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THE ZENITH
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Form 10-K/A
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, 1996
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)
DELAWARE 95-2702776
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION
OR ORGANIZATION)
21255 CALIFA STREET, WOODLAND HILLS, 91367-5021
CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 713-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $1.00 Par Value New York Stock Exchange
(TITLE OF CLASS)
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
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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 26, 1997 was approximately
$257,651,000 (based on the closing sale price of such stock on such date).
At March 26, 1997, 17,681,444 shares of Common Stock were outstanding, net
of 6,842,690 shares of treasury stock.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Annual Report to Stockholders for fiscal year ended
December 31, 1996 -- Part I and Part II.
(2) Portions of the Proxy Statement in connection with the 1997 Annual
Meeting of Stockholders -- Part III.
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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, 1996 of Zenith's property-casualty operations was
100.3%. 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. On December 31, 1996, Zenith completed the acquisition of Associated
General Commerce Self-Insurers' Trust Fund ("AGC-SIF"), a Florida workers'
compensation self-insurers' fund by merging it with and into Zenith Insurance.
The 1996 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, 1996, Zenith and its subsidiaries had approximately 1,500
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:
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<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.
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<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.
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DESCRIPTION OF THE BUSINESS
Zenith and its subsidiaries conduct business principally in the property and
casualty insurance industry. Property-casualty operations comprise Workers'
Compensation (47% of 1996 consolidated net premiums earned); other
property-casualty, principally automobile, homeowners, farmowners, commercial
coverages and health insurance (45% of 1996 consolidated net premiums earned);
and reinsurance (8% of 1996 consolidated net premiums earned). Results of such
operations for the three years ended December 31, 1996 are set forth in the
table on page 22 of the 1996 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."
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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 16 -- "Segment
Information" on pages 50 and 51 of the 1996 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 by state and 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 1996 by
state are set forth in the table below:
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1996 PREMIUMS EARNED %
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California.................... $ 148,810,000 70.5%
Texas......................... 33,899,000 16.1
Arkansas...................... 9,480,000 4.5
Illinois...................... 9,045,000 4.3
Other......................... 9,682,000 4.6
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$ 210,916,000 100.0%
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According to A.M. Best, Zenith's 5 year loss ratio of 45.3% through 1995
(latest available statistics) was the lowest loss ratio of the top 50 insurers.
These statistics are attributed to Zenith's managed care efforts, return to work
strategies, safety and health, fraud and litigation efforts. During the past 10
years, the Zenith's workers' compensation combined ratio was 100.0%.
Zenith Insurance is licensed to conduct business in 39 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 1996 were more favorable than its California results.
However, increased competition, nationally, is expected to follow from these
favorable trends and management intends to proceed cautiously with its national
expansion.
On December 31, 1996, Zenith completed the acquisition of AGC-SIF. AGC-SIF's
1996 earned premium was approximately $43 million. Zenith anticipates that
non-California premium income will increase significantly in 1997 as a result of
this acquisition.
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. 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 to such improvements. Rates in California
were deregulated effective January 1, 1995. Insurance companies now file and use
their own, actuarially determined rates for workers' compensation insurance in
California. Zenith decreased its rates 2.5% on January 1, 1997 following an
increase of 8% on January 1, 1996. The 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,
the success of Zenith's geographic expansion outside of California
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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 focused on returning the workers' compensation operation to
profitability and achieving the overall goal of a combined ratio of 100%.
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 1996, and are likely to become relatively
insignificant in the future as an element in workers' compensation insurance in
California.
Zenith is continuing to market integrated workers' compensation, health and
disability insurance products ("24-Hour Coverage") through alliances with
selected health insurers, health maintenance organizations and UNUM Life
Insurance Company of America, one of the nation's largest disability insurance
companies. Beginning in the second quarter of 1997, Zenith plans to expand its
alliances to include United HealthCare of California, Inc. and MetraHealth Care
Plan. The policies are sold on an integrated basis in California and Arkansas
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, primarily in California. 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") which includes a preferred provider organization plan and a Medicare
supplement product. During the past 11 years, the combined ratio of Zenith's
Other Property-Casualty operation was 101.1%.
Automobile insurance (both commercial and personal) is the largest line of
CalFarm Insurance's business, representing 14% of Zenith's property and casualty
premiums written in 1996. CalFarm Insurance insured approximately 19,500
personal automobiles and 65,500 commercial and farm vehicles in 1996. Farmowners
business is the second largest line of CalFarm Insurance's business,
representing approximately 11% of Zenith's property and casualty premiums
written in 1996.
Zenith's Other Property-Casualty operations are subject to the regulatory
provisions of California Initiative Proposition 103 ("Proposition 103"). The
principal effects of Proposition 103 on Zenith's Other Property-Casualty
business are as follows: rates must be approved by the California 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
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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 California Insurance Commissioner. New
automobile rating factor regulations pertaining to the implementation of
Proposition 103 are expected to be implemented during 1997 which will further
limit the impact of territorial rating on automobile insurance rates.
The California Legislature passed legislation in September 1996 which
created the California Earthquake Authority ("CEA"). The CEA became operational
in December 1996 and is a privately financed, publicly managed state agency,
which will provide limited earthquake coverage throughout California.
Participation in the CEA is voluntary and Zenith has elected not to participate.
Zenith will continue to offer broader earthquake coverages than are available
through the CEA as long as private reinsurance is available and affordable.
Zenith can elect to participate in the CEA at a later date subject to meeting
the participation requirements at that time.
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 1997 and
premium income in 1997 may be reduced compared to 1996.
During the past 11 years, the combined ratio of Zenith's Reinsurance
operation was 96.8%
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 $6.4
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 developing, building and
selling private residences in Las Vegas, Nevada. In 1996, Perma-Bilt closed and
delivered 287 homes at an average selling price of $145,000, compared to 240
homes the prior year. Revenues in 1996 were $41,554,000 and pre-tax income was
$1,909,000 compared to sales of $31,736,000 and $2,075,000 of pre-tax income,
the previous year. Land presently owned at a cost of about $27,382,000 will
support the construction and sale of an estimated 1,561 homes over the
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next several years and possibly some commercial construction. 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.
Zenith and its subsidiaries are currently in the process of modifying or
replacing its computer systems for year 2000 compliance. Such activity is
expected to continue through 1999.
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 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 32 and
33, 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 49 of the 1996 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. 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 40 through 42 of the 1996 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 23 of the 1996 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, Pennsylvania, Utah, Illinois and
effective December 31, 1996, Orlando, Florida, 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 California. In addition to enhancing data processing, the new
system is designed, among other things, to
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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 and 1996, 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 $409,138,000 of total reserves for unpaid losses and loss adjustment expenses
of $620,078,000) at December 31, 1996 included in the 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
Other Property and Casualty loss reserves are paid, on the average, within
approximately 3.5 years.
Property insurance coverages and CalFarm Insurance'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." 1996 results
benefited from the absence of catastrophe losses. In 1995, CalFarm Insurance
sustained losses of $10,700,000 in conjunction with three major California
storms. In 1994, losses attributable to the Northridge earthquake were
$3,200,000, of which $800,000 was assessed by the California Fair Plan.
CalFarm Insurance maintains three 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 18% of its total
reserves, net of ceded reinsurance, for property and casualty unpaid losses and
loss adjustment expenses at December 31, 1996, 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".
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.
ENVIRONMENTAL AND ASBESTOS LOSSES
The exposure of the insurance industry to losses arising out of the cost of
environmental and asbestos damage has been the focus of attention of a number of
interested parties in recent years. The process of evaluating an insurance
company's exposure is subject to significant uncertainties.
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Among the complications are lack of historical data, long reporting delays,
uncertainty as to the number and identity of insureds with potential exposure
and unresolved legal issues regarding policy coverage. The legal issues
concerning the interpretations of various insurance policy provisions and
whether environmental and asbestos losses are or were ever intended to be
covered are complex. Courts have reached different and sometimes inconsistent
conclusions regarding such issues as: when the loss occurred and what policies
provide coverage, how policy limits are determined, how policy exclusions are
applied and interpreted, whether clean-up costs are covered as insured property
damage, and whether site assessment costs are either indemnity payments or
adjusting costs.
Zenith has exposure to asbestos losses in its Workers' Compensation
operation for medical, indemnity and loss adjustment expenses associated with
insureds' long-term exposure to asbestos or asbestos-contained materials. Most
of these claims date back to the 1970's and early 1980's and Zenith's exposure
is generally limited to a pro-rata share of the loss for the period of time
coverage was provided. Zenith also has potential exposure to environmental and
asbestos losses and loss adjustment expenses beginning in 1985 through its
Reinsurance operation and through CalFarm Insurance, which writes liability
coverage under farmowners' and small commercial policies, however such losses
are substantially excluded from all such coverage. The business reinsured by
Zenith contains exclusion clauses for environmental and asbestos losses, and in
1988 an absolute pollution exclusion was incorporated into CalFarm Insurance's
policy forms. All claims for damages resulting from environmental or asbestos
losses are identified and handled by Zenith's most experienced claims/legal
professionals. Environmental and asbestos losses have not been material and
Zenith believes that its reserves for environmental and asbestos losses are
appropriately established based on currently available facts, technology, laws
and regulations. However, due to the long-term nature of these claims, the
inconsistencies of court coverage decisions, plaintiff's expanded theories of
liability, the risks inherent in major litigation and other uncertainties, the
ultimate exposure from these claims may vary from the amounts currently
reserved.
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 26 and 27 of
Zenith's 1996 Annual Report to Stockholders which is hereby incorporated by
reference). At December 31, 1996 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 5.1 years at
December 31, 1996. Investment income by segment is set forth in Note 16 --
"Segment Information" on pages 50 and 51 of the 1996 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 91% of the investments in debt securities at December 31, 1996, as
available-for-sale. In 1996 stockholders' equity decreased by $9.1 million, net
of deferred taxes, as a result of changes in the fair values of such
investments.
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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
$24,642,000, $21,112,000 and $21,521,000 in 1996, 1995 and 1994, respectively,
or 5.4%, 4.9% and 4.9% of earned premiums in 1996, 1995 and 1994, respectively.
Reinsurance recoverable amounted to $93,651,000, $54,429,000 and $47,696,000 in
1996, 1995 and 1994, respectively, or 15.1%, 10.5% and 9.3% of gross reserves
for unpaid losses and loss adjustment expenses in 1996, 1995 and 1994,
respectively. Included in the December 31, 1996 balance is $37,261,000 of
reinsurance recoverable, including state disability trust funds, which is 36.3%
of the gross reserve for loss and loss adjustment expenses acquired from AGC-SIF
on December 31, 1996. Each insurance subsidiary maintains separate reinsurance
arrangements, which during 1996 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 UNUM Life Insurance Company and Connecticut
General Life. Zenith's Reinsurance division did not purchase any reinsurance
protection on its assumed business in the three years ended December 31, 1996.
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.
Prior to Zenith's acquisition of AGC-SIF, AGC-SIF purchased aggregate excess
and specific excess reinsurance for protection against losses in excess of
stated retentions in each year of coverage. Such retention for 1996 was $750,000
per occurrence and the maximum coverage was the statutory limit. Such coverage
for 1996 was placed with National Union Fire Insurance Company. Beginning in
1997, reinsurance for business written in Florida will be combined with Zenith's
existing reinsurance arrangements.
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 $45,000,000, excess of a retention of
$5,000,000, for which the principal reinsurers are General Reinsurance
Corporation and Cat. Ltd. The catastrophe reinsurance was increased to 95% of
$55,000,000, excess of a retention of $5,000,000 effective January 1, 1997.
CalFarm Insurance also maintains reinsurance agreements with Employers
Reinsurance Corporation and Duncanson & Holt for excess risks on its accident
and health contracts. Employers
9
<PAGE>
Reinsurance Corporation provides coverage for CalFarm's Farm Bureau health
insurance program 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 other group health policy
claims that exceed $100,000 in each calendar year.
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 1,300 independent licensed insurance agents and brokers throughout
California, Texas, Florida and other areas in which Zenith conducts workers'
compensation operations. Certain CalFarm Insurance 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 180 agents who sell insurance products
exclusively for CalFarm Insurance, primarily in rural and suburban areas. These
agents operate out of 112 offices throughout the State of California, including
30 offices shared with the Farm Bureau. In addition, 193 independent agents
market CalFarm Insurance products and 511 independent agents market the CalFarm
Insurance health 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. CalFarm Insurance uses earthquake modeling
software to monitor earthquake exposures related to its homeowners and
farmowners business. Catastrophe reinsurance is used to protect CalFarm
Insurance from excessive catastrophe losses -- see "Reinsurance Ceded." 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 71,000 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 71,000 member families, approximately 61% are insured by CalFarm
Insurance. The business of CalFarm Insurance is closely tied to the California
farm economy, however approximately 42% of Farm Bureau
10
<PAGE>
members (and CalFarm Insurance insureds) are non-farmers and approximately 60%
of CalFarm Insurance premium volume is generated by non-farm business. Total
written premium in CalFarm Insurance attributable to sales that were sponsored
by the Farm Bureau constituted approximately 31%, 30% and 32% of Zenith's total
written premium for the years 1996, 1995 and 1994, respectively. The agreement
of CalFarm 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 1996, 1995 and 1994.
CalFarm Insurance continues to be the largest writer of farmowners policies
in the state and benefits from its sponsorship of the Farm Bureau. Such benefit
is derived from the use of the CalFarm name and the Farm Bureau membership
lists. Further, CalFarm Insurance's 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
11
<PAGE>
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 net of reinsurance plus a
statutory formula reserve based on a minimum of 65% of earned premiums for the
latest three years. Zenith Insurance and ZNAT Insurance are subject to similar
deposit requirements in certain other states based on those states' retaliatory
statutes.
Detailed annual and quarterly reports must be filed by Zenith's insurance
subsidiaries with the California Department of Insurance and the Texas
Department of Insurance, and with other states in which they are licensed to
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, 1996, adjusted
capital under the RBC regulations was 364% 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 1996 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 27 and 28 of Zenith's 1996 Annual
Report to Stockholders, which is hereby incorporated by reference.
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OTHER REGULATION
Property and casualty insurance coverage is subject to certain regulation as
described herein under "Property and Casualty -- Other" and 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 63% of Zenith's property and casualty earned premiums in 1996.
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 page 46 of the 1996 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.
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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 1996 1995
- ------------------------------------------------------------ ------- -------
<S> <C> <C>
First
High...................................................... 24 7/8 22 3/4
Low....................................................... 21 1/8 19 3/8
Second
High...................................................... 28 7/8 22
Low....................................................... 23 7/8 20
Third
High...................................................... 28 1/2 24 1/4
Low....................................................... 26 1/4 20
Fourth
High...................................................... 28 24 5/8
Low....................................................... 25 1/4 20
</TABLE>
As of March 26, 1997, there were 375 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 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
March 7, 1996....................... $.25 cash per share April 30, 1996 May 15, 1996
May 22, 1996........................ $.25 cash per share July 31, 1996 August 15, 1996
September 5, 1996................... $.25 cash per share October 31, 1996 November 15, 1996
December 10, 1996................... $.25 cash per share January 31, 1997 February 14, 1997
</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 1996, Zenith Insurance paid
dividends of $15,000,000 to Zenith. During 1997, Zenith Insurance will be able
to pay $26,534,000 in dividends to Zenith without prior approval. In 1997,
CalFarm Insurance, ZNAT Insurance and Zenith Star, together, can pay $7,832,000
to Zenith Insurance.
ITEM 6. SELECTED FINANCIAL DATA.
The five-year summary of selected financial information and accompanying
notes, included in Zenith's 1996 Annual Report to Stockholders on pages 30 and
31, is hereby incorporated by reference.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements if accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed. Forward-looking statements include those
related to the plans and objectives of management for future operations, future
economic performance, or projections of revenues, income, earnings per share,
capital expenditures, dividends, capital structure, or other financial items.
Statements containing words such as EXPECT, ANTICIPATE, BELIEVE, or similar
words that are used in Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations, in other parts of this Report or
in other written or oral information conveyed by or on behalf of Zenith are
intended to identify forward-looking statements. Zenith undertakes no obligation
to update such forward-looking statements, which are subject to a number of
risks and uncertainties that could cause actual results to differ materially
from those projected. These risks and uncertainties include but are not limited
to the following: (1) heightened competition, particularly intense price
competition; (2) adverse state and federal legislation and regulations; (3)
changes in interest rates causing a reduction of investment income; (4) general
economic and business conditions which are less favorable than expected; (5)
unanticipated changes in industry trends; (6) adequacy of loss reserves; (7)
catastrophic events or the occurrence of a significant number of storms and wind
and hail losses; and (8) other risks detailed herein and from time to time in
Zenith's other reports and filings with the Securities and Exchange Commission.
"Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations," included in Zenith's 1996 Annual Report to
Stockholders on pages 21 to 28 is hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to pages 32 and 33 of Zenith's 1996 Annual Report to
Stockholders for information setting forth the loss and loss adjustment expense
liability development for 1986 through 1996 and to the consolidated financial
statements and notes thereto on pages 34 to 51 of Zenith's Annual Report to
Stockholders, which are hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the captions "Section 16(a) Beneficial
Ownership Reporting Compliance" and "Election of Directors" in the Proxy
Statement in connection with Zenith's 1997 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 59 Chairman of the Board, President (1) Annual 1977
Fredricka Taubitz 53 Executive Vice President and Annual 1985
Chief Financial Officer (1)
James P. Ross 50 Senior Vice President and Actuary (1) Annual 1978
John J. Tickner 58 Senior Vice President and Secretary (1) Annual 1985
Keith E. Trotman 60 Senior Vice President (2) Annual 1988
Philip R. Hunt 54 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 footnotes 3 and 6 to the table set forth under
the caption "Election of Directors" in the Proxy Statement is hereby
incorporated by reference.
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<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 1996 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, 1996 and 1995
Consolidated Statement of Operations for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
2.FINANCIAL STATEMENT SCHEDULES
Zenith National Insurance Corp. and Subsidiaries
As of December 31, 1996.
I -- Summary of Investments -- Other Than Investments in Related
Parties
For the years ended December 31, 1996, 1995 and 1994.
III -- Supplementary Insurance Information
IV -- Reinsurance
Zenith National Insurance Corp.
As of December 31, 1996 and 1995 and for the years ended December
31, 1996, 1995 and 1994.
II -- Condensed Financial Information of Registrant
Property and Casualty Loss Development on pages 32 and 33 of the 1996
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.
17
<PAGE>
3. EXHIBITS
The Exhibits listed below are filed in a separate Exhibit Volume to this
Report.
<TABLE>
<S> <C> <C>
2.1 Amended and Restated Agreement and Plan of Merger by and among Zenith AGC Acquisition
Insurance Company, Zenith Insurance Company, Zenith National Insurance Corp., Associated
General Commerce Self-Insurers' Trust Fund and AGC Risk Management Group Inc. dated as
of October 7, 1996.
2.2 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.)
2.3 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).
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C>
(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).
(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 Amendment No. 2 to the Zenith National Insurance Corp. Amended and Restated
Non-Qualified Stock Option Plan, dated as of April 9, 1996. (Incorporated herein by
reference to Exhibit 10.4 to Zenith's Quarterly Report on Form 10Q for the quarter ended
June 30, 1996.)
*10.7 Zenith National Insurance Corp. 1996 Employee Stock Option Plan, approved by the
Stockholders on May 22, 1996. (Incorporated herein by reference to Exhibit 10.5 to
Zenith Quarterly report on Form 10Q for the quarter ended June 30, 1996. (SEC File No.
333-04399)).
*10.8 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 10K
for the year ended December 31, 1994).
*10.9 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 10K
for the year ended December 31, 1994).
*10.10 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 10K
for the year ended December 31, 1994).
*10.11 Stock Option Agreement, dated as of March 15, 1996, between Zenith and Stanley R. Zax.
(Incorporated herein by reference to Exhibit 10.3 to Zenith's Quarterly Report on Form
10Q for the quarter ended June 30, 1996).
*10.12 Zenith National Insurance Corp. Executive Officer Bonus Plan, dated as of March 21,
1994.
10.13 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.)
10.14 Amendment dated as of December 28, 1995 to Credit Agreement, dated as of December 14,
1994, between Zenith and Sanwa Bank of California. (Incorporated herein by reference to
Exhibit 10.11 to Zenith's Annual Report on Form 10K for the year ended December 31,
1995.)
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C>
10.15 Second Amendment, dated June 28, 1996, to Revolving Note Agreement, dated December 14,
1994 between Zenith and Sanwa Bank California. (Incorporated by reference to Exhibit
10.2 to Zenith's Quarterly Report of Form 10Q for the quarter ended June 30, 1996.)
10.16 Revolving Note Agreement, dated July 1, 1996, between Zenith and City National Bank.
(Incorporated herein by reference to Exhibit 10.1 to Zenith's Quarterly Report on Form
10Q for the quarter ended June 30, 1996.)
10.17 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. (Incorporated herein by reference to
Exhibit 10.13 to Zenith's Annual Report on Form 10K for the year ended December 31,
1995.)
10.18 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.)
10.19 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.)
10.20 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.)
10.21 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.)
10.22 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.)
10.23 Agreement of Reinsurance No. 420 among General Reinsurance Corporation, American
Reinsurance Company, Cat Limited, Renaissance Reinsurance Company and Vesta Fire
Insurance Company and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective
September 1, 1996.
10.24 Aggregate Excess of Loss Reinsurance Agreement between Associated General Contractors
Self Insurers Trust Fund and Reliance Insurance Company effective December 31, 1991.
10.25 Specific Excess Workers' Compensation and Employers' Liability Policy between Planet
Insurance Company (now Reliance National Indemnity Company) and Associated General
Contractors of Florida Self Insurance Fund effective January 1, 1993.
10.26 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, 1996
13 Zenith's Annual Report to Stockholders for the year ended
December 31, 1996, 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 10K.
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C>
21 Subsidiaries of Zenith.
23 Consent of Coopers & Lybrand L.L.P., dated March 28, 1997. (Incorporated herein by
reference to page F-1 of this Annual Report on Form 10K).
27 Financial Data Schedule
99.1 Information required by rule 15d-21 under the Securities Exchange Act of 1934 for the
year ended December 31, 1996 for the Zenith Investment Partnership 401(k) Plan (to be
filed by amendment on Form 10-K/A within 180 days of December 31, 1996).
</TABLE>
- ------------------------
*Management contract or compensatory plan or arrangement
(b)REPORTS ON FORM 8-K
None.
21
<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 28, 1997.
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 28, 1997.
STANLEY R. ZAX Chairman of the Board, President
- --------------------------------------------- and Director (Principal
Stanley R. Zax Executive Officer)
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
- --------------------------------------------- Director
Saul P. Steinberg
GERALD TSAI, JR. Director
- ---------------------------------------------
Gerald Tsai, Jr.
FREDRICKA TAUBITZ Executive Vice President and
- --------------------------------------------- Chief Financial Officer
Fredricka Taubitz (Principal Financial and
Accounting Officer)
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANT
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (File Nos. 33-8948, 33-22219 and 333-04399) of our report dated
February 14, 1997 on our audits of the consolidated financial statements and
financial statement schedules of Zenith National Insurance Corp. and
subsidiaries as of December 31, 1996 and 1995, and for each of the three years
in the period ended December 31, 1996, which is included in this Annual Report
on Form 10-K.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
March 28, 1997
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, 1996 and 1995, and for each
of the three years in the period ended December 31, 1996, which financial
statements are included on pages 34 through 51 of the Company's 1996 Annual
Report to Stockholders and incorporated by reference herein. We have also
audited the financial statement schedules listed in the index on page 17 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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, 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.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
February 14, 1997
F-2
<PAGE>
SCHEDULE I -- SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN RELATED PARTIES
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
DECEMBER 31, 1996
<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.................... $ 299,447 $ 297,278 $ 297,248
Public utilities.............................. 19,292 19,168 19,168
Industrial and miscellaneous.................. 323,903 322,577 322,847
Redeemable preferred stocks..................... 19,467 19,720 19,720
---------- ---------- ---------------
Total fixed maturities.................... 662,109 658,743 658,983
---------- ---------- ---------------
Equity securities
Floating rate preferred stocks.................. 14,614 14,071 14,071
Convertible and nonredeemable preferred
stocks........................................ 750 784 784
Common stocks, industrial....................... 18,030 22,771 22,771
---------- ---------- ---------------
Total equity securities................... 33,394 37,626 37,626
---------- ---------- ---------------
Short-term investments............................ 106,712 106,712 106,712
Other investments................................. 49,478 49,478 49,478
---------- ---------- ---------------
Total investments......................... $ 851,693 $ 852,559 $ 852,799
---------- ---------- ---------------
---------- ---------- ---------------
</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) 1996 1995
-------- --------
<S> <C> <C>
Investments
Bonds, at market (cost $9,896, 1996).................................................... $ 9,803
Common stocks, at market (cost $2,182, 1996 and $668, 1995)............................. 2,318 $ 709
Short-term investments (at cost which approximates market).............................. 30,720 84,678
Other invested assets................................................................... 10,000
Cash...................................................................................... 1,463 996
Investment in subsidiaries (Note A)....................................................... 334,227 318,620
Federal income taxes receivable (Note A).................................................. 138
Other assets.............................................................................. 30,164 12,116
-------- --------
Total assets...................................................................... $418,833 $417,119
-------- --------
-------- --------
LIABILITIES
Senior notes payable, less unamortized discount of $647, 1996 and
$768, 1995 (Note B)..................................................................... $ 74,353 $ 74,232
Cash dividends payable to stockholders.................................................... 4,401 4,455
Federal income taxes payable (Note A)..................................................... 4,676
Other liabilities......................................................................... 2,576 3,324
-------- --------
Total liabilities................................................................. 81,330 86,687
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par--shares authorized 1,000; issued and outstanding, none in 1996 and
1995....................................................................................
Common stock, $1 par--shares authorized 50,000; issued 24,447, outstanding 17,604, 1996;
issued 24,310, outstanding 17,784, 1995................................................. 24,447 24,310
Additional paid-in capital................................................................ 258,875 256,083
Retained earnings......................................................................... 175,684 155,634
Net unrealized appreciation on investments, net of deferred tax expense of $284, 1996 and
$4,752, 1995............................................................................ 528 8,825
-------- --------
459,534 444,852
Less treasury stock at cost (6,843 shares, 1996 and 6,526 shares, 1995)................... (122,031) (114,420)
-------- --------
Total stockholders' equity........................................................ 337,503 330,432
-------- --------
Total liabilities and stockholders' equity........................................ $418,833 $417,119
-------- --------
-------- --------
</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) 1996 1995 1994
------------ ------------- -------------
<S> <C> <C> <C>
Investment income............................................................... $ 2,697 $ 219 $ 457
Realized gains on investments................................................... 43 11
Income from legal settlement.................................................... 1,910
------------ ------------- -------------
Total revenue................................................................... 2,697 262 2,378
Operating expense............................................................... 2,970 1,863 4,059
Interest expense................................................................ 4,877 6,960 5,937
------------ ------------- -------------
Loss from continuing operations before federal income tax benefit and equity in
income from continuing operations of subsidiaries............................. (5,150) (8,561) (7,618)
Federal income tax benefit...................................................... 1,845 3,123 2,678
------------ ------------- -------------
Loss from continuing operations before equity in income from continuing
operations of subsidiaries.................................................... (3,305) (5,438) (4,940)
Equity in income from continuing operations of subsidiaries (Note A)............ 40,905 25,160 34,738
------------ ------------- -------------
Income from continuing operations............................................... 37,600 19,722 29,798
Income (loss) from discontinued operations (Note C)............................. (13,122) 8,102
------------ ------------- -------------
Net income...................................................................... $ 37,600 $ 6,600 $ 37,900
------------ ------------- -------------
------------ ------------- -------------
</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) 1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Investment income received.................................................... $ 612 $ 193 $ 477
Recovery from lawsuit settlement.............................................. 6,036
Operating expenses paid....................................................... (3,651) (1,455) (4,099)
Interest paid................................................................. (4,908) (6,596) (5,842)
Income taxes (paid) refunded.................................................. (616) 3,571 (1,471)
------------- ------------- -------------
Net cash flows from continuing operating activities......................... (8,563) (4,287) (4,899)
Net cash flow from expenses of discontinued operations........................ (2,274)
------------- ------------- -------------
Net cash flows from operating activities.................................... (8,563) (6,561) (4,899)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments:
Debt and equity securities Available-for-Sale............................... (11,446)
Other debt and equity securities and other investments...................... (10,000)
Net change in short-term investments.......................................... 55,865 (82,549) 12,867
Other......................................................................... (3,151)
Proceeds from the sale of CalFarm Life........................................ 120,000
------------- ------------- -------------
Net cash flows from investing activities.................................... 31,268 37,451 12,867
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received from bank line of credit........................................ 43,400 2,100
Cash paid on bank line of credit.............................................. (43,400) (2,100)
Cash dividends paid to common stockholders.................................... (17,605) (18,273) (18,894)
Proceeds from exercise of stock options....................................... 2,572 4,405 2,093
Purchase of treasury shares................................................... (7,611) (29,318) (346)
Dividends received from subsidiaries.......................................... 15,000 10,500 15,000
Net cash from (to) subsidiary................................................. (14,594) 458 (5,356)
------------- ------------- -------------
Net cash flows from financing activities.................................... (22,238) (32,228) (7,503)
Net increase (decrease) in cash................................................. 467 (1,338) 465
Cash at beginning of year....................................................... 996 2,334 1,869
------------- ------------- -------------
Cash at end of year............................................................. $ 1,463 $ 996 $ 2,334
------------- ------------- -------------
------------- ------------- -------------
RECONCILIATION OF INCOME FROM CONTINUING OPERATIONS TO NET CASH FLOWS FROM
OPERATING ACTIVITIES:
Income from continuing operations............................................. $ 37,600 $ 19,722 $ 29,798
Income from continuing operations of subsidiaries............................. (40,905) (25,160) (34,738)
Cash flow from expenses of discontinued operations............................ (2,274)
Federal income taxes.......................................................... (2,461) 511 (4,149)
Decrease in receivable from lawsuit settlement................................ 3,467
Other......................................................................... (2,797) 640 723
------------- ------------- -------------
Net cash flow from operating activities..................................... $ (8,563) $ (6,561) $ (4,899)
------------- ------------- -------------
------------- ------------- -------------
</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 partially funds the cash flow requirements of its real estate
construction subsidiary. Intercompany interest charges to such subsidiary
reduce Zenith's interest expense.
Zenith files a consolidated federal income tax return. The equity in the
income from continuing operations of subsidiaries of $40,905,000 in 1996,
$25,160,000 in 1995 and $34,738,000 in 1994 is net of a provision for
federal income tax expense of $21,362,000 in 1996, $12,823,000 in 1995 and
$17,986,000 in 1994. Zenith has formulated tax allocation procedures with
its subsidiaries and the 1996, 1995 and 1994 condensed financial information
reflect Zenith's portion of the consolidated taxes.
Zenith Insurance Company paid dividends to Zenith of $15,000,000 in
1996, $10,000,000 in 1995 and $15,000,000 in 1994. CalFarm Life Insurance
paid a dividend to Zenith of $500,000 prior to its sale in the fourth
quarter of 1995.
B. 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 9% Note is payable semi-annually. The 9%
Notes are general unsecured obligations of Zenith.
C. 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. 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)
1996
- ------------------------------
Property and Casualty
Workers' compensation....... $ 4,870 $ 329,670 $ 28,330 $ 210,916
Other property/casualty..... 14,422 108,899 88,884 204,778
Reinsurance................. 1,460 87,858 9,995 37,162
----------- ----------- ----------- ----------- ----------- -----------
20,752 526,427 127,209 452,856 $ 48,457
Reinsurance ceded............. 93,651
Registrant.................... 2,697
----------- ----------- ----------- ----------- ----------- -----------
Total....................... $ 20,752 $ 620,078 $ 127,209 $ -- $ 452,856 $ 51,154
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
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
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<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)
1996
- ------------------------------
Property and Casualty
Workers' compensation....... $ 159,047 $ 35,921 $ 32,704 $ 210,603
Other property/casualty..... 137,423 43,247 16,031 212,399
Reinsurance................. 18,230 4,925 1,709 35,059
----------- ----------- ----------- -----------
314,700 84,093 50,444 458,061
Reinsurance ceded.............
Registrant.................... 2,969
----------- ----------- ----------- -----------
Total....................... $ 314,700 $ 84,093 $ 53,413 $ 458,061
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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, 1996
Premiums earned........................................ $ 435,568 $ 24,642 $ 41,930 $ 452,856 9.3%
-------------- ------------ ----------- -------------- ----------
-------------- ------------ ----------- -------------- ----------
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%
-------------- ------------ ----------- -------------- ----------
-------------- ------------ ----------- -------------- ----------
</TABLE>
F-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE NUMBER
- ---------- -----------
<S> <C> <C>
2.1 Amended and Restated Agreement and Plan of Merger by and among Zenith AGC Acquisition
Insurance Company, Zenith Insurance Company, Zenith National Insurance Corp.,
Associated General Commerce Self-Insurers' Trust Fund and AGC Risk Management Group
Inc. dated as of October 7, 1996.
2.2 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.)
2.3 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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
(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).
(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 Amendment No. 2 to the Zenith National Insurance Corp. Amended and Restated
Non-Qualified Stock Option Plan, dated as of April 9, 1996. (Incorporated herein by
reference to Exhibit 10.4 to Zenith's Quarterly Report on Form 10Q for the quarter
ended June 30, 1996.
*10.7 Zenith National Insurance Corp. 1996 Employee Stock Option Plan, approved by the
Stockholders on May 22, 1996. (Incorporated herein by reference to Exhibit 10.5 to
Zenith Quarterly report on Form 10Q for the quarter ended June 30, 1996. (SEC File
No. 333-04399)).
*10.8 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
10K for the year ended December 31, 1994).
*10.9 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
10K for the year ended December 31, 1994).
*10.10 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
10K for the year ended December 31, 1994).
*10.11 Stock Option Agreement, dated as of March 15, 1996, between Zenith and Stanley R.
Zax. (Incorporated herein by reference to Exhibit 10.3 to Zenith's Quarterly Report
on Form 10Q for the quarter ended June 30, 1996).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
*10.12 Zenith National Insurance Corp. Executive Officer Bonus Plan, dated as of March 21,
1994.
10.13 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.)
10.14 Amendment dated as of December 28, 1995 to Credit Agreement, dated as of December 14,
1994, between Zenith and Sanwa Bank of California. (Incorporated herein by reference
to Exhibit 10.11 to Zenith's Annual Report on Form 10K for the year ended December
31, 1995.)
10.15 Second Amendment, dated June 28, 1996, to Revolving Note Agreement, dated December
14, 1994 between Zenith and Sanwa Bank California. (Incorporated by reference to
Exhibit 10.2 to Zenith's Quarterly Report of Form 10Q for the quarter ended June 30,
1996.)
10.16 Revolving Note Agreement, dated July 1, 1996, between Zenith and City National Bank.
(Incorporated herein by reference to Exhibit 10.1 to Zenith's Quarterly Report on
Form 10Q for the quarter ended June 30, 1996.)
10.17 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. (Incorporated herein by reference to
Exhibit 10.13 to Zenith's Annual Report on Form 10K for the year ended December 31,
1995.)
10.18 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.)
10.19 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.)
10.20 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.)
10.21 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.)
10.22 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.)
10.23 Agreement of Reinsurance No. 420 among General Reinsurance Corporation, American
Reinsurance Company, Cat Limited, Renaissance Reinsurance Company and Vesta Fire
Insurance Company and CalFarm Insurance, Zenith Insurance and ZNAT Insurance,
effective September 1, 1996.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.24 Aggregate Excess of Loss Reinsurance Agreement between Associated General Contractors
Self Insurers Trust Fund and Reliance Insurance Company effective December 31, 1991.
10.25 Specific Excess Workers' Compensation and Employers' Liability Policy between Planet
Insurance Company (now Reliance National Indemnity Company) and Associated General
Contractors of Florida Self Insurance Fund effective January 1, 1993.
10.26 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, 1996
13 Zenith's Annual Report to Stockholders for the year ended
December 31, 1996, 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 10K.
21 Subsidiaries of Zenith.
23 Consent of Coopers & Lybrand L.L.P., dated March 28, 1997. (Incorporated herein by
reference to page F-1 of this Annual Report on Form 10K).
27 Financial Data Schedule
99.1 Information required by rule 15d-21 under the Securities Exchange Act of 1934 for the
year ended December 31, 1996 for the Zenith Investment Partnership 401(k) Plan.
</TABLE>
- ------------------------
*Management contract or compensatory plan or arrangement
(b) REPORTS ON FORM 8-K
None.
<PAGE>
Exhibit 99.1
------------------------------------
Financial Statements
Required by Form 11-K in accordance with
Rule 15d-21 under the Securities
Exchange Act of 1934
------------------------------------
For the Fiscal Year Ended December 31, 1996
of
The Zenith Investment Partnership
401(k) Plan
ZENITH NATIONAL INSURANCE CORP.
The principal executive offices of Zenith National Insurance Corp. are located
at 21255 Califa Street, Woodland Hills, California 91367-5021.
<PAGE>
ITEM 1. NOT APPLICABLE
- -------
ITEM 2. NOT APPLICABLE
- -------
ITEM 3. NOT APPLICABLE
- -------
ITEM 4. FINANCIAL STATEMENTS AND SCHEDULES
- ------- PREPARTED IN ACCORDANCE WITH THE FINANCIAL
REPORTING REQUIREMENTS OF ERISA
Page
----
Report of Independent Accountants 2
Statements of Net Assets Available for
Benefits As Of December 31, 1996
and 1995 3
Statements Of Changes In Net Assets
Available For Benefits For The Years
Ended December 31, 1996 and 1995 4
Notes To Financial Statements 5
Supplemental Schedules:
Line 27a - Schedule of Assets Held For
Investment Purposes As Of December 31, 1996 13
Line 27d - Schedule of Reportable
Transactions For The Year
Ended December 31, 1996 14
<PAGE>
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, hereunto duly authorized.
Zenith National Insurance Corp.
-------------------------------
(Registrant)
Date: June 25, 1997 By: /s/ Fredricka Taubitz
------------------ --------------------------
(Signature)
Fredricka Taubitz
Executive Vice President
& Chief Financial Officer
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
-------------------
REPORT ON AUDITED FINANCIAL STATEMENTS
AND SUPPLEMENTAL SCHEDULES
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
-------------------
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(K) PLAN
INDEX OF FINANCIAL STATEMENTS
AND SUPPLEMENTAL SCHEDULES
-------------
Page
----
Report of Independent Accountants 2
Financial Statements:
Statements of Net Assets Available for Benefits
as of December 31, 1996 and 1995 3
Statements of Changes in Net Assets Available for
Benefits for the years ended December 31, 1996
and 1995 4
Notes to Financial Statements 5
Supplemental Schedules:
Line 27a - Schedule of Assets Held for Investment
Purposes as of December 31, 1996 13
Line 27d - Schedule of Reportable Transactions
for the year ended December 31, 1996 14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
--------------
To the Administrative Committee of
The Zenith Investment Partnership
401(k) Plan
We have audited the accompanying statements of net assets available for benefits
of The Zenith Investment Partnership 401(k) Plan (the "Plan") as of December 31,
1996 and 1995 and the related statements of changes in net assets available for
benefits for the years then ended. These financial statements are the
responsibility of the Plan'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 net assets available for benefits of the Plan as
of December 31, 1996 and 1995 and the changes in net assets available for
benefits for the years then ended in conformity with generally accepted
accounting principles.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of the Plan,
listed in the index on page 1, are presented for purposes of additional analysis
and are not a required part of the basic financial statements but are
supplementary information required by the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974. The supplemental schedules have been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, are fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
/s/ Coopers & Lybrand L.L.P.
Los Angeles, California
May 30, 1997
2
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
as of December 31, 1996 and 1995
--------------------------------
Assets: 1996 1995
---- ----
Investments:
Zenith National Insurance Corp. Common
stock at fair value (326,662 shares,
$6,695,581 cost for 1996 and 339,644
shares, $6,762,363 cost for 1995) $8,942,372 $7,259,891
Short-Term Investment Fund 13,063,710 10,593,944
Invested cash 41,596 274,039
------------- -------------
Total investments 22,047,678 18,127,874
Accrued investment income 57,188 51,087
------------- -------------
Net assets available for benefits $22,104,866 $18,178,961
------------- -------------
------------- -------------
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
for the years ended December 31, 1996 and 1995
---------------------------------
Additions: 1996 1995
---- ----
Contributions:
Employer $791,874 $782,497
Participants 3,119,541 3,134,376
------------ ------------
Total contributions 3,911,415 3,916,873
------------ ------------
Rollovers from other plans 189,466 328,849
------------ ------------
Investment income:
Zenith National Insurance Corp.
Common Stock Dividends 333,477 334,621
Short Term Investment Fund 618,686 543,851
Net appreciation(depreciation)
in fair value of investment in
Zenith National Insurance Corp.
Common Stock 1,988,957 (137,086)
------------ ------------
Total investment income 2,941,120 741,386
------------ ------------
Total additions 7,042,001 4,987,108
------------ ------------
Deductions:
Withdrawals by participants 3,116,096 2,244,119
------------ ------------
Net increase 3,925,905 2,742,989
Net assets available for benefits:
Beginning of year 18,178,961 15,435,972
------------ ------------
End of year $22,104,866 $18,178,961
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
------------
1. THE PLAN:
The following is a general description of The Zenith Investment Partnership
401(k)Plan (the "Plan").
GENERAL
The Plan is a qualified stock bonus plan offered to all eligible employees
of Zenith National Insurance Corp. ("ZNIC") and its affiliates (the
"Company"), who are age twenty-one or older as of the enrollment dates.
The Plan is subject to the provisions of the Employee Retirement Income
Security Act of 1974 ("ERISA") and Section 401(a) and Section 401(k) of the
Internal Revenue Code of 1986, as amended ("Code"). All assets of the Plan
are held by a trustee ("Trustee") in a trust ("Trust") created by a trust
agreement dated as of August 1, 1988 ("Trust Agreement"). At December 31,
1996 and 1995 there were, respectively, 1,007 and 944 participants in the
Plan.
CONTRIBUTIONS
Participants may elect to contribute between 1% to 12% of their basic
compensation up to a maximum of $9,500 for 1996 and $9,240 for 1995 (Salary
Reduction Contributions). The maximum is adjusted each year for increases
in the cost of living as provided in applicable regulations. This annual
amount is an aggregate limitation that applies to all of an individual's
Salary Reduction Contributions and similar contributions under other plans.
The Company contributes 33-1/3% of the participant's "matched" contribution
amount (matched contributions are defined as the first 6% of each
participant's monthly contributions). The Company's contribution is
invested exclusively in the common stock of ZNIC ("Company Stock").
The Salary Reduction Contributions and Company contributions, made on
behalf of each participant, are paid to the Trustee on or immediately after
the last day of each month.
5
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS, CONTINUED
----------------
1. THE PLAN, CONTINUED:
PARTICIPANT ACCOUNTS
Each participant's account is credited with: (1) the participant's
contributions, (2) participant rollover contributions from non-Company
plans, (3) the related Company matching contributions, and (4) fund
earnings. Allocations of earnings are based on account balance as defined
in the Plan Agreement. These accounts are summarized in the accompanying
financial statements as net assets available for benefits.
VESTING
Each participant has an immediate, fully vested right to receive all Salary
Reduction Contributions, all Company matching contributions made prior to
January 1, 1991, and earnings thereon, upon termination from the Company,
or upon separation caused by death of the participant. All Company
matching contributions made after January 1, 1991 are subject to a five
year graduated vesting schedule with respect to participants who became
employed by the Company on or after April 1, 1988.
However, irrespective of the vesting schedule, a participant is fully
vested upon his death, disability or attainment of age 65.
FORFEITURES
Upon termination of service, a participant forfeits any non-vested Company
contributions. Such forfeitures are used first to reinstate participant
account balances previously forfeited which are subject to reinstatement
under the terms of the Plan. Any remaining unused forfeitures are used to
reduce current or future years contributions to the Plan by the Company.
At December 31, 1996, forfeited non-vested accounts totaled $12,833.
These accounts will be used to reduce future employer contributions. Also,
in 1996, employer contributions were reduced by $81,048 from forfeited
non-vested accounts.
6
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS, CONTINUED
-------------------
1. THE PLAN, CONTINUED:
WITHDRAWALS PRIOR TO TERMINATION OF EMPLOYMENT
Except in limited circumstances, withdrawals may not be made by a
participant while employed by the Company. Hardship withdrawals of a
participant's Salary Reduction Contributions are permitted where a
participant has an immediate and heavy financial need (as determined under
Section 401(k)(2)(B)(IV) of the Code) and that need cannot be satisfied
from other resources of the participant. In addition, participants who are
59-1/2 years old may withdraw their Salary Reduction Contributions and
Rollover balances plus applicable earnings under certain restrictions.
INVESTMENTS
The Short-Term Investment Fund invests in a no-load diversified open-end
management investment company whose objective is maximum current income
consistent with liquidity and the maintenance of a portfolio of high
quality, short-term "money-market" instruments. All Salary Reduction
Contributions and any earnings thereon are invested in the Short-Term
Investment Fund.
The Company's contributions and any earnings thereon are invested in the
Company Stock Fund, which invests solely in Company Stock, and are not
subject to participant direction until such participant reaches age fifty-
five (55).
PAYMENT OF BENEFITS
Upon termination of employment, if a distribution is made, a participant
(1) receives cash with respect to the Short-Term Investment Fund and (2)
may elect to receive cash or shares of Company Stock plus cash in lieu of
any fractional shares, with respect to the Company Stock Fund. Payments
are made after each calendar quarter-end allocation is performed.
7
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS, CONTINUED
------------------
1. THE PLAN, CONTINUED:
EXPENSES
Expenses in connection with the purchase or sale of Company Stock or other
securities are charged to the fund for which such purchase or sale is made.
The Trust Agreement stipulates that expenses incurred by the Trustee in the
performance of its duties shall be paid from the funds held in the Trust
unless paid by the Company at its sole discretion. During 1996 and 1995,
the Company elected to pay the Trustee's expenses in excess of the interest
earned during the year on temporarily invested cash. The total Trustee
expenses for 1996 and 1995 were $40,929 and $26,165, of which $7,981 and
$3,055 respectively, were offset by income on unallocated cash temporarily
invested. The balances of $32,948 and $23,110 were paid by the Company.
In addition, certain administrative expenses such as accounting, legal and
recordkeeping fees, were paid by the Company during 1996 and 1995.
TERMINATION
While the Company has not expressed an intent to terminate the Plan, it may
do so at any time. Upon such termination, each participant shall be fully
(100%) vested in his account balances, determined as of the date of such
termination.
ADMINISTRATION
The Plan is administered by an Administrative Committee appointed by the
Board of Directors of ZNIC.
The Administrative Committee has responsibility for administration of the
Plan, including supervision of the collection of contributions, delivery of
such contributions to the Trustee, and maintenance of necessary records.
The Trustee is City National Bank, Beverly Hills, California. The
Trustee's responsibilities include receipt of Plan contributions,
investment and maintenance of trust assets in the available funds, and
distributions under the Plan of such amounts as the Administrative
Committee shall direct from time to time.
8
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS, CONTINUED
------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF ACCOUNTING
The financial statements of the Plan are prepared on the accrual basis
of accounting in conformity with generally accepted accounting principles.
INVESTMENTS
Investments are stated at fair value.
The value ("net asset value") of a share of the no-load diversified open-
end management investment company ("Management Company") in which the
Short-Term Investment Fund invests is determined by adding the value of all
securities and other assets in the Management Company's portfolio,
deducting the Management Company's liabilities and dividing by the number
of shares outstanding. The Management Company intends to use its best
efforts to maintain a constant net asset value of $1 per share.
The value of the Company Stock is determined using the December 31, 1996
and 1995 closing price on the New York Stock Exchange.
Purchases and sales of securities are reflected on a trade date basis (the
date when the order to buy or sell is executed). Gains or losses on sales
of securities are computed on an average cost basis.
Dividend income is accrued on the ex-dividend date. The net appreciation
(depreciation) in the fair value of the Plan's investments disclosed in the
Statement of Changes in Net Assets Available For Benefits consists of
realized gains or losses and unrealized appreciation(depreciation) on
investments.
CONTRIBUTIONS
Company and participant contributions are recorded in the period that a
participant's payroll deduction is made.
9
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS, CONTINUED
------------------
3. TAX STATUS:
The Plan was designed to qualify under Sections 401(a) and 401(k) of the
Code and for the Trust to be exempt from federal income taxes under Section
501(a) of the Code. The Plan initially received a favorable determination
in 1989 from the Internal Revenue Service as to the above. In 1995 the
Plan applied for, and received, an updated Determination Letter that the
Plan, as amended, continues to be qualified under Sections 401(a) and
401(k) of the Code and that the Trust continues to be exempt from federal
income tax under Sections 501(a) of the Code.
As described in Note 7, the Plan was amended effective January 1,
1997. The amendment will have no impact on the net assets available for
benefits. The Plan Sponsor believes that the Plan, as amended, will
continue to be qualified under Sections 401(a) and 401(k) of the Code and
that the Trust will continue to be exempt from federal income tax under
Section 501(a) of the Code. The Plan Sponsor will be submitting an
application to the Internal Revenue Service for a updated Determination
Letter to such effect.
4. RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500:
Amounts allocated to withdrawing participants for benefit claims that have
been processed and approved for payment prior to December 31, but not yet
paid are included in net assets available for plan benefits. For reporting
to the Department of Labor, these amounts are reported as a liability on
the Form 5500.
The following is a reconciliation of net assets available for plan benefits
as shown in the accompanying financial statements to those shown in the
Form 5500 at:
December 31,
1996 1995
---- ----
Net assets available for plan
benefits per the accompanying
financial statements $22,104,866 $18,178,961
Amounts allocated to
withdrawing participants 445,037 1,002,055
------------ ------------
Net assets available for plan
benefits per the Form 5500 $21,659,829 $17,176,906
------------ ------------
------------ ------------
10
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS, CONTINUED
-----------------
4. RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500, CONTINUED:
The following is a reconciliation of benefits paid to participants as shown
in the accompanying financial statements to those shown in the Form 5500
for the years ended:
December 31,
1996 1995
---- ----
Benefits paid to participants per
the accompanying financial
statements $3,116,096 $2,244,119
Add: Amounts allocated to
withdrawing participants at
end of year 445,037 1,002,055
Less: Amounts allocated to
withdrawing participants at
beginning of year 1,002,055 342,160
--------- -------
Benefits paid to participants per
the Form 5500 $2,559,078 $2,904,014
---------- ----------
---------- ----------
5. FEDERAL INCOME TAXES APPLICABLE TO PARTICIPANTS:
The income tax rules affecting Plan participation are complex, subject to
interpretation by the Secretary of the Treasury and subject to change. A
general summary of the federal tax consequences of participation in the
Plan follows. An expanded discussion of tax consequences is available in
the prospectus dated June 26, 1988, as amended March 18, 1994 related to
the Plan.
In general, 401(k) Company and Salary Reduction Contributions are not
subject to tax when made. In addition, earnings and gains on a
participant's account are not subject to tax when credited.
Generally, distributions from the Plan are subject to tax in the year
received from the Plan. However, under certain circumstances, a
distribution, or part thereof, may not be taxed if rolled over to an
Individual Retirement Account or other qualified plan. If taxable, a
distribution may be eligible for special tax treatment under the Code.
11
<PAGE>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS, CONTINUED
------------------
5. FEDERAL INCOME TAXES APPLICABLE TO PARTICIPANTS, CONTINUED:
In addition to regular taxes, most distributions received before a
participant is age 59-1/2 will be subject to a 10% additional tax. Under
limited circumstances, distributions in excess of Code determined limits
will be subject to a 15% excise tax.
6. RISK AND UNCERTAINTY:
Approximately 40% of the Plan's net assets available for benefits are held
in the Company's stock. Due to the inherent risk associated securities
traded in public markets, it is reasonably possible that fluctuations in
the Company's stock could have a significant impact on the net assets of
the Plan in the near term.
7. PLAN AMENDMENT:
Effective January 1, 1997 the following significant changes to the Plan
were made:
a. The name of the Plan will be The Zenith 401(k) Plan.
b. A one year employment eligibility for participation will be imposed;
the minimum age requirement for participation will be eliminated.
c. A choice of investment options into which Participants may direct their
contributions will be given. The choices will be: Met Managed GIC --
Intermediate Duration; Founders Balanced Fund; Scudder Growth & Income
Fund; State Street Research Equity Investment Fund; Janus Worldwide
Fund; PBHG Growth Fund; Warburg Pincus Emerging Growth Fund; and Zenith
Company Stock Fund (consisting of Company Stock). Participants may
allocate each contribution from their compensation among the choices in
such percentages as they may determine, so long as the amount directed
to the Zenith Company Stock Fund does not exceed twenty percent of that
contribution. The value of each fund will be determined daily and
Participants will be able to transfer amounts between funds on any
business day, except that amounts may be only transferred out of, but
not into, the Zenith Company Stock Fund.
d. The Plan will comply with ERISA Section 404(c) as a self-directed
account plan.
e. A loan feature will be instituted by which Participants will generally
be able to borrow up to one-half of the value of their contributions
to a maximum of $50,000.
f. The definition of compensation will be broadened to include bonuses,
commissions, overtime, and elective deferrals.
12
<PAGE>
<TABLE>
<CAPTION>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
LINE 27a SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
AS OF DECEMBER 31, 1996
-------------------------------
(a) (b) Identity of Issuer (c) Description of Investments (d) Cost (e) Current Value
---------------------- ------------------------------ -------- -----------------
<S> <C> <C> <C> <C>
* Zenith National Common Stock, 326,662 shares,
Insurance Corp. $1 par value per share $6,695,581 $8,942,372
Merrill Lynch 13,063,710 shares, $1 par value
Institutional Fund per share 13,063,710 13,063,710
* City National Bank
Money Market
Investment Account 41,596 shares, $1 par value per
share 41,596 41,596
</TABLE>
* Indicates party in interest for which a statutory exemption exists.
13
<PAGE>
<TABLE>
<CAPTION>
THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN
LINE 27d SCHEDULE OF REPORTABLE TRANSACTIONS
for the year ended December 31, 1996
------------------------------------------------------
(h) Current value of Asset (i) Net Gain
(a) (b)Description (c) Purchase Price (d) Selling Price (g) Cost on Transaction Date or (Loss)
-------------- ------------------ ----------------- -------- -------------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
PURCHASES:
Zenith National
Insurance Corp. common
stock $1,133,922 $1,133,922
(26 purchases)
Merrill Lynch
Institutional Fund 4,181,967 4,181,967
(29 purchases)
City National Bank Money
Market Investment Account 6,882,314 6,882,314
(124 purchases)
SALES:
Zenith National Insurance
Corp. common stock $1,388,128 $1,148,434 1,388,128 $239,694
(19 sales)
Merrill Lynch Institutional
Fund 1,712,200 1,712,200 1,712,200 -0-
(14 sales)
City National Bank Money
Market Investment Account 7,114,757 7,114,757 7,114,757 -0-
(109 sales)
</TABLE>
14
