among Zenith Insurance,
Zenith and the Commissioner (Incorporated herein by reference to Exhibit 10.6 to
Zenith's Annual Report on Form 10-K for the year ended December 31, 1985), together
with the following exhibits:
(a) Exhibit A -- Grant Deed, dated July 25, 1985, by the Commissioner in favor of
Zenith Insurance. (Incorporated herein by reference to
Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31,
1985).
(b) Exhibit B -- Bill of Sale, dated as of July 26, 1985, by the Commissioner in favor
of Zenith Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's
Annual Report on Form 10-K for the year ended December 31, 1985).
(c) Exhibit C -- Assignment of Assets and Assumption of Liabilities, dated as of July
26, 1985, between the Commissioner and Zenith Insurance. (Incorporated herein by
reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year
ended December 31, 1985).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------
<S> <C> <C>
(d) Exhibit D -- Noncompetition Agreement, dated as of July 26, 1985, between the
Commissioner and Zenith Insurance. (Incorporated herein by reference to Exhibit
28.3 to Zenith's Current Report on Form 8-K, date of report July 26, 1985).
(e) Exhibit E -- First Assignment Separate from Certificate, dated July 26, 1985, by
the Commissioner in favor of Zenith. (Incorporated herein by reference to Exhibit
10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985).
(f) Exhibit F -- Engagement and Reimbursement Agreement, dated as of July 26, 1985,
between Zenith Insurance and the Commissioner. (Incorporated herein by reference
to Exhibit 28.2 to Zenith's Current Report on Form 8-K, date of report July 26,
1985).
*10.4 Zenith's Non-Qualified Stock Option Plan, as in effect immediately prior to December
6, 1985. (Incorporated herein by reference to Zenith's Registration Statement on Form
S-8 (SEC File No. 2-97962)).
*10.5 Zenith's Amended and Restated Non-Qualified Stock Option Plan, adopted by Zenith's
Board of Directors on December 6, 1985. (Incorporated herein by reference to Zenith's
Registration Statement on Form S-8
(SEC File No. 33-8948)).
*10.6 Employment Agreement, dated February 8, 1995, between Zenith and Fredricka Taubitz.
(Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form
10-K for the year ended December 31, 1994).
*10.7 Employment Agreement, dated February 16, 1995, between Zenith and John J. Tickner.
(Incorporated herein by reference to Exhibit 10.7 to Zenith's Annual Report on Form
10-K for the year ended December 31, 1994).
*10.8 Employment Agreement, dated February 2, 1995, between Zenith and Stanley R. Zax.
(Incorporated herein by reference to Exhibit 10.8 to Zenith's Annual Report on Form
10-K for the year ended December 31, 1994).
*10.9 Stock Option Agreement, dated as of May 19, 1987, between Zenith and Stanley R. Zax.
(Incorporated herein by reference to Exhibit 10.15 to Zenith's Annual Report on Form
10-K for the year ended December 31, 1987).
10.10 Credit Agreement dated as of December 14, 1994, between Zenith and Sanwa Bank of
California. (Incorporated herein by reference to Exhibit 10.10 to Zenith's Annual
Report on Form 10K for the year ended December 31, 1994.)
10.11 Amendment dated as of December 28, 1995 to Credit Agreement, dated as of December 14,
1994, between Zenith and Sanwa Bank of California.
10.12 Revolving Note Agreement, dated July 1, 1995, between Zenith and City National Bank.
(Incorporated herein by reference to Exhibit 10 to Zenith's Quarterly Report on Form
10Q for the quarter ended June 30, 1995.)
10.13 Agreement of Reinsurance #8051 between General Reinsurance Corporation and Zenith
Insurance Company, ZNAT Insurance Company, Zenith Star Insurance Company and CalFarm
Insurance Company, dated as of May 22, 1995.
10.14 Workers' Compensation and Employers' Liability Reinsurance Agreement between Zenith
Insurance Company and Employers Reinsurance Corporation, effective January 1, 1986.
(Incorporated herein by reference to Exhibit 10.14 to Zenith's Annual Report on Form
10K for the year ended December 31, 1991.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------
<S> <C> <C>
10.15 Agreement of Reinsurance No. 7276 between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of February 5, 1988. (Incorporated herein by
reference to Exhibit 10.15 to Zenith's Annual Report on Form 10K for the year ended
December 31, 1991.)
10.16 Agreement of Reinsurance No. B226 between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by
reference to Exhibit 10.16 to Zenith's Annual Report on Form 10K for the year ended
December 31, 1991.)
10.17 Agreement of Reinsurance No. B197-A between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by
reference to Exhibit 10.17 to Zenith's Annual Report on Form 10K for the year ended
December 31, 1991.)
10.18 Agreement of Reinsurance No. B196-A between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by
reference to Exhibit 10.18 to Zenith's Annual Report on Form 10K for the year ended
December 31, 1991.)
10.19 Agreement of Reinsurance No. 7832 between General Reinsurance Corporation and CalFarm
Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993.
(Incorporated herein by reference to Exhibit 10.21 to Zenith's Annual Report on Form
10K for the year ended December 31, 1993.)
10.20 Agreement of Reinsurance No. 623-0005 between American Re-Insurance Company and
CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993.
(Incorporated herein by reference to Exhibit 10.22 to Zenith's Annual Report on Form
10K for the year ended December 31, 1993.)
10.21 Agreement of Reinsurance No. 0079460 between Employers Reinsurance Corporation and
CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993.
(Incorporated herein by reference to Exhibit 10.23 to Zenith's Annual Report on Form
10K for the year ended December 31, 1993.)
10.22 Life, Disability and Accidental Death Facultive Reinsurance Agreement between CalFarm
Insurance Company and Occidental Life Insurance Company of California, effective April
1, 1971. (Incorporated herein by reference to Exhibit 10.21 to Zenith's Annual Report
on Form 10K for the year ended December 31, 1991.)
11 Computation of Earnings Per Share for the three (3) years ended
December 31, 1995.
13 Zenith's Annual Report to Stockholders for the year ended December 31, 1995, but only
to the extent such report is expressly incorporated by reference herein, and such
report is not otherwise to be deemed "filed" as a part of this Annual Report on Form
10-K.
21 Subsidiaries of Zenith.
23 Consent of Coopers & Lybrand L.L.P., dated March 29, 1996. (Incorporated herein by
reference to page F-1 of this Annual Report on Form 10-K).
27 Financial Data Schedule.
28 Property and Casualty Loss Statistics.
99.1 Information required by rule 15d-21 under the Securities Exchange Act of 1934 for the
year ended December 31, 1995 for the Zenith Investment Partnership 401(k) Plan (to be
filed by amendment on Form 10-K/A within 180 days of December 31, 1995).
</TABLE>
- ------------------------
*Management contract or compensatory plan or arrangement
<PAGE>
EXHIBIT 10.11
AMENDMENT TO LINE OF CREDIT AGREEMENT
This First Amendment to Line of Credit Agreement (the "Amendment") is made
and entered into this 28th day of December, 1995, by and between SANWA BANK
CALIFORNIA (the "Bank") and ZENITH NATIONAL INSURANCE CORP. (the "Borrower")
with respect to the following:
This Amendment shall be deemed to be a part of and subject to that certain
Line of Credit Agreement dated as of December 15, 1995 as it may be amended from
time to time, and any and all addenda and riders thereto (collectively the
"Agreement"). Unless otherwise defined herein, all terms used in this Amendment
shall have the same meanings as in the Agreement. To the extent that any of the
terms or provisions of this Amendment conflict with those contained in the
Agreement, the terms and provisions contained herein shall control.
WHEREAS, the Borrower and the Bank mutually desire to extend and/or modify
the Agreement.
NOW THEREFORE, for value received and hereby acknowledged, the Borrower and
the Bank agree as follows:
1. CHANGE IN REPORTING REQUIREMENTS. Section 4.05 C., D., and E. of
the Agreement are deleted in their entirety and the following is substituted
in lieu thereof:
"C. TRI-ANNUAL AUDIT. Not later than 30 days after the Borrower
receives it, a copy of the tri-annual audit of Zenith Insurance
Company prepared by the Department of Insurance.
D. QUARTERLY STATUTORY STATEMENTS. Not later than 75 days after the
end of the first three quarters of each fiscal year of the Borrower,
copies of the quarterly statutory statement of Zenith Insurance
Company and its consolidated insurance subsidiaries.
E. ANNUAL STATUTORY STATEMENTS. Not later than 120 days after the
end of each of the Borrower's fiscal years, copies of the annual
statutory statements of Zenith Insurance Company and its
consolidated insurance subsidiaries".
2. MODIFICATION OF ADDITIONAL INDEBTEDNESS. Section 4.06 of the
Agreement is deleted in its entirety and the following is substituted in
lieu thereof:
4.06 ADDITIONAL INDEBTEDNESS OF INSURANCE SUBSIDIARIES. Borrower's
consolidated insurance subsidiaries shall not, after the date
hereof, create, incur or assume, directly or indirectly, any
Indebtedness exceeding in the aggregate the amount of
$20,000,000.00. The term "Indebtedness", as used in this Agreement
with respect to the Borrower or each of its subsidiaries, as
applicable, shall mean, at any date, the aggregate amount, excluding
in all cases the amount of indebtedness owed to a corporate
affiliate, of, without duplication, (a) all obligations for borrowed
money from banks including, but not limited to, guaranties and
letters of credit, (b) all obligations evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations to pay
the deferred purchase price of property or services, (d) capitalized
lease obligations, (e) all obligations or liabilities of others
secured by a lien on any asset whether or not such obligation or
liability is assumed, and (f) any other obligations or liabilities
which are required by generally accepted accounting principles to be
shown as debt on a balance sheet".
1
<PAGE>
3. CHANGE IN FINANCIAL CONDITION. Section 4.10 C. of the Agreement is
deleted in its entirety and the following is substituted in lieu thereof:
"C. AGGREGATE STATUTORY SURPLUS. Zenith Insurance Company and its
consolidated insurance subsidiaries shall maintain an aggregate
statutory surplus of at least $140,000,000.00".
4. MODIFICATION OF CORPORATE RATING. Section 4.13 of the Agreement is
deleted in its entirety and the following is substituted in lieu thereof:
"4.13 CORPORATE RATING. Zenith Insurance Company (on a pooled or
individual basis) shall maintain at all times an A.M. Best rating of
no lower than B+".
5. CONFIRMATION OF OTHER TERMS AND CONDITIONS OF THE AGREEMENT. Except
as specifically provided in this Amendment, all other terms, conditions and
covenants of the Agreement unaffected by this Amendment shall remain
unchanged and shall continue in full force and effect and the Borrower
hereby covenants and agrees to perform and observe all terms, covenants and
agreements provided for in the Agreement, as hereby amended.
IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto
as of the date first hereinabove written.
<TABLE>
<CAPTION>
BANK: BORROWER:
<S> <C>
SANWA BANK CALIFORNIA ZENITH NATIONAL INSURANCE CORP.
By: JOHN C. HYCHE By: STANLEY R. ZAX
---------------------------------------- ----------------------------------------
Name: JOHN C. HYCHE Name: STANLEY R. ZAX
------------------------------------- -------------------------------------
Title: Vice President Title: President and Chairman of the
-------------------------------------- Board
--------------------------------------
</TABLE>
2
<PAGE>
EXHIBIT 10.13
AGREEMENT OF REINSURANCE
NO. 8051
BETWEEN
GENERAL REINSURANCE CORPORATION
A DELAWARE CORPORATION
HAVING ITS PRINCIPAL OFFICES AT
FINANCIAL CENTRE
695 EAST MAIN STREET
STAMFORD, CONNECTICUT 06904
(HEREINAFTER REFERRED TO AS THE "REINSURER")
AND
ZENITH INSURANCE COMPANY
ZNAT INSURANCE COMPANY
ZENITH STAR INSURANCE COMPANY
WOODLAND HILLS, CALIFORNIA
CALFARM INSURANCE COMPANY
SACRAMENTO, CALIFORNIA
(HEREIN COLLECTIVELY REFERRED TO AS THE "COMPANY")
In consideration of the promises set forth in this Agreement, the parties
agree as follows:
ARTICLE I -- BUSINESS COVERED
This Agreement is to indemnify the Company, subject to the terms and
conditions contained herein, in respect of the excess liability of the Company
resulting from accidents, happenings or occurrences arising during the currency
of this Agreement under policies, contracts or binders of insurance, or
reinsurance, oral or written, or other evidences of liability (hereinafter
called "policy" or "policies") heretofore issued or which may hereafter be
issued in respect of business classified by the Company as Workers' Compensation
(including Occupational Disease) and/or Employers' Liability.
The indemnity afforded by this Agreement shall apply to each and every loss
or series of losses arising out of one accident, happening or occurrence,
whether involving any one or any combination of the classes of business listed
in the preceding paragraph, regardless of the number of policies under which
such loss is payable or the number of different interests insured.
ARTICLE II -- PARTIES TO THE AGREEMENT
This Agreement is solely between the Company and the Reinsurer. When more
than one Company is named as a party to this Agreement, the first Company named
shall be the agent of the other companies as to all matters pertaining to this
Agreement. Performance of the obligations of each party under this Agreement
shall be rendered solely to the other party. However, if the Company becomes
insolvent, the liability of the Reinsurer shall be modified to the extent set
forth in the article entitled INSOLVENCY. In no instance shall any insured of
the Company or any claimant against an insured of the Company have any rights
under this Agreement.
ARTICLE III -- EXCLUSIONS
This Agreement does not cover:
(a) Excess insurance;
(b) All reinsurance assumed except from its affiliates and except from
companies which have fronted the Company's incidental out-of-state
exposures;
1
<PAGE>
(c) In respect of any policy issued or reinsured by the Company to cover the
following occupations or employments, except when such occupations or
employments are incidental to and form a minor part of the usual
occupation or employment of the insured:
(1) Working and navigation of any vessel, other than light craft on
inland waterways and dredging;
(2) Manufacture, storage, filing, breaking down, or transport of:
(i) Fireworks, ammunition, fuse, cartridges, powder, nitroglycerine
or any explosive;
(ii) Gasses and/or air under pressure in containers (but this
exclusion shall not apply to the storage or distribution of
liquid petroleum gas by wholesale or retail dealers);
(3) Underground coal mines;
(4) Manufacture of celluloid and pyroxylin;
(5) Erection of structural iron and/or steel works, unless in
conjunction with ordinary construction of buildings. Except that
this Exclusion shall not apply to insureds engaged in steel work
where such steel work erection is not beyond twelve stories in
height;
(6) Contractors doing building wrecking exclusively;
(7) Tunnelling;
(8) Tower, steeple and chimney shaft work;
(9) Operation of dry docks, docks, quays and wharves;
(10) Construction and maintenance of coffer dams;
(11) Subaqueous construction and/or other subaqueous work;
(12) Oil tanks and/or refining works;
(13) Aviation risks involving flying risks;
(14) Operations involving atomic energy and nuclear fission;
(15) Operations of a carrier by rail;
(16) Maritime and federal employments including all United States
Longshoremen's and Harbor Workers' Act exposures;
(d) Liability of the Company arising, by contract, operation of law, or
otherwise, from its participation or membership, whether voluntary or
involuntary, in any insolvency fund. "Insolvency Fund" includes any
guaranty fund, insolvency fund, plan, pool, association, fund or other
arrangement, howsoever denominated, established or governed; which
provides for any assessment of or payment or assumption by the Company of
part or all of any claim, debt, charge, fee or other obligation of an
insurer, or its successors or assigns, which has been declared by any
competent authority to be insolvent, or which is otherwise deemed unable
to meet any claim, debt, charge, fee or other obligation in whole or in
part.
If the Company provides insurance for an insured with respect to any
operations listed in one or more of the exclusions in (c) above, and such
operations constitute only a minor and incidental part of the total operations
of the insured, such exclusions shall not apply.
In connection with those occupations or employments enumerated under
exclusion (c) of this Article, if the Company, without the knowledge of and
contrary to the instructions of its head office, is bound or is unknowingly
exposed on a risk falling otherwise within one of the exclusions set
2
<PAGE>
forth, such risk is covered under this Agreement until the Company's head office
receives knowledge thereof and, pending cancellation of such risk by the
Company, for a further period of thirty days after receipt of such knowledge by
the head office of the Company.
Where policies are issued by the Company through its membership of or
participation in an assigned risk plan or similar facility which involves
occupations or employments prohibited under exclusion (c) of this Article, such
policies are not excluded under this Agreement.
ARTICLE IV -- TERRITORY
This Agreement shall cover wherever the Company's policies cover.
ARTICLE V -- TERM, CANCELLATION AND EXTENDED EXPIRATION
This Agreement shall take effect at 12:01 A.M., January 1, 1995, and is of
unlimited duration but may be terminated as of 12:01 A.M., of the first day of
any calendar quarter by either party giving to the other not less than 90 days'
prior written notice. This Agreement shall apply to all losses occurring during
the currency of this Agreement irrespective of the inception dates of the
original policy or policies.
By 12:01 A.M., is meant 12:01 A.M., Standard Time at the place where the
risk or risks upon which loss is sustained is or are located.
If this Agreement shall terminate while the loss covered hereunder is in
progress, subject to the other conditions of this Agreement the Reinsurer is
responsible for its proportion of the entire loss or damage provided the loss
covered hereunder started before the time of termination.
ARTICLE VI -- AMOUNT OF COVER
The Reinsurer will indemnify the Company in respect of the Company's "excess
losses", as hereinafter defined.
"Excess losses" shall be defined as follows:
(A) IN RESPECT OF ALL BUSINESS COVERED HEREUNDER
The Company's ultimate net loss the excess of $550,000 in respect of
each accident, happening or occurrence up to a further $4,450,000 in respect
of each such accident, happening or occurrence.
(B) IN RESPECT OF OCCUPATIONAL DISEASE AND/OR CONTINUOUS INJURY CLAIMS
The Company's ultimate net loss the excess of $550,000 any one
employee sustained by the Company resulting from occupational disease and/or
continuous injury claims of one specific kind or class suffered by each
employee, up to a further $4,450,000 ultimate net loss.
ARTICLE VII -- ULTIMATE NET LOSS AND CLAIM EXPENSES
The term "ultimate net loss" wherever used in this Agreement shall mean the
actual loss or losses sustained by the Company, after making deductions for all
recoveries, all salvages and all claims on other reinsurances, except underlying
quota share reinsurance with UNUM, whether collected or not. Nothing in this
clause, however, shall be construed as meaning that losses are not recoverable
from the Reinsurer until the ultimate net loss to the Company has been
ascertained.
The words "ultimate net loss" shall in addition include 80% of Extra
Contractual Obligations as defined herein, provided the Company notifies the
Reinsurer of any claim which may involve such Extra Contractual Obligations, and
the Reinsurer concurs in writing with the course of action taken by the Company.
All salvages, recoveries or payments recovered or received subsequent to a
loss settlement under this Agreement shall be applied as if recovered or
received prior to the aforesaid settlement, and all necessary adjustments shall
be made by the parties hereto.
3
<PAGE>
The term "ultimate net loss" shall include all claim expenses of the Company
arising from the settlement of claims. The term "claim expenses" shall mean
court costs, interest upon awards and judgments, allocated expenses for
investigation and adjustment, and allocated legal expenses paid by the Company.
The Reinsurer shall not, however, be required to contribute to the salary
charges of any officials or permanent employees of the Company except in the
case of field claim adjusters or staff attorneys and then only when the time
spent by any adjuster or staff attorney is definitely allocated to a specific
claim.
ARTICLE VIII -- EXTRA CONTRACTUAL OBLIGATIONS
This Agreement shall protect the Company, within the limits hereof, where
the ultimate net loss includes any extra contractual obligations. "Extra
Contractual Obligations" are defined as those liabilities not covered under any
other provision of this Agreement and which arise from the handling of any claim
on business covered hereunder, such liabilities arising because of, but not
limited to, the following: failure by the Company to settle within the policy
limit, or by reason of alleged or actual negligence, fraud or bad faith in
rejecting an offer of settlement or in the preparation of the defense or in the
trial of any action against its insured or reinsured or in the preparation or
prosecution of an appeal consequent upon such action.
The date on which an extra contractual obligation is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original accident,
casualty, disaster or loss occurrence.
However, coverage hereunder as respects extra contractual obligations shall
not apply where the loss has been incurred due to the fraud of a member of the
Board of Directors or a corporate officer of the Company acting individually or
collectively or in collusion with any individual or corporation or any other
organization or party involved in the presentation, defense or settlement of any
claim covered hereunder.
ARTICLE IX -- LOSS IN EXCESS OF POLICY LIMITS
The Reinsurer shall be liable for its proportion of any loss in excess of
the limit of the Company's original policy, such loss in excess of the limit
having been incurred because of failure by the Company to settle within the
policy limit or by reason of alleged or actual negligence, fraud or bad faith in
rejecting an offer of settlement or in the preparation of the defense or in the
trial of any action against its Insured or Reinsured or in the preparation or
prosecution of an appeal consequent upon such action.
However, this Article shall not apply where the loss has been incurred due
to the fraud of a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
For the purposes of this Article, the word "loss" shall mean any amounts for
which the Company would have been contractually liable to pay had it not been
for the limit of the original policy.
The liability of the Reinsurer with respect to the sum of ultimate net loss
and loss in excess of policy limits shall not exceed the Reinsurer's limit of
liability as set forth in the article entitled AMOUNT OF COVER.
ARTICLE X -- NET RETAINED LINES
This Agreement applies only to that portion of any insurance or reinsurance
which the Company retains net for its own account, subject to underlying quota
share reinsurance with UNUM, and in calculating the amount of any loss hereunder
and also in computing the amount or amounts in excess of which this Agreement
attaches, only loss or losses in respect of that portion of any insurances or
reinsurances which the Company retains net for its own account, subject to
4
<PAGE>
underlying quota share reinsurance with UNUM, shall be included; however, this
requirement shall be satisfied if such amount is retained by the Company or its
affiliated companies under common ownership.
The amount of the Reinsurer's liability hereunder in respect of any loss or
losses shall not be increased by reason of the inability of the Company to
collect from any other Reinsurer, whether specific or general, any amounts which
have become due from them, whether such inability arises from the insolvency of
such other Reinsurer or otherwise.
ARTICLE XI -- AUTOMATIC REINSTATEMENT
In the event of any claim arising or payments made under this Agreement, the
indemnity provided hereby shall be automatically reinstated to the original
amount without the payment of any additional premium.
ARTICLE XII -- PREMIUM
The premium to be paid for this reinsurance shall be calculated by applying
a rate of 1.09% to the Company's gross net earned premium income on business the
subject matter of this Agreement during the currency of this Agreement. The term
"gross net earned premium income" shall mean gross earned premiums on business
covered under this Agreement, less cancellations and returns only and less the
earned portion of any premiums paid for reinsurance, recoveries under which
would inure to the Reinsurer's benefit.
ARTICLE XIII -- CURRENCY
The Dollars mentioned herein shall mean United States Dollars.
ARTICLE XIV -- ILLEGALITY
If any law or regulation of the Federal or State or Local Government of any
jurisdiction in which the Company is doing business shall render illegal the
arrangements made in this Agreement, the Agreement can be terminated
immediately, insofar as it applies to such jurisdiction, by the Company giving
notice to the Reinsurer to such effect.
ARTICLE XV -- ACCOUNTS
Within 25 days after the close of each month, the Company shall render to
the Reinsurer a report of the reinsurance premium for the month with respect to
the Company's gross net earned premium income on business the subject matter of
this Agreement during the month; and the amount due the Reinsurer shall be
remitted within 60 days after the close of the month.
ARTICLE XVI -- ERRORS AND OMISSIONS
Any inadvertent delays, omissions or errors made in connection with this
Agreement shall not release either party hereto from any liability which would
have arisen hereunder if such delay, omission or error had not been made,
provided such delays, omissions or errors are rectified immediately upon
discovery.
ARTICLE XVII -- NOTICE OF LOSS AND LOSS SETTLEMENTS
The Company shall report promptly to the Reinsurer each claim or loss for
which the Company's estimated amount of net loss is 50% or more of the amount of
the Company Retention and shall also report all cases of serious injury which,
regardless of considerations of liability or coverage, might involve this
reinsurance, including but not limited to the following:
(a) Cord injury -- paraplegia, quadriplegia;
(b) Amputations -- requiring a prosthesis;
(c) Brain damage affecting mentality or central nervous system -- such as
permanent disorientation, behavior disorder, personality change,
seizures, motor deficit, inability to speak (aphasia), hemiplegia or
unconsciousness (comatose);
(d) Blindness;
5
<PAGE>
(e) Burns -- involving over 10% of body with third degree or 30% of body
with second degree;
(f) Multiple fractures -- involving more than one member or non-union;
(g) Fracture of both heel bones (fractured bilateral os calcis);
(h) Nerve damage causing paralysis and loss of sensation in arm and hand
(brachial plexus nerve damage);
(i) Massive internal injuries affecting body organs;
(j) Injury to nerves at base of spinal canal (Cauda Equina) or any other
back injury resulting in incontinence of bowel and/or bladder;
(k) Any other serious injury which, in the judgment of the Company, might
involve the Reinsurer.
All loss settlements made by the Company, provided they are within the terms
of this Agreement, shall be unconditionally binding upon the Reinsurer, and
amounts falling to the share of the Reinsurer shall be payable by it immediately
upon reasonable evidence of the amount paid or to be paid being given by the
Company.
ARTICLE XVIII -- LIABILITY OF THE REINSURER
The liability of the Reinsurer shall follow that of the Company in every
case and shall be subject in all respects to all the general and special
stipulations, clauses, waivers and modifications of the Company's policy or
policies and any endorsements thereon.
The Company shall be the sole judge as to what shall constitute a claim or
loss covered under the Company's original policy and as to the Company's
liability thereunder and as to the amount or amounts which it shall be proper
for the Company to pay thereunder; and the Reinsurer shall be bound by the
judgment of the Company as to the liability and obligation of the Company under
its original policies.
No error or omission in reporting any risk or loss reinsured hereunder shall
invalidate the liability of the Reinsurer, but the reporting of reinsurance not
authorized by this Agreement or by special acceptance hereunder shall not bind
the Reinsurer, except for the return of premium paid therefor.
ARTICLE XIX -- ACCESS TO RECORDS
The Reinsurer or its duly accredited representative shall have free access
to the appropriate books and records of the Company at all reasonable times for
the purpose of obtaining information concerning this Agreement or the subject
matter thereof.
ARTICLE XX -- TAX
In consideration of the terms under which this Agreement is issued, the
Company undertakes not to claim any deduction in respect of the premium hereon
when making tax returns, other than Income or Profits Tax returns, to any State
or Territory or the District of Columbia.
ARTICLE XXI -- OFFSET
The Company or the Reinsurer may offset any balance, whether on account of
premium, commission, claims or losses, adjustment expense, salvage, or
otherwise, due from one party to the other under this Agreement or under any
other agreement heretofore or hereafter entered into between the Company and the
Reinsurer, provided, however, that, in the event of an insolvency of a party
hereto, an offset shall only be allowed in accordance with the provisions of
section 7427 of the Insurance Law of the State of New York.
ARTICLE XXII -- ARBITRATION
As a precedent to any right of action hereunder, if any dispute shall arise
between the Company and the Reinsurer with reference to the interpretation of
this Agreement or their rights
6
<PAGE>
with respect to any transaction involved, whether such dispute arises before or
after termination of this Agreement, such dispute, upon the written request of
either party, shall be submitted to three arbitrators, one to be chosen by each
party, and the third by the two so chosen. If either party refuses or neglects
to appoint an arbitrator within thirty days after the receipt of written notice
from the other party requesting it to do so, the requesting party may appoint
two arbitrators. If the two arbitrators fail to agree in the selection of a
third arbitrator within thirty days of their appointment, each of them shall
name two, of whom the other shall decline one and the decision shall be made by
drawing lots. All arbitrators shall be executive officers of insurance or
reinsurance companies or Underwriters at Lloyd's, London not under the control
of either party to this Agreement.
The arbitrators shall interpret this Agreement as an honorable engagement
and not as merely a legal obligation; they are relieved of all judicial
formalities and may abstain from following the strict rules of law, and they
shall make their award with a view to effecting the general purpose of this
Agreement in a reasonable manner rather than in accordance with a literal
interpretation of the language. Each party shall submit its case to its
arbitrator within thirty days of the appointment of the third arbitrator.
The decision in writing of any two arbitrators, when filed with the parties
hereto, shall be final and binding on both parties. Judgment may be entered upon
the final decision of the arbitrators in any court having jurisdiction. Each
party shall bear the expense of the third arbitrator and of the arbitration.
Said arbitration shall take place in the city in which the Company's head office
is located unless some other place is mutually agreed upon by the Company and
the Reinsurer.
ARTICLE XXIII -- INSOLVENCY
In the event of the insolvency of the Company, this reinsurance shall be
payable directly to the Company, or to its liquidator, receiver, conservator or
statutory successor immediately upon demand, with reasonable provision for
verification, on the basis of the liability of the Company without diminution
because of the insolvency of the Company or because the liquidator, receiver,
conservator or statutory successor of the Company has failed to pay all or a
portion of any claim. It is agreed, however, that the liquidator, receiver,
conservator or statutory successor of the Company shall give written notice to
the Reinsurer of the pendency of a claim against the Company indicating the
policy or bond reinsured which claim would involve a possible liability on the
part of the Reinsurer within a reasonable time after such claim is filed in the
conservation or liquidation proceeding or in the receivership, and that during
the pendency of such claim the Reinsurer may investigate such claim and
interpose, at its own expense, in the proceeding where such claim is to be
adjudicated any defense or defenses that it may deem available to the Company or
its liquidator, receiver, conservator or statutory successor. The expense thus
incurred by the Reinsurer shall be chargeable, subject to the approval of the
court, against the Company as part of the expense of conservation or liquidation
to the extent of a pro rata share of the benefit which may accrue to the Company
solely as a result of the defense undertaken by the Reinsurer.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate this 22nd day of May, 1995.
GENERAL REINSURANCE CORPORATION
/s/ M. L.
--------------------------------------
M. L.
Vice President
Attest: /s/ KATHY MITAS
---------------------------------
Kathy Mitas
this 25th day of May, 1995.
ZENITH INSURANCE COMPANY
/s/ JOHN J. TICKNER
--------------------------------------
John J. Tickner
Attest: /s/ RUTH FULGIUN
---------------------------------
Ruth Fulgiun
and this 25th day of May, 1995.
ZNAT INSURANCE COMPANY
/s/ JOHN J. TICKNER
--------------------------------------
John J. Tickner
Attest: /s/ RUTH FULGIUN
---------------------------------
Ruth Fulgiun
and this 25th day of May, 1995.
ZENITH STAR INSURANCE COMPANY
/s/ JOHN J. TICKNER
--------------------------------------
John J. Tickner
Attest: /s/ RUTH FULGIUN
---------------------------------
Ruth Fulgiun
and this 25th day of May, 1995.
CALFARM INSURANCE COMPANY
/s/ JOHN J. TICKNER
--------------------------------------
John J. Tickner
Attest: /s/ RUTH FULGIUN
---------------------------------
Ruth Fulgiun
8
<PAGE>
ENDORSEMENT NO. 1
ATTACHED TO AND MADE A PART OF
AGREEMENT OF REINSURANCE
NO. 8051
BETWEEN
GENERAL REINSURANCE CORPORATION
AND
ZENITH INSURANCE COMPANY
ZNAT INSURANCE COMPANY
ZENITH STAR INSURANCE COMPANY
CALFARM INSURANCE COMPANY
IT IS MUTUALLY AGREED that, as respects new and renewal policies of the
Company becoming effective at and after 12:01 A.M., January 1, 1996, and
policies of the Company in force at 12:01 A.M., January 1, 1996, the first
sentence of ARTICLE XII -- PREMIUM is amended to read as follows:
"The premium to be paid for this reinsurance shall be calculated by applying
a rate of 1.30% to the Company's gross net earned premium income on business the
subject matter of this Agreement during the currency of this Agreement."
IN WITNESS WHEREOF, the parties hereto have caused this Endorsement to be
executed in duplicate this 18th day of January, 1996.
GENERAL REINSURANCE CORPORATION
/s/ ANTHONY J. ANASTANIO
--------------------------------------
Anthony J. Anastanio
Vice President
Attest: /s/ KATHY MITAS
---------------------------------
Kathy Mitas
this 23rd day of January, 1996.
ZENITH INSURANCE COMPANY
/s/ JOHN J. TICKNER
--------------------------------------
John J. Tickner
Attest: /s/ RUTH FULGIUN
---------------------------------
Ruth Fulgiun
and this 23rd day of January, 1996.
ZNAT INSURANCE COMPANY
/s/ JOHN J. TICKNER
--------------------------------------
John J. Tickner
Attest: /s/ RUTH FULGIUN
---------------------------------
Ruth Fulgiun
and this 23rd day of January, 1996.
9
<PAGE>
ZENITH STAR INSURANCE COMPANY
/s/ JOHN J. TICKNER
--------------------------------------
John J. Tickner
Attest: /s/ RUTH FULGIUN
---------------------------------
Ruth Fulgiun
and this 23rd day of January, 1996.
CALFARM INSURANCE COMPANY
/s/ JOHN J. TICKNER
--------------------------------------
John J. Tickner
Attest: /s/ RUTH FULGIUN
---------------------------------
Ruth Fulgiun
10
<PAGE>
EXHIBIT 11
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
A) Net income.................................................. $ 6,600,000 $ 37,900,000 $ 53,200,000
-------------- -------------- --------------
-------------- -------------- --------------
Number of shares used in calculating primary
earnings per share:
Weighted average outstanding shares during
the period............................................... 18,273,000 18,906,000 18,998,000
Additional common shares issuable under
employee stock options using the treasury
stock method (Note 1):................................... 91,000 184,000 299,000
-------------- -------------- --------------
B) Average outstanding shares.................................. 18,364,000 19,090,000 19,297,000
-------------- -------------- --------------
-------------- -------------- --------------
Primary earnings per share
(A)/(B).................................................... $ 0.36 $ 1.99 $ 2.76
-------------- -------------- --------------
-------------- -------------- --------------
Number of shares used in calculating fully diluted
earnings per share:
Weighted average outstanding shares during
the period............................................... 18,273,000 18,906,000 18,998,000
Additional common shares issuable under
employee stock options using the treasury stock method
(Note 2):................................................ 106,000 191,000 326,000
-------------- -------------- --------------
C) Average outstanding shares.................................. 18,379,000 19,097,000 19,324,000
-------------- -------------- --------------
-------------- -------------- --------------
Fully diluted earnings per share
(A)/(C).................................................... $ 0.36 $ 1.98 $ 2.75
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
- ------------------------
(1) Based of the average quarterly market price of each period.
(2) Based on the higher of the average market price at the end of each period.
<PAGE>
PROPERTY-CASUALTY COMBINED RATIO
- --------------------------------------------------------------------------------
[CHART]
The information in the following table provides estimates of Zenith's
incurred
losses by accident year, evaluated in the year they were incurred and as they
were subsequently evaluated in succeeding years.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Incurred losses and loss adjustment expense
Years in which reported at end of year (dollars in thousands)
losses were ----------------------------------------------------------------------
incurred 1990 1991 1992 1993 1994 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Prior to 1990 $1,680,414 $1,669,574 $1,675,392 $1,681,907 $1,682,631 $1,683,210
1990 278,636 290,904 301,869 306,829 307,053 307,705
Cumulative 1,959,050 1,960,478 1,977,261 1,988,736 1,989,684 1,990,915
1991 296,825 300,070 306,399 305,882 307,563
Cumulative 2,257,303 2,277,331 2,295,135 2,295,566 2,298,478
1992 305,525 296,873 298,906 294,691
Cumulative 2,582,856 2,592,008 2,594,472 2,593,169
1993 297,652 285,544 275,591
Cumulative 2,889,660 2,880,016 2,868,760
1994 303,749 312,953
Cumulative 3,183,765 3,181,713
1995 327,503
Ratios:
1990 67.23% 70.19% 72.83% 74.03% 74.08% 74.24%
1991 70.61 71.39 72.89 72.77 73.17
1992 71.71 69.67 70.15 69.16
1993 66.20 63.51 61.29
1994 68.87 70.95
1995 74.67
- ---------------------------------------------------------------------------------------------
</TABLE>
This analysis displays the accident year incurred losses and loss adjustment
expense development on a statutory basis for accident years 1990-1995 for all
property-casualty business. The total cost for all claims occurring within each
annual period is shown first at the end of that year and then annually
thereafter. The total cost includes both payments made and the estimate of
future payments as of each year-end. Past development may not be an accurate
indicator of future development since trends and conditions change. Incurred
losses and loss ratios prior to 1995 have been restated to include health
insurance.
CALFARM
TheZenith 9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Overview
Zenith's principal source of consolidated earnings is the income from
operations of its property-casualty insurance businesses. Property-casualty
operations are comprised of: Workers' Compensation (46% of 1995 consolidated net
premiums earned); Other Property-Casualty, principally automobile, homeowners,
farmowners and commercial coverages and health insurance (44% of 1995
consolidated net premiums earned); and Reinsurance (10% of 1995 consolidated net
premiums earned). Results of such operations for the three years ended December
31, 1995 are set forth in the table on page 29. Historically, Zenith's Workers'
Compensation operation has been focused almost entirely in California. In each
of the three years ended December 31, 1995 an increasing volume of business has
been generated outside of California. Substantially all of Zenith's Other
Property-Casualty business is written in California. Reinsurance business
assumed by Zenith provides reinsurance coverage for world-wide exposures with a
particular emphasis on catastrophe losses and large property risks. Property
insurance and reinsurance coverages expose Zenith to the risk of significant
loss in the event of major adverse natural phenomena, known in the insurance
industry as catastrophes. These catastrophes may cause significant
contemporaneous financial statement losses since catastrophe losses may not be
accrued in advance of the event. Zenith also conducts real estate operations
through Perma-Bilt, a Nevada Corporation ("Perma-Bilt"), a wholly-owned
subsidiary that develops land and constructs private residences for sale in Las
Vegas, Nevada.
In 1995, Zenith sold 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
previously written by CalFarm Life. The results of operations and net assets of
CalFarm Life's life and annuity business are included as discontinued operations
and results of the health insurance operation are included in restated Other
Property-Casualty results in the accompanying consolidated financial statements.
Net income in 1995 includes a loss of $19.5 million associated with the sale of
CalFarm Life.
The table below sets forth the components of net income for the three years
ended December 31, 1995:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(Dollars in thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income, after tax $ 30,690 $ 26,995 $ 26,888
Realized gains on investments, after tax 2,354 929 9,443
- -------------------------------------------------------------------------------------------------
Sub-total 33,044 27,924 36,331
- -------------------------------------------------------------------------------------------------
Property-casualty underwriting, after tax:
Income (loss) excluding catastrophes (226) 15,652 8,801
Catastrophe losses (8,710) (9,945) (1,365)
- -------------------------------------------------------------------------------------------------
Property-casualty underwriting income (loss) (8,936) 5,707 7,436
- -------------------------------------------------------------------------------------------------
Income from real estate operations, after tax 1,349 1,423
Interest expense, after tax (4,524) (3,859) (4,328)
Parent net expenses, after tax (1,211) (2,638) (2,176)
Other items, after tax:
Lawsuit settlement 1,241 4,914
Income (loss) from discontinued life and annuity operations (13,122) 8,102 11,023
- -------------------------------------------------------------------------------------------------
Net income $ 6,600 $ 37,900 $ 53,200
- -------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
Property-Casualty Insurance Operations
Premiums earned and underwriting results of Zenith's property-casualty
subsidiaries were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
(Dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums earned
Workers' Compensation $203,252 $216,030 $244,661
Other Property-Casualty 192,276 186,661 179,314
Reinsurance 41,985 36,138 23,295
- ----------------------------------------------------------------------------------
Total $437,513 $438,829 $447,270
- ----------------------------------------------------------------------------------
Underwriting income (loss) before taxes
Workers' Compensation $(14,548) $ 12,151 $ 11,618
Other Property-Casualty (12,007) (6,966) (5,474)
Reinsurance 12,955 4,322 5,337
- ----------------------------------------------------------------------------------
Total $(13,600) $ 9,507 $ 11,481
- ----------------------------------------------------------------------------------
</TABLE>
Our key operating goal is to achieve a combined ratio of 100%. The combined
ratio, expressed as a percentage, is the key measure of underwriting
profitability traditionally used in the property-casualty insurance business. It
is the sum of underwriting expenses, net incurred losses, loss adjustment
expenses and policyholders' dividends, expressed as a percentage of net premiums
earned. Combined ratios were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Combined loss and expense ratios
Workers' Compensation
Losses 48.8% 32.3% 38.9%
Loss adjustment expenses 26.8% 27.6% 28.5%
Underwriting expenses 28.8% 26.4% 21.7%
Dividends to policyholders 2.8% 8.1% 6.2%
- -----------------------------------------------------------------------------------------------
Combined ratio 107.2% 94.4% 95.3%
- -----------------------------------------------------------------------------------------------
Other Property-Casualty
Losses and loss adjustment expenses 77.9% 74.4% 71.4%
Underwriting expenses 28.3% 29.3% 31.7%
- -----------------------------------------------------------------------------------------------
Combined ratio 106.2% 103.7% 103.1%
- -----------------------------------------------------------------------------------------------
Reinsurance
Losses and loss adjustment expenses 52.6% 70.7% 58.7%
Underwriting expenses 16.5% 17.3% 18.4%
- -----------------------------------------------------------------------------------------------
Combined ratio 69.1% 88.0% 77.1%
- -----------------------------------------------------------------------------------------------
Total combined ratio 103.1% 97.8% 97.4%
- -----------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
The profitability of property-casualty insurance underwriting operations is
dependent upon, principally, the adequacy of rates charged to the insured for
insurance protection, the frequency and severity of claims, the ability to
accurately estimate and accrue reported and unreported losses in the correct
period, the level of dividends paid to policyholders, and the ability to service
claims, maintain policies and acquire business efficiently.
The amount by which losses, measured subsequently by reference to payments
and additional estimates, differ from those originally reported for a period is
known as development. This is favorable when losses ultimately settle for less
than the amount reserved or subsequent estimates indicate a basis for reducing
reserves on open claims. The following shows the one-year loss reserve
development for losses and loss expenses for the three main lines of
property-casualty business:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Workers' Other
(Dollars in thousands) Compensation Property-Casualty Reinsurance Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One-year loss
development in:
1995 $ (517) $ 1,337 $ (2,955) $ (2,135)
1994 (12,944) 4,051 (827) (9,720)
1993 4,704 4,657 (290) 9,071
Favorable development is shown in brackets.
- --------------------------------------------------------------------------------
</TABLE>
The exposure of the insurance industry to losses arising out of the cost of
pollution damage has been the focus of attention of a number of interested
parties in recent years. Zenith's potential exposure to losses arising out of
pollution clean-up costs began in 1985 when it commenced the writing of
liability coverage under Farmowners' and small commercial policies through
CalFarm Insurance and through its reinsurance operation. These policies written
or reinsured since 1985 by Zenith's subsidiaries contain exclusion clauses for
pollution-related losses and such losses are thereby substantially excluded from
all such coverage written by Zenith's subsidiaries. While Zenith has from time
to time received claims for damages resulting from pollution, Zenith believes
that many of these claims will be excluded from coverage and that these claims
will not have a material adverse effect on Zenith's financial condition.
Some of the factors that continue to impact the environment in which Zenith
operates include: an uncertain political and regulatory environment, both state
and federal; the uncertain outlook for economic growth in parts of California;
the expansion of Zenith's Workers' Compensation business outside of California;
a highly competitive insurance industry; and the changing environment for
controlling medical, legal and rehabilitation costs, as well as fraud and abuse.
Although management is currently unable to predict the effect of any of the
foregoing, these trends and uncertainties could have a material effect on
Zenith's future operations and financial condition.
Workers' Compensation
Underwriting results in the Workers' Compensation operation deteriorated
significantly in 1995 compared to 1994 and 1993. During 1995, 1994 and 1993,
approximately 78%, 89% and 97%, respectively, of earned premiums were
attributable to Zenith's California Workers' Compensation operations. Premium
rate decreases of 7.0% at July 16, 1993, 12.7% at January 1, 1994 and 16.0% at
October 1, 1994 applicable through December 31, 1994, in the California minimum
statutory rates impacted earned premiums in 1994 and 1995. Effective January 1,
1995, the minimum rate law was repealed and insurers were allowed to charge
their own rates for workers' compensation coverage in California. The number of
Zenith's policies in force in California was relatively unchanged during 1995
using actuarially-determined rates which were substantially similar to those in
effect at the end of 1994, although premiums earned in California declined by
17% in 1995 compared to 1994. Due to the decline in premium revenue, the
inability to reduce operating costs proportionately, and additional operating
costs associated with a new computer system, underwriting results in the
Workers' Compensation operation declined by $26.7 million in 1995 compared to
1994. Notwithstanding the decline in underwriting income, the loss ratio of the
Workers' Compensation operation remained low in 1995 and was in line with both
the expectations used in establishing rates for 1995 and Zenith's historical
experience. The outlook for future profitability in the Workers' Compensation
operation is dependent upon a continuation of such historically low loss ratios
and the ability to reduce operating expenses in proportion to reduced premium
income.
Underwriting results in California in 1993 and 1994 benefited from favorable
loss experience attributable, in part, to reform
30
<PAGE>
legislation enacted in 1993 and to private initiatives undertaken by Zenith and
others to combat fraud and abuse in the California workers' compensation system.
Premium revenues and underwriting results in 1993 and 1994 also benefited from
Zenith's ability to selectively underwrite policies at rates above the statutory
minimum rates.
Zenith's non-California Workers' Compensation operations include Texas,
Arkansas, Illinois and Utah. Expansion of Workers' Compensation operations
outside of California will continue in 1996. National results for workers'
compensation insurers in recent years have been favorable by recent historic
standards and Zenith's non-California underwriting results in 1995 were more
favorable than its California results. However, increased competition,
nationally, is expected to follow from these favorable trends and management
intends to progress cautiously with its national expansion. Zenith's goal is to
become a specialist, risk-oriented national workers' compensation insurer.
Zenith is continuing to develop integrated workers' compensation, health and
disability insurance products in alliances with selected health insurers, health
maintenance organizations and UNUM Corporation, the nation's largest disability
insurance company. In addition to enhancing the marketability of its workers'
compensation policies, Zenith also expects to derive the benefit of applying
managed care techniques to the medical component of workers' compensation
claims. At this time, it is too early for management to predict the likely
outcome of these initiatives on the future results of its operations.
Other Property-Casualty
Results for the Other Property-Casualty operation in 1994 and 1993 have been
restated to include group health insurance, previously written by CalFarm Life,
which was sold in 1995. Health insurance premiums were $34.1 million, $36.9
million and $41.4 million in 1995, 1994 and 1993, respectively.
Underwriting results were impacted adversely by catastrophe losses as
follows: in 1995, losses of $10.7 million were incurred in conjunction with
California storm damage; in 1994, losses of $3.2 million were sustained from
claims arising out of the Northridge earthquake; and in 1993, the brush fires in
Southern California caused losses of $1.6 million.
Premiums earned increased in 1995 and 1994 compared to 1993 due primarily to
new business and rate increases for Farmowners' and Homeowners' policies. Rate
increases are subject to prior approval by the California Department of
Insurance ("the Department"). Management is unable to predict whether requests
for future rate increases, if any, will be granted by the Department, but
failure by the Department to act upon such requests would adversely affect the
adequacy of such rates and the profitability of operations in the lines of
business so affected.
CalFarm is required to participate in involuntary market plans, including
the California Automobile Assigned Risk Plan ("CAARP"), the Commercial
Automobile Insurance Procedure ("CAIP") and the California Fair Plan. CAARP,
CAIP and the California Fair Plan are organizations that were established by
statute in California but are serviced by the insurance industry. These
organizations provide private passenger automobile coverage for bodily injury
and property damage, commercial automobile coverage and property coverage to
risks that would not otherwise be accepted in the ordinary course of business by
private insurance carriers. The California Legislature and the California
Insurance Commissioner continue to debate the need to expand insurance
coverages, including earthquake, for these organizations. Participation in these
organizations by private carriers in California is mandatory. CAARP, CAIP and
the California Fair Plan together result in additional involuntary assumptions
of insurance premiums and losses which resulted in underwriting losses before
taxes of approximately $1.8 million in 1994 and $1.6 million in 1993 and which
were break-even in 1995.
Reinsurance
Zenith's assumed reinsurance operation emphasizes the reinsurance of
accumulated losses from catastrophes and the reinsurance of large property
risks. Because of the severity of losses, culminating with Hurricane "Andrew" in
1992, rates for such reinsurance increased significantly in 1993. Zenith's
premium revenue from reinsurance increased in 1994 with an increase in the
number of treaties in which it participated and in 1995, Zenith increased its
premium revenues with increased participation in some casualty-oriented
treaties.
31
<PAGE>
Underwriting results were favorable during the last three years even though
losses were incurred in 1995 of approximately $2.5 million principally
attributable to Hurricane "Marilyn" and in 1994 $9.3 million of losses were
incurred attributable to the Northridge earthquake of January 1994.
The outlook for profitability in the Reinsurance operation is dependent
upon, among other things, the level of rates for property and catastrophe
reinsurance and the frequency and severity of world-wide property losses. Zenith
has observed decreases in catastrophe reinsurance rates for 1996 and, as a
result, premium income in 1996 may be reduced compared to 1995.
Investments
At December 31, 1995, approximately 90% of Zenith's consolidated portfolio
of fixed maturity investments were classified as Available-for-Sale under the
provisions of Statement of Financial Accounting Standards No. 115 -- Accounting
for Certain Investments in Debt and Equity Securities. In 1995, Zenith
reclassified certain investments previously classified as "Held-to-Maturity" --
See Note 2 to the Consolidated Financial Statements. The unrealized appreciation
or depreciation on investments which are classified as Available-for-Sale is
recorded as a separate component of stockholders' equity. The effect on
consolidated stockholders' equity of the increase in the value of fixed
maturities classified as Available-for-Sale in 1995 compared to 1994 was an
increase of $53.4 million, net of deferred taxes. Any future changes in interest
rates will impact stockholders' equity through changes in the values of fixed
maturity investments which are classified as Available-for-Sale.
Zenith's principal investment goal is to maintain safety and liquidity,
enhance principal values and achieve increased rates of return consistent with
regulatory constraints. The allocation amongst various types of securities is
adjusted from time to time based on market conditions, credit conditions, tax
policy, fluctuations in interest rates and other factors.
The change in the carrying value of Zenith's consolidated investment
portfolio in 1995 was as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Carrying value at beginning of year $ 709,030
Purchases at cost 366,230
Maturities and exchanges of investments (24,151)
Proceeds from sales of investments:
Available-for-sale $(293,024)
Trading portfolio (2,240)
Other investments (5,086)
---------
Total proceeds from disposal of investments (300,350)
Realized gains from maturities and exchanges of investments:
Available-for-sale 134
Realized gains from sales of investments:
Available-for-sale 2,557
Trading portfolio 1,039
Other investments 23
Realized losses from writedowns of investments (132)
---------
Total net realized gains on investments 3,621
Unrealized gains on investments 42,099
Increase in short-term investments 38,522
Net amortization of bonds and preferred stocks and other changes 213
- ------------------------------------------------------------------------------------------------
Carrying value at end of year $ 835,214
- ------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
At December 31, 1995, and December 31, 1994, Zenith's consolidated
investment portfolio emphasized high-quality, taxable bonds and short-term
investments. Bonds constituted 72% and 74%, and short-term investments
constituted 16% and 14%, of the consolidated carrying value of Zenith's
consolidated investment portfolio at December 31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, 96% and 98% of the consolidated carrying values
of investments in bonds were rated investment grade.
Investment income during the years ended December 31, was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------
(Dollars in
thousands) 1995 1994 1993
- --------------------------------------------------
<S> <C> <C> <C>
Before tax $ 46,150 $ 40,068 $ 39,309
After tax 30,690 26,995 26,888
- --------------------------------------------------
</TABLE>
The yields on invested assets vary with the general level of interest rates,
the average life of invested assets and the amount of funds available for
investment, and for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------
1995 1994 1993
- --------------------------------------------------
<S> <C> <C> <C>
Before tax 6.0% 5.2% 5.4%
After tax 4.0% 3.5% 3.7%
- --------------------------------------------------
</TABLE>
Real Estate
Zenith recognized revenue of $31.7 million and $30.2 million in 1995 and
1994, respectively, related to its real estate operations which commenced in
1993. Income from real estate operations before taxes was $2.1 million and $2.2
million in 1995 and 1994, respectively. Construction in progress, including
undeveloped land, was $25.5 million at December 31, 1995 compared to $19.9
million at December 31, 1994.
Liquidity and Inflation
Zenith's property-casualty insurance subsidiaries create liquidity because
insurance premiums are generally collected prior to disbursements for claims and
benefits. These net cash flows, as set forth on page 43 in the Consolidated
Financial Statements, are invested as described in "Investments" above. Net cash
flows from continuing operations were $9.6 million, $15.9 million and $42.5
million, for 1995, 1994 and 1993, respectively.
Zenith's principal liquidity requirements in the long-term and the
short-term are the funds needed to pay its expenses, service its outstanding
debt, pay any cash dividends which may be declared to its stockholders and fund
the land acquisitions of its real estate subsidiary, Perma-Bilt. To meet these
requirements, Zenith has been principally dependent upon its lines of credit of
up to $50.0 million, all of which was available at December 31, 1995, and
dividends from Zenith Insurance. In 1995, Zenith sold CalFarm Life and at
year-end had cash and short-term investments amounting to $80 million. In the
opinion of management, Zenith's sources of liquidity are sufficient to fund its
short-term and long-term requirements for liquidity.
Zenith's insurance subsidiaries are subject to insurance regulations which
restrict their ability to distribute dividends. Such dividend capabilities are
set forth in Note 10 to the Consolidated Financial Statements. Such restrictions
have not had, and under current regulations are not expected to have, a material
adverse impact on Zenith. Zenith received dividends from its subsidiaries
amounting to $10.5 million in 1995, $15.0 million in 1994 and $25.0 million in
1993. Maximum dividend capability, without prior approval of the Department, of
Zenith's subsidiaries in 1996 is $22.3 million. Risk-based capital guidelines
issued by the National Association of Insurance Commissioners in 1994 for
property-casualty companies are not expected to have any material adverse
consequences for Zenith's insurance subsidiaries.
Perma-Bilt maintains certain bank credit facilities to provide financing for
its development and construction of private residences for sale. At December 31,
1995, maximum permitted borrowing under the facilities was $20.6 million, with a
balance outstanding of $8.9 million.
Workers' compensation insurers are required to have securities on deposit
for the protection of policyholders in accordance with various states'
regulations. At December 31, 1995, investments carried at their fair value of
$310.1 million were on deposit to comply with such regulations.
At December 31, 1995, Zenith was authorized to purchase up to 420,000 shares
of Zenith common stock pursuant to a resolution from its Board of Directors to
purchase up to 1,000,000 such shares under a share repurchase program. These
purchases, which are made at
33
<PAGE>
prevailing market prices, are discretionary and can be adequately funded from
Zenith's existing sources of liquidity.
Inflation rates impact the financial statements and operating results in
several areas. Fluctuations in inflation rates impact the market value of the
investment portfolio and yields on new investments. Inflation also impacts the
portion of the loss reserves that relates to hospital and medical expenses and
property claims and loss adjustment expenses, but not the portion of loss
reserves that relates to workers' compensation indemnity payments for lost wages
which are fixed by statute. Adjustments for inflationary impacts are implicitly
included as part of Zenith's subsidiaries' continuous review of property-
casualty reserve estimates. Actuarial account of increased costs is considered
in setting adequate rates, and this is particularly important in the health
insurance area where hospital and medical inflation rates have exceeded general
inflation rates. Workers' compensation premium income is determined primarily by
applying a rate to payrolls, and as inflation increases, average wage rates are
generally adjusted, resulting in decreases in premium rates. Operating expenses,
including payrolls, are impacted to a certain degree by the inflation rate.
Social inflation affects the loss reserves for other property-casualty
liability claims for which settlements are determined in court proceedings.
Recent Developments in FASB Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("SFAS No. 121"). SFAS No. 121 requires a review of the carrying amounts of
long-lived assets and certain identifiable intangibles for possible impairment.
If it is determined that the carrying amount of an asset is not recoverable, the
impairment loss must be recognized. The accounting standard is effective for
fiscal years beginning after December 15, 1995 and Zenith has not yet quantified
the impact, if any, of SFAS No. 121.
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 it will implement SFAS No.
123.
34
<PAGE>
FINANCIAL RECORD
- --------------------------------------------------------------------------------
CALFARM
TheZenith
<PAGE>
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Zenith National Insurance Corp. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, Note 1995 1994
<S> <C> <C> <C>
- -----------------------------------------------------------------
(DOLLARS AND SHARES IN THOUSANDS,
EXCEPT PER SHARE DATA)
REVENUES 1
Property-casualty insurance
operations
Premiums earned $ 437,513 $ 438,829
Investment income 46,150 40,068
Realized gains on investments 3,621 1,428
Real estate operations 31,736 30,220
Income from legal settlement 1,910
- -----------------------------------------------------------------
TOTAL REVENUE 1 519,020 512,455
- -----------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
AFTER TAX AND
BEFORE REALIZED GAINS 1, 2 17,368 27,628
Per share 1, 2 .95 1.45
- -----------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
AFTER TAX 10 19,722 29,798
Per share 10 1.08 1.56
- -----------------------------------------------------------------
COMPONENTS OF NET INCOME 1
Underwriting income (loss) 3, 4
Excluding catastrophe losses (226) 15,652
Including catastrophe losses (8,936) 5,707
Net investment income 30,690 26,995
Realized gains on investments 5 2,354 929
Real estate operations 1,349 1,423
Parent operations (5,735) (5,256)
Income (loss) from discontinued
life and annuity operations 10 (13,122) 8,102
Cumulative effect of change in
accounting and extraordinary
items 6, 7
- -----------------------------------------------------------------
NET INCOME 6,600 37,900
Per share .36 1.99
- -----------------------------------------------------------------
CASH DIVIDENDS PER SHARE TO COMMON
STOCKHOLDERS 1.00 1.00
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 18,364 19,090
- -----------------------------------------------------------------
FINANCIAL CONDITION 1
Total assets 1,115,433 1,093,675
Investments 835,214 709,030
Property-casualty unpaid claims 8 517,552 510,406
Senior notes and bank debt 83,135 76,582
Total stockholders' equity 330,432 309,860
Stockholders' equity per share 18.58 16.35
Stockholders' equity per share,
excluding effect of SFAS No. 115 9 18.18 18.79
Return on average equity 2.0% 11.7%
- -----------------------------------------------------------------
PROPERTY-CASUALTY INSURANCE
STATISTICS (GAAP) 1
Paid loss and loss expense ratio 74.3% 69.6%
Loss and loss expense ratio 74.4% 66.9%
Underwriting expense ratio 27.4% 26.9%
Policyholder dividends ratio 1.3% 4.0%
Combined ratio before Proposition
103 rollback refund 103.1% 97.8%
Combined ratio after Proposition
103 rollback refund 3 103.1% 97.8%
Net premiums earned-to-surplus
ratio 1.4 1.7
Loss and loss expense
reserves-to-surplus ratio (net
of reinsurance) 1.5 1.7
- -----------------------------------------------------------------
</TABLE>
36
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
(DOLLARS AND SHARES IN THOUSANDS,
EXCEPT PER SHARE DATA)
REVENUES
Property-casualty insurance
operations
Premiums earned $ 447,270 $ 421,557 $419,202
Investment income 39,309 45,478 48,675
Realized gains on investments 14,272 9,977 10,948
Real estate operations
Income from legal settlement 7,561
- ----------------------------------------------------------------------------------------------------------
TOTAL REVENUE 508,412 477,012 478,825
- ----------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
AFTER TAX AND
BEFORE REALIZED GAINS 27,820 13,204 28,064
Per share 1.44 .70 1.48
- ----------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
AFTER TAX 42,177 20,749 38,973
Per share 2.19 1.10 2.06
- ----------------------------------------------------------------------------------------------------------
COMPONENTS OF NET INCOME
Underwriting income (loss)
Excluding catastrophe losses 8,801 (14,061) 3,408
Including catastrophe losses 7,436 (23,961) (3,522)
Net investment income 26,888 32,953 37,306
Realized gains on investments 9,443 8,792 8,309
Real estate operations
Parent operations (1,590) (6,399) (5,720)
Income (loss) from discontinued
life and annuity operations 11,023 7,951 6,928
Cumulative effect of change in
accounting and extraordinary
items 9,364 2,600
- ----------------------------------------------------------------------------------------------------------
NET INCOME 53,200 28,700 45,901
Per share 2.76 1.52 2.42
- ----------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PER SHARE TO COMMON
STOCKHOLDERS 1.00 1.00 1.00
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 19,297 18,918 18,981
- ----------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION
Total assets 1,125,211 1,060,545 938,694
Investments 754,107 713,579 651,123
Property-casualty unpaid claims 519,418 504,902 475,657
Senior notes and bank debt 73,989 73,868 49,799
Total stockholders' equity 349,465 301,598 281,234
Stockholders' equity per share 18.55 16.03 14.93
Stockholders' equity per share,
excluding effect of SFAS No. 115 17.90 16.03 14.93
Return on average equity 16.3% 9.7% 17.3%
- ----------------------------------------------------------------------------------------------------------
PROPERTY-CASUALTY INSURANCE
STATISTICS (GAAP)
Paid loss and loss expense ratio 67.9% 71.4% 65.1%
Loss and loss expense ratio 68.5% 77.1% 71.0%
Underwriting expense ratio 25.5% 26.8% 29.0%
Policyholder dividends ratio 3.4% 0.7% 1.9%
Combined ratio before Proposition
103 rollback refund 97.4% 104.6% 101.9%
Combined ratio after Proposition
103 rollback refund 97.4% 108.4% 101.9%
Net premiums earned-to-surplus
ratio 1.6 1.7 1.7
Loss and loss expense
reserves-to-surplus ratio (net
of reinsurance) 1.7 1.9 1.8
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) All restated for health insurance included in property-casualty operations.
(2) Excludes extraordinary items and cumulative effect of accounting change.
Excludes $1,241,000, or $.06 per share, in 1994 and $4,914,000, or $.26 per
share, in 1993 for the effect of legal settlement. In 1992, also excludes
$10,611,000, or $.56 per share, for the effect of Proposition 103 rollback
refund, after taxes.
(3) Includes Proposition 103 rollback refund of $16,078,000, net of
reinsurance, before tax or $10,611,000 ($.56 per share) after tax in 1992.
(4) After tax benefit for "fresh start" of $531,000 ($.03 per share) in 1991.
(5) Taxes on realized gains were reduced in 1992 and 1993 for the tax benefit
associated with capital losses carried forward from 1990.
(6) Debt redemption costs of $1,355,000, net of $698,000 of tax benefit, (or
$.07 per share) were recognized as an extraordinary item in 1992. The tax
benefit of $2,600,000 (or $.14 per share) associated with capital losses carried
forward was recognized as an extraordinary item in 1991.
(7) Net income in 1992 includes an increase of $10,719,000 for the cumulative
effect of adoption of SFAS No. 109, Accounting for Income Taxes.
(8) Prior year amounts have been restated to reflect the accounting changes
prescribed by Statement of Financial Accounting Standards No. 113, Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts
which was adopted at December 31, 1992.
(9) Effective December 31, 1993, Zenith adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities (SFAS No. 115), under which the unrealized appreciation or
depreciation, net of deferred taxes, on debt securities classified as
available-for-sale is recorded in stockholders' equity.
(10) In 1995, Zenith sold CalFarm Life (see Note 14 to the Consolidated
Financial Statements).
37
<PAGE>
PROPERTY-CASUALTY LOSS DEVELOPMENT
- --------------------------------------------------------------------------------
Zenith National Insurance Corp. and Subsidiaries
The table that follows shows analysis of development of loss and loss
adjustment expense liabilities as originally estimated on a GAAP basis at
December 31 of each year presented. The accounting policies used to estimate
these liabilities are described in Note 1 to the Consolidated Financial
Statements. Amounts represent all property-casualty operations. Information for
1994 and prior years has been restated to include the health insurance business
previously written by CalFarm Life Insurance Company.
Analysis Of Loss And Loss Adjustment Expense Liability Development
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 1994
<S> <C> <C>
- -------------------------------------------------------
(DOLLARS IN THOUSANDS)
LIABILITY FOR UNPAID LOSS AND LOSS
ADJUSTMENT EXPENSES, NET OF
REINSURANCE $463,123 $462,710
- -------------------------------------------------------
PAID NET OF REINSURANCE
(CUMULATIVE) AS OF:
One year later 175,488
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
- -------------------------------------------------------
LIABILITY NET OF REINSURANCE
RE-ESTIMATED AS OF:
One year later 460,575
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
- -------------------------------------------------------
FAVORABLE (DEFICIENT) DEVELOPMENT $ 2,135
- -------------------------------------------------------
NET LIABILITY -- DECEMBER 31, $463,123 $462,710
Reinsurance recoverables 54,429 47,696
- -------------------------------------------------------
GROSS LIABILITY -- DECEMBER 31, $517,552 510,406
Re-estimated liability, net of
reinsurance 460,575
Re-estimated reinsurance
recoverables 44,019
- -------------------------------------------------------
Re-estimated liability, gross 504,594
- -------------------------------------------------------
FAVORABLE (DEFICIENT) DEVELOPMENT,
GROSS $ 5,812
- -------------------------------------------------------
</TABLE>
The analysis above presents the development of Zenith's balance sheet
liabilities for 1985 through 1995. The first line in the table shows the
liability for loss and loss adjustment expense as estimated at the end of each
calendar year. The first section shows the actual payments of losses and
expenses that relate to each year end liability as they are paid during
subsequent annual periods. The second section includes revised estimates of the
original unpaid amounts, net of reinsurance, including the subsequent payments.
The next line shows the favorable or deficient developments of the original
estimates for each year through 1995, net of reinsurance. The liability at the
end of each year includes an estimate of the amount yet unpaid and still due at
the subsequent re-evaluation date for all previously estimated liabilities. For
example, the liability at the end of 1994 includes an estimate of the amount
still due on the 1993 and prior liabilities.
Since conditions and trends that have affected loss and loss adjustment
expense development in the past may not occur in the future in exactly the same
manner, if at all, future results may not be reliably predicted by extrapolation
of the data presented.
38
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989 1988 1987 1986 1985
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
LIABILITY FOR UNPAID LOSS AND LOSS
ADJUSTMENT EXPENSES, NET OF
REINSURANCE $474,499 $471,832 $447,702 $424,373 $386,445 $347,888 $293,981 $223,011 $159,857
- -----------------------------------------------------------------------------------------------------------------------------
PAID NET OF REINSURANCE
(CUMULATIVE) AS OF:
One year later 173,699 184,498 184,593 162,642 129,605 118,332 105,939 89,361 77,099
Two years later 272,221 292,914 291,228 264,904 205,132 179,241 159,746 134,848 113,478
Three years later 355,710 352,208 323,685 258,632 216,321 189,980 162,555 133,906
Four years later 390,459 357,233 289,963 245,629 207,890 178,111 145,562
Five years later 380,524 309,524 263,971 225,849 187,558 152,405
Six years later 323,041 275,983 237,474 199,609 157,266
Seven years later 284,877 245,429 207,163 161,253
Eight years later 251,801 212,854 164,713
Nine years later 217,881 166,887
Ten years later 169,152
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITY NET OF REINSURANCE
RE-ESTIMATED AS OF:
One year later 464,779 480,903 467,636 427,458 381,096 341,679 293,526 219,734 160,401
Two years later 453,497 483,334 485,399 442,332 371,272 332,541 290,002 225,541 163,110
Three years later 482,019 485,816 453,802 374,455 327,961 289,074 227,251 167,165
Four years later 488,723 454,744 380,983 325,457 285,801 228,382 170,538
Five years later 455,971 381,703 328,415 280,860 227,972 170,464
Six years later 382,280 328,640 281,385 229,472 171,059
Seven years later 329,058 282,498 231,909 172,968
Eight years later 282,882 234,455 175,382
Nine years later 235,045 178,785
Ten years later 180,185
- -----------------------------------------------------------------------------------------------------------------------------
FAVORABLE (DEFICIENT) DEVELOPMENT $ 21,002 $(10,187) $(41,021) $(31,598) $ 4,165 $ 18,830 $ 11,099 $(12,034) $(20,328)
- -----------------------------------------------------------------------------------------------------------------------------
NET LIABILITY -- DECEMBER 31, $474,499 $471,832
Reinsurance recoverables 44,919 33,070
- -------------------------------------------------------
GROSS LIABILITY -- DECEMBER 31, 519,418 504,902
Re-estimated liability, net of
reinsurance 453,497 482,019
Re-estimated reinsurance
recoverables 49,291 66,659
- -------------------------------------------------------
Re-estimated liability, gross 502,788 548,678
- -------------------------------------------------------
FAVORABLE (DEFICIENT) DEVELOPMENT,
GROSS $ 16,630 $(43,776)
- -------------------------------------------------------
</TABLE>
39
<PAGE>
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Zenith National Insurance Corp. and Subsidiaries
- --------------------------------------------------------------------------------------------------------------
DECEMBER 31, Note 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS
Investments
Fixed maturities:
At amortized cost (fair value $57,816) $ 56,674
At fair value (cost $555,922, 1995 and $573,694, 1994) 566,826 $ 546,120
Floating rate preferred stocks, at fair value (cost $14,614, 1995 and $19,618,
1994) 13,588 18,506
Convertible and non-redeemable preferred stocks, at fair value (cost $250, 1995
and $8,684, 1994) 281 8,153
Common stocks, at fair value (cost $18,937, 1995 and $19,628, 1994) 22,656 19,355
Short-term investments (at cost, which approximates market) 137,083 97,400
Other investments 38,106 19,496
- --------------------------------------------------------------------------------------------------------------
Total investments 1, 2 835,214 709,030
Cash 6,919 5,358
Accrued investment income 8,810 8,665
Premiums receivable, less allowance for doubtful accounts of $612 in 1995
and $912 in 1994 70,155 66,912
Receivable from reinsurers and prepaid reinsurance premiums 64,781 58,613
Deferred policy acquisition costs 20,339 18,506
Properties and equipment, less accumulated depreciation 3 48,702 48,581
Federal income taxes 6 14,609 31,270
Purchased intangibles and other assets 1 5,974 7,550
Excess of cost over net assets acquired 1 2,009 2,009
Other assets 1 37,921 32,809
Net assets of discontinued operations 14 104,372
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,115,433 $1,093,675
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
40
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, Note 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(DOLLARS AND SHARES IN THOUSANDS)
LIABILITIES
Policy liabilities and accruals
Unpaid losses and loss expenses 13 $ 517,552 $ 510,406
Unearned premiums 119,591 121,825
Policyholders' dividends accrued 12,100 20,522
Other policyholder funds 15,491 14,605
Reserves on loss portfolio transfers 9,073 9,972
Payable to banks 4 8,903 2,471
Senior notes payable, less unamortized issue costs
of $768, 1995 and $889, 1994 5 74,232 74,111
Other liabilities 28,059 29,903
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 785,001 783,815
- -----------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities 8
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 24,310, outstanding 17,784
1995; issued 24,034, outstanding 18,950, 1994 9 24,310 24,034
Additional paid-in capital 256,083 251,363
Retained earnings 155,634 167,025
Net unrealized appreciation (depreciation) on investments, net of $4,752 deferred tax
expense in 1995 and $3,969 deferred tax benefit in 1994 1, 2, 14 8,825 (47,460)
- -----------------------------------------------------------------------------------------------------------------------------
444,852 394,962
Less treasury stock at cost (6,526 shares, 1995 and 5,084 shares, 1994) 9 (114,420) (85,102)
- -----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 330,432 309,860
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,115,433 $ 1,093,675
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Zenith National Insurance Corp. and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, Note 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED REVENUES:
Premium earned 7 $ 437,513 $ 438,829 $ 447,270
Net investment income 2 46,150 40,068 39,309
Realized gains on investments 2 3,621 1,428 14,272
Real estate sales 31,736 30,220
Income from legal settlement 8 1,910 7,561
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenues 519,020 512,455 508,412
- ---------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Losses and loss expenses incurred 7, 13 325,589 293,848 306,544
Policy acquisition costs 81,846 77,253 73,046
Other underwriting and operating expenses 39,882 44,868 44,503
Policyholders' dividends and participation 5,660 17,412 15,175
Real estate construction and operating costs 29,661 28,031
Interest expense 4, 5 6,960 5,937 6,658
- ---------------------------------------------------------------------------------------------------------------------------------
Total expenses 489,598 467,349 445,926
- ---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before federal income tax expense 29,422 45,106 62,486
Federal income tax expense 6 9,700 15,308 20,309
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 19,722 29,798 42,177
- ---------------------------------------------------------------------------------------------------------------------------------
Income from life and annuity operations of CalFarm Life (less income tax expense
(benefit) of $3,463, $4,363 and $(31)) 14 6,431 8,102 11,023
Loss on disposal of CalFarm Life, including income tax expense of $4,099 14 (19,553)
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (13,122) 8,102 11,023
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 6,600 $ 37,900 $ 53,200
- ---------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Income from continuing operations $ 1.08 $ 1.56 $ 2.19
Income (loss) from discontinued operations (.72) .43 .57
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ .36 $ 1.99 $ 2.76
- ---------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 18,364 19,090 19,297
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
42
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Zenith National Insurance Corp. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Premiums collected $ 457,907 $ 469,151 $ 482,350
Investment income received 45,606 37,819 42,044
Proceeds from sales of real estate 31,736 30,220
Losses and loss adjustment expenses paid (325,200) (305,142) (303,808)
Underwriting and other operating expenses paid (120,533) (111,275) (104,425)
Real estate construction costs paid (34,307) (36,133) (7,285)
Reinsurance premiums paid (21,586) (21,995) (20,874)
Dividends paid to policyholders, including Proposition 103 refund in 1993 (13,744) (18,171) (31,419)
Interest paid (8,390) (6,949) (6,914)
Income taxes paid (4,578) (25,953) (7,156)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash flows from continuing operating activities, excluding cash from trading portfolio 6,911 11,572 42,513
Net proceeds from sales of trading portfolio investments 2,677 4,363
- ------------------------------------------------------------------------------------------------------------------------------
Net cash flows from continuing operating activities including cash from trading portfolio 9,588 15,935 42,513
Net cash from discontinued operating activities, including cash from trading portfolio 12,655 118,644 13,333
- ------------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 22,243 134,579 55,846
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments:
Debt securities Held-to-Maturity (141,531)
Debt and equity securities Available-for-Sale (210,600) (478,179)
Other debt and equity securities and other investments (13,885) (5,571) (374,302)
Proceeds from maturities and exchanges of investments:
Debt securities Held-to-Maturity 4,284
Debt and equity securities Available-for-Sale 16,869 30,556
Other debt and equity securities and other investments 2,085 1,839 64,291
Proceeds from sales of investments:
Debt and equity securities Available-for-Sale 293,024 333,949
Other debt and equity securities and other investments 5,086 238 413,177
Proceeds from the sale of CalFarm Life Insurance Company 120,000
Net change in short-term investments (38,522) 123,055 (121,272)
Other (6,289) (7,301) 3,299
Net cash used in investing activities of discontinued operations (30,093) (144,314) (73,198)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash flows from investing activities 428 (145,728) (88,005)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash advanced from bank line of credit 43,400 2,100 1,000
Cash repaid on bank line of credit (43,400) (2,100) (1,000)
Cash advanced from bank construction loans 30,657 11,316
Cash repaid on bank construction loans (24,225) (8,845)
Cash dividends paid to common stockholders (18,273) (18,894) (19,018)
Proceeds from exercise of stock options 4,405 2,093 6,261
Purchase of treasury shares (29,318) (346) (7,367)
Net cash provided by financing activities of discontinued operations 15,644 24,375 58,234
- ------------------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities (21,110) 9,699 38,110
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 1,561 (1,450) 5,951
Cash at beginning of year 5,358 6,808 857
- ------------------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 6,919 $ 5,358 $ 6,808
- ------------------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF INCOME FROM CONTINUING OPERATIONS TO NET CASH FLOWS
FROM OPERATING ACTIVITIES:
Income from continuing operations $ 19,722 $ 29,798 $ 42,177
Adjustments to reconcile income from continuing operations to net cash flows from operating
activities:
Depreciation and amortization 4,975 4,001 6,158
Realized gains on investments (3,621) (1,428) (14,272)
Net cash from trading portfolio 2,677 4,363
Net cash flow from discontinued operations 12,655 118,644 13,333
Decrease (increase) in:
Premiums receivable (3,243) (1,518) 1,657
Receivable from reinsurers (6,168) (1,980) (9,769)
Deferred policy acquisition costs (1,833) (1,490) (1,289)
Real estate construction in progress (5,596) (12,671) (7,215)
Increase (decrease) in:
Unpaid losses and loss expenses 7,416 (8,906) 16,009
Unearned premiums 2,234 9,962 10,107
Policyholders' dividends accrued and accumulated (8,422) (80) (16,009)
Federal income taxes 4,946 (10,644) 13,154
Other (3,499) 6,528 1,805
- ------------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities $ 22,243 $ 134,579 $ 55,846
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
43
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Zenith National Insurance Corp. and Subsidiaries
- --------------------------------------------------------------------------------------------------------------------
PREFERRED COMMON
THREE YEARS ENDED DECEMBER 31, 1995 NOTE STOCK $1 PAR STOCK $1 PAR
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE AT JANUARY 1, 1993 $ 23,562
Net income for 1993
Net unrealized appreciation on investments,
net of deferred tax expense of $543 1, 2
Cumulative effect of change in accounting for investments, net of
deferred tax expense of $6,550 1
Exercise of 348,000 stock options 9 348
Tax benefit on options exercised in 1993
Purchase of 320,000 treasury shares at cost
Cash dividends declared to common stockholders ($1.00 per share,
paid quarterly)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 23,910
Net income for 1994
Net unrealized (depreciation) on investments,
net of deferred tax benefit of $11,062 2
Exercise of 124,000 stock options 9 124
Tax benefit on options exercised in 1994
Purchase of 15,000 treasury shares at cost
Cash dividends declared to common stockholders ($1.00 per share,
paid quarterly)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 24,034
Net income for 1995
Net unrealized appreciation on investments,
net of deferred tax expense of $8,721 2, 14
Exercise of 276,000 stock options 9 276
Tax benefit on options exercised in 1995
Purchase of 1,442,000 treasury shares at cost
Cash dividends declared to common stockholders ($1.00 per share,
paid quarterly)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 $ 24,310
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
44
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
NET UNREALIZED
APPRECIATION
ADDITIONAL RETAINED (DEPRECIATION) ON TREASURY
PAID-IN CAPITAL EARNINGS INVESTMENTS STOCK TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE AT JANUARY 1, 1993 $ 242,226 $ 113,867 $ (668) $ (77,389) $ 301,598
Net income for 1993 53,200 53,200
Net unrealized appreciation on investments, net of
deferred tax expense of $543 1,681 1,681
Cumulative effect of change in accounting for
investments, net of deferred tax expense of
$6,550 12,163 12,163
Exercise of 348,000 stock options 5,913 6,261
Tax benefit on options exercised in 1993 953 953
Purchase of 320,000 treasury shares at cost (7,367) (7,367)
Cash dividends declared to common stockholders
($1.00 per share, paid quarterly) (19,024) (19,024)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 249,092 148,043 13,176 (84,756) 349,465
Net income for 1994 37,900 37,900
Net unrealized (depreciation) on investments,
net of deferred tax benefit of $11,062 (60,636) (60,636)
Exercise of 124,000 stock options 1,969 2,093
Tax benefit on options exercised in 1994 302 302
Purchase of 15,000 treasury shares at cost (346) (346)
Cash dividends declared to common stockholders
($1.00 per share, paid quarterly) (18,918) (18,918)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 251,363 167,025 (47,460) (85,102) 309,860
Net income for 1995 6,600 6,600
Net unrealized appreciation on investments,
net of deferred tax expense of $8,721 56,285 56,285
Exercise of 276,000 stock options 4,129 4,405
Tax benefit on options exercised in 1995 591 591
Purchase of 1,442,000 treasury shares at cost (29,318) (29,318)
Cash dividends declared to common stockholders
($1.00 per share, paid quarterly) (17,991) (17,991)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 $ 256,083 $ 155,634 $ 8,825 $ (114,420) $ 330,432
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Zenith National Insurance Corp. and Subsidiaries
Note 1
Summary of Accounting Policies, Operations and Principles of Consolidation
Zenith National Insurance Corp. ("Zenith") is engaged through its
wholly-owned property-casualty insurance subsidiaries in the business of writing
workers' compensation insurance, approximately 78% of which is in California;
reinsurance, principally of world-wide property and catastrophe risks; and auto,
homeowners, farmowners, health and other coverages primarily in the rural areas
of California. Zenith's subsidiaries sell insurance and reinsurance through
agents and brokers and not directly to consumers. The market for insurance
products and services is highly competitive. Zenith also conducts real estate
operations, developing private residences for sale in Las Vegas, Nevada, through
its wholly-owned subsidiary, Perma-Bilt, a Nevada Corporation ("Perma-Bilt"). In
1995, Zenith sold its wholly-owned life insurance subsidiary, CalFarm Life
Insurance Company (See Note 14).
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") and include Zenith and its subsidiaries.
GAAP requires the use of assumptions and estimates in reporting certain assets
and liabilities and related disclosures and actual results could differ from
those estimates. All significant intercompany transactions and balances have
been eliminated in consolidation.
Fair Values of Financial Instruments
Financial instruments are contractual obligations that result in the
delivery of cash or an ownership interest in an entity. Disclosures, included in
these notes, regarding the fair value of financial instruments have been derived
using external market sources, estimates using present value or other valuation
techniques.
The following summarizes the carrying amounts and fair value of Zenith's
financial instruments as of December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1995 1994
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
(Dollars in thousands) NOTE AMOUNT VALUE AMOUNT VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments: 2
Trading securities $ 10,944 $ 10,944 $ 12,555 $ 12,555
Other investments 824,270 825,412 696,475 696,475
---------- ---------- ---------- ----------
835,214 836,356 709,030 709,030
LIABILITIES:
Payable to banks 4 8,903 8,903 2,471 2,471
Senior notes payable 5 74,232 85,853 74,111 75,848
- --------------------------------------------------------------------------------------
</TABLE>
Investments
Zenith accounts for its investment portfolio in accordance with the
provisions of Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities ("SFAS No. 115") which
requires investments in debt and equity securities to be identified in three
categories as follows: held-to-maturity -- those securities, which by their
terms must be redeemed by the issuing company and that the enterprise has the
positive intent and ability to hold to maturity, are reported at amortized cost;
trading securities -- those securities that are held principally for the purpose
of selling them in the near term and are reported at fair value with unrealized
gains and losses included in earnings; available-for-sale -- those securities
not classified as either held-to-maturity or trading securities and are reported
at fair value with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity. Zenith adopted SFAS
No. 115 effective December 31, 1993.
When, in the opinion of management, a decline in market value of investments
is considered to be "other than temporary," such investments are written down to
their net realizable value. The determination of "other than temporary"
includes, in addition to consideration of other relevant factors, a presumption
that if the market value is below cost by a significant amount for a period of
time, a writedown is necessary.
The market value of investments was supplied by the Merrill Lynch pricing
service,
46
<PAGE>
with the exception of 37 items whose values were obtained from other brokers
making a market in the investment, the Bloomberg financial news service, and
analytical pricing methods for issues for which there is no market. These market
values are considered fair value.
The cost of securities sold is determined by the "identified cost" method.
Short-term investments include certificates of deposit, commercial paper and
U.S. Treasury securities with maturities of less than one year at the time of
purchase. For these short-term investments, the carrying amount is a reasonable
estimate of fair value.
Recognition of Property-Casualty
Revenue and Expense
Property-casualty premiums are earned on a pro rata basis over the terms of
the policies. Premiums applicable to the unexpired terms of policies in force
are recorded as unearned premiums. Premiums earned reflect an estimate for
earned but unbilled audit premiums. Workers' compensation insurance premiums are
based upon the payroll of the insured.
Policy acquisition costs, consisting of commissions, premium taxes and
certain other underwriting costs, are deferred and amortized as the related
premiums are earned.
Zenith's insurance subsidiaries make provision for the settlement of all
incurred claims, both reported and unreported. The liabilities for unpaid losses
and loss expenses are estimates for the eventual costs of claims incurred but
not settled, less estimates of salvage and subrogation. Estimates for reported
claims are primarily determined by evaluation of individual reported claims.
Estimates for claims incurred but not reported are based on experience with
respect to the probable number and nature of such claims. The methods for making
such estimates and for establishing the resulting liabilities are continually
reviewed and updated and any adjustments resulting therefrom are reflected in
earnings currently.
An estimated provision for workers' compensation policyholders' dividends is
accrued as the related premiums are earned. Such dividends do not become a fixed
liability unless and until declared by the respective Boards of Directors of
Zenith's insurance subsidiaries. Due to deregulation in California,
policyholders' dividends are anticipated not to be material in the foreseeable
future.
Property insurance and reinsurance coverages expose Zenith to the risk of
significant loss in the event of major adverse natural phenomena, known in the
insurance industry as catastrophes. These catastrophes may cause significant
contemporaneous financial statement losses since catastrophe losses may not be
accrued in advance of the event.
The concentration of Zenith's business in California makes the results of
operations highly dependent upon the California economy, social and cultural
trends in California, legislative and regulatory changes in California and
catastrophic events in California such as windstorms and the Northridge
earthquake. In addition, premium revenues for most property-casualty insurance
coverages written in California (except workers' compensation) are subject to
prior approval of rates by the California Department of Insurance.
Reinsurance
In accordance with general industry practices, Zenith's insurance
subsidiaries annually purchase reinsurance to protect themselves against
liabilities in excess of certain limits on insurance risks they have
underwritten. Such arrangements are known in the industry as "excess of loss"
protection. The purpose of such reinsurance is to protect Zenith from the impact
of large, unforeseen losses and such reinsurance reduces the magnitude of sudden
and unpredictable changes in net income and the capitalization of insurance
operations.
The ceding of reinsurance does not discharge the original insurer from
primary liability to its policyholder. Balances due from reinsurers on unpaid
losses, including an estimate of such recoverables related to reserves for
incurred but not reported losses, are reported as assets and are included in
receivables from reinsurers. Earned premiums are stated in the consolidated
financial statements after deduction of amounts ceded to reinsurers.
Approximately 69% of amounts recoverable from reinsurers at December 31, 1995
are attributable to reinsurance arrangements with one large United States
reinsurance company. No material amounts due from reinsurers have been written
off as uncollectible in the three years ended December 31, 1995.
47
<PAGE>
Real Estate Operations
Land, land development costs and construction costs, including costs of
acquisition and development, property taxes and related interest are
capitalized. Such costs, and an estimate of the costs to complete a project, are
recognized pro rata against sales of completed units. Such capitalized costs are
included in other assets.
Profitable real estate operations are dependent upon real estate values,
interest rates, construction costs, competition and management ability.
Properties and Equipment
Properties and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated principally on a straight-line basis using the
following useful lives: buildings, 10 to 40 years; furniture, fixture and
equipment, 3 to 10 years.
Expenditures for maintenance and repairs are charged to operations as
incurred. Additions and improvements to buildings and other fixed assets are
capitalized and depreciated. Upon disposition, the asset cost and related
depreciation are removed from the accounts and the resulting gain or loss is
included in income.
The cost of purchased software for internal use is capitalized and amortized
over the useful life of the software. The cost of internally-developed software
for internal use is expensed as incurred.
Purchased Intangibles and Other Assets
Purchased intangibles and other assets represent the total amount of the cost in
excess of net tangible assets acquired since 1970. This amount has been assigned
to various intangibles and other amortizable assets and the assigned values are
being amortized on a straight-line basis over 25 years. Amortization expense was
$487,000 in 1995, 1994 and 1993, and accumulated amortization was $5,756,000 at
December 31, 1995 and $5,269,000 at December 31, 1994.
Excess of Cost Over Net Assets Acquired
The excess of cost over net assets acquired of $2,009,000 represents the
unamortized excess of cost over underlying net tangible assets of companies
acquired prior to 1970, which is considered to have continuing value, and is not
being amortized.
Reclassifications and Restatements
Certain 1994 and 1993 amounts have been reclassified to conform to the 1995
presentation. Financial information with respect to Life and Annuity operations
has been restated as discontinued operations (see Note 14). Health insurance has
been reclassified to property-casualty operations.
Note 2
Investments
The amortized cost and fair values of investments held-to-maturity,
available-for-sale and trading securities were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
TYPE OF SECURITY
(Dollars in GROSS GROSS
thousands) AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1995 COST GAINS (LOSSES) VALUE
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY
Mortgage-backed $ 56,674 $ 1,142 $ 57,816
- -------------------------------------------------------------------------
Total, held-to-
maturity $ 56,674 $ 1,142 $ 57,816
- -------------------------------------------------------------------------
AVAILABLE-FOR-SALE
U.S. Treasuries $ 176,997 $ 641 $ (251) $ 177,387
Corporate debt 231,198 10,485 (126) 241,557
Mortgage-backed 117,876 427 (861) 117,442
Redeemable preferred
stocks 19,849 643 20,492
Equities 32,910 4,185 (1,566) 35,529
Short-term investments 137,083 137,083
- -------------------------------------------------------------------------
Total, available-
for-sale $ 715,913 $ 16,381 $ (2,804) $ 729,490
- -------------------------------------------------------------------------
TRADING
U.S. Treasuries $ 7,044 $ (17) $ 7,027
Corporate debt 2,958 (37) 2,921
Equities 891 $ 105 996
- -------------------------------------------------------------------------
Total, trading $ 10,893 $ 105 $ (54) $ 10,944
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TYPE OF SECURITY
(Dollars in GROSS GROSS
thousands) AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1994 COST GAINS (LOSSES) VALUE
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasuries $ 350,946 $ (14,817) $ 336,129
Corporate debt 139,811 $ 178 (5,769) 134,220
Mortgage-backed 52,825 (5,842) 46,983
Redeemable preferred
stocks 18,918 190 (703) 18,405
Equities 45,602 1,042 (2,802) 43,842
Short-term investments 97,400 97,400
- -------------------------------------------------------------------------
Total, available-
for-sale $ 705,502 $ 1,410 $ (29,933) $ 676,979
- -------------------------------------------------------------------------
TRADING
U.S. Treasuries $ 7,028 $ (262) $ 6,766
Corporate debt 4,166 (549) 3,617
Equities 2,328 $ 26 (182) 2,172
- -------------------------------------------------------------------------
Total, trading $ 13,522 $ 26 $ (993) $ 12,555
- -------------------------------------------------------------------------
</TABLE>
48
<PAGE>
In 1995, Zenith owned certain debt securities issued by 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 SFAS No. 115, would occur
with respect to Zenith's 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.
On December 28, 1995, under the guidance of FASB Special Report, A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities -- Questions and Answers, Zenith re-evaluated its
portfolio of held-to-maturity securities. As a result, Zenith reclassified
certain held-to-maturity securities, with an amortized cost of $76,029,000 and
an unrealized gain of $6,651,000 at the date of transfer, to available-for-sale.
Debt securities at December 31, 1995, are due as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------
(Dollars in thousands) AMORTIZED FAIR
DECEMBER 31, 1995 COST VALUE
- -----------------------------------------------------
<S> <C> <C>
HELD-TO-MATURITY:
Due after ten years $ 56,674 $ 57,816
- -----------------------------------------------------
Total $ 56,674 $ 57,816
- -----------------------------------------------------
AVAILABLE-FOR-SALE:
Due in one year or less $ 276,003 $ 276,535
Due after one year through
five years 150,447 154,416
Due after five years
through ten years 98,375 102,838
Due after ten years 158,178 160,172
- -----------------------------------------------------
Total $ 683,003 $ 693,961
- -----------------------------------------------------
</TABLE>
Fluctuating interest rates will impact stockholders' equity, profitability
and maturities of certain debt and preferred securities. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with
or without call or prepayment penalties. Mortgage-backed securities are shown as
being due at their average expected maturity dates. Redeemable preferred stocks
with sinking fund redemption periods are shown as being due at the mid-point of
the sinking fund period. During the past three years, Zenith has not incurred
any material losses due to the credit quality of its investments and has not
included in its financial statements any allowance for possible future losses.
The gross realized gains on sales of investments classified as
available-for-sale during 1995 and 1994 were $4,161,000 and $4,310,000,
respectively and the gross realized losses were $1,604,000 and $2,140,000,
respectively. Proceeds from sales of debt securities were $342,501,000 during
1993. Gross gains on such sales were $7,434,000 in 1993 and gross losses were
$281,000.
Investment income is summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1995 1994 1993
- ---------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities
Bonds $ 37,019 $ 29,391 $ 27,406
Redeemable
preferred stocks 1,143 2,199 3,205
Equity securities
Floating rate
preferred stocks 1,229 1,439 2,181
Convertible and
nonredeemable
preferred stocks 281 484 642
Common stocks 571 441 315
Short-term investments 6,555 6,931 7,155
Other 1,703 2,112 1,396
- ---------------------------------------------------------------
48,501 42,997 42,300
Less investment expenses 2,351 2,929 2,991
- ---------------------------------------------------------------
Net investment income $ 46,150 $ 40,068 $ 39,309
- ---------------------------------------------------------------
</TABLE>
Investments carried at their fair value of $310,107,000 at December 31, 1995
and $297,487,000 at December 31, 1994 were on deposit with regulatory
authorities in compliance with insurance company regulations.
At December 31, 1995, Zenith and its subsidiaries owned $3,739,000, at fair
value, of securities issued by Reliance Insurance Company, its parent and
affiliates. Reliance Insurance Company is a major stockholder of Zenith. At
December 31, 1995, Zenith and its subsidiaries owned $12,500,000, at fair value,
of securities in Delta Life Corporation. The Chairman, President and Chief
Executive Officer of Delta Life Corporation is also a Director of Zenith.
49
<PAGE>
NOTE 3
PROPERTIES AND EQUIPMENT
PROPERTIES AND EQUIPMENT CONSIST OF THE FOLLOWING:
<TABLE>
<CAPTION>
- ------------------------------------------------------
(Dollars in thousands)
DECEMBER 31, 1995 1994
- ------------------------------------------------------
<S> <C> <C>
Land $ 14,836 $ 14,836
Buildings 31,142 33,806
Furniture, fixtures and
equipment 26,218 35,088
- ------------------------------------------------------
72,196 83,730
Less accumulated depreciation 23,494 35,149
- ------------------------------------------------------
Total $ 48,702 $ 48,581
- ------------------------------------------------------
</TABLE>
Depreciation expense amounted to $4,949,000, $4,267,000 and $4,978,000 in
1995, 1994 and 1993, respectively.
Note 4
Payable to Banks
Zenith has lines of credit available of $50 million. As of December 31, 1995
and 1994, there were no outstanding balances on these unsecured lines of credit.
Interest on funds borrowed through one of these lines of credit is payable at
the bank's prime rate, less .55%, or a fixed rate chosen by Zenith, and at the
bank's prime rate, less .25%, or a fixed rate chosen by Zenith on the other line
of credit.
Under these agreements, certain restrictive covenants apply including the
maintenance of a specific level of net worth for Zenith and its insurance
subsidiaries.
The weighted average interest rate for 1995, 1994 and 1993 was 6.8%, 8.5%
and 5.5%, respectively. At December 31, 1995 and 1994 the bank's prime interest
rate was 8.5%.
Perma-Bilt has two construction loan agreements, each providing for a
subdivision lot development loan and a construction revolving line of credit
loan, bearing interest at prime plus 1.5% and prime plus 1.25%, respectively.
Each agreement pertains to a separate residential housing project and the
maximum that may be borrowed under the two agreements combined is $20,575,000.
At December 31, 1995, $8,903,000 was outstanding with respect to these loans.
The loans mature between January 1, 1997 and June 20, 1997. The carrying value
of these variable-rate loans approximates fair value at December 31, 1995.
Note 5
Senior Notes Payable
Zenith issued $75,000,000 of 9% Senior Notes due 2002 (the "9% Notes") at
par in May 1992. Interest on the notes is payable semi-annually. The notes are
general unsecured obligations of Zenith. Issue costs of $1,213,000 are being
amortized over the term of the notes and $121,000, $122,000 and $121,000 of such
costs were amortized during 1995, 1994 and 1993, respectively. Covenants
contained in the indenture include restrictions on the ability of Zenith and its
subsidiaries to incur secured debt and the right of holders of the 9% Notes to
require Zenith to repurchase the 9% Notes upon a decline in the rating of the 9%
Notes within ninety days after the occurrence of certain events. Those events
are: (a) a person or group becomes the beneficial owner of more than 50% of
Zenith common stock; (b) 10% or more of Zenith common stock is acquired by
Zenith within any 12-month period; or (c) the sum of the fair market value of
distributions (other than regular dividends or distributions of capital stock)
and the consideration for purchases of Zenith common stock by Zenith during a
12-month period is 30% or more of the fair market value of outstanding Zenith
common stock. The fair value at December 31, 1995 of the 9% Notes is $85,853,000
based on a price published by a rating agency.
Interest incurred on all borrowing is summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1995 1994 1993
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Interest capitalized for real estate
operations $1,572 $1,219 $ 407
Interest not related to real estate
operations 6,960 5,937 6,658
- ---------------------------------------------------------------------
Total interest incurred $8,532 $7,156 $7,065
- ---------------------------------------------------------------------
</TABLE>
Note 6
Federal Income Taxes
The components of the provision (benefit) for taxes on income from
continuing operations are:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------
<S> <C> <C> <C>
Current $ 5,947 $ 16,716 $ 8,092
Deferred 3,753 (1,408) 12,217
- -------------------------------------------------------------
Total federal income taxes $ 9,700 $ 15,308 $ 20,309
- -------------------------------------------------------------
</TABLE>
50
<PAGE>
The difference between the statutory federal income tax rate of 35% and
Zenith's effective tax rate on income from continuing operations, as reflected
in the financial statements, is explained as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax $10,298 $15,787 $21,870
Increase (reduction) in taxes:
Dividend received
deduction (710) (944) (1,332)
Other 112 465 (229)
- -------------------------------------------------------------------
Total federal income taxes $ 9,700 $15,308 $20,309
- -------------------------------------------------------------------
</TABLE>
Deferred taxes are provided based upon temporary differences between the tax
and book basis of assets and liabilities. The components of the net deferred tax
assets and liabilities were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1995 1994
(Dollars in thousands) DEFERRED TAX DEFERRED TAX
YEAR ENDED DECEMBER 31, ASSETS LIABILITIES ASSETS LIABILITIES
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Differences between the tax
basis and carrying value of
investments, principally
unrealized appreciation on
available-for-sale
investments $ 6,291 $ 10,081
Deferred policy acquisition
costs 7,119 $ 6,477
Purchased intangibles 5,372 3,731
Properties and equipment 2,224 2,592
Property-casualty loss
reserve discount $ 25,408 25,663
Limitation on deduction for
unearned premiums 7,921 7,775
Policyholders' dividends
accrued 4,235 7,183
Other 1,711 4,079 2,551 5,964
- -----------------------------------------------------------------------------
39,275 25,085 53,253 18,764
Valuation allowance (6,383)
- -----------------------------------------------------------------------------
Net deferred tax assets and
liabilities $ 14,190 $ 28,106
- -----------------------------------------------------------------------------
</TABLE>
Deferred tax assets attributable to loss reserves, unearned premiums and
accrued policyholder dividends are considered to be fully realizable because of
the historic profitability of Zenith's property-casualty operations.
Property-casualty loss reserves are not discounted for book purposes,
however the Tax Reform Act of 1986 requires property-casualty loss reserves to
be discounted for tax purposes.
Current taxes receivable (payable) and deferred taxes were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1995 1994
- ------------------------------------------------------------
<S> <C> <C>
Current taxes $ 419 $ 3,164
Deferred taxes 14,190 28,106
- ------------------------------------------------------------
Federal income taxes $ 14,609 $ 31,270
- ------------------------------------------------------------
</TABLE>
Zenith files a consolidated federal income tax return. Zenith's insurance
subsidiaries pay premium taxes on gross premiums written in lieu of state income
or franchise tax.
Note 7
Reinsurance
Reinsurance transactions reflected in the financial statements are as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
(Dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------
<S> <C> <C> <C>
Ceded reinsurance netted
against earned premiums
for the year $ 21,112 $ 21,521 $ 22,301
Ceded reinsurance netted
against property and
casualty losses and loss
adjustment expenses
incurred 15,532 17,133 38,716
Net assumed reinsurance
included in earned
premiums for the year 45,367 37,787 26,094
- -----------------------------------------------------------
</TABLE>
Zenith Insurance has an assumed reinsurance agreement with Reliance
Insurance Company, a major stockholder of Zenith. Three of Zenith's directors
are also directors of Reliance Insurance Company. Estimated costs paid to
Reliance relating to this arrangement amounted to $460,000, $370,000 and
$578,000 for 1995, 1994 and 1993, respectively. Zenith's reinsurance
arrangements provide protection against claims in excess of between $350,000 and
$700,000 per occurrence depending upon the type of coverage. Zenith's
catastrophe reinsurance provides protection against aggregate losses per event
on property and workers' compensation coverages with limits ranging from
$35,000,000 to $100,000,000. Assumed reinsurance business is not covered by such
catastrophe reinsurance. Credit quality of reinsurers may impact profitability
and stockholders' equity. No losses have been incurred from uncollectible
reinsurance during the past three years and no allowances are carried on the
financial statements for unrecoverable reinsurance.
Note 8
Commitments and Contingent Liabilities
Zenith and its subsidiaries lease space for some of its offices expiring
through 2002, equipment on leases expiring through 1998 and automobiles on two
through five-year leases. The minimum rentals on these operating leases as of
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(Dollars in thousands) EQUIPMENT
AND
YEAR AUTO FLEET OFFICES TOTAL
- -------------------------------------------------------------
<S> <C> <C> <C>
1996 $ 619 $ 2,858 $ 3,477
1997 308 2,054 2,362
1998 43 1,667 1,710
1999 1,535 1,535
2000 1,329 1,329
Thereafter 2,446 2,446
- -------------------------------------------------------------
Total $ 970 $ 11,889 $ 12,859
- -------------------------------------------------------------
</TABLE>
51
<PAGE>
Rental expenses for 1995, 1994 and 1993 amounted to $5,397,000, $5,033,000
and $5,124,000, respectively.
Zenith is a corporate underwriting member of Lloyd's and has committed funds
of $5 million to support the underwriting of a certain syndicate.
Zenith and its subsidiaries are involved in certain litigation. In the
opinion of management and legal counsel, such litigation is either without merit
or the ultimate liability, if any, will not have a material effect on the
consolidated financial condition of Zenith.
Contingencies Surrounding Estimates of
Liabilities for Unpaid 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 observed certain unusual claim reserving
trends and patterns in 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 $297,354,000 of
total reserves for unpaid losses and loss adjustment expenses of $517,552,000)
at December 31, 1995 included in these 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.
Resolution of Contingencies Surrounding
Certain Litigation
Other income of $1,910,000 and $7,561,000 was recognized in 1994 and 1993,
respectively, relating to the settlement in 1993 of litigation associated with
Zenith's write-down of non-investment grade securities in 1990.
Note 9
Common Stock
Under an employee non-qualified stock option plan adopted by the Board of
Directors in 1978, as amended, options are issued to officers and key employees
for the purchase of Zenith's common stock at 100% of the market price at the
date of grant. The options outstanding at December 31, 1995 expire five years
after the date of grant or three months after termination of employment. Zenith
makes no charges to earnings in connection with stock options.
Additional information with respect to stock options is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(SHARES AND TOTAL DOLLARS IN OPTION PRICE
THOUSANDS) NUMBER -------------------------
OPTIONS OF SHARES PER SHARE TOTAL
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31,
1993 1,304 $11.94-$28.19 $ 25,745
Granted 190 21.88- 25.06 4,464
Exercised 124 11.94- 19.09 2,093
Expired or cancelled 75 11.94- 23.25 1,415
- ----------------------------------------------------------------------
Outstanding at December 31,
1994 1,295 $11.94-$28.19 $ 26,701
Granted 509 20.94- 23.25 10,952
Exercised 276 11.94- 20.57 4,405
Expired or cancelled 394 17.13- 28.19 8,368
- ----------------------------------------------------------------------
Outstanding at December 31,
1995 1,134 $16.13-$28.19 $ 24,880
- ----------------------------------------------------------------------
</TABLE>
The 1,134,000 outstanding options are exercisable: 1996, 618,000; 1997,
238,000; 1998, 157,000 and 1999, 121,000.
At December 31, 1995, 1994 and 1993, respectively, 221,000, 336,000 and
454,000 shares were available to be granted. At December 31, 1995 and 1994,
respectively, 335,000 and 764,000 options could have been exercised. In 1993,
348,000 options were exercised for a total amount of $6,261,000 with an option
price of $11.94-$19.81 per share.
At December 31, 1995, Zenith had authority from its Board of Directors to
purchase 420,000 shares at prevailing market prices.
Note 10
Dividend Restrictions
State insurance regulations limit the maximum dividends that may be paid to
Zenith by its insurance company subsidiaries during any 12-month period without
prior regulatory approval. Stockholder's equity of Zenith's insurance
subsidiaries, in accordance with generally accepted accounting principles,
amounted to $313,592,000 as of December 31, 1995, of which $22,301,000 can be
paid in 1996 to Zenith in dividends without prior approval, leaving a restricted
balance of $291,291,000.
52
<PAGE>
Note 11
Statutory Financial Data
Capital stock and surplus and net income of Zenith's insurance subsidiaries
on a statutory basis as reported to regulatory authorities were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------
(Dollars in
thousands)
YEAR ENDED
DECEMBER 31, 1995 1994 1993
- -----------------------------------------------------
<S> <C> <C> <C>
Capital stock and
surplus $ 223,019 $ 230,040 $ 228,093
Net income 17,157 32,856 49,698
- -----------------------------------------------------
</TABLE>
The insurance business is subject to state-by-state regulation and
legislation focused on solvency, pricing, market conduct, claims practices,
underwriting, accounting, investment criteria and other areas. Such regulation
and legislation is constantly changing and compliance is essential and is an
inherent risk of the business.
Note 12
Unaudited Quarterly Financial Data
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
(Dollars in thousands
except per share data)
YEAR ENDED MARCH JUNE SEPTEMBER DECEMBER
DECEMBER 31, 1995 31 30 30 31
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premium earned $ 107,059 $ 106,439 $ 108,401 $ 115,614
Net investment
income 11,291 11,949 11,510 11,400
Realized gains on
investments 166 1,013 1,548 894
Real estate sales 8,820 11,273 8,859 2,784
Income from continuing
operations 4,358 7,511 6,000 1,853
Income from continuing
operations per share .23 .40 .34 .10
Net income (loss) 6,900 10,200 (11,800) 1,300
Net income (loss) per
share .36 .54 (.66) .07
- ------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
(Dollars in thousands
except per share data)
YEAR ENDED MARCH JUNE SEPTEMBER DECEMBER
DECEMBER 31, 1994 31 30 30 31
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premium earned $ 107,490 $ 109,927 $ 115,653 $ 105,759
Net investment
income 9,236 10,052 10,450 10,330
Realized gains
(losses) on
investments 1,789 290 (627) (24)
Real estate sales 8,773 7,079 14,368
Other income 1,760 71 79
Income from continuing
operations 6,614 9,026 8,104 6,054
Income from continuing
operations per share .35 .47 .42 .32
Net income 8,200 10,900 10,100 8,700
Net income per share .43 .57 .53 .46
- ------------------------------------------------------------------------
</TABLE>
Amounts for 1994 and the first two quarters of 1995 have been restated to
reflect the life and annuity operations of CalFarm Life Insurance Company as
discontinued operations.
Note 13
Loss and Loss Adjustment Expense Reserves
The following table represents a reconciliation of changes in liabilities
for unpaid property-casualty losses and loss adjustment expenses for the three
years ended December 31, 1995.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------
<S> <C> <C> <C>
Beginning of year, net of
reinsurance recoverable $ 462,710 $ 474,499 $ 471,832
Incurred claims:
Current year 327,724 303,568 297,473
Prior years (2,135) (9,720) 9,071
- --------------------------------------------------------------
Total incurred claims 325,589 293,848 306,544
- --------------------------------------------------------------
Payments:
Current year (149,688) (131,938) (119,379)
Prior years (175,488) (173,699) (184,498)
- --------------------------------------------------------------
Total payments (325,176) (305,637) (303,877)
- --------------------------------------------------------------
End of year, net of
reinsurance 463,123 462,710 474,499
Reinsurance recoverable on
unpaid losses 54,429 47,696 44,919
- --------------------------------------------------------------
End of year $ 517,552 $ 510,406 $ 519,418
- --------------------------------------------------------------
</TABLE>
Statutory reserves are not materially different from GAAP reserves, net of
reinsurance, presented above.
Note 14
Discontinued Operations
During the fourth quarter of 1995, Zenith completed the sale of its
wholly-owned subsidiary, CalFarm Life Insurance Company ("CalFarm Life"), to a
subsidiary of SunAmerica, Inc. for approximately $120 million in cash. The group
health insurance business of CalFarm Life was retained by Zenith. The sale
resulted in a loss of approximately $19.5 million, after tax, which was
recognized by Zenith principally in the third quarter of 1995. The life and
annuity operations of CalFarm Life are presented as discontinued operations and
prior-year financial statements have been restated. Assets and liabilities
attributable to discontinued operations at December 31, 1994 have been
reclassified as net assets of discontinued operations. The unrealized loss
associated with investments classified as available-for-sale in the life and
annuity operation at December 31, 1994 was $22,539,000 net of deferred taxes.
Group health insurance operations are included in the property-casualty business
segment.
Revenues for the discontinued operation were $88,610,000, $83,357,000 and
$82,489,000 for 1995, 1994 and 1993, respectively. After tax income for the
discontinued operation from the measurement date to the disposal date was
$3,960,000.
53
<PAGE>
Note 15
Segment Information
Zenith's operations are conducted through two business segments. These
segments and their respective operations are as follows:
Parent
Zenith is a holding company owning directly or indirectly all of the capital
stock of certain California insurance and insurance-related companies. In 1993,
Zenith commenced a real estate operation through a newly formed subsidiary,
Perma-Bilt.
Property-Casualty Operations
Zenith's property-casualty insurance operations offer multiple product line
direct insurance and reinsurance. Investments and related income of the
property-casualty insurance companies are available for payment of claims and
benefits and have not been identified with individual product lines.
The following table is a summary of results by major segments:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands except per share data)
YEAR ENDED DECEMBER 31 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PROPERTY-CASUALTY
Net written premiums $ 439,882 $ 448,640 $ 456,600
Net earned premiums 437,513 438,829 447,270
Investment income 45,931 39,611 38,817
Underwriting income (loss) (13,600) 9,507 11,481
Income from continuing operations after taxes and before
realized gains(1) 21,608 32,405 33,987
Income from continuing operations after taxes 23,934 33,327 42,848
Identifiable assets 1,005,133 961,212 972,739
- -----------------------------------------------------------------------------------------------------
PARENT
Real estate sales 31,736 30,220
Investment income 219 457 492
(Loss) from continuing operations after taxes and before
realized gains (1) (4,240) (3,536) (1,253)
(Loss) from continuing operations after taxes (4,212) (3,529) (671)
Identifiable assets 115,429 28,752 32,409
- -----------------------------------------------------------------------------------------------------
CONSOLIDATED TOTAL
Premium income and other policy charges 437,513 438,829 447,270
Real estate sales 31,736 30,220
Investment income 46,150 40,068 39,309
Underwriting income (loss) (13,600) 9,507 11,481
Income from continuing operations after taxes and before
realized gains(1)(2) 17,368 27,628 27,820
Income from continuing operations 19,722 29,798 42,177
Income (loss) from discontinued life and annuity
operations, net of tax (13,122) 8,102 11,023
Net income 6,600 37,900 53,200
Per share .36 1.99 2.76
Total assets(3) $ 1,115,433 $ 1,093,675 $ 1,125,211
- -----------------------------------------------------------------------------------------------------
(1) Realized gains on investments after taxes were as
follows:
1995 1994 1993
---------------------------------------
Property-Casualty $ 2,326 $ 922 $ 8,861
Parent 28 7 582
---------------------------------------
Consolidated Total $ 2,354 $ 929 $ 9,443
(2) Excludes $1,241,000 and $4,914,000 in 1994 and 1993, respectively, for effect of legal
settlement.
(3) Reflects elimination entry of $5,129,000, $661,000 and $4,547,000 in 1995, 1994 and 1993,
respectively and net assets of discontinued operations of $104,372,000 and $124,610,000 in 1994
and 1993, respectively.
</TABLE>
54
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
- --------------------------------------------------------------------------------
To the Stockholders and Board of Directors of Zenith National Insurance Corp.
We have audited the accompanying consolidated balance sheet of Zenith
National Insurance Corp. and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations, cash flows, and stockholders'
equity for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Zenith National
Insurance Corp. and subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for investments as of December 31, 1993.
Coopers & Lybrand L.L.P.
Los Angeles, California, February 14, 1996
55
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF ZENITH
Set forth below are the names of certain subsidiaries of Zenith. Certain
subsidiaries, which considered in the aggregate would not constitute a
significant subsidiary, are omitted from the listing below.
<TABLE>
<CAPTION>
JURISDICTION OF
NAME ORGANIZATION
- ---------------------------------------- ---------------------------
<S> <C>
Zenith Insurance Company California
CalFarm Insurance Company California
ZNAT Insurance Company California
CalFarm Insurance Agency California
Zenith Star Insurance Company Texas
Perma-Bilt, a Nevada Corporation Nevada
ZIC Lloyd's Underwriting Limited England
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 693,961
<DEBT-CARRYING-VALUE> 56,674
<DEBT-MARKET-VALUE> 57,816
<EQUITIES> 36,525
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 835,214
<CASH> 6,919
<RECOVER-REINSURE> 70,155
<DEFERRED-ACQUISITION> 20,339
<TOTAL-ASSETS> 1,115,433
<POLICY-LOSSES> 517,552
<UNEARNED-PREMIUMS> 119,591
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 15,491
<NOTES-PAYABLE> 83,135
0
0
<COMMON> 24,310
<OTHER-SE> 306,122
<TOTAL-LIABILITY-AND-EQUITY> 1,115,433
437,513
<INVESTMENT-INCOME> 46,150
<INVESTMENT-GAINS> 3,621
<OTHER-INCOME> 31,736
<BENEFITS> 325,589
<UNDERWRITING-AMORTIZATION> 81,846
<UNDERWRITING-OTHER> 39,882
<INCOME-PRETAX> 29,422
<INCOME-TAX> 9,700
<INCOME-CONTINUING> 19,722
<DISCONTINUED> (13,122)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,600
<EPS-PRIMARY> .36
<EPS-DILUTED> 0
<RESERVE-OPEN> 462,710
<PROVISION-CURRENT> 327,724
<PROVISION-PRIOR> (2,135)
<PAYMENTS-CURRENT> 149,688
<PAYMENTS-PRIOR> 175,488
<RESERVE-CLOSE> 463,123
<CUMULATIVE-DEFICIENCY> (2,135)
</TABLE>
