<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission file number 1-9627
ZENITH NATIONAL INSURANCE CORP.
[Exact name of registrant as specified in its charter]
DELAWARE 95-2702776
[State or other jurisdiction of [I.R.S. Employer
incorporation or organization] identification No.]
21255 Califa Street, Woodland Hills, California 91367-5021
[Address of principal executive offices] [Zip Code]
[818] 713-1000
[Registrant's telephone number, including area code]
Not Applicable
[Former name, former address and former fiscal year, if changed
since last report.]
Indicate by check mark whether the registrant [1] has filed all reports
required to be filed by Section 13 or 15[d] of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and [2] has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. At July 31, 1997,
17,697,000 shares of common stock were outstanding, net of 6,854,000 shares
of treasury stock.
<PAGE>
EXPLANATORY NOTE
On August 14, 1997, Zenith National Insurance Corp. filed its Quarterly
Report on Form 10-Q for the period ending June 30, 1997 (Second Quarter Form
10-Q) with the Securities and Exchange Commission (the "Commission").
Zenith National Insurance Corp. is filing this Form 10-Q/A with the
Commission as amendment number 1 to the Second Quarter Form 10-Q to correct a
typographical error that appears on page 2 in the Liabilities section of the
Consolidated Balance Sheet. The amounts reported as "Senior notes payable,
less unamortized issue costs of $586 & $647" should have been reported as
"Payable to banks and other notes payable" and the amounts reported as
"Payable to banks and other notes payable" should have been reported as
"Senior notes payable, less unamoritized issue costs of $586 & $647". The
remainder of the Second Quarter Form 10-Q is unchanged by this Form 10-Q/A.
<PAGE>
PART I FINANCIAL INFORMATION
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
ITEM 1:
Dollars and Shares in Thousands
<TABLE>
<CAPTION>
ASSETS JUN. 30, 1997 DEC. 31, 1996
<S> <C> <C>
Investments
Fixed maturities:
At amortized cost (fair value $50,717 & $53,113) $ 50,668 $ 53,353
At fair value (cost $610,975 & $608,756) 607,050 605,630
Floating rate preferred stocks, at fair value (cost $14,614) 14,352 14,071
Convertible and non-redeemable preferred stocks, at fair value
(cost $750) 759 784
Common stocks, at fair value (cost $11,513 & $18,030) 16,572 22,771
Short-term investments (at cost, which approximates fair value) 122,392 106,712
Other investments 45,045 49,478
----------- ------------
TOTAL INVESTMENTS 856,838 852,799
Cash 10,968 12,125
Accrued investment income 11,352 10,973
Premiums receivable 89,389 80,545
Receivable from reinsurers,state trust funds, and prepaid reinsurance premiums 108,563 104,748
Deposits receivable 12,710 14,776
Federal income taxes 22,198 29,939
Deferred policy acquisition costs 21,778 20,752
Properties and equipment, less accumulated depreciation 56,359 49,179
Other assets 64,306 66,888
----------- ------------
TOTAL ASSETS $1,254,461 $1,242,724
----------- ------------
----------- ------------
LIABILITIES
Policy liabilities and accruals
Unpaid losses and loss expenses $ 627,431 $ 620,078
Unearned premiums 135,017 127,209
Policyholders' dividends accrued 4,950 7,670
Other policyholder funds 6,288 9,109
Reserves on loss portfolio transfers 12,231 8,359
Payable to banks and other notes payable 13,133 14,508
Senior notes payable, less unamortized issue costs of $586 & $647 74,414 74,353
Other liabilities 35,470 43,935
----------- ------------
TOTAL LIABILITIES 908,934 905,221
----------- ------------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par - shares authorized 1,000; issued and outstanding,
none in 1997 and 1996
Common stock, $1 par - shares authorized 50,000; issued 24,542,
outstanding 17,688, 1997; issued 24,447, outstanding 17,604, 1996 24,542 24,447
Additional paid-in capital 260,841 258,875
Retained earnings 181,842 175,684
Net unrealized appreciation on investments, net of deferred
tax expense of $332 & $284 618 528
----------- ------------
467,843 459,534
Less treasury stock at cost (6,854 shares 1997 & 6,843 shares 1996) (122,316) (122,031)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 345,527 337,503
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,254,461 $1,242,724
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of this statement.
Page 2
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
Dollars in thousands, except per share data 1997 1996 1997 1996
<S> <C> <C> <C> <C>
CONSOLIDATED REVENUES:
Premium earned $ 125,831 $ 108,255 $ 248,194 $ 220,492
Net investment income 13,406 12,836 25,854 24,890
Realized gains on investments 1,996 3,778 3,872 8,050
Real estate sales 11,174 8,810 21,137 14,795
---------- ---------- ---------- ----------
Total revenues 152,407 133,679 299,057 268,227
EXPENSES:
Property and casualty losses and loss expenses incurred 89,180 74,429 176,947 147,844
Policy acquisition costs 23,248 19,887 46,362 42,251
Other underwriting and operating expenses 16,443 13,247 31,619 25,373
Policyholders' dividends and participation 2 316 (966) 875
Real estate construction and operating costs 10,495 8,233 20,199 13,983
Interest expense 816 1,416 1,952 2,836
---------- ---------- ---------- ----------
Total expenses 140,184 117,528 276,113 233,162
Income before federal income tax 12,223 16,151 22,944 35,065
Federal income tax expense 4,323 5,451 7,944 11,965
---------- ---------- ---------- ----------
NET INCOME $ 7,900 $ 10,700 $ 15,000 $ 23,100
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS PER SHARE:
Net income per common share $ 0.44 $ 0.60 $ 0.84 $ 1.30
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
Page 3
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
Dollars in thousands ENDED JUNE 30,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Premiums collected $ 257,706 $ 227,111
Investment income received 25,281 23,219
Proceeds from sales of real estate 21,137 14,795
Losses & loss expenses paid (173,034) (162,866)
Underwriting & other operating expenses paid (79,224) (64,610)
Real estate construction costs paid (18,894) (26,595)
Reinsurance premiums paid (14,810) (11,644)
Dividends paid to policyholders (308) (1,387)
Interest paid (3,883) (3,863)
Income taxes paid 104 (12,563)
----------- -----------
Net cash flows from operating activities, excluding cash from trading portfolio 14,075 (18,403)
Net cash from sales of trading portfolio investments 1,416 7,050
----------- -----------
Net cash flows from operating activities, including cash from trading portfolio 15,491 (11,353)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments:
Debt securities Held-to-Maturity (5,342)
Debt and equity securities Available-for-Sale (53,997) (240,091)
Other investments (919) (1,659)
Proceeds from maturities and exchanges of investments:
Debt securities Held-to-Maturity 2,620 5,781
Debt and equity securities Available-for-Sale 14,338 8,932
Other investments 361
Proceeds from sales of investments:
Debt and equity securities Available-for-Sale 45,265 277,132
Other investments 5,410 2,491
Capital and other expenditures (10,136) (2,674)
Cash received from portfolio transfers 4,647
Losses paid on portfolio transfers (775) (492)
Net change in short-term investments (14,744) (14,766)
Other 12
----------- -----------
Net cash flows from investing activities (7,918) 29,312
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash advanced from bank construction loans 17,749 14,751
Cash repaid on bank construction loans (19,193) (16,272)
Cash dividends paid to common stockholders (8,826) (8,824)
Proceeds from exercise of stock options 1,825 962
Purchase of treasury shares (285) (7,404)
----------- -----------
Net cash flows from financing activities (8,730) (16,787)
----------- -----------
Net increase (decrease) in cash (1,157) 1,172
Cash at beginning of period 12,125 6,919
----------- -----------
Cash at June 30, $ 10,968 $ 8,091
----------- -----------
----------- -----------
(continued)
</TABLE>
Page 4
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(continued)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
1997 1996
(Dollars in Thousands)
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH FLOWS
FROM OPERATING ACTIVITIES:
Net Income $ 15,000 $ 23,100
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 2,843 1,730
Realized gains on investments (3,870) (8,050)
Net cash from trading portfolio 1,416 7,050
Decrease (increase) in:
Accrued investment income (379) (449)
Premiums receivable (8,844) (12,678)
Receivable from reinsurers (1,749) (1,764)
Deferred policy acquisition costs (1,026) (974)
Federal income taxes 8,057 (599)
Real estate construction in progress 987 (12,064)
Increase (decrease) in:
Unpaid losses and loss expenses 7,353 (13,403)
Unearned premiums 7,808 10,335
Policyholders' dividends accrued (2,720) (1,975)
Other policyholder funds (2,821) (2,431)
Other (6,564) 819
---------- ----------
Net cash flows from operating activities $ 15,491 $ (11,353)
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
Page 5
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Computation of earnings per share:
Dollars and shares in thousands, except
per share data
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
(A) Net income $ 7,900 $ 10,700 $ 15,000 $ 23,100
-------- --------- --------- ---------
-------- --------- --------- ---------
(B) Number of shares used in calculating
primary earnings per share:
Weighted average outstanding shares
during the period 17,898 17,524 17,910 17,615
Additional common shares issuable under
employee stock options using the
treasury stock method (1) 250 166
-------- --------- --------- ---------
17,898 17,774 17,910 17,781
-------- --------- --------- ---------
-------- --------- --------- ---------
Net income per share (A)/(B) $ 0.44 $ 0.60 $ 0.84 $ 1.30
-------- --------- --------- ---------
-------- --------- --------- ---------
(C) Number of fully diluted shares:
Weighted average outstanding shares
during the period 17,946 17,524 17,934 17,615
Additional common shares issuable under
employee stock options using the
treasury stock method (2) 344 224
-------- --------- --------- ---------
17,946 17,868 17,934 17,839
-------- --------- --------- ---------
-------- --------- --------- ---------
Net income per share (A)/(C) $ 0.44 $ 0.60 $ 0.84 $ 1.29
-------- --------- --------- ---------
-------- --------- --------- ---------
</TABLE>
(1) Based on the average market price during the period.
(2) Based on the higher of the average market price or price at the end of each
period.
Note 2. New Accounting Standards
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings per Share (SFAS
No. 128). The accounting standard is effective for periods ending after
December 15, 1997, including interim periods. SFAS No. 128 requires dual
presentation of newly defined basic and diluted earnings per share on the
face of the income statement for all entities with complex capital
structures. Based on its current capital structure, Zenith National Insurance
Corp. (Zenith) will present basic earnings per share based on its
weighted-average shares outstanding for the period, without considering
options outstanding. Diluted earnings per share will be the equivalent of
primary earnings per share under current guidance. The following table shows
the pro-forma effect of adoption of SFAS No. 128 for Zenith.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
Basic earnings per share $.45 $.61 $.85 $1.31
Diluted earnings per share .44 .60 .84 1.30
Page 6
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). This accounting
standard is effective for periods ending after December 15, 1997, including
interim periods. SFAS No. 130 requires companies to report comprehensive
income and its components in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital. Comprehensive income includes all
changes in equity during a period except those resulting from investments by
shareholders and distributions to shareholders. Zenith has not determined the
impact of SFAS No. 130.
Also, in June 1997, the FASB issued Statement of Financial Accounting
Standards, No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). This statement specifies revised guidelines
for determining an entity's operating segments and the type and level of
financial information to be disclosed. SFAS No. 131 is effective for periods
ending after December 15, 1997, including interim periods. Zenith has not
determined the impact of SFAS No. 131.
Note 3. Proposed Acquisition
On June 17, 1997, Zenith announced that its wholly-owned subsidiary, Zenith
Insurance Company (Zenith Insurance), had entered into an agreement with
RISCORP, Inc. (RISCORP) to purchase all of the assets of RISCORP related to
its workers' compensation business, including RISCORP's existing in-force
business, as well as the right to all new and renewal policies. Zenith
Insurance will also purchase RISCORP's "First Call" managed care workers'
compensation system. After the transaction closes, RISCORP will no longer
engage in the workers' compensation or managed care businesses. In connection
with the transaction, Zenith Insurance will assume certain liabilities
related to RISCORP's insurance businesses, including $15 million in
indebtedness of RISCORP. The purchase price, which will be in cash, will be
the difference between the book value of the assets purchased and the book
value of the liabilities assumed by Zenith Insurance on the closing date,
subject to a minimum purchase price of $35 million. Zenith intends to finance
the purchase price with bank financing and internal funds.
Effective June 18, 1997, Zenith Insurance entered into a reinsurance
agreement with RISCORP. Under the reinsurance agreement, Zenith Insurance
has reinsured all of RISCORP's liabilities on or after June 18, 1997 in
respect of new, renewal, and in-force Florida workers' compensation policies
in the event RISCORP is declared insolvent under applicable insurance law
pursuant to court order. RISCORP has assigned to Zenith Insurance its right
to receive certain payments from other reinsurers in respect of the business
Zenith Insurance has reinsured. In addition, RISCORP has established a trust
account of approximately $50 million to reimburse Zenith Insurance for any
amounts paid under the reinsurance agreement. Although there can be no
assurance that such amount ultimately would be sufficient to reimburse Zenith
fully for such payments, Zenith believes that any contingent liability under
this agreement as of June 30, 1997 would not be material.
The closing of the purchase of RISCORP's assets and liabilities is subject to
several conditions, including the review and approval by appropriate state
and federal regulatory agencies and by RISCORP's shareholders. The agreement
has been approved by the Boards of Directors of Zenith, Zenith Insurance, and
RISCORP. It cannot be predicted at this time when or whether the closing will
occur.
Page 7
<PAGE>
Note 4. Contingencies
The following updates contingencies set forth in Note 8 of Zenith's
consolidated financial statement as of December 31, 1996.
Florida has created a State Disability Trust Fund ("SDTF") and assesses
workers' compensation insurers to pay for what is commonly referred to as
"Second Injuries". Assessments, based upon premiums written, have been
inadequate to completely fund obligations of SDTF. Zenith expects future
political changes to affect SDTF, the nature of which cannot be determined at
this time. Zenith has recorded a receivable from SDTF at June 30, 1997 based
upon specific claims identified by Associated General Commerce - Self
Insurers' Trust Fund ("AGC-SIF"), and its historical recovery experience, the
recoverability of which is dependent upon such political changes, if any.
Zenith has not recorded a liability for any future assessments from SDTF.
On July 5, 1995, Zenith's new workers' compensation computer system became
operational. In addition to enhancing data processing, the new system is
designed, among other things, to improve workflow in the workers'
compensation claims handling process. Management observed certain unusual
claim reserving trends and patterns in 1995, 1996, and 1997, possibly related
to disruption of normal workflows due to implementation of the new system.
Workflows in the future may continue to be impacted as training and
optimization of the new system continues. Management believes that its
estimate of liabilities for unpaid workers' compensation losses and loss
adjustment expenses (amounting to $411,223,000 of the total reserves for
unpaid losses and loss adjustment expenses of $627,431,000) at June 30,1997
included in these financial statements is adequate. However, subsequent
re-interpretation of currently available data or any new information that
becomes available may change the estimate of such liabilities in future
periods and such changes, if any, will be reflected in the financial
statements of the period in which they occur.
Note 5. Subsequent Event
On July 24, 1997, Zenith entered into a credit agreement with Bank of America
NT & SA providing for a $50 million revolving line of credit in two tranches.
One tranche for $20 million is for a one year term; the other for $30
million, a five year term.
Page 8
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
In the opinion of management, all adjustments necessary for a fair
presentation of the results of operations for the periods presented
(consisting only of normal recurring adjustments) have been included. The
results of operations for an interim period are not necessarily indicative of
the results for an entire year.
On May 15, 1997, the Board of Directors declared a regular quarterly cash
dividend of $.25 per share on the outstanding shares, payable August 15, 1997
to stockholders of record at the close of business on July 31, 1997.
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW:
Zenith's principal source of consolidated earnings is the income, including
investment income, from operations of its property and casualty insurance
businesses. The comparative results of operations are set forth in the table
below, followed by a discussion of significant changes.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
Dollars in thousands 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income, after tax $8,877 $8,536 $17,142 $16,552
Realized gains on investments, after tax 1,298 2,456 2,517 5,233
- ----------------------------------------------------------------------------------------------------
Sub-total 10,175 10,992 19,659 21,785
- ----------------------------------------------------------------------------------------------------
Property-casualty underwriting, after tax:
Income (loss) excluding catastrophes (1,506) 688 (1,929) 3,464
Catastrophe losses (910)
- ----------------------------------------------------------------------------------------------------
Property-casualty underwriting income (loss) (1,506) 688 (2,839) 3,464
- ----------------------------------------------------------------------------------------------------
Income from real estate operations, after tax 442 375 599 538
Interest expense, after tax (531) (920) (1,269) (1,843)
Parent expenses, after tax (680) (435) (1,150) (844)
- ----------------------------------------------------------------------------------------------------
Net income $7,900 $10,700 $15,000 $23,100
- ----------------------------------------------------------------------------------------------------
</TABLE>
Page 9
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
Condition and Results of Operations (continued)
PROPERTY AND CASUALTY INSURANCE OPERATIONS:
Premiums earned, underwriting results and combined ratios before tax for the
three and six months ended June 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months ended June 30, Six Months Ended June 30,
Dollars in Thousands 1997 1996 Change 1997 1996 Change
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums Earned
Workers' Compensation
California $35,292 $35,722 (1%) $69,237 $73,686 (6%)
Outside California 27,586 13,651 102% 54,386 27,213 100%
--------- --------- --------- ---------
Total Workers' Compensation 62,878 49,373 27% 123,623 100,899 23%
Other Property & Casualty 54,751 49,820 10% 107,475 99,989 7%
Reinsurance 8,202 9,062 (9%) 17,096 19,604 (13%)
--------- --------- --------- ---------
Total $125,831 $108,255 16% $248,194 $220,492 13%
--------- --------- --------- ---------
--------- --------- --------- ---------
Underwriting Income (Loss) Before Taxes
Workers' Compensation ($6,777) ($4,322) ($12,758) ($5,632)
Other Property & Casualty 1,664 2,493 2,636 4,702
Reinsurance 2,996 2,875 6,001 6,378
--------- --------- --------- ---------
Total ($2,117) $1,046 ($4,121) $5,448
--------- --------- --------- ---------
--------- --------- --------- ---------
Combined Loss and Loss Expense Ratios
Workers' Compensation
Losses and Loss Expenses 77.7% 74.3% 78.0% 71.6%
Underwriting Expenses 33.1% 33.8% 33.1% 33.1%
Dividends to Policyholders 0.7% (0.8%) 0.9%
--------- --------- --------- ---------
Combined Ratio 110.8% 108.8% 110.3% 105.6%
Other Property & Casualty
Losses and Loss Expenses 66.8% 65.3% 67.1% 65.4%
Underwriting Expenses 30.2% 29.7% 30.4% 29.9%
--------- --------- --------- ---------
Combined Ratio 97.0% 95.0% 97.5% 95.3%
Reinsurance
Losses and Loss Expenses 46.4% 57.3% 49.1% 52.2%
Underwritng Expenses 17.1% 11.0% 15.8% 15.3%
--------- --------- --------- ---------
Combined Ratio 63.5% 68.3% 64.9% 67.5%
Total Property & Casualty
Losses and Loss Expenses 70.9% 68.8% 71.3% 67.1%
Underwriting Expenses 30.8% 29.9% 30.8% 30.0%
Dividends to Policyholders 0.3% (0.4%) 0.4%
--------- --------- --------- ---------
Combined Ratio 101.7% 99.0% 101.7% 97.5%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 10
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
Condition and Results of Operations (continued)
Underwriting results declined in the quarter and six months ended June 30,
1997 compared to the corresponding periods in 1996 principally because of the
continued decline in workers' compensation profitability.
The decline in workers' compensation profitability is primarily due to
adverse development of prior year loss and loss expenses in the quarter and
six months ended June 30, 1997. Workers' compensation premium growth is
primarily due to the previously announced Florida acquisition, which was
effective December 31, 1996. Management expects that workers' compensation
premiums generated outside of California will increase in future periods if
the acquisition of RISCORP's insurance assets is consummated.
Competition in the workers' compensation business continues to be intense and
profitability is dependent upon the ability to maintain adequate rates,
manage claims costs and keep operating expenses in line with premium volume.
Zenith is unable to predict when its California Workers' Compensation
operation will return to underwriting profitability that is consistent with
Zenith's historical experience.
The results of Other Property and Casualty operations reflect an increase in
the severity of newly reported claims in the quarter and six months ended
June 30, 1997, compared to the corresponding periods in 1996. In addition,
the six months ended June 30, 1997 includes losses from severe weather damage
in California, which amounted to $1.4 million, before tax.
Reinsurance premiums earned declined in the quarter and six months ended June
30, 1997 compared to the corresponding periods in 1996 due primarily to
selected non-renewal of certain reinsurance treaties and softening of
property catastrophe rates.
Page 11
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
Condition and Results of Operations (continued)
INVESTMENTS:
Fluctuations in interest rates continue to impact stockholders' equity due to
changes in the market value of fixed maturity securities classified as
Available-for-Sale. At June 30, 1997, the unrealized loss on such fixed
maturities was $3.8 million, before deferred taxes, compared to an unrealized
loss of $3.0 million, before deferred taxes, at December 31, 1996. This
change resulted in a decrease in stockholders' equity of $.5 million, after
deferred taxes, between December 31, 1996 and June 30, 1997. Stockholders'
equity will continue to be affected by volatility in the fixed maturity
securities markets.
Investment income increased in the quarter and six months ended June 30, 1997
compared to the corresponding periods in 1996 principally due to the increase
in invested assets for Zenith Insurance associated with its merger with
AGC-SIF.
The yields on invested assets, which vary with the general level of interest
rates, were as follows:
- -------------------------------------------------------------------
Three Months Six Months
Investment Yields Ended June 30, Ended June 30,
1997 1996 1997 1996
- -------------------------------------------------------------------
Pre-tax 6.1% 6.2% 5.9% 6.0%
Post-tax 4.0% 4.1% 3.9% 4.0%
- -------------------------------------------------------------------
Bonds with investment grade ratings represented 97% of the consolidated
carrying values of investments in bonds at both June 30, 1997 and December
31, 1996. At June 30, 1997 and December 31, 1996, the average maturity of
the investment portfolio was 5.1 years.
Page 12
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
Condition and Results of Operations (continued)
The change in the carrying value of Zenith's consolidated investment
portfolio during the six months ended June 30, 1997 was as follows:
Dollars in thousands
- -----------------------------------------------------------------------------
Carrying Value at December 31, 1996 $852,799
Purchases at cost 54,916
Maturities and exchanges of investments (17,319)
Proceeds from sales of fixed maturity investments (52,090)
Realized gains from maturities and exchanges of investments:
Available-for-sale 46
Realized gains from sales of investments:
Available-for-sale 2,785
Trading portfolio 190
Other investments 849
-------
Total realized gains on investments 3,870
Unrealized gains on investments 137
Increase in short-term investments 15,680
Net amortization of bonds and preferred stocks and other changes (1,155)
- -----------------------------------------------------------------------------
Carrying Value at June 30, 1997 $856,838
- -----------------------------------------------------------------------------
LIQUIDITY:
Zenith is principally dependent upon its portfolio of marketable securities
and the investment yields thereon; dividends from its insurance subsidiaries,
whose operations are supported by their own cash flows; and available lines
of credit to pay its expenses, service debt and pay any cash dividends which
may be declared to its stockholders.
On July 24, 1997, Zenith entered into a Credit Agreement with Bank of America
NT&SA, providing for a $50 million revolving line of credit in two tranches.
One tranche for $20 million is for a one year term; the other for $30
million, a five year term. This new line, together with existing lines,
provide Zenith with $100 million of revolving credit, which is currently
available, along with internal funds, to fund the closing of the proposed
acquisition of certain assets and liabilities from RISCORP. The closing date
and ultimate purchase price cannot be determined at this time, although the
purchase agreement calls for a minimum purchase price of $35 million.
The increase in net cash flows from operations for the six months ended June
30, 1997 compared to the same period last year is due primarily to increased
premiums collected in the Workers' Compensation operations, resulting from
the acquisition of AGC-SIF on December 31, 1996.
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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
Condition and Results of Operations (continued)
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.
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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Stockholders' Meeting of Zenith was held on May 15, 1997. The
only matter presented to Stockholders was the election of Directors.
The tabulation of votes for the nominees, all of whom were elected, is as
follows:
Director Votes for Votes Withheld
- -------- --------- --------------
George E. Bello 14,849,646 113,647
Max M. Kampelman 14,847,206 116,087
Jack M. Ostrow 14,847,206 116,087
William Steele Sessions 14,849,846 113,447
Harvey L. Silbert 14,847,206 116,087
Robert M. Steinberg 14,194,710 768,583
Saul P. Steinberg 14,194,510 768,783
Gerald Tsai, Jr. 14,849,846 113,447
Stanley R. Zax 14,849,846 113,447
There were no votes cast against any Director, no abstentions and no broker
non-votes.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
[a] Exhibits
[3.1] Certificate of Incorporation of Zenith as in effect immediately prior
to November 22, 1985. (Incorporated herein by reference to Exhibit 3
to Zenith's amendment on Form 8, date of amendment October 10, 1985,
to Zenith's Current Report on Form 8-K, date of report July 26, 1985.)
Certificate of Amendment to Certificate of Incorporation of Zenith,
effective November 22, 1985. (Incorporated herein by reference to
Zenith's Current Report on Form 8-K, date of report November 22, 1985.)
[3.2] By-Laws of Zenith, as currently in effect. (Incorporated herein by
reference to Exhibit 3.2 to Zenith's Annual Report on Form 10-K for
the year ended December 31, 1988.)
[10.1] Interim Reinsurance Agreement by and among Zenith Insurance Company,
RISCORP Insurance Company and RISCORP Property & Casualty Insurance
Company dated as June 18, 1997, together with (1) related Trust
Agreement by and among RISCORP Insurance Company, as guarantor, Zenith
Insurance Company, as beneficiary, and First Union National Bank, as
trustee, dated as of June 18, 1997 (with amendment no. 1 thereto), and
(2) related Trust Agreement by and among RISCORP Property & Casualty
Insurance Company, as guarantor, Zenith Insurance Company, as
beneficiary, and First Union National Bank, as trustee, dated as of
June 18, 1997 (with amendment no. 1 thereto). (Previously filed with
Second Quarter Form 10-Q; not included herewith)
[10.2] Revolving Note dated July 1, 1997, from Zenith National Insurance
Corp. to City National Bank. (Previously filed with Second Quarter
Form 10-Q; not included herewith)
[10.3] Credit Agreement dated as of July 24, 1997 between Zenith National
Insurance Corp. and Bank of America National Trust and Savings
Association, together with Tranche A and Tranche B Promissory Notes
referenced therein. (Previously filed with Second Quarter Form
10-Q; not included herewith)
[11] Statement re: computation of per share earnings. Part I, Item 1,
Note 1 of the consolidated financial statements is incorporated herein
by reference.
[27] Financial Data Schedule (Previously filed with Second Quarter Form
10-Q; not included herewith)
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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART II OTHER INFORMATION
[b] Reports on Form 8-K
The registrant filed a Form 8-K Current Report dated June 25, 1997,
followed by amendment No. 1 thereto on Form 8-K/A Current Report
dated July 11, 1997, in connection with the proposed acquisition
by Zenith Insurance Company of certain assets of RISCORP, Inc.
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<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ZENITH NATIONAL INSURANCE CORP.
Registrant
Date: August 29, 1997 /s/ Fredricka Taubitz
--------------------------------------------
Fredricka Taubitz, Executive Vice President
& Chief Financial Officer
(Principal Accounting Officer)
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