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THE ZENITH
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND 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)
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DELAWARE 95-2702776
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION
OR ORGANIZATION)
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21255 CALIFA STREET, WOODLAND HILLS, 91367-5021
CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 713-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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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)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on March 9, 1998 was approximately $248,495,000
(based on the closing sale price of such stock on such date).
At March 9, 1998, 16,981,000 shares of Common Stock were outstanding, net of
7,792,000 shares of treasury stock.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Annual Report to Stockholders for fiscal year ended
December 31, 1997 -- Part I and Part II.
(2) Portions of the Proxy Statement in connection with the 1998 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 (as defined
below) for the 10 years ended December 31, 1997 of Zenith's property-casualty
operations was 100.9%. 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. 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. On October 10, 1997, Zenith Insurance Company
of Florida ("ZIC of Florida") was incorporated in Florida with a capitalization
of $6 million. ZIC of Florida has no direct business, but has assumed business
from Zenith Insurance. See "Reinsurance Ceded -- Pooling Agreement."
On June 17, 1997, Zenith Insurance entered into an agreement with RISCORP,
Inc. and certain of its subsidiaries (collectively "RISCORP") to purchase all of
the assets of RISCORP related to its workers' compensation business and to
assume certain liabilities related to RISCORP's insurance businesses. See
"Pending RISCORP Acquisition" on page 31 of "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations" and
Notes to Consolidated Financial Statements -- Note 14 -- "Acquisitions" on pages
54 and 55 of Zenith's 1997 Annual Report to Stockholders, which are hereby
incorporated by reference.
The 1997 edition of Best's Key Rating Guide ("Best's") assigns 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. Zenith is currently
under review by A.M. Best Company and Standard & Poor's.
At December 31, 1997, Zenith and its subsidiaries had approximately 1,400
full-time 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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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.
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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.
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.
Retrocession A reinsurance of reinsurance assumed.
Statutory accounting Accounting practices 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.
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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 (49% of 1997 consolidated net premiums earned); other
property-casualty, principally automobile, homeowners, farmowners, commercial
coverages and health insurance (44% of 1997 consolidated net premiums earned);
and reinsurance (7% of 1997 consolidated net premiums earned). Results of such
operations for the three years ended December 31, 1997 are set forth in the
table on page 25 of Zenith's 1997 Annual Report to Stockholders, which table is
hereby incorporated by reference. The earnings of Zenith's property-casualty
operations are supplemented by the generation of investment income discussed
under "Investments."
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 Notes to Consolidated
Financial Statements -- Note 17 -- "Segment Information" on pages 55 and 56 of
Zenith's 1997 Annual Report to Stockholders, which note is hereby incorporated
by reference.
PROPERTY-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. On December 31, 1996, Zenith
completed the acquisition of AGC-SIF in Florida.
Net premiums earned in 1997 by state are set forth in the table below:
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(DOLLARS IN THOUSANDS) 1997 PREMIUMS EARNED %
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California.................... $ 129,791 53.6%
Florida....................... 47,214 19.5
Texas......................... 28,045 11.6
Arkansas...................... 12,377 5.1
Illinois...................... 9,844 4.1
Other......................... 14,793 6.1
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$ 242,064 100.0%
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Premiums earned from Florida are expected to further increase upon closing
of the pending RISCORP acquisition. See "General."
According to A.M. Best, Zenith's five-year loss ratio of 45.1% through 1996
(latest available statistics) was the lowest loss ratio of the top 50
property-casualty 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 101.9%.
Zenith Insurance is licensed to conduct business in 43 states and the
District of Columbia. 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,
although the California workers' compensation market has been impacted by
intense price competition and a decline in industry premium volume since 1995.
Zenith's non-California underwriting results in 1997 were more favorable than
its California results, and management intends to proceed with its national
expansion. However, increased national competition is expected to follow from
these favorable trends.
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 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.
Companies must file such rates with the California Department of Insurance, but
the use of scheduled rating credits allow companies considerable flexibility in
determining the amount of premium to be charged to a policyholder or potential
policyholder. 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 success of Zenith's geographic expansion outside
of California, the economic outlook for area in which Zenith operates, Zenith's
continuing efforts to control medical and indemnity costs through return-to-work
and managed care strategies and the ability to keep operating expenses in line
with premium volume. 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% or lower.
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 became
insignificant as an element in workers' compensation insurance in California.
Zenith continued to market its integrated workers' compensation, health and
disability insurance products in California and Arkansas 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. The policies are sold on an integrated basis in
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California and Arkansas under the name "SinglePoint." SinglePoint did not have a
significant impact on the 1997 operations of Zenith.
PROPERTY-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. For the 12 years since CalFarm was acquired by Zenith, the
combined ratio of Zenith's Other Property-Casualty operation was 100.6%.
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 1997. CalFarm Insurance insured approximately 19,300
personal automobiles and 64,200 commercial and farm vehicles in 1997. Farmowners
business is the second largest line of CalFarm Insurance's business,
representing approximately 11% of Zenith's property and casualty premiums
written in 1997.
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 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 were implemented during 1997 which further
limit the impact of territorial rating on automobile insurance rates.
In January 1997, the mandatory proof of insurance law and Proposition 213,
which created the Personal Responsibility Act of 1996, became effective in
California. Proposition 213 limits non-economic recoveries by uninsured
motorists in motor vehicle accidents.
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 provides limited earthquake coverage throughout California. Participation
in the CEA is voluntary and Zenith 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. During 1997, Zenith continued to write homeowners and
associated earthquake exposures. Earthquake exposure is monitored
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through the use of earthquake modeling software and simulation techniques and
through the use of industry experts. Catastrophe reinsurance is used to protect
Zenith from excessive catastrophe losses. See "Reinsurance Ceded."
PROPERTY-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 1998 and
premium income in 1998 may be reduced compared to 1997. Since the inception of
this operation in 1985, the combined ratio of Zenith's Reinsurance operation was
94.1%.
On January 1, 1995, Zenith Insurance became a corporate underwriting member
of Lloyd's through a 100% wholly-owned subsidiary, ZIC Lloyd's Underwriting
Limited, which had committed funds to support the underwriting of a certain
syndicate. During the fourth quarter of 1997, this subsidiary was sold at a
profit.
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 1997, Perma-Bilt closed and
delivered 305 homes at an average selling price of $149,000, compared to 287
homes at an average selling price of $145,000, the prior year. Sales in 1997
were $45,419,000 and pre-tax income was $1,678,000 compared to sales of
$41,554,000 and pre-tax income of $1,909,000 the previous year. Land acquired by
Perma-Bilt at a cost of about $33,466,000 will support the construction and sale
of an estimated 1,150 homes over the next several years and possibly some
commercial and/or apartment development. Increased interest rates may impact the
rate of home sales, but Zenith believes that the land it has acquired is
strategically located and will have long-term value.
YEAR 2000
In the spring of 1996, Zenith began replacing and modifying its computer and
business systems to be Year 2000 compliant. Zenith has established a central
team to evaluate and implement the changes to computer systems, applications and
business processes necessary to
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achieve Year 2000 conversion with no disruption to business operations. Even
though Zenith has been communicating with third parties with whom it does
business to assure that they are Year 2000 compliant, Zenith may be adversely
impacted if such third parties do not address this issue successfully. Through
December 31, 1997, Zenith has incurred about $2.5 million on the Year 2000
efforts and anticipates an additional $2.0 million will be incurred through
1999. All of the significant internal insurance computer systems, applications
and business processes are expected to be fully compliant by the end of 1998.
Management of RISCORP has informed Zenith that it is currently in the
process of identifying and evaluating its computer and business systems with
respect to Year 2000 issues. At this time, however, management of RISCORP has
neither informed Zenith of the total cost of achieving Year 2000 compliance for
its systems nor presented a plan for doing so. If the transaction closes, Zenith
may be adversely impacted if substantial changes are required after the closing
for RISCORP's computer and business systems to achieve Year 2000 compliance, and
if such changes are not covered by indemnification rights contained in the
purchase agreement.
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 36 and 37
of Zenith's 1997 Annual Report to Stockholders, which is hereby incorporated by
reference, and the table setting forth the reconciliation of changes in the
liabilities for loss and loss adjustment expenses included in Notes to
Consolidated Financial Statements -- Note 13 -- "Loss and Loss Adjustment
Expense Reserves" on page 53, of Zenith's 1997 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 Notes to Consolidated Financial Statements -- Note 1 -- "Summary of
Accounting Policies, Operations, and Principles of Consolidation" on pages 44
through 47 of Zenith's 1997 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 insurance business is set forth in
the table on page 26 of Zenith's 1997 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 four regional offices in California and offices
outside of California in Texas, Arkansas, Pennsylvania, Utah, Illinois and
Florida, each of which is fully staffed to conduct all
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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 enable 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 to improve 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.
In 1995, Zenith's new workers' compensation computer system ("system")
became operational. Management observed certain unusual claim reserving trends
and patterns in 1995 and 1996, and to a much lesser degree, during the first
three quarters of 1997. Based on currently available data, these claim reserving
trends and patterns have stabilized. Any subsequent re-interpretation of new
information that becomes available from the system which may change the estimate
of such liabilities in future periods is not considered to have a material
impact on the financial position or results of operations.
In 1997, loss and loss adjustment expense reserves were strengthened by
approximately $12 million for accident years 1995 and 1996. Additionally, the
1997 accident year loss ratio was increased.
OTHER PROPERTY-CASUALTY
Other Property-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." In 1997,
CalFarm Insurance sustained losses of $1,500,000 in conjunction with California
storms. 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.
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 3 years.
Zenith's Reinsurance reserves constitute approximately 13% of its total
reserves, net of ceded reinsurance, for property and casualty unpaid losses and
loss adjustment expenses at December 31, 1997, 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." There were no catastrophes in 1996 and 1997.
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
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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. 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." 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 among 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
"Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations -- Investments" on pages 30 and 31 of Zenith's 1997 Annual
Report to Stockholders, which discussion is hereby incorporated by reference. At
December 31, 1997 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
9
<PAGE>
common stocks. The average life of the consolidated portfolio was 4.2 years at
December 31, 1997. Investment income by segment is set forth in Notes to
Consolidated Financial Statements -- Note 17 -- "Segment Information" on pages
55 and 56 of Zenith's 1997 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 SFAS No. 115, Zenith has identified certain securities,
amounting to approximately 92% of the investments in debt securities at December
31, 1997, as available-for-sale. In 1997 stockholders' equity increased by $5.0
million, net of deferred taxes, as a result of changes in the fair values of
such investments.
REINSURANCE CEDED
In accordance with general industry practices, Zenith's insurance
subsidiaries annually purchase excess of loss reinsurance. Reinsurance makes the
assuming reinsurer liable to the ceding company to the extent of the
reinsurance. It does not, however, discharge the ceding company from its primary
liability to its policyholders in the event 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,
unforeseen 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
$26,191,000, $24,642,000 and $21,112,000 in 1997, 1996 and 1995, respectively,
or 5.3%, 5.4% and 4.9% of earned premiums in 1997, 1996 and 1995, respectively.
Reinsurance recoverable on unpaid losses amounted to $87,665,000, $93,651,000
and $54,429,000 in 1997, 1996 and 1995, respectively, or 14.3%, 15.1% and 10.5%
of gross reserves for unpaid losses and loss adjustment expenses in 1997, 1996
and 1995, respectively. Each insurance subsidiary maintains separate reinsurance
arrangements, which were as follows during 1997:
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, Everest Reinsurance Company 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, ReliaStar 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, 1997. 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. Beginning in 1997, reinsurance for
business written in Florida was 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
10
<PAGE>
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
$80,000,000, excess of a retention of $5,000,000, for which the principal
reinsurers are General Reinsurance Corporation and Centre Cat Ltd. The
catastrophe reinsurance was increased to 95% of $110,000,000, excess of a
retention of $5,000,000 effective February 1, 1998. CalFarm Insurance also
maintains reinsurance agreements with Employers Reinsurance Corporation and
Duncanson & Holt for excess risks on its accident and health contracts.
Employers Reinsurance Corporation provides coverage 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,
American Reinsurance Company and other reinsurers rated A+ by A.M. Best Company.
Pooling Agreement -- Zenith Insurance, CalFarm Insurance, ZNAT Insurance,
ZIC of Florida and Zenith Star are parties to a pooling agreement. Under the
pooling 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 four companies in the following
proportions: Zenith Insurance, 77.5%; CalFarm Insurance, 18%; ZNAT Insurance,
2%; ZIC of Florida, 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 1,400 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 policies. Zenith Insurance's assumed reinsurance
premiums are generated nationally by brokers and reinsurance intermediaries.
CalFarm Insurance maintains a sales force of approximately 160 agents who
primarily sell insurance products for CalFarm Insurance, principally in rural
and suburban areas. In addition, 210 independent agents market CalFarm Insurance
products and 1,285 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. 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 and health
insurance. The Farm Bureau is California's
11
<PAGE>
largest general farm organization, and represents more than 75,000 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 75,000 member
families, approximately 60% are insured by CalFarm Insurance. The business of
CalFarm Insurance is closely tied to the California farm economy. However,
approximately 46% of Farm Bureau 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%, 31% and 30% of Zenith's total written premium for the years
1997, 1996 and 1995, respectively. The agreement of CalFarm Insurance with the
Farm Bureau, which is subject to cancellation by either party on six months'
notice, requires CalFarm Insurance to make 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 by CalFarm
Insurance to the Farm Bureau were approximately $1 million in each of 1997, 1996
and 1995.
CalFarm Insurance continues to be the largest writer of farmowners policies
in the state and benefits from its sponsorship by 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
12
<PAGE>
supervision by the California Department of Insurance, except for Zenith Star
and ZIC of Florida, which are primarily subject to regulation and supervision in
the State of Texas and the State of Florida, respectively. These states have
broad regulatory, supervisory and administrative powers. Such powers relate to,
among other things, the granting and revocation of licenses to transact
business; the licensing of agents; the standards of solvency to be met and
maintained; the nature of and limitations on investments; approval of policy
forms and rates; periodic examination of the affairs of insurance companies; and
the form and content of required financial statements.
In California, Zenith Insurance, CalFarm Insurance and ZNAT Insurance are
required, with respect to their workers' compensation line of business, to
maintain on deposit investments meeting specified standards that have an
aggregate market value equal to the companies' loss reserves. For this purpose,
loss reserves are defined as the current estimate of reported and unreported
claims 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, 1996. Although the final Report of Examination
has not yet been issued, Management does not expect any material findings.
Zenith Star was examined by the Texas Department of Insurance as of December 31,
1996. Although the final Report of Examination has not yet been issued,
Management does not expect any 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, Model Insurance Laws, Regulations and Guidelines (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 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. At December 31, 1997, adjusted
capital under the RBC regulations for the Zenith Insurance Group (consisting of
Zenith Insurance, CalFarm Insurance, ZIC of Florida, ZNAT Insurance and Zenith
Star) was 332%, significantly above the RBC control, or required, level of
capital under the regulations.
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 1997 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.
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<PAGE>
The NAIC is in the process of codifying statutory accounting principles to
provide a comprehensive basis of statutory accounting and reporting for use by
insurance departments, insurers, and auditors. The codified principles have not
yet been finalized, therefore, the effective date has not been determined.
Implementation of the codified statutory accounting principles may affect the
surplus level and the capitalization requirement of Zenith's insurance
subsidiaries on a statutory basis. Zenith has not determined the impact of this
codification.
INSURANCE HOLDING COMPANY SYSTEM REGULATORY ACT
Zenith's insurance subsidiaries are also subject to the California, Florida
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. The Holding
Company Acts also limit dividend payments and material transactions by Zenith's
insurance subsidiaries. See "Management's Discussion and Analysis of
Consolidated Financial Condition and Result of Operations -- Liquidity and
Capital Resources" on page 32 of Zenith's 1997 Annual Report to Stockholders,
which discussion is hereby incorporated by reference.
OTHER REGULATION
Property and casualty insurance coverage is subject to certain regulation as
described herein under "Description of Business -- Property-Casualty -- Other,"
and Zenith's other property-casualty rates are subject to prior approval by the
California Department of Insurance. The provisions of Proposition 103 do not
apply to Workers' Compensation, Health insurance or Reinsurance, which combined
to account for 64.5% of Zenith's property-casualty earned premiums in 1997.
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 Notes to Consolidated
Financial Statements -- Note 8 -- "Commitments and Contingent Liabilities" on
page 51 of Zenith's 1997 Annual Report to Stockholders, which note is hereby
incorporated by reference.
CalFarm Insurance owns its home office building consisting of 133,000 square
feet (and surrounding property of approximately 4 acres) in Sacramento,
California.
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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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Zenith's Common Stock, par value $1.00 per share, is traded on the New York
Stock Exchange under the symbol ZNT. 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 1997 1996
- ------------------------------------------------------------ ------- -------
<S> <C> <C>
First
High...................................................... 27 7/8 24 7/8
Low....................................................... 25 7/8 21 1/8
Second
High...................................................... 27 1/2 28 7/8
Low....................................................... 24 5/8 23 7/8
Third
High...................................................... 28 5/8 28 1/2
Low....................................................... 26 5/16 26 1/4
Fourth
High...................................................... 28 3/4 28
Low....................................................... 25 7/16 25 1/4
</TABLE>
As of March 9, 1998, there were 353 registered 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>
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
February 27, 1997................... $.25 cash per share April 30, 1997 May 15, 1997
May 15, 1997........................ $.25 cash per share July 31, 1997 August 15, 1997
September 4, 1997................... $.25 cash per share October 31, 1997 November 14, 1997
December 11, 1997................... $.25 cash per share January 30, 1998 February 13, 1998
February 24, 1998................... $.25 cash per share April 30, 1998 May 15, 1998
</TABLE>
The Holding Company Acts limit the ability of Zenith Insurance to pay
dividends to Zenith, and of CalFarm Insurance, ZNAT Insurance, ZIC of Florida
and Zenith Star to pay dividends to Zenith Insurance, by providing that the
appropriate insurance regulatory authorities in the State of California, Texas
or Florida 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 1997, Zenith Insurance paid
dividends of $22,750,000 to Zenith. During 1998, Zenith Insurance will be able
to pay $27,841,000 in dividends to Zenith without prior approval. In 1998,
CalFarm Insurance, ZNAT Insurance, ZIC of Florida and Zenith Star, together,
will be able to pay $9,317,000 in dividends to Zenith Insurance without prior
approval.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The five-year summary of selected financial information and accompanying
notes, included in Zenith's 1997 Annual Report to Stockholders on pages 34 and
35, is hereby incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
"Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations," included in Zenith's 1997 Annual Report to
Stockholders on pages 24 to 33 is hereby incorporated by reference.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable for the year ended December 31, 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to pages 36 and 37 of Zenith's 1997 Annual Report to
Stockholders for information setting forth the loss and loss adjustment expense
liability development for 1987 through 1997 and to the consolidated financial
statements and notes thereto on pages 38 to 56 of Zenith's 1997 Annual Report to
Stockholders, which are hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
16
<PAGE>
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 distributed to stockholders in connection with Zenith's 1998 Annual
Meeting of Stockholders which is to be filed by Zenith after the date this
Report on Form 10-K is filed (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 60 Chairman of the Board and President (1) Annual 1977
Fredricka Taubitz 54 Executive Vice President and Annual 1985
Chief Financial Officer (1)
Jack D. Miller 52 Executive Vice President (2) Annual (3)
James P. Ross 51 Senior Vice President (1) Annual 1978
John J. Tickner 59 Senior Vice President and Secretary (1) Annual 1985
Keith E. Trotman 61 Senior Vice President (4) Annual 1988
Philip R. Hunt 55 Senior Vice President (2) Annual 1988
</TABLE>
- ------------------------
(1) Officer of Zenith and its subsidiaries.
(2) Officer of Zenith's subsidiaries only.
(3) Designated as an executive officer of the registrant on February 24, 1998.
(4) Ceased being an executive officer of the registrant on February 24, 1998.
Each of the executive officers has occupied an executive position with
Zenith or a subsidiary of Zenith for more than five years, except for Mr. Jack
D. Miller who was previously with Industrial Indemnity Company, a
Property-casualty insurance company, serving as the President and Chief
Executive Officer from 1995 to 1997; acting President and Chief Executive
Officer from 1994 to 1995; and in various other positions from 1987 to 1994,
culminating in Executive Vice President and Chief Operating Officer.
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,"
"Executive Compensation," "Summary Compensation Table," "Option/SAR Grants in
Last Fiscal Year," "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," "Compensation Committee
Interlocks and Insider Participation" and "Board of Directors' Report on
Executive Compensation, Performance Bonus Committee Report on Performance Based
Compensation Plans for Executive Officers" in the Proxy Statement is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is hereby incorporated
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth in footnote 3 to the table set forth under the
caption "Election of Directors" in the Proxy Statement is hereby incorporated by
reference.
17
<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 Zenith's 1997 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, 1997 and 1996
Consolidated Statement of Operations for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
2.FINANCIAL STATEMENT SCHEDULES
Zenith National Insurance Corp. and Subsidiaries
As of December 31, 1997.
I -- Summary of Investments -- Other Than Investments in Related
Parties
For the years ended December 31, 1997, 1996 and 1995.
III -- Supplementary Insurance Information
IV -- Reinsurance
Zenith National Insurance Corp.
As of December 31, 1997 and 1996 and for the years ended December
31, 1997, 1996 and 1995.
II -- Condensed Financial Information of Registrant
Property and Casualty Loss Development on pages 36 and 37 of Zenith's
1997 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.
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<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. (Incorporated herein by reference to Exhibit 2.1 to Zenith's Annual
Report on Form 10-K for the year ended December 31, 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>
19
<PAGE>
<TABLE>
<S> <C> <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 10-Q 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 10-Q for the quarter ended June 30, 1996.)
*10.8 Employment Agreement, dated December 11, 1997, between Zenith and Fredricka Taubitz.
*10.9 Employment Agreement, dated January 5, 1998, between Zenith and John J. Tickner.
*10.10 Employment Agreement, dated December 11, 1997, between Zenith and Stanley R. Zax.
*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
10-Q for the quarter ended June 30, 1996.)
*10.12 Zenith National Insurance Corp. Executive Officer Bonus Plan, dated as of March 21,
1994. (Incorporated herein by reference to Exhibit 10.12 to Zenith's Annual Report on
Form 10-K for the year ended December 31, 1996.)
10.13 Line of Credit Agreement, dated as of December 15, 1994, between Zenith and Sanwa Bank
of California. (Incorporated herein by reference to Exhibit 10.10 to Zenith's Annual
Report on Form 10-K for the year ended December 31, 1994.)
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C>
10.14 Amendment dated as of December 28, 1995 to Line of Credit Agreement, dated as of
December 15, 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 Line of Credit Agreement, dated December 15,
1994 between Zenith and Sanwa Bank California. (Incorporated by reference to Exhibit
10.2 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.)
10.16 Third Amendment, effective as of January 2, 1998, to Line of Credit Agreement, dated
December 15, 1994 between Zenith and Sanwa Bank California.
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 10-K 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
10-K 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 10-K 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 10-K 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 10-K 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 10-K for the year ended December 31,
1991.)
10.23 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 10-K for the year ended December 31, 1991.)
10.24 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. (Incorporated herein by reference to Exhibit 10.23 to Zenith's Annual
Report on Form 10-K for the year ended December 31, 1996.)
10.25 Aggregate Excess of Loss Reinsurance Agreement between Associated General Contractors
Self Insurers Trust Fund and Reliance Insurance Company effective December 31, 1991.
(Incorporated herein by reference to
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C>
Exhibit 10.24 to Zenith's Annual Report on Form 10-K for the year ended December 31,
1996.)
10.26 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. (Incorporated
herein by reference to Exhibit 10.25 to Zenith's Annual Report on Form 10-K for the year
ended December 31, 1996.)
10.27 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.) (Incorported herein by
reference to Exhibit 10.1 to Zenith's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997.)
10.28 Revolving Note dated July 1, 1997, from Zenith National Insurance Corp. to City National
Bank. (Incorporated herein by reference to Exhibit 10.2 to Zenith's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997.)
10.29 Modification of Note dated October 10, 1997 modifying the original Revolving Note dated
July 1, 1997 between Zenith National Insurance Corp. and City National Bank.
(Incorporated herein by reference to Exhibit 10.5 to Zenith's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997.)
10.30 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. (Incorporated herein by reference to
Exhibit 10.3 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.)
10.31 Amendment No. 1 to Credit Agreement dated January 21, 1998 amending the original Credit
Agreement dated July 24, 1997 between Zenith National Insurance Corp. and Bank of
America.
10.32 Asset Purchase Agreement, dated as of June 17, 1997, by and among Zenith Insurance
Company and RISCORP, Inc., RISCORP Management Services, Inc., RISCORP of Illinois, Inc.,
Independent Association Administrators Incorporated, RISCORP Insurance Services, Inc.,
RISCORP Managed Care Services, Inc., CompSource, Inc., RISCORP Real Estate Holdings,
Inc., RISCORP Acquisition, Inc., RISCORP West, Inc., RISCORP of Florida, Inc., RISCORP
Insurance Company, RISCORP Property & Casualty Insurance Company, RISCORP National
Insurance Company, RISCORP Services, Inc., RISCORP Staffing Solutions Holding, Inc.,
RISCORP Staffing Solutions, Inc. I and RISCORP Staffing Solutions, Inc. II.
(Incorporated herein by reference to Exhibit 10.1 to Zenith's Current Report on Form
8-K/A, date of report June 17, 1997.)
11 Statements re computation of per share earnings. (Incorporated herein by reference to
Notes to Consolidated Financial Statements -- Note 16 -- "Earnings Per Share" on page 55
of Zenith's 1997 Annual Report to Stockholders.)
13 Zenith's Annual Report to Stockholders for the year ended
December 31, 1997, but only to the extent such report is expressly
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C>
incorporated by reference herein, and such report is not otherwise to be deemed "filed"
as a part of this Annual Report on Form 10-K.
21 Subsidiaries of Zenith.
23 Consent of Coopers & Lybrand L.L.P., dated March 20, 1998. (Incorporated herein by
reference to page F-1 of this Annual Report on Form 10-K.)
27.1 Financial Data Schedule for year ended December 31, 1997.
27.2 Restated Financial Data Schedule for years ended December 31, 1996 and 1995, and periods
ended March 31, 1996, June 30, 1996, and September 30, 1996.
27.3 Restated Financial Data Schedule for periods ended March 31, 1997, June 30, 1997, and
September 30, 1997.
99.1 Information required by rule 15d-21 under the Securities Exchange Act of 1934 for the
year ended December 31, 1997 for The Zenith 401(k) Plan (to be filed by amendment on
Form 10-K/A within 180 days of December 31, 1997).
</TABLE>
- ------------------------
*Management contract or compensatory plan or arrangement
(b)REPORTS ON FORM 8-K
No Reports on Form 8-K were filed by the Registrant for the quarter ended
December 31, 1997.
23
<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 20, 1998.
<TABLE>
<S> <C> <C>
ZENITH NATIONAL INSURANCE CORP.
By: /s/ STANLEY R. ZAX
-----------------------------------------
Stanley R. Zax
Chairman of the Board and President
</TABLE>
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 20, 1998.
<TABLE>
<C> <S>
/s/ STANLEY R. ZAX
- --------------------------------------------- Chairman of the Board, President and
Stanley R. Zax Director (Principal Executive Officer)
/s/ GEORGE E. BELLO
- --------------------------------------------- Director
George E. Bello
- --------------------------------------------- Director
Max M. Kampelman
/s/ JACK M. OSTROW
- --------------------------------------------- Director
Jack M. Ostrow
/s/ WILLIAM S. SESSIONS
- --------------------------------------------- Director
William S. Sessions
/s/ HARVEY L. SILBERT
- --------------------------------------------- Director
Harvey L. Silbert
/s/ ROBERT M. STEINBERG
- --------------------------------------------- Director
Robert M. Steinberg
/s/ SAUL P. STEINBERG
- --------------------------------------------- Director
Saul P. Steinberg
/s/ GERALD TSAI, JR.
- --------------------------------------------- Director
Gerald Tsai, Jr.
/s/ FREDRICKA TAUBITZ Executive Vice President and Chief Financial
- --------------------------------------------- Officer (Principal Financial and Accounting
Fredricka Taubitz Officer)
</TABLE>
24
<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 4, 1998 on our audits of the consolidated financial statements and
financial statement schedules of Zenith National Insurance Corp. and
subsidiaries as of December 31, 1997 and 1996, and for each of the three years
in the period ended December 31, 1997, which is included in this Annual Report
on Form 10-K.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
March 20, 1998
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, 1997 and 1996, and for each
of the three years in the period ended December 31, 1997, which financial
statements are included on pages 38 through 56 of the Company's 1997 Annual
Report to Stockholders and incorporated by reference herein. We have also
audited the financial statement schedules listed in the index on page 18 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, 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 4, 1998
F-2
<PAGE>
SCHEDULE I -- SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN RELATED PARTIES
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COLUMN D
COLUMN C ---------------
COLUMN A COLUMN B ---------- AMOUNT AT WHICH
- -------------------------------------------------- ---------- FAIR SHOWN IN THE
TYPE OF INVESTMENT COST(1) VALUE BALANCE SHEET
- -------------------------------------------------- ---------- ---------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities
Bonds:
United States Government and government
agencies and authorities.................... $ 243,346 $ 244,921 $ 243,974
Public utilities.............................. 31,088 31,515 31,515
Industrial and miscellaneous.................. 291,245 297,592 297,221
Redeemable preferred stocks..................... 16,040 16,717 16,717
---------- ---------- ---------------
Total fixed maturities.................... 581,719 590,745 589,427
---------- ---------- ---------------
Equity securities
Floating rate preferred stocks.................. 14,614 15,670 15,670
Convertible and nonredeemable preferred
stocks........................................ 6,672 6,602 6,602
Common stocks, industrial....................... 17,790 23,439 23,439
---------- ---------- ---------------
Total equity securities................... 39,076 45,711 45,711
---------- ---------- ---------------
Short-term investments............................ 209,827 209,827 209,827
Other investments................................. 35,008 35,008 35,008
---------- ---------- ---------------
Total investments......................... $ 865,630 $ 881,291 $ 879,973
---------- ---------- ---------------
---------- ---------- ---------------
</TABLE>
- ------------------------
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accrual of discounts.
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) 1997 1996
--------- ---------
<S> <C> <C>
Investments
Bonds, at fair value (cost $9,896, 1996)................................................ $ 9,803
Common stocks, at fair value (cost $676, 1997 and $2,182, 1996)......................... $ 1,088 2,318
Short-term investments (at cost, which approximates fair value)......................... 38,994 30,720
Other invested assets................................................................... 4,736 10,000
Cash...................................................................................... 730 1,463
Investment in subsidiaries (Note A)....................................................... 353,462 334,227
Federal income taxes receivable (Note A).................................................. 154 138
Other assets.............................................................................. 45,041 30,164
--------- ---------
Total assets...................................................................... $ 444,205 $ 418,833
--------- ---------
--------- ---------
LIABILITIES
Senior notes payable, less unamortized discount of $526, 1997 and $647, 1996 (Note B)..... $ 74,474 $ 74,353
Cash dividends payable to stockholders.................................................... 4,222 4,401
Other liabilities......................................................................... 3,643 2,576
--------- ---------
Total liabilities................................................................. 82,339 81,330
--------- ---------
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 24,681, outstanding 17,819, 1997;
issued 24,447, outstanding 17,604, 1996................................................. 24,681 24,447
Additional paid-in capital................................................................ 264,098 258,875
Retained earnings......................................................................... 186,268 175,684
Net unrealized appreciation on investments, net of deferred tax expense of $5,025, 1997
and $284, 1996.......................................................................... 9,332 528
--------- ---------
484,379 459,534
Less treasury stock at cost (6,862 shares, 1997 and 6,843 shares, 1996)................... (122,513) (122,031)
--------- ---------
Total stockholders' equity........................................................ 361,866 337,503
--------- ---------
Total liabilities and stockholders' equity........................................ $ 444,205 $ 418,833
--------- ---------
--------- ---------
</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) 1997 1996 1995
------------ ------------- -------------
<S> <C> <C> <C>
Investment income............................................................... $ 1,196 $ 2,697 $ 219
Realized gains (losses) on investments.......................................... (446) 43
------------ ------------- -------------
Total revenues.................................................................. 750 2,697 262
Operating expense............................................................... 3,557 2,970 1,863
Interest expense................................................................ 3,980 4,877 6,960
------------ ------------- -------------
Loss from continuing operations before federal income tax benefit and equity in
income from continuing operations of subsidiaries............................. (6,787) (5,150) (8,561)
Federal income tax benefit...................................................... 2,097 1,845 3,123
------------ ------------- -------------
Loss from continuing operations before equity in income from continuing
operations of subsidiaries.................................................... (4,690) (3,305) (5,438)
Equity in income from continuing operations of subsidiaries (Note A)............ 32,790 40,905 25,160
------------ ------------- -------------
Income from continuing operations............................................... 28,100 37,600 19,722
Loss from discontinued operations (Note C)...................................... (13,122)
------------ ------------- -------------
Net income...................................................................... $ 28,100 $ 37,600 $ 6,600
------------ ------------- -------------
------------ ------------- -------------
</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,
-----------------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Investment income received.................................................... $ 903 $ 612 $ 193
Operating expenses paid....................................................... (1,465) (3,651) (1,455)
Interest paid................................................................. (3,648) (4,908) (6,596)
Income taxes (paid) refunded.................................................. 2,505 (616) 3,571
------------- ------------- -------------
Net cash used in continuing operating activities............................ (1,705) (8,563) (4,287)
Net cash used in expenses of discontinued operations.......................... (2,274)
------------- ------------- -------------
Net cash used in operating activities....................................... (1,705) (8,563) (6,561)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments:
Debt and equity securities available-for-sale............................... (19) (11,446)
Other debt and equity securities and other investments...................... (10,000)
Proceeds from sale of securities available-for-sale......................... 11,631
Proceeds from sale of other investments..................................... 5,423
Net change in short-term investments.......................................... (8,274) 55,865 (82,549)
Capital expenditures.......................................................... (11,014)
Other......................................................................... 469 (3,151)
Proceeds from the sale of CalFarm Life........................................ 120,000
------------- ------------- -------------
Net cash provided by (used in) investing activities......................... (1,784) 31,268 37,451
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received from bank line of credit........................................ 43,400
Cash paid on bank line of credit.............................................. (43,400)
Cash dividends paid to common stockholders.................................... (17,695) (17,605) (18,273)
Proceeds from exercise of stock options....................................... 4,940 2,572 4,405
Purchase of treasury shares................................................... (482) (7,611) (29,318)
Dividends received from subsidiaries.......................................... 22,750 15,000 10,500
Net cash from (to) subsidiary................................................. (6,757) (14,594) 458
------------- ------------- -------------
Net cash provided by (used in) financing activities......................... 2,756 (22,238) (32,228)
Net increase (decrease) in cash................................................. (733) 467 (1,338)
Cash at beginning of year....................................................... 1,463 996 2,334
------------- ------------- -------------
Cash at end of year............................................................. $ 730 $ 1,463 $ 996
------------- ------------- -------------
------------- ------------- -------------
RECONCILIATION OF INCOME FROM CONTINUING OPERATIONS TO NET CASH FLOWS FROM
OPERATING ACTIVITIES:
Income from continuing operations............................................. 28,100 $ 37,600 $ 19,722
Income from continuing operations of subsidiaries............................. (32,790) (40,905) (25,160)
Cash flow from expenses of discontinued operations............................ (2,274)
Federal income taxes.......................................................... 371 (2,461) 511
Other......................................................................... 2,614 (2,797) 640
------------- ------------- -------------
Net cash used in operating activities....................................... $ (1,705) $ (8,563) $ (6,561)
------------- ------------- -------------
------------- ------------- -------------
</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,
ZIC of Florida, Zenith Star Insurance Company (a Texas 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 $32,790,000 in 1997,
$40,905,000 in 1996 and $25,160,000 in 1995 is net of a provision for
federal income tax expense of $17,475,000 in 1997, $21,362,000 in 1996, and
$12,823,000 in 1995. Zenith has formulated tax allocation procedures with
its subsidiaries and the 1997, 1996 and 1995 condensed financial information
reflect Zenith's portion of the consolidated taxes.
Zenith Insurance Company paid dividends to Zenith of $22,750,000 in
1997, $15,000,000 in 1996 and $10,000,000 in 1995. 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 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 taxes. The life and annuity
operations of CalFarm Life are presented as discontinued operations.
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)
1997
- ------------------------------
Property and Casualty
Workers' compensation....... $ 4,034 $ 339,215 $ 25,229 $ 242,064
Other property-casualty..... 15,575 109,003 95,636 214,406
Reinsurance................. 1,231 77,383 7,604 32,251
----------- ----------- ----------- ----------- ----------- -----------
20,840 525,601 128,469 488,721 $ 51,136
Reinsurance ceded............. 87,665
Registrant.................... 1,196
----------- ----------- ----------- ----------- ----------- -----------
Total....................... $ 20,840 $ 613,266 $ 128,469 $ -- $ 488,721 $ 52,332
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
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
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<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)
1997
- ------------------------------
Property and Casualty
Workers' compensation....... $ 197,450 $ 41,225 $ 40,188 $ 238,963
Other property-casualty..... 139,832 44,514 23,551 218,370
Reinsurance................. 10,883 6,474 707 29,780
----------- ----------- ----------- -----------
348,165 92,213 64,446 487,113
Reinsurance ceded.............
Registrant.................... 3,557
----------- ----------- ----------- -----------
Total....................... $ 348,165 $ 92,213 $ 68,003 $ 487,113
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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, 1997
Premiums earned........................................ $ 477,527 $ 26,191 $ 37,385 $ 488,721 7.6%
-------------- ------------ ----------- -------------- ----------
-------------- ------------ ----------- -------------- ----------
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%
-------------- ------------ ----------- -------------- ----------
-------------- ------------ ----------- -------------- ----------
</TABLE>
F-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
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.
(Incorporated herein by reference to Exhibit 2.1 to Zenith's Annual Report on Form 10-K for the year
ended December 31, 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>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
(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 10-Q 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 10-Q
for the quarter ended June 30, 1996.)
*10.8 Employment Agreement, dated December 11, 1997, between Zenith and Fredricka Taubitz.
*10.9 Employment Agreement, dated January 5, 1998, between Zenith and John J. Tickner.
*10.10 Employment Agreement, dated December 11, 1997, between Zenith and Stanley R. Zax.
*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 10-Q for the quarter ended
June 30, 1996.)
*10.12 Zenith National Insurance Corp. Executive Officer Bonus Plan, dated as of March 21, 1994.
(Incorporated herein by reference to Exhibit 10.12 to Zenith's Annual Report on Form 10-K for the
year ended December 31, 1996.)
10.13 Line of Credit Agreement, dated as of December 15, 1994, between Zenith and Sanwa Bank of California.
(Incorporated herein by reference to Exhibit 10.10 to Zenith's Annual Report on Form 10-K for the
year ended December 31, 1994.)
10.14 Amendment dated as of December 28, 1995 to Line of Credit Agreement, dated as of December 15, 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 Line of Credit Agreement, dated December 15, 1994 between
Zenith and Sanwa Bank California. (Incorporated by reference to Exhibit 10.2 to Zenith's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.16 Third Amendment, dated January 2, 1998, to Line of Credit Agreement, dated December 15, 1994 between
Zenith and Sanwa Bank California.
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 10-K
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 10-K 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 10-K 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 10-K 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 10-K 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 10-K for the year ended December 31, 1991.)
10.23 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 10-K for the year ended
December 31, 1991.)
10.24 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. (Incorporated herein by reference
to Exhibit 10.23 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1996.)
10.25 Aggregate Excess of Loss Reinsurance Agreement between Associated General Contractors Self Insurers
Trust Fund and Reliance Insurance Company effective December 31, 1991. (Incorporated herein by
reference to Exhibit 10.24 to Zenith's Annual Report on Form 10-K for the year ended December 31,
1996.)
10.26 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. (Incorporated herein by reference to Exhibit 10.25 to
Zenith's Annual Report on Form 10-K for the year ended December 31, 1996.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.27 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). (Incorported herein by reference
to Exhibit 10.1 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.)
10.28 Revolving Note dated July 1, 1997, from Zenith National Insurance Corp. to City National Bank.
(Incorporated herein by reference to Exhibit 10.2 to Zenith's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.)
10.29 Modification of Note dated October 10, 1997 modifying the original Revolving Note dated July 1, 1997
between Zenith National Insurance Corp. and City National Bank. (Incorporated herein by reference to
Exhibit 10.5 to Zenith's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.)
10.30 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. (Incorporated herein by reference to Exhibit 10.3 to Zenith's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997.)
10.31 Amendment No. 1 to Credit Agreement dated January 21, 1998 amending the original Credit Agreement
dated July 24, 1997 between Zenith National Insurance Corp. and Bank of America.
10.32 Asset Purchase Agreement, dated as of June 17, 1997, by and among Zenith Insurance Company and
RISCORP, Inc., RISCORP Management Services, Inc., RISCORP of Illinois, Inc., Independent Association
Administrators Incorporated, RISCORP Insurance Services, Inc., RISCORP Managed Care Services, Inc.,
CompSource, Inc., RISCORP Real Estate Holdings, Inc., RISCORP Acquisition, Inc., RISCORP West, Inc.,
RISCORP of Florida, Inc., RISCORP Insurance Company, RISCORP Property & Casualty Insurance Company,
RISCORP National Insurance Company, RISCORP Services, Inc., RISCORP Staffing Solutions Holding, Inc.,
RISCORP Staffing Solutions, Inc. I and RISCORP Staffing Solutions, Inc. II. (Incorporated herein by
reference to Exhibit 10.1 to Zenith's Current Report on Form 8-K/A, date of report June 17, 1997.)
11 Statements re computation of per share earnings. (Incorporated herein by reference to Notes to
Consolidated Financial Statements -- Note 16 -- "Earnings Per Share" on page 55 of Zenith's 1997
Annual Report to Stockholders.)
13 Zenith's Annual Report to Stockholders for the year ended
December 31, 1997, but only to the extent such report is expressly incorporated by reference herein,
and such report is not otherwise to be deemed "filed" as a part of this Annual Report on Form 10-K.
21 Subsidiaries of Zenith.
23 Consent of Coopers & Lybrand L.L.P., dated March 20, 1998. (Incorporated herein by reference to page
F-1 of this Annual Report on Form 10-K.)
27.1 Financial Data Schedule for year ended December 31, 1997.
27.2 Restated Financial Data Schedule for years ended December 31, 1996 and 1995, and periods ended March
31, 1996, June 30, 1996, and September 30, 1996.
27.3 Restated Financial Data Schedule for periods ended March 31, 1997, June 30, 1997, and September 30,
1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
99.1 Information required by rule 15d-21 under the Securities Exchange Act of 1934 for the year ended
December 31, 1997 for The Zenith 401(k) Plan (to be filed by amendment on Form 10-K/A within 180 days
of December 31, 1997).
</TABLE>
- ------------------------
*Management contract or compensatory plan or arrangement
<PAGE>
EXECUTION COPY
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into effective as of the
11th day of December, 1997 ("Effective Date"), on this 8th day of
January, 1998 between ZENITH NATIONAL INSURANCE CORP., a Delaware corporation
(hereinafter referred to as "Company"), and FREDRICKA TAUBITZ (hereinafter
referred to as "Employee").
WHEREAS, Employee is presently employed as Executive Vice President and
Chief Financial Officer of Zenith National Insurance Corp. pursuant to a written
Employment Agreement originally effective as of October 1, 1985 for a term of
five years, which agreement was extended and modified pursuant to a written
Employment Agreement dated as of February 28, 1990 for a term of five years
expiring on October 1, 1995 and further extended and modified pursuant to a
written Employment Agreement dated as of December 6, 1994 for a term of three
years expiring on October 1, 1998; and
WHEREAS, Company and Employee deem it in their respective best interests to
extend the term of said Employment Agreement at the present time and modify
certain other provisions thereof;
NOW, THEREFORE, it is AGREED as follows:
1. EMPLOYMENT.
(a) Subject to earlier termination as provided herein, the
Employee is employed as Executive Vice President and Chief Financial Officer of
the Company from the Effective Date through the Term of this Agreement (as
defined below). In this capacity the Employee shall devote her full business
time and energy to the business, affairs and interests of the Company and
matters related thereto. During the Term of the Agreement, the Employee shall
have no other employment other than with a subsidiary of the Company, except
with the prior written approval of the Board of Directors of the Company (the
"Board"). The Employee shall have such duties and responsibilities and such
executive power and authority as is customary for an officer in her position and
as shall be allocated to her in such capacity and such other duties and
responsibilities as the Board or the President of the Company shall designate
that are not inconsistent with the Employee's position with the Company.
Without limiting the foregoing, the Employee shall have such duties and
responsibilities with respect to any subsidiaries of the Company as may be
requested by the Board, including (without limitation) as Executive Vice
President of Zenith Insurance Company, a wholly owned subsidiary of the Company
The Company hereby acknowledges
<PAGE>
and agrees that the Employee shall have the right to serve in any capacity
with civic, educational, charitable and professional organizations and to
make and manage personal business investments that do not violate the
noncompetition provisions of Section 11 of this Agreement so long as such
activities do not interfere with the discharge of her duties to the Company
hereunder.
(b) During her employment hereunder, the Employee shall report
to the Company's Chief Executive Officer.
(c) The Company agrees to reappoint the Employee to the board of
directors of CalFarm Insurance Company ("CalFarm"), which appointment shall
continue throughout the Employee's period of employment hereunder; provided,
however, that the Company's obligation to make such appointment shall expire on
the date the Company ceases to own a controlling interest in CalFarm. If
elected, the Employee agrees to serve on the board of CalFarm so long as the
Company owns a controlling interest in CalFarm.
(d) The Employee shall not be required to relocate outside of
Southern California in order to perform the services hereunder, without the
Employee's consent, except for travel reasonably required in the performance of
her duties hereunder.
2. TERM. This Agreement shall be in effect for a term commencing on the
Effective Date and expiring on December 31, 2002 ("Expiration Date"), and such
period shall be referred to herein as the "Term" of this Agreement, and such
Term shall not be affected by a termination of employment as elsewhere provided
herein.
3. SALARY. Effective January 1, 1998, Employee shall be paid the sum of
Three Hundred and Ninety One Thousand Dollars per year, subject to such other
increases as the Board of Directors of Company may from time to time determine
("Base Salary").
4. BONUSES. In addition to the Base Salary, Employee shall be a
participant in the Executive Officers Bonus Plan of the Company.
5. DEFERRED COMPENSATION. In advance of the annual period for which
earned, the Employee shall have the right to defer all or any portion of her
salary and bonus to a specified date or event. Any such deferred compensation
shall not be forfeitable and shall bear interest at a rate to be determined by
the Board. Any election to defer compensation shall be disregarded, and any
compensation so deferred shall be added back, in the calculation of those of
Employee's rights and benefits under this Agreement that are based upon
Employee's salary or bonus or the sum thereof.
<PAGE>
6. PARTICIPATION IN RETIREMENT AND EMPLOYEE BENEFIT PLANS. During her
employment hereunder, the Employee shall be entitled to participate in any plan
of the Company relating to stock options, stock purchases, pension, thrift,
profit sharing, life insurance, medical coverage, disability insurance,
education, and other retirement or employee benefits that the Company has
adopted or may adopt for the benefit of its executive employees, and the Company
shall provide the Employee with such insurance or other provisions for
indemnification, defense or hold-harmless of officers that are generally in
effect for other senior executive officers of the Company. Notwithstanding the
foregoing, nothing contained in this Agreement shall prohibit or limit the right
of the Company to discontinue, modify or amend any plan or benefit in its
absolute discretion at any time; provided, however, that any such
discontinuance, modification or amendment shall apply to employees of the
Company generally, or to a defined group of such employees and shall not apply
solely to the Employee.
7. FRINGE BENEFITS; AUTOMOBILE. In addition to the benefit plans
referred to in Section 6 hereof, the Employee shall be entitled to participate
in any other fringe benefits that are now or may be or become applicable to the
Company's executive employees, including the payment of reasonable expenses for
attending annual and periodic meetings of trade associations, and any other
benefits that are commensurate with the duties and responsibilities to be
performed by the Employee under this Agreement and reimbursement for reasonable
expenses incurred in the course of her duties hereunder in accordance with the
Company's policy with respect thereto. In addition, the Company shall provide
the Employee with a deluxe car or car allowance of her choice. The benefits
provided under this Section 7 shall cease upon the Employee's Date of
Termination (as defined below).
8. VACATION; CLUB MEMBERSHIPS. During her employment hereunder, the
Employee shall be entitled to an annual paid vacation in accordance with the
Company's standard employment practices of at least four weeks per year or such
longer period as the Board may approve (prorated on a daily basis for any period
that is less than one calendar year). Up to four weeks of accrued vacation time
that is not used in a calendar year may be carried over into the following
calendar year. Upon termination of the Employee's employment for any reason,
the Employee shall be entitled to payment for any accrued but unused vacation
time based upon her then current salary. The time of paid vacations shall be
scheduled in a reasonable manner by the Employee.
During her employment hereunder, the Employee shall be entitled to
appropriate professional association and business club memberships, including
reimbursement of payment of dues and assessments pertaining thereto.
9. TERMINATION.
<PAGE>
(a) DISABILITY. If, as a result of the Employee's incapacity
due to physical or mental illness, injury or similar incapacity, she shall have
been absent from the full-time performance of her duties with the Company for
six months within any eighteen-month period, her employment may be terminated by
written notice (as provided below) from the Company for "Disability".
(b) CAUSE. Subject to the notice provisions set forth below,
the Company may terminate the Employee's employment for "Cause" at any time.
Termination for "Cause" shall mean termination upon (1) the continued willful
failure by the Employee to substantially perform her duties with the Company or
her other willful breach of this Agreement (other than any such failure or
breach resulting from her incapacity due to physical or mental illness, injury
or similar incapacity) after a written demand for substantial performance is
delivered to her by the Board, which demand specifically identifies the manner
in which the Board believes that she has failed to substantially perform her
duties, or has otherwise breached this Agreement, (2) the Employee's conviction
of a felony, (3) the Employee's willful misconduct that is materially and
demonstrably injurious to the Company or (4) the violation by the Employee of
Section 11 hereof; provided, however, that the Employee shall not be terminated
for "Cause" unless and until the Board has given the Employee reasonable notice
of its intended actions and the alleged events or activities giving rise thereto
and with respect to those events or activities for which a cure is possible, a
reasonable opportunity to cure such breach and there shall have been delivered
to her a copy of a resolution duly adopted by the Board regarding such actions.
(c) CONSTRUCTIVE TERMINATION. If at any time during the Term
of this Agreement, any of the following events shall occur, the Employee shall
be entitled to terminate her employment hereunder and be treated as if her
employment had been terminated by the Company other than for Cause:
(i) Mr. Stanley R. Zax ceases to be full-time
Chairman of the Board and President of the Company other
than by reason of death or disability;
(ii) The Employee is removed or otherwise
prohibited or restricted in the performance of her duties as set
forth in Section 1 hereof;
(iii) Any payment due under this Agreement shall
remain unpaid for more than 60 days;
(iv) A Change in Control of the Company (as
defined below) shall occur during the Term of this Agreement
and, within 180 days after the effective date of any such Change
in Control, the Employee delivers to the Company a written
<PAGE>
notice of her election to terminate the Agreement effective as
of the date set forth in such notice, which effective date shall
not be less than 30 days nor more than 90 days after the date
of delivery of such written notice.
For purposes of this paragraph, a Change in Control shall mean either
(i) a merger or consolidation of the Company with or into another company in
which the Company does not survive; or (ii) an assignment of this Agreement by
the Company under the provisions of Section 12(b) hereof; or (iii) the sale of
all or substantially all of the Company's assets; or (iv) a change in the
identities of a majority of the members of the Board within a one-year period or
less; or (v) any other transaction that would require a party or affiliated
group of parties to obtain approval from or require such transactions to be
presented for approval by, the California Insurance Commissioner (assuming there
is no preemption of California insurance laws by federal law).
(d) NOTICE OF TERMINATION. Any purported termination of the
Employee's employment by the Company or by her shall be communicated by a
written notice ("Notice of Termination") that shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Employee's employment under the provision so indicated.
(e) DATE OF TERMINATION, ETC. "Date of Termination" shall mean
(1) if the Employee's employment is terminated by her death, the date of her
death; (2) if the Employee's employment is terminated for Disability, thirty
days after Notice of Termination is given; (3) if the Employee's employment is
terminated for Cause, the date specified in the Notice of Termination, which
shall not be less than thirty days from the date such Notice of Termination is
given; and (4) if the Employee's employment is terminated for any other reason,
the date specified in the Notice of Termination.
10. COMPENSATION UPON TERMINATION OR DURING DISABILITY. The Employee
shall be entitled to the following benefits during a period of disability, or
upon termination of her employment, as the case may be, if such period or
termination occurs during the Term of this Agreement:
(a) During any period that the Employee fails to perform her
full-time duties with the Company as a result of incapacity due to physical or
mental illness, injury or similar incapacity, she shall continue to receive her
compensation and other benefits payable to her under this Agreement at the rate
in effect at the commencement of any such period, together with all compensation
payable to her under the Company's disability plan or program or other similar
plan during such period, until her employment is terminated pursuant to Section
9(a) hereof. Thereafter, or in the event the Employee's
<PAGE>
employment shall be terminated by reason of her death, her benefits shall be
determined under the Company's retirement, insurance and other compensation
programs then in effect in accordance with the terms of such programs, and
the Company shall have no further obligations to her under this Agreement.
(b) If at any time the Employee's employment shall be terminated
(i) by reason of her death, (ii) by the Company for Cause or Disability or (iii)
by her (other than by reason of a constructive termination pursuant to Section
9(c) hereof), the Company shall pay her (or her appropriate payee, as determined
in accordance with Section 12 (c) hereof) her full base salary through the Date
of Termination at the rate in effect at the time Notice of Termination is given,
plus all other amounts to which she is entitled under any compensation plan of
the Company at the time such payments are due, and the Company shall have no
further obligations to her under this Agreement. In addition, in the event the
Employee's employment is terminated by reason of the Employee's death or
Disability, the Employee (or her appropriate payee) shall be entitled to receive
a pro rata portion of any bonus that would otherwise have been payable to the
Employee with respect to the year in which the Employee's employment is
terminated. For purposes of this provision, if the Employee's bonus for such
year has not been determined, the Employee shall be deemed to have been entitled
to a bonus equal to the highest annual bonus paid or payable to the Employee
during the three consecutive years immediately preceding her termination.
(c) If the Employee's employment should be terminated by the
Company other than for Cause or Disability or by the Employee by reason of a
constructive termination pursuant to Section 9(c) hereof, she shall be entitled
to the benefits provided below ("Severance Payments"):
(i) The Company shall pay to the Employee her full
base salary through the Date of Termination, at the rate in effect
at the time Notice of Termination is given, plus all other amounts
to which she is entitled under any compensation plan of the
Company, in each case at the time such payments are due;
(ii) Company shall pay to Employee a cash lump
sum payment, no later than the fifteenth day following the
effective date of the Notice of Termination, equal to the greater
of (a) two times the sum of (x) her Base Salary at the rate in
effect as of the effective date of the Notice of Termination and
(y) the highest annual bonus paid or payable to Employee
during the three consecutive years immediately preceding her
termination of employment, or (b) the "actuarial equivalent" of
all Base Salary and bonus payments that would have been
payable to Employee pursuant to Paragraphs 3 and 4 of this
<PAGE>
Agreement had Employee continued to be employed through
the Expiration Date (the "Severance Period"), assuming, for
purposes of this Paragraph, that the annual bonus payable to
Employee pursuant to Paragraph 4 of this Agreement for each
year of such remaining term is equal to the highest annual bonus
paid or payable to Employee during the three consecutive years immediately
preceding her termination of employment. For purposes of this subparagraph
10(c)(ii), "actuarial equivalent" shall be determined by an actuary
selected by Company, subject to approval by Employee, and calculated in
accordance with the actuarial assumptions used by the Pension Benefit
Guaranty Corporation to value liabilities for pension plans terminating as
of the effective date of Employee's or Company's Notice of Termination;
(iii) All stock option rights, stock appreciation
rights, and any and all other similar rights theretofore granted to
the Employee, including, but not limited to, the Employee's right
to receive cash in lieu of exercising stock options, as may be
provided in her stock option agreements, shall vest and shall
then be exercisable in full, and the Employee shall have 90 days
following her termination within which to exercise any and all
such rights and the restrictions on any and all shares of restricted
stock granted to the Employee that are outstanding on the Date
of Termination shall lapse as of the Date of Termination;
(iv) During the Severance Period the Company
shall, at its cost, arrange to provide the Employee with life,
disability, dental, accident and group health insurance benefits
substantially similar to those that she was receiving immediately
prior to the Notice of Termination plus an additional amount
necessary to reimburse the Employee for any taxes imposed
solely by reason of her receipt of such benefits following her
termination of employment. Notwithstanding the foregoing, the
Company shall not provide any benefit otherwise receivable by
the Employee pursuant to this subparagraph if an equivalent
benefit is actually received by her at any time during the
Severance Period and any such benefit actually received by her
shall be reported to the Company.
(d) The Company shall continue in effect for the benefit of the
Employee all insurance or other provisions for indemnification, defense or hold-
harmless of officers or directors of the Company that are in effect on the date
the Notice of Termination is sent to the Employee or the Company with respect to
all of her acts and omissions while an officer or director as fully and
completely as if
<PAGE>
such termination had not occurred, and until the final expiration or running
of all periods of limitation against actions that may be applicable to such
acts or omissions.
(e) The Employee shall have the right to terminate her
employment under this Agreement upon thirty (30) days notice to the Company
without liability to the Company for damages incurred solely by reason of such
termination.
(f) Nothwithstanding anything to the contrary in this Agreement,
in the event that Employee becomes entitled to the Severance Payments, if any of
the Severance Payments will be subject to the tax (the "Excise Tax") imposed by
section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"),
Company shall pay to Employee an additional amount (the "Gross-Up Payment") such
that the net amount retained by Employee, after deduction of any Excise Tax on
the Total Payments (as hereinafter defined) and any federal, state and local
income and other tax and Excise Tax upon the payment provided for by this
Paragraph 10(f), shall be equal to the Total Payments. For purposes of
determining whether any of the Total Payments will be subject to the Excise Tax
and the amount of such Excise Tax, (i) any other payments or benefits received
or to be received by Employee in connection with a Change in Control or
Employee's termination of employment (whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with Company, any person
whose actions result in a change in control or any person affiliated with
Company or such person (which, together with Severance Payments, shall
constitute "Total Payments"), shall be treated as "parachute payments" within
the meaning of section 280G(b)(2) of the Code, and all "excess parachute
payments" within the meaning of section 280G(b)(1) shall be treated as subject
to the Excise Tax, unless in the opinion of tax counsel selected by Company's
independent auditors and acceptable to Employee, such other payments or benefits
(in whole or in part) do not constitute parachute payments, or such excess
parachute payments (in whole or in part) represent reasonable compensation for
services actually rendered within the meaning of section 280G(b)(4) of the Code
in excess of the base amount, within the meaning of section 280G(b)(3) of the
Code, or are otherwise not subject to the Excise Tax, (ii) the amount of the
Total Payments which shall be treated as subject to the Excise Tax shall be
equal to the lesser of (A) the total amount of the Total Payments or (B) the
amount of excess parachute payments within the meaning of section 280G(b)(1)
(after applying clause (i), above), and (iii) the value of any non-cash benefits
or any deferred payment or benefit shall be determined by Company's independent
auditors in accordance with the principles of sections 280G(d)(3) and (4) of the
Code. For purposes of determining the amount of the Gross-Up Payment, Employee
shall be deemed to pay federal income taxes at the highest marginal rate of
federal income taxation in the calendar year in which the Gross-Up Payment is to
be made and state and local income taxes at the
<PAGE>
highest marginal rate of taxation in the state and locality of Employee's
residence on the date of termination of employment, net of the maximum
reduction in federal income taxes which could be obtained from deduction of
such state and local taxes. In the event that the Excise Tax is subsequently
determined to be less than the amount taken into account hereunder at the
time of termination of Employee's employment, Employee shall repay to
Company, at the time that the amount of such reduction in Excise Tax is
finally determined, the portion of the Gross-Up Payment attributable to such
reduction (plus that portion of the Gross-Up Payment attributable to the
Excise Tax and federal, state and local income tax imposed on the Gross-Up
Payment being repaid by the Employee to the extent that such repayment
results in a reduction in Excise Tax and/or a federal, state or local income
tax deduction) plus interest on the amount of such repayment at the rate
provided in section 1274(b)(2)(B) of the Code. In the event that the Excise
Tax is determined to exceed the amount taken into account hereunder at the
time of the termination of Employee's employment (including by reason of any
payment the existence or amount of which cannot be determined at the time of
the Gross-Up Payment), Company shall make an additional Gross-Up Payment in
respect of such excess (plus any interest, penalties or additions payable by
the Employee with respect to such excess) at the time that the amount of such
excess is finally determined.
11. DISCLOSURE OF INFORMATION.
(a) Employee acknowledges that the list of Company's customers,
as they may exist from time to time, and Company's trade secrets and other
confidential information are valuable, special and unique assets of Company's
business. Employee will not, during or after the Term of Employment, disclose
to any person, firm, corporation, association, or any other entity or use for
her own benefit, any list of Company's customers, or any part thereof, or any of
Company's trade secrets or other confidential information, for any reason or
purpose whatsoever.
(b) Employee agrees that upon leaving the employ of Company she
will deliver to Company and not keep or deliver to anyone else, any and all
memoranda, specifications, documents and in general any and all material
relating to Company's business that she may have under her possession or
control.
(c) Employee recognizes that she will possess confidential
information about other employees of Company relating to their education,
experience, skills, abilities, compensation and benefits, and interpersonal
relationships with customers of Company. The Employee recognizes that the
information she will possess about these other employees is not generally known,
is of substantial value to Company in developing its products and in securing
and retaining customers, and will be acquired by her because of her business
position with Company. Employee agrees that, during the period
<PAGE>
ending on the last day of the one-year period following her termination of
employment, she will not, directly or indirectly, solicit or recruit any
employee of Company for the purpose of being employed by her, or any
business, individual, partner, firm, corporation or other entity that is then
in competition with Company ("Competitor") on whose behalf she is acting as
an agent, representative or employee. The Employee further agrees that she
will not convey any such confidential information or trade secrets about
other employees of Company to anyone affiliated with her or to any Competitor.
(d) Employee further acknowledges that the remedy at law for any
breach by her of the covenants contained in Paragraphs 11(a) and (b) will be
inadequate and that in the event of a breach, or threatened breach, by Employee
of the covenants contained therein, Company shall be entitled to an injunction
restraining Employee from using, for her own benefit, and/or from disclosing, in
whole or in part, the list of Company's customers, and/or Company's trade
secrets or other confidential information, and/or from rendering any services to
any person, firm, corporation, association or other entity to whom such a list,
and/or such trade secrets or other confidential information, in whole or in
part, have been disclosed, or are threatened to be disclosed and such other
declaratory relief as is proper to cause Employee to return to Company any and
all memoranda, specifications, documents and all other material relating to
Company's business that she may have under her possession or control. Nothing
herein shall be construed as prohibiting Employee from pursuing professional
employment or investments utilizing her own skills and knowledge or Company from
pursuing any other remedies available to Company from such breach or threatened
breach, including the recovery of damages from Employee. The provisions of this
Paragraph 11 shall survive the expiration or termination, for any reason, of
this Agreement and of Employee's employment.
12. ASSIGNMENTS/MITIGATION.
(a) This Agreement and the rights, interest and benefits
hereunder are personal to the Employee and shall not be assigned, transferred,
pledged, or hypothecated in any way by the Employee, and shall not be subject to
execution, attachment or similar process. Any attempted assignment, transfer,
pledge, or hypothecation, or the levy of any execution, attachment or similar
process thereon, shall be null and void and without effect.
(b) The Company shall have the right to assign this Agreement
and to delegate all of its rights, duties and obligations hereunder, whether in
whole or in part, to any parent, affiliate, successor, or subsidiary
organization of the Company or corporation with which the Company may merge or
consolidate or which acquires by purchase or otherwise all or substantially all
of the Company's consolidated assets, but such assignment shall not release the
Company from its obligations under this Agreement, and in the event of any such
<PAGE>
assignment by the Company, the Employee may, at her sole option, exercise her
termination rights under the provisions of Section 9(c)(iv) of this Agreement.
(c) This Agreement shall inure to the benefit of and be
enforceable by the Employee and her personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Employee should die while any amount would still be payable to
her hereunder had she continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
her devisee, legatee or other designee or, if there is no such designee, to her
estate.
(d) The Employee shall have no duty to mitigate the Company's
obligations hereunder by seeking other employment or by becoming self-employed;
provided, however, that life, disability, dental, accident, group health
insurance and other health and welfare benefits received by the Employee during
or with respect to the Severance Period and attributable to services rendered
during such period by the Employee to persons or entities other than the Company
shall be applied to reduce the Company's obligation to provide such benefits
hereunder. Not less frequently than annually (by the end of the month of the
month next following the month in which the Effective Date occurs), the Employee
shall account to the Company as to the amount of such benefits; if the Company
has paid amounts in excess of those to which the Employee was entitled (after
giving effect to the offsets provided above), the Employee shall reimburse the
Company promptly thereafter for such excess.
13. NOTICE. Notices and all other communications provided for in this
Agreement shall be in writing and shall be deemed to have been duly given when
delivered or five business days after being mailed by United States certified or
registered mail, return receipt requested, postage prepaid, addressed (a) if to
the Employee, to P. O. Box 2001, La Jolla, California 92038 and (b) if to the
Company, to 21255 Califa Street, Woodland Hills, California 91367, Attention:
Stanley R. Zax, with a copy to the Secretary of the Company; or to such other
address as either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only upon
receipt thereof.
14. SECTION HEADINGS. The Section headings used in this Agreement are
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
15. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
<PAGE>
16. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
17. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement (other than an action for injuctive relief
pursuant to Section 11 hereof) shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators in Los Angeles, California in
accordance with the rules of the American Arbitration Association then in
effect. Such arbitrators shall only have jurisdiction to award contract
damages. Judgment may be entered on the arbitrators' award in any court having
jurisdiction. The Employee, if prevailing, shall be entitled to reimbursement
of all of her reasonable expenses in arbitration, including reasonable
attorneys' fees. In the event of a good faith dispute regarding the payment of
salary or benefits under this Agreement, the Company shall make the disputed
payments to the Employee as if such dispute did not exist during the pendency of
such good faith dispute, and, following the resolution of such dispute, the
Employee shall reimburse the Company for any overpayments.
18. LEGAL FEES. The Company agrees to reimburse the Employee for all
reasonable legal fees and other reasonable expenses incurred in connection with
the negotiation and preparation of this Agreement.
19. COMPANY PROPERTY. The Employee agrees that at the time she leaves the
employment of the Company she will deliver to the Company, and will not keep or
deliver to anyone else, all notebooks, memoranda, documents, computer discs, and
any and all other material relating to the Company's business or constituting
the Company's property, whether or not the Employee was the author or recipient
of such material.
20. MISCELLANEOUS.
(a) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by the Employee and such officer as may be specifically designated by
the Board. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
(b) This instrument contains the entire agreement of the parties
hereto relating to the subject matter hereof and it replaces and supersedes all
prior agreements and understandings, oral and written, between the parties
hereto. No agreements or representations, oral or otherwise, express or
implied,
<PAGE>
with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement.
(c) The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of California without
regard to its conflicts of law principles.
(d) All references to Sections of the Exchange Act or the Code shall
be deemed also to refer to any successor provisions to such Sections.
(e) Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law.
(f) The obligations created under the provisions of Sections 5, 8,
10, 11, 12, 17, 18 and 19 shall survive the expiration, suspension or
termination, for any reason, of this Agreement or the Employee's employment
hereunder until such obligations created thereunder are fully satisfied.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
ZENITH NATIONAL INSURANCE
CORP.
By:/s/ Stanley R. Zax
-------------------
STANLEY R. ZAX, Chairman
EMPLOYEE:
/s/ Fredricka Taubitz
-----------------
FREDRICKA TAUBITZ
<PAGE>
JOHN J. TICKNER
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is dated effective as of
January 5, 1998 (the "Effective Date), between ZENITH NATIONAL INSURANCE
CORP., a Delaware corporation (the "Company"), and JOHN J. TICKNER (the
"Employee");
WHEREAS, the parties desire to enter into this Agreement setting forth
the terms and conditions for the employment relationships of the Employee
with the Company.
NOW, THEREFORE, it is AGREED as follows:
1. EMPLOYMENT.
(a) Subject to earlier termination as provided herein, the
Employee is employed as a Senior Vice President and Secretary of the Company,
and Senior Vice President, General Counsel and Secretary of its insurance
subsidiaries from the Effective Date through the Term of this Agreement (as
defined below). In this capacity the Employee shall devote his full business
time and energy to the business, affairs and interests of the Company and
matters related thereto. During the Term of this Agreement, the Employee
shall have no other employment other than with a subsidiary of the Company,
except with the prior written approval of the Board of Directors of the
Company (the "Board"). The Employee shall have such duties and
responsibilities and such executive power and authority as is customary for
an officer in his position and as shall be allocated to him in such capacity
and such other duties and responsibilities as the Board or the President of
the Company shall designate that are not inconsistent with the Employee's
position with the Company.
(b) During his employment hereunder, the Employee shall report to
the Company's Chief Executive Officer.
2. TERM. This Agreement shall be in effect for a term commencing on
the Effective Date and expiring on March 1, 2001, and such period shall be
referred to herein as the "Term" of this Agreement, and such Term shall not
be affected by the termination of the Employee's employment hereunder.
<PAGE>
3. SALARY. Commencing as of the Effective Date, the Company shall pay
the employee an annual base salary at the minimum rate of $265,000, which
shall be payable in installments in conformity with the Company's policy
relating to salaried employees. The Employee's base salary may be subject to
annual adjustment (but not below the then current amount) in the sole
discretion of the Board.
4. DISCRETIONARY BONUSES. During the Term of this Agreement, the
Employee shall be entitled to such discretionary bonuses as may be
authorized, declared, and paid by the Board in its sole discretion.
5. PARTICIPATION IN RETIREMENT AND EMPLOYEE BENEFIT PLANS. During his
employment hereunder, the Employee shall be entitled to participate in any
plan of the Company relating to stock options, stock purchases, pension,
thrift, profit sharing, life insurance, medical coverage, disability
insurance, education, and other retirement or employee benefits that the
Company has adopted or may adopt for the benefit of its executive employees,
and the Company shall provide the Employee with such insurance or other
provisions for indemnification, defense or hold-harmless of officers that are
generally in effect for other senior executive officers of the Company.
Notwithstanding the foregoing, nothing contained in this Agreement shall
prohibit or limit the right of the Company to discontinue, modify or amend
any plan or benefit in its absolute discretion at any time; provided,
however, that any such discontinuance, modification or amendment shall apply
to employees of the Company generally, or to a defined group of such
employees and shall not apply solely to the Employee.
6. FRINGE BENEFITS; AUTOMOBILE. In addition to the benefit plans
referred to in Section 5 hereof, the Employee shall be entitled to
participate in any other fringe benefits that are now or may be or become
applicable to the Company's executive employees, and any other benefits that
are commensurate with the duties and responsibilities to be performed by the
Employee under this Agreement and reimbursement for reasonable expenses
incurred in the course of his duties hereunder in accordance with the
Company's policy with respect thereto. In addition, the Company shall
provide Employee with a Company-leased vehicle. The benefits provided under
this Section 6 shall cease upon the Employee's Date of Termination (as
defined below).
7. VACATION. During his employment hereunder, the Employee shall be
entitled to an annual paid vacation in accordance with the Company's standard
employment practices of at least four weeks per year or such longer period as
the
2
<PAGE>
Board may approve (pro-rated on a daily basis for any period that is less
than one calendar year). Up to four weeks of accrued vacation time that is
not used in a calendar year may be carried over into the following calendar
year. Upon termination of the Employee's employment for any reason, the
Employee shall be entitled to payment for any accrued but unused vacation
time based upon his then current salary. The timing of paid vacations shall
be scheduled in a reasonable manner by the Employee.
8. TERMINATION.
(a). DISABILITY. If, as a result of the Employee's incapacity due
to physical or mental illness, injury or similar incapacity, he shall have
been absent from the full-time performance of his duties with the Company for
six months within any eighteen-month period, his employment may be terminated
by written notice (as provided below) from the Company for "Disability."
(b) CAUSE. Subject to the notice provisions set forth below, the
Company may terminate the Employee's employment for "Cause" at any time.
Termination for "Cause" shall mean termination upon (1) the continued willful
failure by the Employee to substantially perform his duties with the Company
or his other willful breach of this Agreement (other than any such failure or
breach resulting from his incapacity due to the physical or mental illness,
injury or similar incapacity) after a written demand for substantial
performance is delivered to him by the Board, which demand specifically
identifies the manner in which the Board believes that he has failed to
substantially perform his duties, or has otherwise breached this Agreement,
(2) the Employee's conviction of a felony, (3) the Employee's willful
misconduct that is materially and demonstrably injurious to the Company, or
(4) the violation by the Employee of Section 10 hereof; provided, however,
that the Employee shall not be terminated for "Cause" unless and until the
Board has given the Employee reasonable notice of its intended actions and
the alleged events or activities giving rise thereto and with respect to
those events or activities for which a cure is possible, a reasonable
opportunity to cure such breach and there shall have been delivered to him a
copy of a resolution duly adopted by the Board regarding such action.
(c) CONSTRUCTIVE TERMINATION. If at any time during the Term of
this Agreement, any of the following events shall occur, the Employee shall
be entitled to terminate his employment hereunder and be treated as if his
employment had been terminated by the Company other than for Cause:
3
<PAGE>
(i) Mr. Stanley R. Zax ceases to be full-time Chairman of the
Board and President of the Company other than by reason of death or disability;
(ii) The Employee is removed or otherwise prohibited or
restricted in the performance of his duties as set forth in Section 1 hereof;
(iii) Any payment due under this Agreement shall remain unpaid
for more than 60 days;
(iv) A Change in Control of the Company (as defined below)
shall occur during the Term of his Agreement, and within 180 days after the
effective date of any such Change in Control, the Employee delivers to the
Company a written notice of his election to terminate the Agreement effective
as of the date set forth in such notice, which effective date shall not be
less than 30 days nor more than 90 days after the date of delivery of any
such written notice.
For purposes of this paragraph, a Change in Control shall
mean either (i) a merger or consolidation of the Company with or into another
company in which the Company does not survive; or (ii) an assignment of this
Agreement by the Company under the provisions of Section 11(b) hereof; or
(iii) the sale of all or substantially all of the Company's assets; or (iv) a
change in the identities of a majority of the members of the Board within a
one-year period or less; or (v) any other transaction that would require a
party or affiliated group of parties to obtain approval from, or require such
transactions to be presented for approval by, the California Insurance
Commissioner (assuming there is no preemption of California insurance laws by
federal law).
(d) NOTICE OF TERMINATION. Any purported termination of the
Employee's employment by the Company of by him shall be communicated by a
written notice ("Notice of Termination") that shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Employee's employment under the provision so indicated.
(e) DATE OF TERMINATION, ETC. "Date of Termination" shall mean
(1) if the Employee's employment is terminated by his death, the date of his
death; (2) if the Employee's employment is terminated for Disability, thirty
days after Notice of Termination is given; (3) if the Employee's employment
is terminated for Cause, the date specified in the Notice of Termination,
which shall not be less than thirty days from the date such Notice of
Termination is given; and (4) if the
4
<PAGE>
Employee's employment is terminated for any other reason, the date
specified in the Notice of Termination.
9. COMPENSATION UPON TERMINATION OR DURING DISABILITY. The Employee
shall be entitled to the following benefits during a period of disability, or
upon termination of his employment, as the case may be, if such period or
termination occurs during the Term of this Agreement:
(a) During any period that the Employee fails to perform his
full-time duties with the Company as a result of incapacity due to physical
or mental illness, injury or similar incapacity, he shall continue to receive
his compensation and other benefits payable to him under this Agreement at
the rate in effect at the commencement of any such period, together with all
compensation payable to him under the Company's disability plan or program or
other similar plan during such period, until his employment is terminated
pursuant to Section 8(a) hereof. Thereafter, or in the event the Employee's
employment shall be terminated by reason of his death, his benefits shall be
determined under the Company's retirement, insurance and other compensation
programs then in effect in accordance with the terms of such programs, and
the Company shall have no further obligations to him under this Agreement.
(b) If at any time the Employee's employment shall be terminated (i)
by reason of his death, (ii) by the Company for Cause or Disability, or (iii) by
him (other than by reason of a constructive termination pursuant to Section 8(c)
hereof), the Company shall pay him (or his appropriate payee, as determined in
accordance with Section 11(c) hereof) his full base salary through the Date of
Termination at the rate in effect at the time Notice of Termination is given,
plus all other amounts to which he is entitled under any compensation plan of
the Company at the time such payments are due, and the Company shall have no
further obligations to him under this Agreement. In addition, in the event the
Employee's employment is terminated by reason of the Employee's death or
Disability, the Employee (or his appropriate payee) shall be entitled to receive
a pro rata portion of any bonus that would otherwise have been payable to the
Employee with respect to the year in which the Employee's employment is
terminated. For purposes of this provision, if the Employee's bonus for such
year has not been determined, the Employee shall be deemed to have been entitled
to a bonus equal to the bonus paid or payable to the Employee with respect to
the immediately preceding year.
(c) If the Employee's employment should be terminated by the Company
other than for Cause or Disability or by the Employee by reason of a
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constructive termination pursuant to Section 8(c) hereof, he shall be entitled
to the benefits provided below:
(i) The Company shall pay to the Employee his full base
salary through the Date of Termination, at the rate in effect at the time
Notice of Termination is given, plus all other amounts to which he is
entitled under any compensation plan of the Company, in each case at the time
such payments are due;
(ii) The Company shall pay the Employee, at the time such
payments would have been made had the Employee's employment not been
terminated hereunder, all salary payments that would have been payable to the
Employee pursuant to this Agreement had the Employee continued to be employed
for the greater of (x) the remaining Term of this Agreement, or (y) one year
(the "Severance Period") (assuming for the purpose of such continuing
payments that the Employee's salary for each year of such period is equal to
his salary at the Date of Termination), plus a pro rata portion of any bonus
that would otherwise have been payable to the Employee with respect to the
year in which the Employee's employment is terminated; provided, however,
that if the Employee's bonus for such year has not been determined, the
Employee shall be deemed to have been entitled to a bonus equal to the bonus
paid or payable to the Employee with respect to the immediately preceding
year;
(iii) All stock option rights, stock appreciation rights, and
any and all other similar rights theretofore granted to the Employee,
including, but not limited to, the Employee's right to receive cash in lieu
of exercising stock options, as may be provided in his stock option
agreements, shall vest and shall then be exercisable in full, and the
Employee shall have 90 days following his termination within which to
exercise any and all such rights and the restrictions on any and all shares
of restricted stock granted to the Employee that are outstanding on the Date
of Termination shall lapse as of the Date of Termination;
(iv) During the Severance Period the Company shall, at its
cost, arrange to provide the Employee with life, disability, dental, accident
and group health insurance benefits substantially similar to those that he
was receiving immediately prior to the Notice of Termination plus an
additional amount necessary to reimburse the Employee for any taxes imposed
solely by reason of his receipt of such benefits following his termination of
employment. Notwithstanding the foregoing, the Company shall not provide any
benefit otherwise receivable by the Employee pursuant to this subparagraph if
an equivalent benefits is actually received by him at any time during the
Severance
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Period and any such benefit actually received by him shall be
reported to the Company.
(d) The Company shall continue in effect for the benefit of the
employee all insurance or other provisions for the indemnification, defense
of hold-harmless of officers or directors of the Company that are in effect
on the date the Notice of Termination is sent to the Employee or the Company
with respect to all of his acts and omissions while an officer or director as
fully and completely as if such termination had not occurred, and until the
final expiration or running of all periods of limitation against actions that
may be applicable to such acts or omissions.
(e) The Employee shall have the right to terminate his employment
under this Agreement upon thirty (30) days notice to the Company without
liability to the Company for damages incurred solely by reason of such
termination.
(f) Notwithstanding anything to the contrary in this Agreement, in
the event that, in the opinion of counsel for the Company, it is more likely
than not that any payment or benefit under this Agreement or under any other
plan or agreement would not be deemed to be deductible in whole or in part in
the calculation of the federal income tax of the Company, or of any other
person making such payment or providing such benefit, by reason of Section
280G of the Internal Revenue Code of 1986, including the rules and
regulations promulgated thereunder, as amended from time to time and
including any successor legislation thereto (the "Code"), the aggregate
payments and benefits provided by this Agreement shall be reduced (if
necessary, to zero) (with the cash payments provided by this Agreement being
the first reduced) to the minimum extent necessary so that no portion of such
aggregate payments and benefits is not deductible for federal income tax
purposes by reason of Section 280G of the Code. The Company shall hold such
portions not paid to the Employee in escrow. At the end of each calendar
quarter during the term of such escrow, the Company shall deposit into escrow
an amount equal to interest accrued during such calendar quarter on the
amount held in escrow during such calendar quarter at a rate equal to the
rate than payable on judgments in California. If it shall be determined at
any point in time, by counsel selected by the Company and the Employee, that
it is more likely than not that the payment to the Employee of any or all of
such amount held in escrow would be deductible for tax purposes, such amount
shall be paid out of escrow to the Employee. In the event of a final
determination by the Internal Revenue Service or of an arbitration aware
pursuant to Section 16 hereof, that any such amount held in escrow would not
be deductible for tax purposes under the
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then applicable provisions of the Code if paid to the Employee, or if it
shall be determined at any point in time, by counsel selected by the company
and the Employee, that it is more likely than not that the payment to the
Employee of any such amount held in escrow would not be deductible for tax
purposes under the then applicable provisions of the Code, such amount shall
be paid out of escrow to the Company. For purposes of this Subsection
9(f),(i) the value of any non-cash benefits or any deferred or contingent
payment or benefit shall be determined by the company's independent public
accountants in accordance with the principles of Section 280G of the Code,
(ii) no payment or benefit not constituting, in the opinion of such
accountants, a "parachute payment" within the meaning of Section 280G of the
code shall be included in determining the aggregate amount of such payments
and benefits, and (iii) no payment or benefit the receipt or enjoyment of
which has been waived in writing by the Employee shall be included in
determining the aggregate amount of such payments and benefits.
10. CONFIDENTIAL INFORMATION AND NON-COMPETITION.
(a) During the Term of this Agreement and thereafter, the Employee
shall not, except as may be required to perform his duties hereunder or as
required by applicable law, disclose to others or use, whether directly or
indirectly any Confidential Information regarding the Company. "Confidential
Information" shall mean information about the Company, its subsidiaries and
affiliates, and their respective clients and customers that is not available
to the general public and that was learned by the Employee in the course of
his employment by the Company, including (without limitation) any data,
formulae, information, proprietary knowledge, trade secrets and client and
customer lists and all papers, resumes, records and the documents containing
such Confidential Information. The Employee acknowledges that such
Confidential Information is specialized, unique in nature and of great value
to the company, and that such information gives the Company a competitive
advantage. Upon the termination of this employment for any reason
whatsoever, the Employee shall promptly deliver to the Company all documents
(and all copies thereof) containing any Confidential Information.
(b) During the term of his employment hereunder, the Employee
shall not, directly or indirectly, without the prior written consent of the
Company, provide consultative service (with or without pay) to, own, manage,
operate, join, control, participate in, or be connected (as a stockholder,
partner, or otherwise) with, any business, individual, partner, form,
corporation, or other entity that is then in competition with the Company,
any of its subsidiaries or affiliates (a "Competitor of the Company"),
PROVIDED, however, that the "beneficial ownership"
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<PAGE>
by the Employee, either individually or as a member of a "group", as such
terms are used in Rule 13d of the General Rules and Regulations under the
Securities Exchange Act of 9134, as amended (the "Exchange Act"), of not more
than one percent (1%) of the voting stock of any publicly held corporation
shall not be a violation of this Agreement. It is further expressly agreed
that the Company will or would suffer irreparable injury if the Employee were
to compete with the Company or any subsidiary or affiliate of the company in
violation of this Agreement and that the company would by reason of such
competition be entitled to injunctive relief in a court of appropriate
jurisdiction, and the Employee further consents and stipulates to the entry
of such injunctive relief in such a court prohibiting the Employee from
competing with the Company or any subsidiary or affiliate of the Company in
violation of this Agreement.
(c) During the Term of this Agreement, the Employee shall not
directly or indirectly, influence or attempt to influence customers or
suppliers of the Company or any of its subsidiaries or affiliates, to divert
their business to any Competitor of the Company.
(d) The Employee recognizes that he will possess confidential
information about other employees of the Company relating to their education,
experience, skills, abilities, compensation and benefits, and interpersonal
relationships with customers of the Company. The Employee recognizes that
the information he will possess about these other employees is not generally
known, is of substantial value to the Company in developing its products and
in securing and retaining Customers, and will be acquired by him because of
his business position with the Company. The Employee agrees that, during the
period ending on the last day of the three-year period following his Date of
Termination, he will not, directly or indirectly, solicit or recruit any
employee of the Company for the purpose of being employed by him, or any
Competitor of the Company on whose behalf he is acting as an agent,
representative or employee. The Employee further agrees that he will not
convey any such confidential information or trade secrets about other
employees of the Company to anyone affiliated with him or to any Competitor
of the Company.
(e) If it is determined by a court of competent jurisdiction in
any state or applicable arbitration proceeding in accordance with Section 16,
that any restriction in this Section 10 is excessive in duration or scope or
is unreasonable or unenforceable under the laws of that state, it is the
intention of the parties that such restriction may be modified or amended by
the court to render it enforceable to the maximum extent permitted by the law
of that state.
9
<PAGE>
11. ASSIGNMENTS/MITIGATION.
(a) This Agreement and the rights, interest and benefits hereunder
are personal to the Employee and shall not be assigned, transferred, pledged,
or hypothecated in any way by the Employee, and shall not be subject to
execution, attachment or similar process. Any attempted assignment,
transfer, pledge, or hypothecation, or the levy of any execution, attachment
or similar process thereon, shall be null and void and without effect.
(b) The Company shall have the right to assign this Agreement and
to delegate all of its rights, duties and obligations hereunder, whether in
whole or in part, to any parent, affiliate, successor or subsidiary
organization of the Company or corporation with which the Company may merge
or consolidate or which acquires by purchase or otherwise all or
substantially all of the Company's consolidated assets, but such assignment
shall not release the Company from its obligations under this Agreement, and
in the event of any such assignment by the Company, the Employee may, at his
sole option, exercise his termination rights under the provisions of Section
8(c)(iv) of this Agreement.
(c) This Agreement shall inure to the benefit of and be
enforceable by the Employee and his personal or legal representatives,
executors, administrators, successors, heirs, distributes, devisees and
legatees. If the Employee should die while any amount would still be payable
to him hereunder had he continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement
to his devisee, legatee or other designees, or, if there is no such designee,
to his estate.
(d) The Employee shall have no duty to mitigate the Company's
obligations hereunder by seeking other employment or by becoming
self-employed; provided, however, that life, disability, dental, accident,
group health insurance and other health and welfare benefits received by the
Employee during or with respect to the Severance Period and attributable to
services rendered during such period by the Employee to persons or entities
other than the Company shall be applied to reduce the Company's obligation to
provide such benefits hereunder. Not less frequently than annually (by the
end of the month of the month next following the month in which the Effective
Date occurs), the Employee shall account to the Company as to the amount of
such benefits; if the Company has paid amounts in excess of those to which
the Employee was entitled (after giving effect to the offsets provided
above), the Employee shall reimburse the Company promptly thereafter for such
excess.
10
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12. NOTICE. Notices and all other communications provided for in this
Agreement shall be in writing and shall be deemed to have been duly given
when delivered or five business days after being mailed by United States
certified or registered mail, return receipt requested, postage prepaid,
addressed (a) if to the Employee, to 3 Dapplegray Road, Bell Canyon, CA
91307, and (b) if to the Company, to 21255 Califa Street, Woodland Hills, CA
91367, Attention: Stanley R. Zax, with a copy to the Secretary of the
Company; or to such other address as either party may have furnished to the
other in writing in accordance herewith, except that notice of change of
address shall be effective only upon receipt thereof.
13. SECTION HEADINGS. The Section headings used in this Agreement are
included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
14. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
15. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
16. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement (other than an action for injunctive relief
pursuant to Section 10 hereof) shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators in Los Angeles, California, in
accordance with the rules of the American Arbitration Association then in
effect. Such arbitrators shall only have jurisdiction to award contract
damages. Judgment may be entered on the arbitrator's award in any court
having jurisdiction. The prevailing party shall be entitled to reimbursement
of all of its reasonable expenses in arbitration, including reasonable
attorney's fees. In the event of a good faith dispute regarding the payment
of salary or benefits under this Agreement, the Company shall make the
disputed payments to the Employee as if such dispute did not exist during the
pendency of such good faith dispute, and, following the resolution of such
dispute, the Employee shall reimburse the Company for any overpayments.
17. COMPANY PROPERTY. The Employee agrees that at the time he leaves the
employment of the Company he will deliver to the Company, and will not keep or
deliver to anyone else, all notebooks, memoranda, documents, computer discs, and
any and all other material relating to the Company's business or constituting
11
<PAGE>
the Company's property, whether or not the Employee was the author or recipient
of such material.
18. MISCELLANEOUS.
(a) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Employee and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the time
or at any prior or subsequent time.
(b) This instrument contains the entire agreement of the parties
hereto relating to the subject matter hereof and it replaces and supersedes
all prior agreements and understandings, oral and written, between the
parties hereto. No agreements or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof have been made by
either party which are not expressly set forth in this Agreement.
(c) The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of California
without regard to its conflicts of law principles.
(d) All references to Sections of the Exchange Act or the Code
shall be deemed also to refer to any successor provisions to such Sections.
(e) Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law.
(f) The obligations created under the provisions of Sections 7, 9,
10, 11, 16 and 17 shall survive the expiration, suspension or termination,
for any reason, of this Agreement or the Employee's employment hereunder
until such obligations created thereunder are fully satisfied.
19. PRIOR AGREEMENT.
This Agreement replaces and supercedes the Employment Agreement dated
February 16, 1995 between the parties.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
ZENITH NATIONAL INSURANCE CORP.
By: /s/ Stanley R. Zax
----------------------
STANLEY R. ZAX
Chairman and President
EMPLOYEE
/s/ John J. Tickner
----------------------
JOHN J. TICKNER
13
<PAGE>
EXECUTION COPY
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into effective as of the
11th day of December, 1997 ("Effective Date"), on this 8th day of January, 1998
between ZENITH NATIONAL INSURANCE CORP., a Delaware corporation (hereinafter
referred to as "Zenith"), and STANLEY R. ZAX (hereinafter referred to as
"Employee").
WHEREAS, Employee is presently employed as Chairman of the Board
and President of Zenith Insurance Company, a subsidiary of Zenith, pursuant to a
written Employment Agreement originally dated as of December 9, 1981, for a term
of five years ending December 8, 1986, which agreement was extended and modified
pursuant to a written Employment Agreement dated as of December 5, 1985 for a
term of five years ending December 31, 1990, which agreement was extended and
modified pursuant to a written Employment Agreement dated as of February 28,
1990 for a term of five years ending December 31, 1995 and further extended and
modified pursuant to a written Employment Agreement dated December 6, 1994 for a
term of four year expiring on December 31, 1998, and is also employed as
Chairman of the Board and President of Zenith and certain of its other
<PAGE>
subsidiaries (Zenith and all of its subsidiaries collectively referred to
hereinafter as "Employer"); and
WHEREAS, Zenith and Employee deem it in their respective best interests to
extend the term of said Employment Agreement at the present time and modify
certain other provisions thereof;
NOW, THEREFORE, it is agreed as follows:
1. AMENDED AND RESTATED EMPLOYMENT AGREEMENT.
The Agreement is hereby amended and restated in its entirety and the term
thereof is hereby extended as hereinafter provided.
2. ENGAGEMENT AND DUTIES.
During the Term of Employment as defined in Paragraph 3 of this Agreement:
2.1 Employer hereby employs Employee and Employee does hereby agree to be
employed by Employer as Chairman of the Board, President, and Chief Executive
Officer of Zenith and in such other capacities at Zenith and at each of the
corporations which comprise Employer as shall hereafter be agreed upon by
Employee, the Board of Directors of Zenith and the boards of directors of such
other corporations.
2.2 Employee shall perform the normal duties of such offices and such
other executive duties as may from time to time be assigned to him by and in
accordance with instructions and directions of the Board of Directors of
<PAGE>
Zenith. Both Employee and Employer hereby expressly recognize that the
services described herein shall be performed to the reasonable satisfaction
of the Board of Directors of Zenith.
2.3 Employee shall perform the duties contemplated hereunder at his
principal office located in Los Angeles County, California; provided, however,
Employee shall travel outside Los Angeles County to the extent he reasonably
deems it necessary or appropriate in the performance of his duties hereunder.
2.4 Employee, during the Term of Employment, shall devote his time,
attention, energies, skill and best efforts to the performance of his duties for
and on behalf of Employer.
3. TERM OF EMPLOYMENT.
The term of employment hereunder shall be a period commencing on the
Effective Date and terminating December 31, 2002 ("Expiration Date"), unless
sooner terminated as elsewhere provided herein ("Term of Employment").
4. COMPENSATION.
As full and complete consideration for the performance of his duties and
the rendition of any and all services under this Agreement, Employee shall be
compensated as follows:
<PAGE>
4.1 Effective as of the Effective Date, Employee shall be paid the sum One
Million Dollars ($1,000,000) per year, subject to such other increases as the
Board of Directors of Zenith may from time to time determine ("Base
Compensation").
4.2 In addition to the Base Compensation, Employee shall be a participant
in the Executive Officer Bonus Plan of Zenith.
4.3 All compensation hereunder shall be paid by Employer, as allocated
from time to time among the different corporations which comprise Employer by
the Audit Committee of Zenith, and shall comply with all relevant governmental
directives, rules and regulations which may be in effect from time to time. All
Base Compensation shall be payable ratably twice each month, or more or less
often in accordance with the normal payroll practices of Employer.
5. BUSINESS EXPENSES.
Employee shall be reimbursed for reasonable and necessary expenses duly
incurred in connection with the duties to be performed and the services to be
rendered by Employee to Employer under and pursuant to this Agreement, upon
submission of itemized expense statements in the manner and at times specified
by Employer for officers of Employer. In addition, Employee shall be entitiled
to the
<PAGE>
exclusive full time use of one deluxe automobile of his choice, to be
replaced from time to time at Employee's discretion.
6. EMPLOYEE BENEFITS.
6.1 Employee shall be entitled to participate in all employee insurance,
retirement and other benefit plans for which he qualifies and which may be in
effect from time to time. Notwithstanding the foregoing, nothing contained in
this Agreement shall prohibit or limit the right of Employer to discontinue,
modify, or amend any plan or benefit in its absolute discretion at any time,
provided, however, that any such discontinuance, modification or amendment shall
apply to employees of Employer generally, or to a defined group of such
employees, and shall not apply solely to Employee.
6.2 Employee shall be entitled each year to a vacation in accordance with
standard employment practices, during which time his compensation shall be paid
in full. Each vacation shall be taken during a period mutually satisfactory to
both Employer and Employee.
7. DEATH DURING EMPLOYMENT.
If Employee shall die during the Term of Employment, Employer shall pay the
compensation which could otherwise be payable to Employee pursuant to Paragraphs
4.1 and 4.2 of this Agreement, up to the end of the twelfth
<PAGE>
month following the month in which his death occurred (a) to Employee's
spouse, if living, (b) if his spouse is not then living, to his then living
issue by right of representation, and (c) if none of the above are then
living, to his estate.
8. ACKNOWLEDGMENT OF PECULIAR VALUE OF SERVICES.
8.1 Employee acknowledges that the services which he has agreed to render
during the Term of Employment under this Agreement are special, unique, unusual,
extraordinary, and of an intellectual character, and therefore are of peculiar
value to Employer.
8.2 Employee further acknowledges that because of the character of said
services the remedy at law for any breach by him of this Agreement may be
enforced by an injunction in a suit in equity, without the necessity of proving
actual damage, and that a temporary injunction may be granted immediately upon
the commencement of any such suit, and without notice. Nothing herein contained
shall be construed as prohibiting Employer from pursuing any other remedies
available to Employer from such breach or threatened breach, including the
recovery of damages from Employee.
<PAGE>
9. DISCLOSURE OF INFORMATION.
9.1 Employee acknowledges that the list of Employer's customers, as they
may exist from time to time, and Employer's trade secrets and other confidential
information are valuable, special and unique assets of Employer's business.
Employee will not, during or after the Term of Employment, disclose to any
person, firm, corporation, association, or any other entity or use for his own
benefit, any list of Employer's customers, or any part thereof, or any of
Employer's trade secrets or other confidential information, for any reason or
purpose whatsoever.
9.2 Employee agrees that upon leaving the employ of Employer he will
deliver to Employer and not keep or deliver to anyone else, any and all
memoranda, specifications, documents and in general any and all material
relating to Employer's business that he may have under his possession or
control.
9.3 Employee recognizes that he will possess confidential information
about other employees of Employer relating to their education, experience,
skills, abilities, compensation and benefits, and interpersonal relationships
with customers of Employer. The Employee recognizes that the information he
will possess about these other employees is not generally known, is of
substantial value to Employer
<PAGE>
in developing its products and in securing and retaining customers, and will
be acquired by him because of his business position with Employer. Employee
agrees that, during the period ending on the last day of the one-year period
following his termination of employment, he will not, directly or indirectly,
solicit or recruit any employee of Employer for the purpose of being employed
by him, or any business, individual, partner, firm, corporation or other
entity that is then in competition with Employer ("Competitor") on whose
behalf he is acting as an agent, representative or employee. The Employee
further agrees that he will not convey any such confidential information or
trade secrets about other employees of Employer to anyone affiliated with him
or to any Competitor.
9.4 Employee further acknowledges that the remedy at law for any breach by
him of the covenants contained in Paragraphs 9.1 and 9.2 will be inadequate and
that in the event of a breach, or threatened breach, by Employee of the
covenants contained therein, Employer shall be entitled to an injunction
restraining Employee from using, for his own benefit, and/or from disclosing, in
whole or in part, the list of Employer's customers, and/or Employer's trade
secrets or other confidential information, and/or from rendering any services to
any person, firm, corporation,
<PAGE>
association or other entity to whom such a list, and/or such trade secrets or
other confidential information, in whole or in part, have been disclosed, or
are threatened to be disclosed and such other declaratory relief as is proper
to cause Employee to return to Employer any and all memoranda,
specifications, documents and all other material relating to Employer's
business that he may have under his possession or control. Nothing herein
shall be construed as prohibiting Employer from pursuing any other remedies
available to Employer from such breach or threatened breach, including the
recovery of damages from Employee. The provisions of this Paragraph 9 shall
survive the expiration or termination, for any reason, of this Agreement and
of Employee's employment.
10. TERMINATION OF AGREEMENT BY EMPLOYER.
Should any of the following events occur, Employer may terminate this
Agreement by giving written notice thereof to Employee, which notice shall be
effective immediately:
(a) Employee is physically or mentally incapacitated for a period of
one hundred eighty (180) consecutive days. Employee shall be deemed to be
physically or mentally incapacitated if he is unable for any reason whatsoever
to devote his full time and efforts to the business of Employer.
<PAGE>
(b) Employee breaches any of his material obligations under this
Agreement.
10.1 Should Employer terminate the Term of Employment prior to the
Expiration Date pursuant to Paragraph 10(a) hereof, Employer shall thereupon pay
to Employee, in complete satisfaction of its obligations under this Agreement,
the compensation which would otherwise be payable to him pursuant to Paragraphs
4.1 and 4.2 of this Agreement up to the end of the sixth month following the
month in which such termination occurred. Should Employer terminate the Term of
Employment prior to the Expiration Date pursuant to Paragraph 10(b) hereof,
Employer shall pay to Employee in complete satisfaction of its obligations under
this Agreement and without waiving any rights which it or its subsidiaries may
have against Employee, the compensation which would otherwise be payable to him
pursuant to Paragraph 4.1 of this Agreement up to the end of the month in which
such termination occurs and Employer shall not be obligated to make any payments
to Employee pursuant to Paragraph 4.2 of the Agreement.
10.2 Subject to the provisions of Paragraph 11.2 hereof, should Employer
terminate the Term of Employment prior to the Expiration Date for any reason
other than as set forth in Paragraphs 10(a) and 10(b) hereof, Employer shall
thereupon pay to Employee, in complete satisfaction
<PAGE>
of its obligations under this Agreement, the compensation which would
otherwise be payable to him pursuant to Paragraphs 4.1 and 4.2 of this
Agreement had Employee continued to be employed through the Expiration Date,
assuming, for purposes of this Paragraph 10.2, that the annual bonus payable
to Employee pursuant to Paragraph 4.2 of this Agreement for each year of the
remaining term is equal to the highest annual bonus paid or payable to
Employee during the three consecutive years immediately preceding his
termination of employment.
11. CHANGE IN CONTROL; TERMINATION OF AGREE-MENT BY EMPLOYEE OR EMPLOYER.
In the event of a Change in Control (as defined below) at any time during
the Term of Employment, all stock option rights, stock appreciation rights, and
any and all other similar rights theretofore granted to Employee, including, but
not limited to, Employee's right to receive cash in lieu of exercising stock
options, as provided in Section 9 of his Stock Option Agreements entered into
with Zenith as of December 6, 1985 and December 9, 1987, shall vest and shall
then be exercisable in full.
11.1 Employee may, within 180 days after the effective date of any such
Change in Control, deliver to Zenith a written notice of his election to
terminate the
<PAGE>
Term of Employment, effective as of a date set forth in said notice, which
effective date shall be not less than 30 days nor more than 90 days after the
date of delivery of such written notice.
11.2 Notwithstanding anything in this Agreement to the contrary, in the
event of a Change in Control, should Employee terminate the Term of Employment
prior to the Expiration Date pursuant to Paragraph 11.1 hereof, or should
Employer terminate the Term of Employment prior to the Expiration Date for any
reason other than as set forth in Paragraphs 10(a) and 10(b) hereof, then,
effective as of the date set forth in Employee's or Employer's notice to
terminate the Term of Employment, Employee shall be entitled to the benefits
provided below (hereinafter referred to as "Severance Payments"):
(i) Zenith shall pay to Employee his Base Compensation
through the effective date of the notice to terminate the Term of
Employment, at the rate in effect at the time such notice of
termination is given, plus all other amounts to which he is entitled
under any compensation plan of Employer, in each case at the time such
payments are due;
(ii) Zenith shall pay to Employee a cash lump sum
payment, no later than the
<PAGE>
fifteenth day following the effective date of the notice to terminate the
Term of Employment, equal to the greater of (a) two times the sum of (x)
his Base Compensation at the rate in effect as of the effective date of
the notice to terminate the Term of Employment and (y) the highest annual
bonus paid or payable to Employee during the three consecutive years
immediately preceding his termination of employment, or (b) the "actuarial
equivalent" of all Base Compensation and bonus payments that would have
been payable to Employee pursuant to Paragraphs 4.1 and 4.2 of this
Agreement had Employee continued to be employed through the Expiration
Date, assuming, for purposes of this Paragraph, that the annual bonus
payable to Employee pursuant to Paragraph 4.2 of this Agreement for
each year of such remaining term is equal to the highest annual bonus
paid or payable to Employee during the three consecutive years
immediately preceding his termination of employment. For purposes of
this subparagraph 11.2(ii), "actuarial equivalent" shall be determined
by an actuary selected by Zenith, subject to approval by Employee, and
calculated in accordance with
<PAGE>
the actuarial assumptions used by the Pension Benefit Guaranty Corporation
to value liabilities for pension plans terminating as of the effective date
of Employee's or Employer's notice to terminate the Term of Employment;
(iii) During the period beginning as of the
effective date of Employee's or Employer's notice to terminate the
Term of Employment until the Expiration Date, Zenith shall, at its
cost, arrange to provide Employee with life, disability, dental,
accident and group health insurance benefits substantially similar to
those that he was receiving immediately prior to the effective date of
the notice to terminate the Term of Employment plus an additional
amount necessary to reimburse Employee for any taxes imposed solely by
reason of his receipt of such benefits following his termination of
employment. Notwithstanding the foregoing, Zenith shall not provide
any benefit otherwise receivable by Employee pursuant to this
subparagraph 11.2(iii) if an equivalent benefit actually received by
him at any time during the period of coverage, and any such
<PAGE>
benefit actually received by him shall be reported to Zenith.
11.3 For purposes of this Agreement, a Change in Control shall mean either
(i) a merger or consolidation of Zenith with or into another company or
corporation, other than (a) a merger or consolidation which would result in the
voting securities of Zenith outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least 75% of the combined voting power of
the voting securities of Zenith or such surviving entity outstanding immediately
after such merger or consolidation or (b) a merger or consolidation effected to
implement a recapitalization of Zenith (or similar transaction) in which no
"person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended) acquires Zenith more than 50% of the combined
voting power of Zenith's then outstanding securities; or (ii) an assignment of
this Agreement by Zenith under the provisions of Paragraph 15.2 hereof; or (iii)
the sale of all or substantially all of Zenith's assets; or (iv) a change in the
identities of a majority of the members of the Board of Directors of Zenith
within a one-year period or less; or (v) any other transaction which would
require any party or affiliated group of parties to
<PAGE>
obtain approval from, or require such transactions to be presented for
approval by, the California Insurance Commissioner (assuming there is no
preemption of California insurance laws by Federal Law).
11.4 Notwithstanding anything to the contrary in this Agreement, in the
event that Employee becomes entitled to the Severance Payments, if any of the
Severance Payments will be subject to the tax (the "Excise Tax") imposed by
section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"),
Zenith shall pay to Employee an additional amount (the "Gross-Up Payment") such
that the net amount retained by Employee, after deduction of any Excise Tax on
the Total Payments (as hereinafter defined) and any federal, state and local
income and other tax and Excise Tax upon the payment provided for by this
Paragraph 11.4, shall be equal to the Total Payments. For purposes of
determining whether any of the Total Payments will be subject to the Excise Tax
and the amount of such Excise Tax, (i) any other payments or benefits received
or to be received by Employee in connection with a Change in Control or
Employee's termination of employment (whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with Employer, any person
whose actions result in a change in control or any person affiliated with
Employer or such person (which, together
<PAGE>
with Severance Payments, shall constitute "Total Payments"), shall be treated
as "parachute payments" within the meaning of section 280G(b)(2) of the Code,
and all "excess parachute payments" within the meaning of section 280G(b)(1)
shall be treated as subject to the Excise Tax, unless in the opinion of tax
counsel selected by Zenith's independent auditors and acceptable to Employee,
such other payments or benefits (in whole or in part) do not constitute
parachute payments, or such excess parachute payments (in whole or in part)
represent reasonable compensation for services actually rendered within the
meaning of section 280G(b)(4) of the Code in excess of the base amount,
within the meaning of section 280G(b)(3) of the Code, or are otherwise not
subject to the Excise Tax, (ii) the amount of the Total Payments which shall
be treated as subject to the Excise Tax shall be equal to the lesser of (A)
the total amount of the Total Payments or (B) the amount of excess parachute
payments within the meaning of section 280G(b)(1) (after applying clause (i),
above), and (iii) the value of any non-cash benefits or any deferred payment
or benefit shall be determined by Zenith's independent auditors in accordance
with the principles of sections 280G(d)(3) and (4) of the Code. For purposes
of determining the amount of the Gross-Up Payment, Employee shall be deemed
to pay federal income taxes at the highest
<PAGE>
marginal rate of federal income taxation in the calendar year in which the
Gross-Up Payment is to be made and state and local income taxes at the
highest marginal rate of taxation in the state and locality of Employee's
residence on the date of termination of employment, net of the maximum
reduction in federal income taxes which could be obtained from deduction of
such state and local taxes. In the event that the Excise Tax is subsequently
determined to be less than the amount taken into account hereunder at the
time of termination of Employee's employment, Employee shall repay to Zenith,
at the time that the amount of such reduction in Excise Tax is finally
determined, the portion of the Gross-Up Payment attributable to such
reduction (plus that portion of the Gross-Up Payment attributable to the
Excise Tax and federal, state and local income tax imposed on the Gross-Up
Payment being repaid by the Executive to the extent that such repayment
results in a reduction in Excise Tax and/or a federal, state or local income
tax deduction) plus interest on the amount of such repayment at the rate
provided in section 1274(b)(2)(B) of the Code. In the event that the Excise
Tax is determined to exceed the amount taken into account hereunder at the
time of the termination of Employee's employment (including by reason of any
payment the existence or amount of which cannot be determined at the time of
the Gross-Up Payment),
<PAGE>
Zenith shall make an additional Gross-Up Payment in respect of such excess
(plus any interest, penalties or additions payable by the Executive with
respect to such excess) at the time that the amount of such excess is finally
determined.
11.5 The payments provided for in Paragraphs 11.2 (other than subparagraph
11.2(iii)) and 11.4 hereof shall be made not later than the fifth day following
the date of termination of employment, provided, however, that if the amounts of
such payments cannot be finally determined on or before such day, Zenith shall
pay to Employee on such day an estimate, as determined in good faith by Zenith,
of the minimum amount of such payments to which Employee is clearly entitled and
shall pay the remainder of such payments (together with interest at the rate
provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can
be determined but in no event later than the thirtieth (30th) day after the date
of termination of employment. In the event that the amount of the estimated
payments exceeds the amount subsequently determined to have been due, such
excess shall constitute a loan by Zenith to Employee, payable on the fifth (5th)
business day after demand by Zenith (together with interest at the rate provided
in section 1274(b)(2)(B) of the Code). At the time that payments are made under
this Paragraph, Zenith
<PAGE>
shall provide Employee with a written statement setting forth the manner in
which such payments were calculated and the basis for such calculations
including, without limitation, any opinions or other advice Zenith has
received from outside counsel, auditors or consultants (and any such opinions
or advice which are in writing shall be attached to the statement).
12. ATTORNEY'S FEES.
In the event that any action at law or in equity, for injunctive or
declaratory relief, is brought to enforce or interpret the provisions of this
Agreement, if Employee is the prevailing party, he shall be entitled to
reasonable attorney's fees in addition to any other relief to which he may be
entitled.
13. APPLICABLE LAW.
This Agreement and the rights and obligations of the parties hereunder
shall be construed, interpreted and enforced in accordance with, and governed
by, the laws of the State of California applicable to agreements executed and
fully to be performed thereunder.
14. NOTICES.
Any notice required to be given hereunder shall be in writing sent by
registered or certified mail, return receipt requested, to either Zenith or
Employee at the
<PAGE>
addresses listed below, or at such other addresses as either Zenith or
Employee may hereafter designate in writing to the other:
To Zenith:
Zenith National Insurance Corp.
21255 Califa Street
Woodland Hills, California 91367
Attention: Corporate Secretary
To Employee:
813 North Bedford Drive
Beverly Hills, California 90210
15. ASSIGNMENT.
15.1 This Agreement and the rights, interests, and benefits hereunder are
personal to Employee and shall not be assigned, transferred, pledged, or
hypothecated in any way by Employee, and shall not be subject to execution,
attachment or similar process. Any attempted assignment, transfer, pledge, or
hypothecation, or the levy of any execution, attachment or similar process
thereon, shall be null and void and without effect.
15.2 Zenith shall have the right to assign this Agreement and to delegate
all of its rights, duties and obligation hereunder, whether in whole or in part,
to any parent, affiliate, successor, or subsidiary organization or company of
Zenith or corporation with which Zenith may merge or consolidate or which
acquires by purchase or
<PAGE>
otherwise all or substantially all of Zenith's consolidated assets, but such
assignment shall not release Employer from its obligations under this
Agreement, and in the event of any such assignment by Zenith, Employee may,
at his sole option, exercise his termination rights under the provisions of
Paragraph 11 of this Agreement.
16. ENTIRE AGREEMENT.
This Agreement constitutes the entire understanding of the parties hereto
and supersedes any and all prior agreements and understanding whether oral or
written between the parties. This Agreement may only be modified by an
agreement in writing executed by one of Zenith's duly authorized officers (other
than Employee), with the approval of Zenith's Board of Directors, and by
Employee.
17. WAIVER OF BREACH.
The waiver by Employee of a breach of any provision of this Agreement by
Employee shall not operate or be construed as a waiver of any subsequent breach
by Employee.
18. MISCELLANEOUS.
18.1 The titles of the paragraphs of this Agreement are for convenience of
reference only, and are not to be considered in construing this Agreement.
18.2 The unenforceability or invalidity of any paragraph or subparagraph of
this Agreement shall not
<PAGE>
affect the enforceability and validity of the balance of this Agreement.
18.3 Each party hereto shall make, execute and deliver such other
instruments or documents as may be reasonable required in order to effectuate
the purpose of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
Woodland Hills, California, on the date indicated below.
ZENITH NATIONAL INSURANCE CORP.
("Zenith")
Date: By /s/ Fredricka Taubitz
As agent for and on behalf of Zenith
and each and all of its Subsidiaries
("Employer")
Date: By /s/ Stanley R. Zax
STANLEY R. ZAX ("Employee")
<PAGE>
[LOGO]
THIRD AMENDMENT TO LINE OF CREDIT AGREEMENT
This Third Amendment to Line of Credit Agreement (the "Amendment") is
effective as of January 2, 1998, by and between SANWA BANK CALIFORNIA (the
"Bank") and ZENITH NATIONAL INSURANCE CORP. (the "Borrower") with respect to
the following:
This Amendment shall be deemed to be a part of and subject to that
certain Line of Credit Agreement dated as of December 15, 1994, as heretofore
amended, and any and all addenda and riders heretofore made (collectively the
"Agreement"). Unless otherwise defined herein, all terms used in this
Amendment shall have the same meanings as in the Agreement. To the extent
that any of the terms or provisions of this Amendment conflict with those
contained in the Agreement, the terms and provisions contained herein shall
control.
WHEREAS, the Borrower and the Bank mutually desire to extend and/or
modify the Agreement.
NOW THEREFORE, for value received and hereby acknowledged, the Borrower
and the Bank agree as follows:
1. CERTAIN DEFINED TERMS. Unless elsewhere defined in this Third
Amendment, the following terms shall have the following meaning:
"AMOUNTS AVAILABLE FOR DIVIDENDS" shall mean, without
duplication, the amount that is paid or may be paid by Zenith Insurance
Company as a dividend at any time during the then current calendar year
without being an "extraordinary dividend" under Section 1215.5(c) of the
California Insurance Code.
"CONTINGENT OBLIGATIONS" shall mean any agreement, undertaking
or arrangement (other than insurance and reinsurance obligations and
surety bonds, in each case entered into in the ordinary course of
business) by which any Person guarantees, endorses or otherwise becomes or
is contingently liable for (by direct or indirect agreement, contingent or
otherwise, to provide funds for payment, to supply funds to, or otherwise
to invest in, a debtor, or otherwise to assure a creditor against loss but
excluding the Borrower's agreement to subordinate debt owed to it by Perma-
Bilt, a Nevada corporation, to amounts owed to others) the debt,
obligation or other liability of any other Person (other than by
endorsements of instruments in the course of collection), or guarantees
the payment of dividends or other distributions upon the shares of any
other Person. The amount of any Person's obligation under any Contingent
Obligation shall (subject to any limitation set forth therein) be deemed
to be the outstanding principal amount of the debt, obligation of other
liability guaranteed thereby.
"DEBT" shall mean the outstanding principal for which Borrower
is either directly liable or indirectly liable as a Contingent Obligation
for (a) all indebtedness for borrowed money (b) all obligations evidenced
by notes, bonds, debentures or similar instruments, including obligations
so evidenced incurred in connection with the acquisition of property,
assets or business, and (c) all obligations with respect to capital
leases.
1
<PAGE>
"FIXED INTEREST CHARGES" shall mean interest paid, or without
duplication, accrued but unpaid on (i) the Line of Credit, (ii) all
indebtedness for borrowed money , and (iii) all obligations evidenced by
notes, bonds, debentures or similar instruments, including obligations so
evidenced incurred in connection with the acquisition of property, assets,
or businesses, which shall be determined at the end of each fiscal quarter
for the four consecutive fiscal quarters then ended."
"GOVERNMENTAL AUTHORITY" means any nation or government, any
state or other political subdivision thereof, any central bank (or similar
monetary or regulatory authority) thereof, any entity exercising
executive, legislative, judicial, regulatory or administrative functions
of or pertaining to government, and any corporation or other entity owned
or controlled, through stock or capital ownership or otherwise, by any of
the foregoing.
"INSURANCE SUBSIDIARY" shall mean any Subsidiary of the Borrower
(other than Zenith Insurance Management Services, Inc., Zenith Risk
Management, Inc., and CalFarm Insurance Agency or any other Subsidiary
which does not issue or underwrite insurance or reinsurance) that is
authorized or admitted to carry on or transact one or more aspects of the
business of selling, issuing or underwriting insurance or reinsurance.
"INTEREST COVERAGE RATIO" shall mean the ratio of (a) (i)
Amounts Available for Dividends, plus (ii) pre-tax income from the Non-
Insurance Subsidiaries as of the end of each fiscal quarter for the four
quarters then ended, plus (iii) without duplication, pre-tax, pre-interest
income of the Borrower as of the end of each fiscal quarter for the four
quarters then ended to (b) Fixed Interest Charges.
"NON-INSURANCE SUBSIDIARY" means any Subsidiary which is not an
Insurance Subsidiary.
"PERSON" shall mean an individual, partnership, corporation,
limited liability company, business trust, joint stock company, trust,
unincorporated association or Governmental Authority.
"SUBSIDIARY" of a person means any corporation, association,
partnership, limited liability company, joint venture or other business
entity of which more than 50% of the voting stock, membership interests or
other equity interests (in case of Persons other than corporations), is
owned or controlled directly or indirectly by the Person, or one or more
of the Subsidiaries of the Person, or a combination thereof. Unless the
context otherwise clearly requires, references herein to a "Subsidiary"
refer to a Subsidiary of the Borrower.
"SURETY INSTRUMENTS" means all letters of credit (including
standby and commercial), banker's acceptances, surety bonds and similar
instruments but excluding insurance and reinsurance obligations and surety
obligations, in each case entered into in the ordinary course of business.
"TOTAL CAPITALIZATION" shall be defined as (a) Debt plus (b)
Total Shareholder's Equity of the Borrower.
"TOTAL SHAREHOLDER'S EQUITY" shall mean the total shareholder's
equity as determined in accordance with generally accepted accounting
principles (calculated excluding unrealized gains (losses) of securities
as determined in accordance with FASB 115).
2. CHANGE IN INTEREST RATE. Sections 1.02 C. 1, 2 and 3 of the Agreement
are deleted in their entirety and the following is substituted in lieu thereof:
"1. REFERENCE RATE ADVANCES. A variable rate equivalent to an index
for a variable interest rate which is quoted, published or announced from
time to time by the Bank as its reference rate and as to
2
<PAGE>
which loans may be made by the Bank at, below or above such reference rate
(the "Reference Rate"). Interest shall be adjusted concurrently with any
change in the Reference Rate. An Advance based upon the Reference Rate is
hereinafter referred to as a "Reference Rate Advance." Each such Reference
Rate Advance must be in the minimum amount of $100,000.00.
2. FED FUNDS ADVANCES. A variable rate per annum (the "Federal
Funds Rate"), for each day in which the Advance is based upon the Federal
Funds Rate (a "Fed Funds Advance"), equivalent to 0.40% in excess of the
interest rate equal to the weighted average of the rates on overnight
Federal funds transactions with members of the Federal Reserve System,
quoted to the Bank on such day by Federal Funds brokers of recognized
standing which are selected by the Bank in its sole discretion or, if such
day is not a business day, for the immediately preceding business day.
With respect to this section 1.02(C)(2), a business day means a day in
which banks are open generally in Chicago and New York for the conduct of
substantially all of their commercial lending activities. Fed Funds
Advances must be in the minimum amount of $250,000.00.
3. EURODOLLAR ADVANCES. A fixed rate quoted by the Bank for 30, 60,
90, 120, 180 or 360 days or for such other period of time that the Bank
may quote and offer (provided that any such period of time does not extend
beyond the Expiration Date) [the "Interest Period"] for Advances in the
minimum amount of $250,000.00. Such interest rate shall be a percentage
equivalent to 0.40% in excess of the Bank's Eurodollar Rate (rounded
upward, if necessary, to the nearest 1/16th of one per cent (0.0625%)
which is that rate determined by the Bank's Treasury Desk as being the
approximate rate at which the Bank could purchase offshore U.S. dollar
deposits in an amount approximately equal to the amount of the relevant
Advance and for a period of time approximately equal to the relevant
Interest Period (adjusted for any and all assessments, surcharges and
reserve requirements pertaining to the purchase by the Bank of such U.S.
dollar deposits) [the "Eurodollar Rate"]. An Advance based upon the
Eurodollar Rate is hereinafter referred to as a "Eurodollar Advance" or
Eurodollar Rate Advance".
Interest shall be computed on the basis of 360 days per year, but
charged on the actual number of days elapsed.
3. MODIFICATION OF COMMITMENT FEE. Section 1.04(ii). of the Agreement is
deleted in its entirety and the following is inserted in lieu thereof:
"(ii) from the effective date of this Amendment to the termination of
this Agreement a fee equal to 0.125% per annum of the daily unused portion
of the line, payable in arrears for the immediately preceding calendar
quarter on the 15th day of each January, April, July and October of each
year, and payable at the termination date of this Agreement for the
immediately preceding calendar quarter, if not previously paid, and for
the then current calendar quarter, to be computed on the basis of 360 days
per year, but charged on the actual number of days elapsed during the
applicable time period for which the Line of Credit has been in effect."
4. SUBSTITUTION OF FINANCIAL COVENANT. Section 4.10 B is deleted and a
new covenant is inserted to read as follows:
"4.10 B DEBT TO TOTAL CAPITALIZATION. Borrower shall not permit the
Debt to Total Capitalization Ratio to exceed 0.40 to 1.00 as of the end of
any fiscal quarter.
5. NEW FINANCIAL COVENANT. Section 4.10 E is deleted and a new
subsection is to be added to read as follows:
3
<PAGE>
"4.10 E. INTEREST COVERAGE RATIO. Borrower shall not permit
the Interest Coverage Ratio to be less than 2.00 to 1.00 as of the end of
any fiscal quarter.
6. EVENTS OF DEFAULT. Section 5.02 of the Agreement is deleted in its
entirety and the following is inserted in lieu thereof:
"5.02.
a) Performance under this Agreement. The Borrower shall fail in any
material respect to perform or observe any material term, covenant or
agreement contained in this Agreement or any material document,
instrument or agreement evidencing or relating to any material
indebtedness of the Borrower to the Bank and any such failure
(exclusive of the payment of money to the Bank under this Agreement
or any other document, instrument or agreement, which failure shall
constitute an immediate Event of Default if not paid within five (5)
business days after notice from the Bank that the same is past due)
shall continue for more than 30 days after written notice from the
Bank to the Borrower of the existence and character of such Event of
Default or should the default require more than (30) days but less
than ninety (90) days to correct, the Borrower does not commence
material corrective action within thirty (30) days and actively
pursues such corrective action.
b) Performance With Other Third Parties. The Borrower shall:
(1) fail to make any payment in respect of (a) all indebtedness
of Borrower for borrowed money (b) all obligations of Borrower
evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with
the acquisition of property, assets or businesses or (c) all non-
contingent reimbursement or payment obligations of Borrower with
respect to Surety Instruments and (d) all obligations of
Borrower with respect to capital leases or any Contingent
Obligations of Borrower related to (a), (b), (c), and (d),
having an aggregate principal amount (including undrawn
committed or available amounts and including amounts owing to
all creditors under any combined or syndicated credit agreement)
of more than $10,000,000 when due (whether by scheduled
maturity, required prepayment, acceleration, demand, or
otherwise) and such failure continues after the applicable grace
or notice period, if any, specified in the relevant document on
the date of such failure; or
(2) fail to perform or observe any other condition or covenant,
or any other event shall occur or condition exist, under any
agreement or instrument relating to any such indebtedness or
Contingent Obligation, and such failure continues after the
applicable grace or notice period, if any, specified in the
relevant document on the date of such failure if the effect of
such failure, event or condition is to cause such indebtedness
to be declared to be due and payable prior to its stated
maturity, or such Contingent Obligation to become payable or
cash collateral in respect thereof to be demanded.
7. CONFIRMATION OF OTHER TERMS AND CONDITIONS OF THE AGREEMENT. Except
as specifically provided in this Amendment, all other terms, conditions and
covenants of the Agreement unaffected by this Amendment shall remain unchanged
and shall continue in full force and effect and the Borrower hereby covenants
and agrees to perform and observe all terms, covenants and agreements provided
for in the Agreement, as hereby amended.
4
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto
as of the date first hereinabove written.
BANK: BORROWER:
SANWA BANK CALIFORNIA ZENITH NATIONAL INSURANCE CORP.
By: /s/ DIRK A. PRICE By: /s/ STANLEY R. ZAX
---------------------------------- ------------------------------------
Dirk A. Price, Vice President Stanley R. Zax, President & Chairman
5
<PAGE>
January 21, 1998
VIA FEDERAL EXPRESS
Zenith National Insurance Corp.
21255 Califa Street
Woodland Hills, CA 91367-5021
Attention: Mr. Hyman J. Lee, Jr.
Re: AMENDMENT NO. 1 TO CREDIT AGREEMENT
Dear Hyman:
Zenith National Insurance Corp. (the "Borrower") has requested
that Bank of America National Trust and Savings Association (the "Bank")
amend the definition of "Risk-Based Capital" contained in the Credit
Agreement, dated as of July 24, 1997, between the Borrower and the Bank (the
"Credit Agreement"). The Bank has agreed to amend the Credit Agreement to the
extent and on the terms and conditions contained herein. Capitalized terms
used herein without definition shall have the meanings provided therefor in
the Credit Agreement.
The definition of Risk-Based Capital contained in the Credit
Agreement is hereby amended to add the following after the first sentence of
the definition thereof:
"With respect to each quarter other than the fiscal year end, the
amount used in such ratio for the Company Action Level shall be
that which was calculated as of the prior year end."
Except as amended hereby, the Credit Agreement and all Loan
Documents shall remain in full force and effect without amendment or
modification. The amendment contained herein is specifically limited to the
terms hereof.
<PAGE>
Zenith National Insurance Corp.
January 21, 1998
Page 2
Please evidence your agreement with the foregoing by executing
this letter and returning it to the Bank.
Very truly yours,
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ Michael T. Ernst
--------------------------------
Its: Michael T. Ernst
-------------------------------
Accepted and agreed to this 22 day Managing Director
of January, 1998.
ZENITH NATIONAL
INSURANCE CORP.
By: /s/ Fredricka Taubitz
------------------------------
Its: Exec. Vice Pres & Chief Financial Officer
------------------------------------------
<PAGE>
ANNUAL REPORT
1997
ZENITH NATIONAL INSURANCE CORP.
CalFarm
The Zenith
<PAGE>
INSURANCE PRODUCTS AND SERVICES
AUTOMOBILE
.
BUSINESS
.
EARTHQUAKE
.
FARMOWNERS
.
HEALTH
.
HOMEOWNERS
.
REINSURANCE
.
SINGLEPOINT
INTEGRATED 24-HOUR
HEALTH & DISABILITY
.
WORKERS' COMPENSATION
CalFarm
The Zenith
<PAGE>
CONTENTS
<TABLE>
<S> <C>
FINANCIAL HIGHLIGHTS..................................................................... 3
LETTER TO STOCKHOLDERS................................................................... 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................ 24
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION...................................... 34
PROPERTY-CASUALTY LOSS DEVELOPMENT....................................................... 36
CONSOLIDATED BALANCE SHEET............................................................... 38
CONSOLIDATED STATEMENT OF OPERATIONS..................................................... 40
CONSOLIDATED STATEMENT OF CASH FLOWS..................................................... 41
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY........................................... 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................................... 44
INDEPENDENT ACCOUNTANT'S REPORT.......................................................... 57
CORPORATE DIRECTORY
ZENITH NATIONAL INSURANCE CORP....................................................... 59
ZENITH INSURANCE COMPANY............................................................. 60
CALFARM INSURANCE COMPANY............................................................ 61
CALFARM INSURANCE AGENCY............................................................. 62
PERMA-BILT, A NEVADA CORPORATION..................................................... 62
</TABLE>
CalFarm
2 The Zenith
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
OPERATING RESULTS
PER SHARE DATA
KEY STATISTICS 1997 1996 1995
- -------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
OPERATING RESULTS
CONSOLIDATED REVENUES $660,480 $556,371 $519,020
INCOME FROM CONTINUING OPERATIONS AFTER
TAXES AND BEFORE REALIZED GAINS 19,669 30,575 17,368
REALIZED GAINS ON INVESTMENTS AFTER TAXES 8,431 7,025 2,354
INCOME FROM CONTINUING OPERATIONS
AFTER TAXES 28,100 37,600 19,722
NET INCOME 28,100 37,600 6,600
PER SHARE DATA
INCOME FROM CONTINUING OPERATIONS AFTER
TAXES AND BEFORE REALIZED GAINS* 1.10 1.72 .95
REALIZED GAINS ON INVESTMENTS AFTER TAXES* .47 .40 .13
INCOME FROM CONTINUING OPERATIONS* 1.57 2.12 1.08
NET INCOME* 1.57 2.12 .36
STOCKHOLDERS' DIVIDENDS 1.00 1.00 1.00
KEY STATISTICS
COMBINED RATIO
INCLUDING CATASTROPHES 103.4% 99.8% 103.1%
EXCLUDING CATASTROPHES 103.1% 99.8% 100.0%
STATUTORY RISK-BASED CAPITAL RATIO** 332% 364% 377%
STOCKHOLDERS' EQUITY $361,866 $337,503 $330,432
STOCKHOLDERS' EQUITY PER SHARE*** $ 20.31 $ 19.17 $ 18.58
CLOSING COMMON STOCK PRICE $ 25 3/4 $ 27 3/8 $ 21 3/8
- -------------------------------------------------------------------------------------
</TABLE>
*1997 amounts are presented on a diluted basis. 1996 and 1995 amounts are
presented on a diluted basis and have been restated as required to comply with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). For further discussion of earnings per share and the impact
of SFAS No. 128, see Notes 1 and 16 to the consolidated financial statements
on pages 46 and 55.
**The computation of statutory risk-based capital in 1996 compared to 1995 is
different because of phase-in adjustments in the prescribed calculation. On a
comparable basis, the risk-based capital ratio in 1995 was 339%.
***Excluding the effect of Statement of Financial Accounting Standards No. 115,
stockholders' equity per share was $20.03, $19.28 and $18.18 in 1997, 1996,
and 1995, respectively.
CalFarm
The Zenith 3
<PAGE>
TO OUR STOCKHOLDERS
DESPITE SOME SIGNIFICANT ACHIEVEMENTS WITH LONG-TERM POTENTIAL BENEFITS, AND
EXCELLENT RESULTS IN SEVERAL AREAS OF OUR OPERATIONS, 1997 EARNINGS PER SHARE
DECLINED 25.9% FROM 1996 DUE PRIMARILY TO OUR WORKERS' COMPENSATION PERFORMANCE
IN CALIFORNIA.
KEY ACHIEVEMENTS
1. INCREASED INVESTMENT INCOME AND REALIZED GAINS ON INVESTMENTS.
2. FAVORABLE PERFORMANCE FROM OUR CALFARM, REINSURANCE AND PERMA-BILT
BUSINESSES.
3. SENIOR MANAGEMENT ADDITIONS AND ORGANIZATIONAL REFINEMENTS IN OUR WORKERS'
COMPENSATION DIVISION, INCLUDING A 10% WORKFORCE REDUCTION IN CALIFORNIA.
4. CONTINUING NATIONAL DIVERSIFICATION OF OUR WORKERS' COMPENSATION OPERATIONS,
WITH ABOUT 46% OF WORKERS' COMPENSATION PREMIUMS EARNED FROM OPERATIONS
CONDUCTED OUTSIDE CALIFORNIA.
5. PENDING RISCORP ACQUISITION TO BOLSTER OUR SOUTHEASTERN WORKERS' COMPENSATION
MARKETS IN CONJUNCTION WITH THE 1996 ACQUISITION OF AGC-SIF IN FLORIDA.
SUMMARY OF FINANCIAL HIGHLIGHTS
/ / INCOME FROM CONTINUING OPERATIONS AFTER TAXES AND BEFORE NET REALIZED GAINS
ON INVESTMENTS WAS $19,669,000, OR $1.10 PER SHARE, COMPARED TO $30,575,000,
OR $1.72 PER SHARE, IN 1996.
/ / INVESTMENT INCOME AFTER TAXES WAS $34,655,000, OR $1.94 PER SHARE, COMPARED
TO $34,069,000, OR $1.92 PER SHARE, IN 1996.
/ / NET INCOME WAS $28,100,000, OR $1.57 PER SHARE, COMPARED TO $37,600,000, OR
$2.12 PER SHARE, IN 1996.
/ / REALIZED GAINS ON INVESTMENTS AFTER TAXES WERE $8,431,000, OR $.47 PER
SHARE, COMPARED TO $7,025,000, OR $.40 PER SHARE, IN 1996. UNREALIZED GAINS
ON FIXED MATURITIES AFTER TAXES WERE $5,890,000, COMPARED TO AN AFTER TAXES
UNREALIZED LOSS OF $2,123,000, IN 1996.
/ / COMBINED RATIO FOR THE PROPERTY-CASUALTY OPERATIONS WAS 103.4%, COMPARED TO
99.8%, IN 1996.
/ / BOOK VALUE PER SHARE AT 1997 YEAR-END WAS $20.31, COMPARED TO $19.17, AT
1996 YEAR-END.
CalFarm
4 The Zenith
<PAGE>
<TABLE>
<CAPTION>
93 94 95 96 97
<S> <C> <C> <C> <C>
STOCKHOLDERS' EQUITY PER SHARE
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
$18.55 $16.35 $18.58 $19.17 $20.31
</TABLE>
WE CONTINUE TO FOCUS ON EDUCATION AND LEADERSHIP TRAINING FOR OUR MANAGEMENT
AND EMPLOYEES TO POSITION ZENITH FOR THE STRONG ORGANIZATIONAL FOOTING REQUIRED
TO FACE THE COMPETITIVE AND COMPLEX CHALLENGES AHEAD. AT THE SAME TIME, WE HAVE
STRENGTHENED OUR WORKERS' COMPENSATION MANAGEMENT TEAM WITH PROVEN AND
EXPERIENCED PROFESSIONALS.
AS A STOCKHOLDER-ORIENTED COMPANY, WE ARE MINDFUL THAT OUR COMMON STOCK
UNDER-PERFORMED IN THE 1997 MARKET AND WE ARE COMMITTED TO TAKING THE NECESSARY
STEPS TO IMPROVE STOCKHOLDER VALUE. TO THIS END, WE REPURCHASED ABOUT 5% OF OUR
OUTSTANDING SHARES IN THE FIRST FEW TRADING DAYS OF 1998.
ANALYSIS
OPERATING EARNINGS CONSIST OF INVESTMENT INCOME AND INSURANCE UNDERWRITING
RESULTS; THE FOLLOWING TABLE SUMMARIZES PRE-TAX UNDERWRITING PERFORMANCE DURING
THE PAST THREE YEARS:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
UNDERWRITING RESULTS 1997 1996 1995
- ---------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
WORKERS' COMPENSATION $ (37,157) $ (19,462) $ (14,548)
OTHER PROPERTY-CASUALTY 6,509 8,076 (12,007)
REINSURANCE 14,189 12,479 12,955
- ---------------------------------------------------------------------------------
UNDERWRITING INCOME (LOSS) $ (16,459) $ 1,093 $ (13,600)
- ---------------------------------------------------------------------------------
</TABLE>
OUR RESULTS WERE SIGNIFICANTLY BELOW OUR GOALS, DUE ENTIRELY TO CONTINUED
DECLINES IN THE WORKERS' COMPENSATION OPERATIONS. THE COMBINED RATIO FOR
WORKERS' COMPENSATION OF 115.3% WAS COMPOSED OF A 57.3% LOSS RATIO FOR THE 1997
ACCIDENT YEAR, A 53.1% LOSS ADJUSTMENT AND UNDERWRITING EXPENSE RATIO, AND 4.9%
STRENGTHENING FOR THE 1995 AND 1996 ACCIDENT YEARS LOSS AND LOSS ADJUSTMENT
EXPENSE RESERVES. THE EXPENSE RATIO REFLECTS THE LARGE DROP IN THE CALIFORNIA
PREMIUM LEVEL SINCE OPEN RATING COMMENCED IN 1995, AND WE CONTINUE TO WORK TO
BRING OUR
CalFarm
The Zenith 5
<PAGE>
PROPERTY-CASUALTY COMBINED RATIO [CHART]
EXPENSES IN LINE WITH OUR CURRENT PREMIUM LEVEL. HOWEVER, OUR ULTIMATE LOSS
RATIOS, EVEN AFTER THE STRENGTHENING FOR THE 1995 AND 1996 YEARS, AND HIGHER
INITIAL RESERVES IN THE 1997 YEAR, ARE STILL QUITE ACCEPTABLE. SINCE THE
BEGINNING OF OPEN RATING, OUR CALIFORNIA LOSS RATIO HAS AVERAGED 61%, WHILE THE
ENTIRE CALIFORNIA INDUSTRY HAS AVERAGED APPROXIMATELY 82%. THIS 21 POINT
ADVANTAGE IS CONSISTENT WITH OUR RELATIVE RESULTS PRIOR TO OPEN RATING.
EXPANSION OF OUR WORKERS' COMPENSATION OPERATIONS OUTSIDE OF CALIFORNIA
CONTINUES TO BE A PRIMARY MISSION WITH THE 1996 ACQUISITION OF AGC-SIF IN
FLORIDA AND THE PENDING ACQUISITION OF RISCORP. ZENITH IS APPROACHING THE TIME
WHEN OUR NON-CALIFORNIA PREMIUMS WILL APPROXIMATE OR EXCEED OUR CALIFORNIA
BUSINESS. DESPITE THE INCREASING COMPETITIVENESS OF MANY STATE MARKETS, WE HAVE
BEEN ABLE TO GROW AT A REASONABLE COST. WE ESTIMATE OUR 1997 ACCIDENT YEAR LOSS
RATIO FOR ALL STATES OUTSIDE OF CALIFORNIA IS 54.0%.
OUR REINSURANCE OPERATIONS HAD ANOTHER SUCCESSFUL YEAR, THEIR FIFTH
CONSECUTIVE. FURTHERMORE, WE CONDUCTED A DETAILED REVIEW OF THE RUNOFF FOR
TREATIES 10 YEARS OR OLDER AND DETERMINED THAT OUR HELD RESERVES WERE MODESTLY
REDUNDANT AND HAVE REDUCED RESERVES FOR INCURRED BUT NOT REPORTED LOSSES BY
APPROXIMATELY $4 MILLION. HOWEVER, WE SHOULD BE MINDFUL THAT THE REINSURANCE
RESULTS REFLECT AN ABSENCE OF MAJOR CATASTROPHES AND THE RESULTING CONTINUED
DECLINE IN RATES.
CALFARM HAD OUTSTANDING UNDERWRITING PERFORMANCE FOR THE SECOND CONSECUTIVE
YEAR. MANAGEMENT HAS WORKED HARD TO ACHIEVE THESE RESULTS AND IS TO BE
CONGRATULATED.
DURING THE FIVE YEARS ENDED 1997, OUR TOTAL AVERAGE COMBINED RATIO WAS 100.4%,
COMPARED TO THE ESTIMATED INDUSTRY AVERAGE OF 105.9%, AND FOR THE PAST 10 YEARS
WAS 100.9%. SINCE MANAGEMENT ASSUMED OPERATING RESPONSIBILITY IN 1977, THE
COMBINED RATIO HAS AVERAGED 100.7%.
CalFarm
6 The Zenith
<PAGE>
STOCKHOLDERS' EQUITY PER SHARE REACHED $20.31 AT THE END OF 1997,
AN ALL TIME HIGH, COMPARED TO $19.17 AT DECEMBER 31, 1996.
ZENITH COMBINED RATIOS VERSUS INDUSTRY
<TABLE>
<CAPTION>
YEAR ZENITH INDUSTRY*
<S> <C> <C>
- --------------------------------
1993 97.4% 106.9%
1994 97.8 108.5
1995 103.1 106.5
1996 99.8 105.8
1997 103.4 101.8**
AVERAGE 100.4 105.9**
- --------------------------------
*Source A.M. Best
Company **Estimate
</TABLE>
THE ABOVE TABLE CLEARLY SHOWS THAT WE HAVE OUTPERFORMED THE INDUSTRY COMBINED
RATIO OVER THE PAST FIVE YEARS, BUT 1997 WAS THE FIRST YEAR WHERE OUR COMBINED
RATIO WAS HIGHER THAN INDUSTRY AVERAGES. AS PREVIOUSLY DISCUSSED, THE WORKERS'
COMPENSATION RESULTS, PRIMARILY IN CALIFORNIA, ARE THE CAUSE OF THE
BELOW-AVERAGE 1997 RESULTS.
INVESTMENT INCOME AFTER TAXES INCREASED 1.7% FROM $34,069,000, OR $1.92 PER
SHARE, IN 1996 TO $34,655,000, OR $1.94 PER SHARE, IN 1997.
INCOME FROM OPERATIONS AFTER TAXES AND BEFORE NET REALIZED GAINS ON
INVESTMENTS IN 1997 WAS $19,669,000, OR $1.10 PER SHARE, COMPARED TO
$30,575,000, OR $1.72 PER SHARE, IN 1996. THE DECREASE WAS A RESULT OF A LARGER
UNDERWRITING LOSS IN THE WORKERS' COMPENSATION BUSINESS.
NET INCOME IN 1997 WAS $28,100,000, OR $1.57 PER SHARE, COMPARED TO
$37,600,000, OR $2.12 PER SHARE, IN 1996. NET INCOME IN 1997 INCLUDED CAPITAL
GAINS AFTER TAXES OF $8,431,000, OR $.47 PER SHARE, COMPARED TO CAPITAL GAINS OF
$7,025,000, OR $.40 PER SHARE, FOR THE PRIOR YEAR.
STOCKHOLDERS' EQUITY AT DECEMBER 31, 1997 WAS $361,866,000, COMPARED TO
$337,503,000 AT DECEMBER 31, 1996. STOCKHOLDERS' EQUITY PER SHARE WAS $20.31 AT
DECEMBER 31, 1997, AN ALL TIME
CalFarm
The Zenith 7
<PAGE>
DURING THE PAST 10 YEARS, WE HAVE REPURCHASED 28% OF OUR
OUTSTANDING STOCK AT AN AVERAGE PRICE OF $17.85 PER SHARE.
HIGH, COMPARED TO $19.17 AT DECEMBER 31, 1996. STATUTORY CAPITAL OF OUR
INSURANCE COMPANIES INCREASED FROM $265,341,000 AT DECEMBER 31, 1996, TO
$279,993,000 AT YEAR-END 1997.
CASH PROVIDED BY OPERATING ACTIVITIES WAS $26,974,000 IN 1997, COMPARED TO
$9,749,000, IN 1996.
ZENITH REPURCHASED ABOUT 19,000 SHARES OF ZENITH COMMON STOCK DURING 1997, AND
930,000 SHARES IN JANUARY 1998, LEAVING AUTHORITY TO PURCHASE AN ADDITIONAL
1,155,000 SHARES AS OF FEBRUARY 1998. DURING THE PAST 10 YEARS, WE HAVE
REPURCHASED 6,862,000 SHARES, OR APPROXIMATELY 28% OF THE TOTAL SHARES ISSUED AT
AN AGGREGATE COST OF $122,513,000, OR AN AVERAGE OF $17.85 PER SHARE.
AT DECEMBER 31, 1997, ZENITH HAD LONG-TERM DEBT OF $74,474,000, WITH A TOTAL
DEBT-TO-EQUITY POSITION OF 20% DEBT AND 80% EQUITY. ZENITH HAD $100 MILLION OF
BANK LINES OF CREDIT AVAILABLE AT DECEMBER 31, 1997.
ZENITH INSURANCE, CALFARM INSURANCE, ZNAT INSURANCE AND ZENITH STAR INSURANCE
(THE TEXAS-BASED COMPANY) COLLECTIVELY, ARE RATED A+ (SUPERIOR) BY A.M. BEST
COMPANY. STANDARD & POOR'S HAS RATED THE CLAIMS-PAYING ABILITY OF THE
PROPERTY-CASUALTY OPERATIONS AA- (EXCELLENT). ZENITH IS CURRENTLY UNDER REVIEW
BY A.M. BEST COMPANY AND STANDARD & POOR'S.
RISK-BASED CAPITAL OF THE PROPERTY-CASUALTY GROUP WAS 332% IN 1997, COMPARED
TO 364%, IN 1996.
PROPERTY-CASUALTY INCURRED LOSS AND LOSS ADJUSTMENT EXPENSES FOR THE PRIOR
YEARS SHOW NO FURTHER DEVELOPMENT IN 1997. THE UNFAVORABLE DEVELOPMENT IN OUR
WORKERS' COMPENSATION BUSINESS WAS OFFSET BY FAVORABLE RESERVE DEVELOPMENT IN
OUR REINSURANCE AND OTHER PROPERTY-CASUALTY BUSINESSES. THE TABLE ON PAGE 53 IN
NOTE 13 TO THE CONSOLIDATED FINANCIAL STATEMENTS SETS FORTH DATA CONCERNING OUR
PROPERTY-CASUALTY LOSS AND LOSS ADJUSTMENT EXPENSES FOR THREE YEARS ENDED
DECEMBER 31, 1997, AND ONE-YEAR LOSS RESERVE DEVELOPMENT BY LINES OF BUSINESS IS
SET FORTH ON PAGE 26. LOSS RESERVES ARE NOT DISCOUNTED FOR FINANCIAL STATEMENT
PURPOSES.
CalFarm
8 The Zenith
<PAGE>
STOCK PRICES [CHART]
THE INFORMATION IN THE FOLLOWING TABLE PROVIDES ESTIMATES OF ZENITH'S NET
INCURRED LOSS AND LOSS ADJUSTMENT EXPENSES BY ACCIDENT YEAR, EVALUATED IN THE
YEAR THEY WERE INCURRED AND AS THEY WERE SUBSEQUENTLY RE-EVALUATED IN SUCCEEDING
YEARS:
ACCIDENT YEAR RESERVE DEVELOPMENT
<TABLE>
<CAPTION>
NET INCURRED LOSS AND LOSS ADJUSTMENT EXPENSES REPORTED AT END OF YEAR
YEARS IN WHICH ----------------------------------------------------------------------
LOSSES WERE INCURRED 1992 1993 1994 1995 1996 1997
- --------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
PRIOR TO 1992 $2,277,331 $2,295,135 $2,295,566 $2,298,478 $2,300,972 $2,298,585
1992 305,525 296,873 298,906 294,691 297,627 295,865
CUMULATIVE 2,582,856 2,592,008 2,594,472 2,593,169 2,598,599 2,594,450
1993 297,652 285,544 275,591 269,003 267,576
CUMULATIVE 2,889,660 2,880,016 2,868,760 2,867,602 2,862,026
1994 303,749 312,953 304,246 301,550
CUMULATIVE 3,183,765 3,181,713 3,171,848 3,163,576
1995 327,503 333,667 347,501
CUMULATIVE 3,509,216 3,505,515 3,511,077
1996 318,843 365,908
CUMULATIVE 3,876,985
1997 348,849
RATIOS:
1992 71.71% 69.67% 70.15% 69.16% 69.85% 69.44%
1993 66.20% 63.51% 61.29% 59.83% 59.51%
1994 68.87% 70.95% 68.98% 68.37%
1995 74.67% 76.08% 79.23%
1996 70.48% 72.42%
1997 71.67%
- --------------------------------------------------------------------------------------------
</TABLE>
This analysis displays the accident year net incurred loss and loss adjustment
expenses development for accident years 1992-1997 for all property-casualty
business. The total of net loss and loss adjustment expenses for all claims
occurring within each annual period is shown first at the end of that year and
then annually thereafter. The total cost includes both payments made and the
estimate of future payments as of each year-end. Past development may not be an
accurate indicator of future development since trends and conditions change. Net
incurred loss and loss adjustment expenses and loss ratios prior to 1995 have
been restated to include health insurance.
On December 31, 1996, Zenith acquired through merger the outstanding reserves
for net loss and loss adjustment expenses of Associated General Commerce
Self-Insurers' Trust Fund of $65,429,000. The development of these reserves is
included in future operating results of Zenith and is reflected as development
of the 1996 year.
CalFarm
The Zenith 9
<PAGE>
INVESTMENT INCOME AFTER TAXES PER SHARE
[CHART]
INVESTMENTS
INVESTMENT ACTIVITIES ARE A MAJOR PART OF OUR REVENUES AND EARNINGS; WE
BELIEVE OUR PORTFOLIOS ARE DIVERSIFIED TO ACHIEVE A REASONABLE BALANCE OF RISK
AND A STABLE SOURCE OF EARNINGS. ZENITH PRIMARILY INVESTS IN DEBT SECURITIES AS
COMPARED TO EQUITIES AND OUR LARGEST HOLDINGS ARE IN U.S. GOVERNMENT SECURITIES.
/ / CONSOLIDATED INVESTMENT INCOME, BEFORE TAXES, WAS $52,332,000 IN 1997,
COMPARED TO $51,154,000, IN 1996.
/ / CONSOLIDATED INVESTMENT INCOME AFTER TAXES AND AFTER INTEREST EXPENSE WAS
$32,068,000, OR $1.79 PER SHARE IN 1997, COMPARED TO $30,899,000, OR $1.74
PER SHARE, IN 1996. AVERAGE YIELDS ON THIS PORTFOLIO IN 1997 WERE 6.0% BEFORE
TAXES AND 4.0% AFTER TAXES; ABOUT THE SAME AS 1996.
/ / DURING 1997, WE RECORDED NET REALIZED CAPITAL GAINS BEFORE TAXES FROM OUR
INVESTMENT PORTFOLIO OF $14,008,000, COMPARED TO $10,807,000, THE PRIOR
YEAR.
A SUBSTANTIAL PORTION OF OUR INVESTMENT PORTFOLIO IS RECORDED IN THE FINANCIAL
STATEMENTS AT MARKET VALUE WITH OUR CONSOLIDATED INVESTMENT PORTFOLIO CARRYING
VALUE TOTALING $879,973,000 AT DECEMBER 31, 1997, COMPARED TO $852,799,000, AT
THE END OF 1996. AVERAGE LIFE OF THE PORTFOLIO WAS 4.2 YEARS AT DECEMBER 31,
1997, COMPARED TO 5.1 YEARS AT DECEMBER 31, 1996. OUR PORTFOLIO QUALITY IS HIGH,
WITH 96% RATED INVESTMENT GRADE.
THE MAJOR DEVELOPMENTS IN THE U.S. BOND MARKETS WERE CONTINUED LOW INFLATION
AND LOWER INTEREST RATES WITH LONG-TERM GOVERNMENT BONDS TRADING BELOW 6.0%. AS
A RESULT, OUR PORTFOLIO OF FIXED MATURITIES INCREASED IN VALUE, RELATIVE TO
AMORTIZED COST, BY $9,026,000 BEFORE TAXES FROM 1996 TO 1997.
SHORT-TERM INVESTMENTS INCREASED IN 1997 IN ORDER TO PROVIDE THE NECESSARY
LIQUIDITY TO FUND THE PURCHASE OF RISCORP.
CalFarm
10 The Zenith
<PAGE>
OUR INVESTMENT PORTFOLIO IS LIQUID AND OF HIGH QUALITY; OUR BOND
PORTFOLIO HAS AN AVERAGE LIFE OF ABOUT FOUR YEARS.
THE AMORTIZED COST AND FAIR VALUES OF ZENITH'S SECURITIES PORTFOLIO ARE
SUMMARIZED IN THE FOLLOWING TABLE:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
--------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
SECURITIES PORTFOLIO COST* VALUE COST* VALUE
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------
(Dollars in thousands)
SHORT-TERM INVESTMENTS $209,827 $209,827 $106,712 $106,712
U.S. GOVERNMENT BONDS 243,346 244,921 299,447 297,278
TAXABLE BONDS:
INVESTMENT GRADE 305,251 311,553 322,182 320,577
NON-INVESTMENT GRADE 17,083 17,554 21,013 21,168
REDEEMABLE PREFERRED STOCKS 16,040 16,717 19,467 19,720
OTHER PREFERRED STOCKS* 21,286 22,272 15,364 14,855
COMMON STOCKS* 17,790 23,439 18,030 22,771
- -----------------------------------------------------------------------------
</TABLE>
*Equity securities at cost
IN 1993, WE STARTED A HOME-BUILDING SUBSIDIARY (PERMA-BILT) IN ORDER TO
PARTICIPATE IN THE GROWTH OF THE LAS VEGAS, NEVADA HOUSING MARKET. DURING 1997,
WE CLOSED AND DELIVERED 305 HOMES AT AN AVERAGE SELLING PRICE OF $149,000,
COMPARED TO 287 HOMES AT AN AVERAGE SELLING PRICE OF $145,000, THE PRIOR YEAR.
AS A RESULT, SALES OF $45,419,000 AND $1,678,000 OF PRE-TAX INCOME WERE RECORDED
DURING 1997, COMPARED TO SALES OF $41,554,000 AND $1,909,000 OF PRE-TAX INCOME,
THE PREVIOUS YEAR. LAND PRESENTLY OWNED, AT A COST OF ABOUT $33,466,000, WILL
SUPPORT THE
CalFarm
The Zenith 11
<PAGE>
SINCE MANAGEMENT ASSUMED OPERATING RESPONSIBILITY IN 1977, THE
COMBINED RATIO HAS AVERAGED 100.7%.
CONSTRUCTION OF AN ESTIMATED 1,150 HOMES OVER THE NEXT SEVERAL YEARS AND
POSSIBLY SOME COMMERCIAL AND/OR APARTMENT DEVELOPMENT. INCREASED INTEREST RATES
AND OTHER FACTORS MAY IMPACT THE RATE OF HOME SALES, BUT WE ARE CONFIDENT THE
LAND WE HAVE ACQUIRED IS STRATEGICALLY LOCATED AND WILL HAVE LONG-TERM VALUE.
FOR EXAMPLE, WE OWN ABOUT 175 ACRES ON LAS VEGAS BOULEVARD SOUTH OF THE AIRPORT,
ONE OF THE LARGEST UNDEVELOPED HOLDINGS ON THE STRIP.
WORKERS' COMPENSATION
WORKERS' COMPENSATION BUSINESS REPRESENTS APPROXIMATELY 50% OF OUR
PROPERTY-CASUALTY VOLUME. DURING 1997, 54% OF THE BUSINESS WAS IN CALIFORNIA,
WITH THE BALANCE IN 29 STATES, THE GREATEST CONCENTRATIONS OF WHICH ARE IN
FLORIDA AND TEXAS.
WORKERS' COMPENSATION OPERATIONS RECORDED AN UNDERWRITING LOSS, BEFORE
DIVIDENDS TO POLICYHOLDERS, OF $36,802,000 IN 1997, COMPARED TO A LOSS OF
$16,936,000, FOR THE PRIOR YEAR. AFTER POLICYHOLDER DIVIDENDS, RESULTS WERE AN
UNDERWRITING LOSS OF $37,157,000 IN 1997, COMPARED TO AN UNDERWRITING LOSS OF
$19,462,000, IN THE PRIOR YEAR. OUR WORKERS' COMPENSATION COMBINED RATIO WAS
115.3% IN 1997, COMPARED TO 109.2%, THE PRIOR YEAR.
DURING 1997, EARNED PREMIUMS INCREASED ABOUT $31,148,000, OR 15%, PRIMARILY
DUE TO THE FLORIDA EXPANSION. AT YEAR-END 1997, THERE WERE 26,730 POLICIES IN
FORCE COUNTRYWIDE. DURING THE LAST SEVERAL YEARS OUR RESULTS HAVE BEEN
SIGNIFICANTLY BELOW OUR 20-YEAR COMBINED RATIO OF ABOUT 100%. SPECIFICALLY, OUR
COMBINED RATIO FOR THE LAST THREE YEARS HAS AVERAGED 110.8%.
THE FOLLOWING TABLE COMPARES THE COMPONENTS OF OUR AVERAGE COMBINED RATIOS FOR
THE THREE YEARS ENDED 1997 AND FOR THE 10 YEARS ENDED 1997:
CalFarm
12 The Zenith
<PAGE>
DURING THE FIVE YEARS ENDED 1996 (THE LATEST PUBLISHED FIGURES)
ZENITH INSURANCE ACHIEVED THE LOWEST AVERAGE LOSS RATIO OF THE
TOP 50 WRITERS OF WORKERS' COMPENSATION IN THE U.S.
<TABLE>
<CAPTION>
THREE-YEAR AVERAGE 10-YEAR AVERAGE
COMBINED RATIO ANALYSIS TO DECEMBER 1997 TO DECEMBER 1997
<S> <C> <C>
ACCIDENT YEAR LOSS RATIO 53.4% 50.7%
LOSS RESERVE DEVELOPMENT 4.7 (0.1)
UNDERWRITING AND LOSS ADJUSTMENT EXPENSES 51.4 45.3
POLICYHOLDER DIVIDENDS 1.3 6.0
COMBINED RATIO 110.8% 101.9%
- --------------------------------------------------------------------------------
</TABLE>
THE TABLE CLEARLY SHOWS THE UNDERWRITING AND LOSS ADJUSTMENT EXPENSE
PERCENTAGES MADE UP MOST OF THE DIFFERENCE IN THE COMBINED RATIO. SPECIFICALLY,
THE COMBINED RATIO IS 8.9 POINTS HIGHER WITH EXPENSES CONTRIBUTING 6.1 POINTS OF
THIS AMOUNT. ALSO, THE ACCIDENT YEAR LOSS RATIO IS 2.7 POINTS HIGHER WHILE THE
ESTIMATE OF RESERVE ACCURACY HAS DETERIORATED 4.8 POINTS. FROM AN ANALYTICAL
PERSPECTIVE, THE COMBINATION OF ACCIDENT YEAR LOSS RATIO AND POLICYHOLDER
DIVIDENDS IS FAVORABLE BY 2.0 POINTS, A GOOD INDICATION THAT WE CONTINUE TO
MANAGE RISK REALISTICALLY.
THERE ARE MANY CHANGING FACTORS CURRENTLY AFFECTING OUR WORKERS' COMPENSATION
PERFORMANCE AS SUMMARIZED NUMERICALLY IN THE TABLE. AS WE REPORTED, THE
CALIFORNIA SYSTEM CHANGED FROM ADMINISTERED PRICING TO FREE COMPETITION ON
JANUARY 1, 1995. THREE YEARS PRIOR, IN ANTICIPATION OF OPEN RATING IN
CALIFORNIA, AND TO TAKE ADVANTAGE OF PERCEIVED MARKET OPPORTUNITIES, WE BEGAN
GEOGRAPHIC EXPANSION OUTSIDE OF CALIFORNIA. OF INTEREST, OUR NON-CALIFORNIA
MARKETS HAVE DELIVERED BETTER RESULTS THAN CALIFORNIA IN SPITE OF DETERIORATING
COMBINED RATIOS THROUGHOUT THE COUNTRY. CLEARLY, AS SHOWN IN THE ABOVE TABLE,
THE DECLINE IN OUR OVERALL RESULTS IS NOT ASSOCIATED WITH POOR LOSS RATIOS, BUT
IS PRIMARILY A REFLECTION OF OUR COST OF DOING BUSINESS IN RELATION TO OUR
VOLUME.
CalFarm
The Zenith 13
<PAGE>
SINCE THE BEGINNING OF OPEN RATING, OUR WORKERS' COMPENSATION
LOSS RATIO IN CALIFORNIA HAS AVERAGED 61% COMPARED TO THE
INDUSTRY AVERAGE OF APPROXIMATELY 82%.
WITH RESPECT TO THE CALIFORNIA WORKERS' COMPENSATION MARKET, OUR PERFORMANCE
IN 1997 REFLECTED A NUMBER OF FACTORS:
1. INTENSE RATE COMPETITION AND A DECLINE IN INDUSTRY PREMIUM VOLUME OF ABOUT
45% SINCE 1995.
2. CONTINUATION OF 17,500 POLICIES IN FORCE COMPARED TO 20,000 AT YEAR-END 1996,
WITH LOSS RATIOS DURING THIS PERIOD ABOUT 21 PERCENTAGE POINTS BETTER THAN
INDUSTRY AVERAGES.
3. ADDITIONAL EXPENSES OR INVESTMENTS TO UPGRADE OUR COMPUTER SYSTEMS AND
ADDRESS THE YEAR 2000 CHALLENGE.
4. AGENTS OBTAINING MORE COMPETITIVE BIDS THAN IN THE PAST, RESULTING IN HIGHER
COSTS TO WRITE A LOWER DOLLAR VOLUME OF BUSINESS.
5. COMPETITION'S WILLINGNESS TO BUY MARKET SHARE AT INADEQUATE RATES, WITH
NEGATIVE FINANCIAL RESULTS.
6. INCREASE IN EXPENSES TO ADJUST CLAIMS DUE TO CHANGES IN THE WORKERS'
COMPENSATION SYSTEM.
7. INCREASE IN AVERAGE COSTS PER CLAIM, NOTWITHSTANDING A TREND OF DECLINING
CLAIM FREQUENCY FOR OUR COMPANY AND THE INDUSTRY AS A WHOLE.
8. RESERVES FOR ACCIDENT YEARS 1995 AND 1996 WERE STRENGTHENED BY APPROXIMATELY
$12 MILLION; THE 1997 ACCIDENT YEAR LOSS RATIO WAS INCREASED.
9. CONTINUED QUALITY SERVICES IN ORDER TO ACHIEVE LOW LOSS RATIOS WITH THE
CHALLENGE TO DO SO AT LOWER COSTS.
WHAT IS THE CURRENT SITUATION? DURING THE PAST SEVERAL MONTHS, WE HAVE REDUCED
OUR CALIFORNIA WORKFORCE BY ABOUT 10%, WHICH SHOULD BRING COSTS BETTER IN LINE
WITH REVENUES WHILE CONTINUING OUR STRONG SERVICE CAPABILITY. THERE ARE
CONFUSING SIGNS IN THE MARKETPLACE. CERTAIN COMPETITORS ARE WITHDRAWING OR
ADJUSTING THEIR UNDERWRITING AND PRICING POLICIES AND OTHERS CONTINUE TO SELL AT
PRICES SUBSTANTIALLY BELOW APPARENT LOSS COSTS. EMPLOYERS WITH POOR LOSS RESULTS
ARE EXPERIENCING INCREASED PRICES. IN VIEW OF OUR RESULTS AND THE TREND OF
RISING AVERAGE COSTS PER CLAIM, WE MUST MAINTAIN PRICE AND RATE ADEQUACY AND
MORE AGGRESSIVELY MERCHANDISE
CalFarm
14 The Zenith
<PAGE>
THROUGH OUR GEOGRAPHIC EXPANSION, WE ARE APPROACHING THE TIME
WHEN OUR NON-CALIFORNIA PREMIUMS WILL APPROXIMATE OR EXCEED OUR
CALIFORNIA WORKERS' COMPENSATION BUSINESS.
OUR SPECIALIST CAPABILITIES. AT THE SAME TIME, WE WILL CONTINUE ENHANCING OUR
MANAGED CARE, CLAIMS HANDLING, LITIGATION AND RETURN-TO-WORK STRATEGIES TO
ASSIST US IN SUPPORTING OUR LONG-STANDING RECORD OF LOW PURE LOSS RATIOS.
LASTLY, WE WILL CONTINUE REDUCING OUR OPERATING EXPENSES WHILE PROVIDING THE
NECESSARY SERVICES TO OUR CUSTOMERS.
WE ARE INVESTING IN OUR COMPUTER SYSTEMS SO ALL OPERATIONS ULTIMATELY ARE
SERVED BY ONE PLATFORM ON A NATIONAL BASIS. IN THE LONG RUN, THIS WILL PROVIDE
THE MOST EFFICIENT AND COST EFFECTIVE OPERATION. UNDER CURRENT ACCOUNTING RULES
MOST OF THE INTERNAL COSTS HAVE BEEN EXPENSED AGAINST CURRENT EARNINGS. BASED ON
A RECENTLY APPROVED ACCOUNTING STANDARD, IT IS EXPECTED THAT SOME OF THE
EXPENDITURES WILL BE CAPITALIZED IN THE FUTURE.
DURING THE FIVE YEARS ENDED 1996 (THE LATEST PUBLISHED FIGURES), ZENITH
ACHIEVED THE LOWEST AVERAGE LOSS RATIO OF THE TOP 50 WRITERS OF WORKERS'
COMPENSATION IN THE UNITED STATES. COMPARED TO THE CALIFORNIA MARKET AVERAGE,
OUR FIVE-YEAR AVERAGE LOSS RATIO FOR CALIFORNIA WAS BETTER BY 19 POINTS. OUR
ENTIRE ORGANIZATION IS PROUD OF THESE ACCOMPLISHMENTS AND IS FOCUSED ON THE
NECESSARY ADJUSTMENTS TO CONTINUE THIS FAVORABLE RECORD UNDER CHANGING
CONDITIONS.
THERE ARE PENDING LEGISLATIVE CHANGES THAT MAY INCREASE STATUTORY BENEFITS IN
CALIFORNIA AND MAKE OTHER CHANGES TO THE SYSTEM. HOWEVER, WE ARE SKEPTICAL THAT
REFORMS NEEDED TO REDUCE THE TREND OF INCREASING CLAIM COSTS WILL BE GIVEN
SERIOUS CONSIDERATION. THE TIMING OF ANY CHANGES IS DIFFICULT TO PREDICT DUE TO
THE IMPACT OF TERM LIMITS AND POLITICAL ACTIVITY SURROUNDING THE SELECTION OF A
NEW GOVERNOR. MANAGED CARE IS UNDER INTENSE POLITICAL SCRUTINY THROUGHOUT THE
UNITED STATES, AND IF CHANGES ARE MADE THEY WILL UNDOUBTEDLY IMPACT THE WORKERS'
COMPENSATION SYSTEMS. WE BELIEVE THE WORKERS' COMPENSATION INSURANCE INDUSTRY
NEEDS TO DEVELOP A FACT-BASED STRATEGY TO DEAL WITH THIS POTENTIAL ISSUE AND,
THEREFORE, WE ARE SUPPORTING RESEARCH BEING CONDUCTED BY THE WORKERS'
COMPENSATION RESEARCH INSTITUTE OF CAMBRIDGE, MASSACHUSETTS RELATING TO THIS
AREA. WE ARE ALSO TRYING TO STIMULATE THE INDUSTRY TO FOCUS ON THIS EMERGING
ISSUE.
CalFarm
The Zenith 15
<PAGE>
OUR CHALLENGE: ENHANCE OUR MANAGED CARE, CLAIMS HANDLING,
LITIGATION AND RETURN-TO-WORK STRATEGIES AT LOWER COSTS.
CONSIDERING THE EXTREMELY COMPETITIVE MARKET CONDITIONS, OUR FOCUS HAS AND
CONTINUES TO BE ON THE TWO SEGMENTS OF THE BUSINESS IN WHICH WE HAVE MANAGED
RISK SUCCESSFULLY FOR MANY YEARS: SMALLER EMPLOYERS AND INSUREDS WHERE QUALITY
SERVICES IMPACT RESULTS. WE CAN CLEARLY DEMONSTRATE THAT OUR SERVICE
CAPABILITIES REDUCE EMPLOYER EXPERIENCE MODIFICATIONS SIGNIFICANTLY AND,
THEREFORE, SAVE EMPLOYERS MONEY OVER MANY YEARS. AS WE OBTAIN MORE OPPORTUNITIES
TO SERVICE EMPLOYERS AT MORE ADEQUATE PRICES AND CONTINUE TO CONTROL COSTS, WE
ARE CONFIDENT THAT OUR OPERATING RESULTS WILL IMPROVE.
SINGLEPOINT
WE HAVE CONTINUED TO MARKET AN INTEGRATED DISABILITY PROGRAM IN PARTNERSHIP
WITH UNUM IN CERTAIN PARTS OF CALIFORNIA AND ARKANSAS. ALTHOUGH THE RESULTS ARE
NOT SIGNIFICANT TO DATE, SINGLEPOINT IS EXPERIMENTING AND IMPROVING ITS
CAPABILITY IN A MARKET SEGMENT THAT MAY HAVE VALUE FOR CERTAIN EMPLOYERS.
PENDING RISCORP ACQUISITION
ON JUNE 17, 1997, ZENITH ENTERED INTO AN AGREEMENT WITH RISCORP, INC. TO
PURCHASE ALL OF THE ASSETS OF RISCORP RELATED TO ITS WORKERS' COMPENSATION
BUSINESS, INCLUDING RISCORP'S EXISTING IN-FORCE INSURANCE BUSINESS AS WELL AS
THE RIGHT TO ALL NEW AND RENEWAL POLICIES. ZENITH WILL ALSO PURCHASE RISCORP'S
"FIRST CALL" MANAGED CARE WORKERS' COMPENSATION SYSTEM. AFTER THE TRANSACTION
CLOSES, RISCORP WILL NO LONGER ENGAGE IN ITS EXISTING BUSINESSES.
ZENITH WILL ASSUME CERTAIN LIABILITIES RELATED TO RISCORP'S INSURANCE
BUSINESSES IN CONNECTION WITH THE TRANSACTION. IN ADDITION, ZENITH WILL EITHER
ASSUME OR REPAY $15 MILLION IN INDEBTEDNESS OF RISCORP. THE PURCHASE PRICE TO BE
PAID BY ZENITH TO RISCORP WILL BE THE DIFFERENCE BETWEEN THE BOOK VALUE OF THE
ASSETS PURCHASED AND THE BOOK VALUE OF THE LIABILITIES ASSUMED BY ZENITH ON THE
CLOSING DATE, SUBJECT TO A MINIMUM PURCHASE PRICE OF $35 MILLION. AS OF THIS
DATE, IT IS NOT POSSIBLE TO ESTIMATE THE PURCHASE PRICE.
CalFarm
16 The Zenith
<PAGE>
ZENITH CAN CLEARLY DEMONSTRATE THAT OUR SERVICE CAPABILITIES
REDUCE EMPLOYER EXPERIENCE MODIFICATIONS SIGNIFICANTLY AND,
THEREFORE, SAVE EMPLOYERS MONEY OVER MANY YEARS.
ZENITH AND RISCORP ALSO ENTERED INTO AN AGREEMENT UNDER WHICH ALL RISCORP'S
FLORIDA IN-FORCE, AND NEW AND RENEWAL POLICIES ISSUED AFTER JUNE 17, 1997 ARE
REINSURED BY ZENITH IN THE EVENT OF RISCORP'S INSOLVENCY PRIOR TO THE CLOSING.
IF THE ACQUISITION IS CONSUMMATED, THE EXPOSURE UNDER THE REINSURANCE AGREEMENT
WILL BE REPLACED BY THE LIABILITIES ASSUMED.
ZENITH WILL NOT BE PURCHASING THE STOCK OF RISCORP OR ITS AFFILIATES OR
ASSUMING THE LIABILITIES THAT ARE UNRELATED TO THE INSURANCE BUSINESS, INCLUDING
LIABILITIES RELATED TO ANY PRESENT OR FUTURE LITIGATION AGAINST THOSE COMPANIES.
THE CLOSING OF THE PURCHASE IS SUBJECT TO CERTAIN CONDITIONS, INCLUDING THE
REVIEW AND APPROVAL BY APPROPRIATE REGULATORY AGENCIES AND RISCORP'S
SHAREHOLDERS, AND COMPLIANCE WITH CONTRACT PROVISIONS. RISCORP HAS OBTAINED THE
NECESSARY APPROVALS FROM THE SECURITIES AND EXCHANGE COMMISSION TO SOLICIT ITS
SHAREHOLDERS AND THE PROXY SOLICITATION PROCESS IS EXPECTED TO COMMENCE THE
FIRST WEEK OF MARCH 1998. WE ANTICIPATE THAT THE TRANSACTION WILL BE CONSUMMATED
AS SOON AS PRACTICABLE AFTER ALL APPROVALS ARE OBTAINED.
WE BELIEVE THE CONSUMMATION OF THIS STRATEGIC ACQUISITION WILL ADD ADDITIONAL
WORKERS' COMPENSATION BUSINESS, EXPANDED GEOGRAPHIC DIVERSIFICATION,
STATE-OF-THE ART MANAGED CARE AND AGENT INTERNET COMMUNICATION CAPABILITIES TO
OUR OPERATION. RISCORP HAD ABOUT 22,000 POLICIES IN FORCE AT DECEMBER 31, 1997.
UNFORTUNATELY, PROGRESS IN CLOSING THIS TRANSACTION HAS BEEN SLOWER THAN
ANTICIPATED WITH NEGATIVE SHORT-TERM IMPACTS ON THE BUSINESS, EMPLOYEES AND
AGENCY FORCE OF RISCORP. AS A RESULT, WE RECOGNIZE THE TIME, EFFORT AND COST
REQUIRED TO INTEGRATE RISCORP AND ZENITH WILL BE GREATER THAN ANTICIPATED, BUT
WE BELIEVE A STRONGER COMPANY OVERALL WILL EMERGE.
CalFarm
The Zenith 17
<PAGE>
THE PENDING STRATEGIC ACQUISITION OF RISCORP WILL RESULT IN ADDED
WORKERS' COMPENSATION BUSINESS, EXPANDED GEOGRAPHIC DIVERSIFICATION,
AND STATE-OF-THE-ART MANAGED CARE CAPABILITIES.
SELECTED CONSOLIDATED FINANCIAL DATA FOR RISCORP, INC. ARE SHOWN IN THE
FOLLOWING TABLE:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
NINE MONTHS ENDED YEAR ENDED
SELECTED FINANCIAL DATA* SEPTEMBER 30, DECEMBER 31,
- ------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1996 1995
----------- --------- --------- -----------
<S> <C> <C> <C> <C>
OPERATING RESULTS
PREMIUMS EARNED $ 133,882 $ 131,855 $ 173,557 $ 135,887
FEE AND OTHER INCOME 17,969 23,079 31,838 23,413
NET INVESTMENT INCOME 12,557 7,592 12,194 6,708
TOTAL REVENUES 164,408 162,526 217,589 166,008
NET INCOME 3,810 9,301 2,398 13,683
BALANCE SHEET
INVESTED ASSETS 209,134 241,143 255,656 69,365
TOTAL ASSETS 769,276 741,135 828,442 443,242
TOTAL LIABILITIES 607,328 579,801 671,134 427,085
STOCKHOLDERS' EQUITY 161,948 161,334 157,308 16,157
- ------------------------------------------------------------------------------------
</TABLE>
*The above selected consolidated financial data with respect to RISCORP and its
subsidiaries have been excerpted from the information contained in RISCORP'S
Annual Report on Form 10-K for the year ended December 31, 1996 and RISCORP'S
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 filed
with the Securities and Exchange Commission. We do not take any responsibility
for the accuracy or completeness of this information.
THE PURCHASE PRICE WILL BE DETERMINED AS OF THE CLOSING DATE BASED UPON AN
AUDITED STATEMENT OF TRANSFERRED ASSETS AND LIABILITIES, WITH THE PURCHASE
AGREEMENT PROVIDING FOR A DISPUTE RESOLUTION PROCESS IN THE EVENT ZENITH HAS ANY
DISAGREEMENTS WITH SUCH STATEMENT. AS OF THIS DATE, WE ARE UNABLE TO ESTIMATE
THE PURCHASE PRICE OR THE IMPACT THE CONSUMMATION OF THE TRANSACTION WILL HAVE
ON OUR OPERATING RESULTS.
CalFarm
18 The Zenith
<PAGE>
FOR THE 12 YEARS SINCE CALFARM WAS ACQUIRED BY ZENITH, THE COMBINED
RATIO HAS AVERAGED 100.6%, EXCLUDING THE EFFECT OF PROPOSITION 103
ROLLBACK REFUNDS IN 1992.
MANAGEMENT CHANGES
AS PREVIOUSLY ANNOUNCED, WE ADDED SIGNIFICANT MANAGEMENT CAPABILITY TO OUR
WORKERS' COMPENSATION OPERATIONS DURING THIS PAST YEAR. JACK MILLER, FORMERLY
PRESIDENT OF INDUSTRIAL INDEMNITY, JOINED US AS PRESIDENT DESIGNATE OF THE
INSURANCE BUSINESS TO BE ACQUIRED FROM RISCORP AND CHIEF OPERATING OFFICER OF
OUR WORKERS' COMPENSATION DIVISION. BOB MEYER, FORMERLY CHIEF ACTUARY OF THE
CALIFORNIA WORKERS' COMPENSATION RATING BUREAU AND INDUSTRIAL INDEMNITY, JOINED
US AS CHIEF WORKERS' COMPENSATION ACTUARY, AND, COREY INGBER, SENIOR PARTNER OF
HIS OWN LAW FIRM, JOINED US TO SUPERVISE ALL WORKERS' COMPENSATION CLAIM
LITIGATION. THESE INDIVIDUALS, TOGETHER WITH OUR EXISTING MANAGEMENT, PROVIDE
THE NECESSARY CAPABILITIES TO OPERATE AND GROW A NATIONAL SPECIALTY INSURANCE
BUSINESS.
AS 1998 BEGAN, THE OFFICE OF THE CHAIRMAN WAS FORMED CONSISTING OF MYSELF, JIM
ROSS AND JACK MILLER TO BETTER SUPERVISE OUR EXPANDING WORKERS' COMPENSATION
BUSINESS. THIS COMBINATION OF EXPERIENCE WILL PROVIDE THE NECESSARY LEADERSHIP
TO THE ORGANIZATION.
CALFARM INSURANCE COMPANY
CALFARM INSURANCE COMPANY ("CALFARM") IS A SACRAMENTO, CALIFORNIA-BASED
PROPERTY-CASUALTY COMPANY THAT OFFERS COMPREHENSIVE COVERAGES WRITTEN FOR
INDIVIDUAL AND COMMERCIAL CUSTOMERS, PRIMARILY IN THE RURAL AND SUBURBAN AREAS
OF CALIFORNIA. AUTOMOBILE, FARMOWNERS, COMMERCIAL PACKAGE POLICIES AND
HOMEOWNERS ARE THE MAJOR LINES OF BUSINESS WITH ABOUT 108,000 POLICIES IN FORCE.
CALFARM ALSO OFFERS HEALTH INSURANCE PRODUCTS, PREVIOUSLY WRITTEN BY CALFARM
LIFE INSURANCE COMPANY, WITH ABOUT 20,000 POLICIES IN FORCE.
THROUGHOUT THE YEAR, CALFARM CONTINUED ITS EFFORTS TO STRENGTHEN ITS WORKING
RELATIONSHIPS WITH THOSE AGENTS WHO PLAY AN IMPORTANT ROLE IN THE SUCCESSFUL
SALE OF ITS PRODUCTS, MAKING AGENT "PARTNERSHIPS" AND SUPERIOR SERVICE ITS
HIGHEST PRIORITIES. CALFARM'S CUSTOMERS RELY ON OUR AGENTS TO DEVELOP
SPECIALIZED PROTECTION PROGRAMS AND TAILOR COVERAGE TO INDIVIDUAL NEEDS.
CALFARM'S GOAL IS TO BE A "FIRST CHOICE" PROVIDER OF INSURANCE PRODUCTS WITHIN
THE RURAL AND
CalFarm
The Zenith 19
<PAGE>
CALFARM IS INVESTING SUBSTANTIAL SUMS IN IMPROVED COMPUTER SYSTEMS
IN ORDER TO IMPROVE ITS SERVICE CAPABILITY.
SUBURBAN MARKETPLACE. CALFARM'S SUCCESS IS BASED ON OPERATING THE BUSINESS
THROUGH STRONG AGENCY RELATIONSHIPS.
DURING 1997, CALFARM CONTINUED TO IMPROVE ITS SERVICE PROCESSES FOR REPORTING
AND SETTLING CLAIMS. CLAIMS MANAGEMENT PERSONNEL PARTICIPATED IN EXTENSIVE
LEADERSHIP DEVELOPMENT PROGRAMS, AND TRAINING WAS INTRODUCED TO IMPROVE THE
CLAIMS STAFF'S MEDICAL KNOWLEDGE. CALFARM ADDED MEDICAL ADVISORS, INTRODUCED NEW
TOOLS TO ANALYZE MEDICAL INFORMATION, AND ENHANCED THE WORKFLOW AND THE STAFF'S
DECISION-MAKING CAPABILITIES.
IN 1997, CALFARM HIRED ADDITIONAL PROFESSIONAL STAFF AND MADE PROGRESS TOWARD
CREATING A CULTURE THAT NURTURES AND SUPPORTS CONTINUOUS, LIFELONG LEARNING FOR
ITS EMPLOYEES. CALFARM ALSO MADE SIZEABLE INVESTMENTS IN AND PROGRESS TOWARD
ADVANCING ITS SYSTEMS AND INFORMATION CAPABILITIES. MANAGEMENT'S FOCUS IS TO
REDUCE ITS LONG-TERM OPERATING COSTS AND TRANSACT BUSINESS WITH ITS AGENTS IN AN
EFFICIENT MANNER USING NEWER TECHNOLOGIES AND MARKETING MODERN PRODUCTS.
CALFARM HAS CONTINUED TO PROVIDE A RELIABLE MARKET FOR HIGHER-QUALITY
HOMEOWNERS BY OFFERING TO INCLUDE COMPREHENSIVE EARTHQUAKE COVERAGE AT FULL
RATES, IN CONTRAST TO THE SEVERELY RESTRICTED CALIFORNIA EARTHQUAKE AUTHORITY
(CEA) "MINI POLICY" COVERAGE. THE CEA'S FIRST FULL YEAR OF OPERATIONS WAS 1997,
AND CALFARM CHOSE NOT TO PARTICIPATE IN THE STATE-RUN CEA (MOST SMALL MARKET
SHARE COMPETITORS REACHED THE SAME DECISION). CALFARM ACTIVELY MANAGES ITS
CATASTROPHE EXPOSURES AND ENGAGES THE SERVICES OF PROMINENT OUTSIDE EXPERTS TO
ASSIST IN GEOGRAPHIC MODELING AND SIMULATION TECHNIQUES TO MITIGATE RISK AND
ACHIEVE DESIRED OBJECTIVES. CALFARM ALSO PURCHASES QUALITY REINSURANCE AT LEVELS
REASONABLY EXPECTED TO PROTECT OUR CAPITAL FROM LARGE DISASTERS.
1997 WAS AN ACTIVE YEAR POLITICALLY FOR THE CALIFORNIA PERSONAL AUTOMOBILE
MARKET. THE YEAR BEGAN WITH THE IMPLEMENTATION OF THE MANDATORY PROOF OF
INSURANCE LAW AND A REQUIREMENT TO CONSIDER THE BENEFICIAL EFFECTS OF
PROPOSITION 213, WHICH LIMITS NON-ECONOMIC RECOVERIES BY
CalFarm
20 The Zenith
<PAGE>
SINCE THE INCEPTION OF OUR REINSURANCE DIVISION IN 1985, THE
CUMULATIVE COMBINED RATIO IS 94.1%.
UNINSURED MOTORISTS IN MOTOR VEHICLE ACCIDENTS. THE VALIDITY OF PROPOSITION 213
WAS CHALLENGED, BUT IT WAS UPHELD BY THE CALIFORNIA COURT OF APPEALS IN OCTOBER
1997. LATER IN THE YEAR, THE CALIFORNIA INSURANCE DEPARTMENT MANDATED THAT
COMPANIES FILE AND IMPLEMENT A NEW PERSONAL AUTO CLASS PLAN AND RATES IN
ACCORDANCE WITH A REVISED INTERPRETATION OF PROPOSITION 103. PROPOSITION 103
SPECIFIES THAT AN INDIVIDUAL'S DRIVING SAFETY RECORD, ANNUAL MILEAGE, AND YEARS
LICENSED ARE TO BE THE THREE PRIMARY DETERMINANTS OF INSURANCE PREMIUMS. CALFARM
HAS FILED, RECEIVED APPROVAL FOR, AND IMPLEMENTED ITS PROPOSITIONS 103 AND 213
AUTO RATING PLANS.
CALFARM IS THE LARGEST WRITER OF FARMOWNERS POLICIES IN CALIFORNIA WITH AN
ESTIMATED MARKET SHARE OF 42%. IT HAS FIRST-HAND KNOWLEDGE OF THE DIVERSE
BUSINESS AND PERSONAL INSURANCE NEEDS OF THE FARMERS OF CALIFORNIA AND ENJOYS
THE SPONSORSHIP OF THE CALIFORNIA FARM BUREAU, THE STATE'S LARGEST GENERAL
AGRICULTURE ORGANIZATION. CALFARM IS COMMITTED TO SEEKING NEW AND PROFITABLE
OPPORTUNITIES IN CALIFORNIA'S AGRICULTURAL SECTOR, WHICH HAS LED THE NATION IN
FARM PRODUCTION AND INCOME FOR 50 YEARS.
THE LOSS RATIO FOR CALFARM WAS 51.4% IN 1997, COMPARED TO 53.6%, IN 1996, AND
THE COMBINED RATIO WAS 96.9% IN 1997, COMPARED TO 96.1%, IN 1996. THE RESULTS
FOR 1997 INCLUDE CATASTROPHE LOSSES FROM THE 1997 NEW YEAR'S FLOOD OF $1.5
MILLION, COMPARED WITH NO CATASTROPHES IN 1996, AND $4,500,000 OF INCREASED
TECHNOLOGY EXPENDITURES FOR SYSTEM IMPROVEMENTS AND YEAR 2000 COMPLIANCE. FOR
THE 12 YEARS SINCE CALFARM WAS ACQUIRED BY ZENITH, THE COMBINED RATIO HAS
AVERAGED 100.6%, EXCLUDING THE EFFECT OF PROPOSITION 103 ROLLBACK REFUNDS IN
1992. CALFARM IS PLEASED WITH ITS OPERATING RESULTS GIVEN THE FIERCELY
COMPETITIVE CLIMATE AND IS FOCUSED ON MAINTAINING APPROPRIATE UNDERWRITING
MARGINS.
DURING THE FIRST QUARTER OF 1998, CALIFORNIA EXPERIENCED WIDE-SPREAD WIND AND
STORM DAMAGE. MANAGEMENT IS NOT ABLE AT THIS TIME TO ESTIMATE THE IMPACT ON OUR
OPERATIONS OF THESE STORMS.
CalFarm
The Zenith 21
<PAGE>
COMPLIANCE WITH YEAR 2000 INTERNAL SOFTWARE ISSUES IS PROCEEDING
ACCORDING TO SCHEDULE AND WE EXPECT SUBSTANTIAL COMPLETION BY
THE END OF 1998.
REINSURANCE
FOR THE PAST 12 YEARS, ZENITH HAS BEEN SELECTIVELY UNDERWRITING ASSUMED TREATY
AND FACULTATIVE REINSURANCE AS WELL AS COMMERCIAL PACKAGE POLICIES FOR TARGETED
INDUSTRY GROUPS. REINSURANCE REPRESENTS ABOUT 7% OF OUR PROPERTY-CASUALTY VOLUME
WHILE REINSURANCE RESERVES REPRESENT APPROXIMATELY 13% OF OUR TOTAL
PROPERTY-CASUALTY RESERVES.
DURING 1997, THE NET WRITTEN PREMIUM OF THIS OPERATION WAS $29,780,000,
COMPARED TO $35,359,000, IN 1996. EARNED PREMIUM WAS $32,251,000, COMPARED TO
$37,473,000, IN 1996. UNDERWRITING PROFITS OF $14,189,000 WERE RECORDED IN 1997
RESULTING IN A COMBINED RATIO OF 56.0%, COMPARED TO UNDERWRITING PROFITS OF
$12,500,000 AND A COMBINED RATIO OF 66.6%, THE PRIOR YEAR. SINCE THE INCEPTION
OF THIS OPERATION IN 1985, THE COMBINED RATIO IS 94.1%. DURING 1997, THE
MAJORITY OF WRITTEN PREMIUM WAS WORLD-WIDE PROPERTY CATASTROPHE BUSINESS. WE
EXPECT THE TREND OF LOWER PREMIUM VOLUMES TO CONTINUE AS RATES DECLINE DUE TO
FAVORABLE EXPERIENCE AND INCREASED CAPITAL AVAILABLE IN THE MARKETPLACE.
ACCOUNTING FOR THE PROPERTY CATASTROPHE REINSURANCE BUSINESS HAS A DIFFERENT
RESULT FROM OUR OTHER PROPERTY-CASUALTY BUSINESSES. AT THE END OF EACH REPORTING
PERIOD, INCOME IS RECOGNIZED WITHOUT RESERVES BEING ESTABLISHED IF NO MAJOR
CATASTROPHE HAS OCCURRED. IN OUR OTHER BUSINESSES, RESERVES ARE MANDATED BASED
UPON ACTUAL EVENTS AS WELL AS EXPECTED LOSS PATTERNS. AS A RESULT, THERE MAY BE
LARGE FLUCTUATIONS (POSITIVE OR NEGATIVE) IN UNDERWRITING RESULTS FOR THE
PROPERTY CATASTROPHE REINSURANCE BUSINESS IN THE SHORT TERM SINCE ONLY ACTUAL
EVENTS ARE CONSIDERED.
WE BECAME A CORPORATE MEMBER OF LLOYD'S ON JANUARY 1, 1995 SUPPORTING ONE
SYNDICATE WHERE WE HAD LONG-TERM TIES AND CONFIDENCE IN THE MANAGEMENT. DURING
THE LATTER PART OF 1997, WE SOLD OUR INTEREST AT A PROFIT.
CalFarm
22 The Zenith
<PAGE>
MANAGEMENT IS FOCUSED ON THE DUAL CHALLENGES OF IMPROVING
OPERATING RESULTS AND THE PRICE OF OUR COMMON STOCK.
YEAR 2000
WE HAVE MADE SUBSTANTIAL PROGRESS IN PREPARING OUR COMPUTER AND BUSINESS
SYSTEMS TO FUNCTION PROPERLY IN VIEW OF THE YEAR 2000 PROBLEM. TO DATE, WE HAVE
SPENT $2,500,000, AND WE ESTIMATE THAT WITH AN ADDITIONAL COST OF $1,500,000, WE
WILL COMPLETE THE NECESSARY WORK ON OUR INTERNAL COMPUTER AND BUSINESS SYSTEMS
BY THE END OF 1998. WITH RESPECT TO THIRD PARTIES WITH WHOM WE DO BUSINESS, A
PROCESS AND A SCHEDULE ARE IN PLACE TO MONITOR THEIR TIMELY COMPLIANCE.
CONCLUSION
CONSUMMATION OF THE PENDING RISCORP TRANSACTION AND PLANNING FOR FUTURE
OPERATIONS WILL DOMINATE OUR SHORT-TERM ACTIVITIES. UPON COMPLETION, OUR
BUSINESS WILL BE STRENGTHENED AND DIVERSIFIED. WE WILL BE POSITIONED AS A
SPECIALTY COMPANY WITH A STRONG BALANCE SHEET, A LONG HISTORY OF EFFECTIVE RISK
MANAGEMENT AND APPROPRIATE GEOGRAPHIC DIVERSIFICATION. SIMULTANEOUSLY, WE ARE
FOCUSED ON IMPROVING THE PROFITABILITY OF OUR EXISTING OPERATIONS IN A VERY
COMPETITIVE ENVIRONMENT. WE BELIEVE THAT POOR FINANCIAL RESULTS IN THE
CALIFORNIA WORKERS' COMPENSATION MARKET WILL CAUSE CERTAIN COMPETITORS TO
RE-PRICE AND RE-UNDERWRITE THEIR BUSINESS IN THE FORESEEABLE FUTURE.
OUR CALFARM OPERATIONS CONTINUE TO SERVICE THE AGRICULTURAL AND RURAL REGIONS
OF CALIFORNIA WITH NEEDED PRODUCTS AND SERVICES, AND OUR REINSURANCE ACTIVITIES
PROVIDE ADDITIONAL WORLD-WIDE PREMIUMS AND UNDERWRITING PROFITS PRIMARILY IN THE
PROPERTY CATASTROPHE MARKET.
MANAGEMENT UNDERSTANDS AND IS FOCUSED ON THE DUAL CHALLENGES OF IMPROVING OUR
OPERATING RESULTS AND THE PRICE OF OUR COMMON STOCK. WE APPRECIATE THE
ASSISTANCE AND CONFIDENCE OF OUR EMPLOYEES, AGENTS, STOCKHOLDERS AND DIRECTORS
AS WE DEAL WITH THE CHALLENGES AND OPPORTUNITIES AHEAD. THE CONTINUED SUPPORT OF
OUR POLICYHOLDERS AND EXCEPTIONAL EFFORTS OF OUR PEOPLE PROVIDE CONFIDENCE FOR
THE FUTURE.
[SIG]
STANLEY R. ZAX, CHAIRMAN OF THE BOARD AND PRESIDENT
WOODLAND HILLS, CALIFORNIA, FEBRUARY 1998
CalFarm
The Zenith 23
<PAGE>
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 Zenith's Annual
Report on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1997, in other parts of
Zenith's 1997 Annual Report to Stockholders 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; (8) ability to timely and accurately complete the Year 2000
conversion process; (9) impact of any failure of third parties with whom Zenith
does business to be Year 2000 compliant and (10) other risks detailed herein and
from time to time in Zenith's other reports and filings with the Securities and
Exchange Commission.
OVERVIEW
Zenith's principal source of consolidated earnings is the income from
operation of its property-casualty insurance businesses. Property-Casualty
operations comprise Workers' Compensation (49% of 1997 consolidated net premiums
earned); Other Property-Casualty, principally automobile, homeowners, farmowners
and commercial coverages and health insurance (44% of 1997 consolidated net
premiums earned); and Reinsurance (7% of 1997 consolidated net premiums earned).
Results of such operations for the three years ended December 31, 1997 are set
forth in the table on page 25. Historically, Zenith's Workers' Compensation
operation has been focused almost entirely in California. In each of the three
years ended December 31, 1997 an increasing volume of business has been
generated outside of California. Substantially all of Zenith's Other
Property-Casualty business is written in California. Reinsurance business
assumed by Zenith provides reinsurance coverage for world-wide exposures with a
particular emphasis on catastrophe losses and large property risks. Property
insurance and reinsurance coverages expose Zenith to the risk of significant
loss in the event of major adverse natural phenomena, known in the insurance
industry as catastrophes. These catastrophes may cause significant
contemporaneous financial statement losses since catastrophe losses may not be
accrued in advance of the event. Zenith also conducts real estate operations
through Perma-Bilt, a Nevada Corporation ("Perma-Bilt"), a wholly-owned
subsidiary that develops land and primarily constructs private residences for
sale in Las Vegas, Nevada.
On December 31, 1996, Zenith completed the purchase of Associated General
Commerce Self-Insurers' Trust Fund ("AGC-SIF"), a Florida workers' compensation
self-insurers' fund, which added earned premium of $47 million to the 1997
operations.
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.
CalFarm
24 The Zenith
<PAGE>
The results of operations and net assets of CalFarm Life's life and annuity
business are included as discontinued operations and results of the health
insurance operation are included in restated Other Property-Casualty results in
the accompanying consolidated financial statements. Net income in 1995 includes
a loss of $19.5 million associated with the sale of CalFarm Life.
The table below sets forth the components of net income for the three years
ended December 31, 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income, after taxes $ 34,655 $ 34,069 $ 30,690
Realized gains on investments, after taxes 8,431 7,025 2,354
- --------------------------------------------------------------------------------------------------
Sub-total 43,086 41,094 33,044
- --------------------------------------------------------------------------------------------------
Property-Casualty underwriting results, after taxes:
Income (loss) excluding catastrophes (10,217) 356 (226)
Catastrophe losses (975) (8,710)
- --------------------------------------------------------------------------------------------------
Property-Casualty underwriting income (loss), after taxes (11,192) 356 (8,936)
- --------------------------------------------------------------------------------------------------
Income from real estate operations, after taxes 1,079 1,251 1,349
Interest expense, after taxes (2,587) (3,170) (4,524)
Parent net expenses, after taxes (2,286) (1,931) (1,211)
Loss from discontinued life and annuity operations, after taxes (13,122)
- --------------------------------------------------------------------------------------------------
Net income $ 28,100 $ 37,600 $ 6,600
- --------------------------------------------------------------------------------------------------
</TABLE>
PROPERTY-CASUALTY INSURANCE OPERATIONS
Premiums earned and underwriting results of Zenith's Property-Casualty
subsidiaries for the three years ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums earned
Workers' Compensation $242,064 $210,916 $203,252
Other Property-Casualty 214,406 204,778 192,276
Reinsurance 32,251 37,162 41,985
- ----------------------------------------------------------------------------------
Total $488,721 $452,856 $437,513
- ----------------------------------------------------------------------------------
Underwriting income (loss), before taxes
Workers' Compensation $(37,157) $(19,462) $(14,548)
Other Property-Casualty 6,509 8,076 (12,007)
Reinsurance 14,189 12,479 12,955
- ----------------------------------------------------------------------------------
Total $(16,459) $ 1,093 $(13,600)
- ----------------------------------------------------------------------------------
</TABLE>
Zenith's key operating goal is to achieve a combined ratio of 100% or lower.
The combined ratio, expressed as a percentage, is the key measure of
underwriting profitability traditionally used in the Property-Casualty insurance
business. It is the sum of net incurred loss and loss adjustment expenses,
underwriting expenses and policyholders' dividends, expressed as a percentage of
net premiums earned.
CalFarm
The Zenith 25
<PAGE>
<TABLE>
<CAPTION>
The combined ratios for the three years ended December 31, 1997 were as follows:
- ------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Combined loss and expense ratios
Workers' Compensation
Loss and loss adjustment expenses 81.6% 75.4% 75.6%
Underwriting expenses 33.6 32.6 28.8
Dividends to policyholders 0.1 1.2 2.8
- ------------------------------------------------------------------------------------------------------
Combined ratio 115.3 109.2 107.2
- ------------------------------------------------------------------------------------------------------
Other Property-Casualty
Loss and loss adjustment expenses 65.2 67.1 77.9
Underwriting expenses 31.7 29.0 28.3
- ------------------------------------------------------------------------------------------------------
Combined ratio 96.9 96.1 106.2
- ------------------------------------------------------------------------------------------------------
Reinsurance
Loss and loss adjustment expenses 33.7 49.0 52.6
Underwriting expenses 22.3 17.4 16.5
- ------------------------------------------------------------------------------------------------------
Combined ratio 56.0 66.4 69.1
- ------------------------------------------------------------------------------------------------------
Total combined ratio 103.4% 99.8% 103.1%
- ------------------------------------------------------------------------------------------------------
</TABLE>
The profitability of property-casualty insurance underwriting operations is
principally dependent upon the adequacy of rates charged to the insured for
insurance protection, the frequency and severity of claims, the ability to
accurately estimate and accrue reported and unreported losses in the correct
period, the level of dividends paid to policyholders, and the ability to service
claims, maintain policies and acquire business efficiently.
The amount by which losses, measured subsequently by reference to payments
and additional estimates, differ from those originally reported for a period is
known as development. This is favorable when losses ultimately settle for less
than the amount reserved or subsequent estimates indicate a basis for reducing
reserves on open claims. The following shows the one-year loss reserve
development for loss and loss adjustment expense for the three main lines of
property-casualty business:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Other
(Dollars in Workers' Property-
thousands) Compensation Casualty Reinsurance Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One-year loss
development in:
1997 $ 11,837 $ (5,316) $ (6,870) $ (349)
1996 (869) (224) (2,716) (3,809)
1995 (517) 1,337 (2,955) (2,135)
Favorable development is shown in brackets.
- -----------------------------------------------------------------------------
</TABLE>
The unfavorable development in 1997 for Workers' Compensation operation is
due to loss and loss adjustment expense reserve strengthening for prior accident
years, principally 1995 and 1996 accident years.
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. 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 applied and 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.
CalFarm
26 The Zenith
<PAGE>
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-containing 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, plaintiffs' 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.
In the spring of 1996, Zenith began replacing and modifying its computer and
business systems to be Year 2000 compliant. Zenith has established a central
team to evaluate and implement the changes to computer systems, applications and
business processes necessary to achieve Year 2000 conversion with no disruption
to business operations. Even though Zenith has been communicating with third
parties with whom it does business to assure that they are Year 2000 compliant,
Zenith may be adversely impacted if such third parties do not address this issue
successfully. Through December 31, 1997, Zenith has incurred about $2.5 million
on the Year 2000 efforts and anticipates an additional $2.0 million will be
incurred through 1999. All of the significant internal insurance computer
systems, applications and business processes are expected to be fully compliant
by the end of 1998.
Some of the factors that continue to impact the business and economic
environment in which Zenith operates include: an uncertain political and
regulatory environment, both state and federal; the outlook for economic growth
in geographic areas where Zenith operates; the expansion itself of Zenith's
Workers' Compensation business outside of California; a highly competitive
insurance industry; and the changing environment for controlling medical, legal
and rehabilitation costs, as well as fraud and abuse. Although management is
currently unable to predict the effect of any of the foregoing, these factors
and related trends and uncertainties could have a material effect on Zenith's
future operations and financial condition.
Inflation rates impact the financial statements and operating results in
several areas. Fluctuations in inflation rates impact the market value of the
investment portfolio and yields on new investments. Inflation also impacts the
portion of the loss reserves that relates to hospital and medical expenses and
property claims and loss adjustment expenses, but not the portion of loss
reserves that relates to workers' compensation indemnity payments for lost wages
which are fixed by statute. Adjustments for inflationary impacts are implicitly
included as part of Zenith's subsidiaries' continual review of property-casualty
reserve estimates. Actuarial account of increased costs is considered in setting
adequate rates, and this is particularly important in the health insurance area
where hospital and medical inflation rates have exceeded general inflation
rates. Workers' compensation premium income is determined primarily by applying
a rate to payrolls, and as inflation increases, average wage rates are generally
adjusted, resulting in decreases in premium rates. Operating expenses, including
payrolls, are impacted to a certain degree by the inflation rate. Social
inflation affects the loss reserves for other property-casualty liability claims
for which settlements are determined in court proceedings.
CalFarm
The Zenith 27
<PAGE>
WORKERS' COMPENSATION
Underwriting results in the Workers' Compensation operation deteriorated
significantly in 1997, 1996 and 1995 compared to prior years. The underwriting
losses in 1997, 1996 and 1995, were the result of intense competition, lower
premium income, the inability of Zenith to adjust operating expenses
commensurate with the decrease in premiums, and additional operating costs
associated with a new computer system which became operational in mid-1995. In
1997, Workers' Compensation results were also impacted by loss and loss
adjustment expense reserve strengthening of about $12 million for prior accident
years, and higher reserves for the current accident year. 1996 results were
affected by increased claim costs attributable to 1994 and 1995 accident years
which were offset by improvements in claim handling costs for the same periods.
Effective January 1, 1995, the minimum rate law in California was repealed
with the adoption of an open rating system in which insurers were allowed to
charge their own rates for Workers' Compensation coverage. Companies must file
such rates with the California Department of Insurance, but the use of scheduled
rating credits allow companies considerable flexibility in determining the
amount of premium to be charged to a policyholder or potential policyholder.
Competition in the industry based on price has become intense, negatively
impacting overall industry volume. Since open rating began, the
interrelationship of Zenith's actuarially-determined rates, underwriting and
agents' commission in comparison to the industry has resulted in the loss of
some business to competitors. The number of California policies in-force
decreased approximately 13% from 1996 to 1997 and 8% from 1995 to 1996.
The strategic geographic diversification in non-California markets primarily
offsets the decreasing premium in the California market. Zenith's non-California
Workers' Compensation operations include Texas, Arkansas, Illinois,
Pennsylvania, Utah and, effective January 1, 1997, Florida. During 1997, 1996
and 1995, approximately 46%, 29% and 22%, respectively, of earned premiums were
attributable to Zenith's non-California Workers' Compensation operations. The
increase in 1997 is primarily the result of the AGC-SIF acquisition effective
December 31, 1996. AGC-SIF's 1997 earned premiums contributed $47 million to the
1997 operations. National results for Workers' Compensation insurers in recent
years continue to be favorable by recent historic standards and Zenith's
non-California underwriting results in 1997, 1996, and 1995 were more favorable
than its California results. Management will continue to monitor the national
expansion of its Workers' Compensation operation.
The outlook for future profitability in the Workers' Compensation operation
is dependent upon the ability to maintain adequate rates, manage claims costs
and to keep operating expenses in line with premium volume.
Zenith continued to market its integrated Workers' Compensation, Health and
Disability insurance products in California and Arkansas in alliances with
selected health insurers, health maintenance organizations and UNUM Life
Insurance Company of America, one of the nation's largest disability insurance
companies. In 1997, this program did not have a material impact on Zenith's
operations.
Zenith is required to participate in the National Workers' Compensation
Reinsurance Pool ("NWCRP"), which is an involuntary assigned risk pool that
covers several states in which Zenith conducts business. Zenith's participation
in NWCRP premiums earned in 1997, 1996, and 1995 was approximately $3.3 million,
$3.6 million, and $1.4 million, respectively. The underwriting results for NWCRP
did not materially impact Workers' Compensation underwriting results in 1997,
1996, or 1995.
Florida has created the Special Disability Trust Fund ("the Fund") which
assesses Workers' Compensation insurers to pay for what are commonly referred to
as "Second Injuries". Historic assessments have been inadequate to completely
fund obligations of the Fund. In late 1997, the Florida statute was amended so
that the Fund will not be liable for and will not reimburse employers or
carriers for Second Injuries occurring on or after January 1, 1998. Zenith has
recorded its receivable from the Fund for Second Injuries based on specific
claims and historical experience prior to January 1, 1998. Management believes
that the remaining balance of the receivable at December 31, 1997 of $5,094,000
will be recovered.
CalFarm
28 The Zenith
<PAGE>
In 1995, Zenith's new workers' compensation computer system ("system") became
operational. Management observed certain unusual claim reserving trends and
patterns in 1995 and 1996, and to a much lesser degree, during the first three
quarters of 1997. Based on currently available data, these claim reserving
trends and patterns have stabilized. Any subsequent re-interpretation of new
information that becomes available from the system which may change the estimate
of such liabilities in future periods is not considered to have a material
impact on the financial position or results of operations.
OTHER PROPERTY-CASUALTY
Underwriting results in the Other Property-Casualty operation were favorable
for both 1997 and 1996. 1997 underwriting results declined, compared to 1996,
due primarily to upgrades to the existing computer systems and computer costs
incurred for Year 2000 compliance, partially offset by favorable loss experience
in both current and prior accident years. 1997 results include $1.5 million of
catastrophe losses attributable to California storm damage.
The 1996 underwriting results improved significantly compared to 1995
primarily due to the absence of catastrophes in 1996 versus 1995 catastrophe
losses of $10.7 million from California storm damage.
Premiums earned increased in 1997 and 1996 compared to 1995, primarily due to
new business and rate increases for homeowners, earthquake, farmowners,
commercial coverages and health. The increase in premium was limited by the
competitive insurance market and pricing pressures for all lines of business in
California. All rate increases, except health, are subject to prior approval by
the California Department of Insurance (the "Department"). Management is unable
to predict whether requests for future rate increases, if any, will be granted
by the Department. Failure by the Department to act upon such requests would
adversely affect the adequacy of such rates and the profitability of operations
in the associated lines of business.
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
provides limited earthquake coverage throughout California. Participation in the
CEA is voluntary and Zenith elected not to participate. Zenith can elect to
participate in the CEA at a later date subject to meeting the participation
requirements at that time.
During 1997, Zenith continued to write homeowners and associated earthquake
with broader coverages than available through the CEA. Zenith will continue to
offer broader earthquake coverage as long as private reinsurance is available
and affordable.
Zenith is required to participate in involuntary market plans, including the
California Automobile Assigned Risk Plan ("CAARP"), the Commercial Automobile
Insurance Procedure ("CAIP"), and the California Fair Plan ("Fair Plan"). CAARP,
CAIP and the Fair Plan are organizations that were established by statute in
California but are serviced by the insurance industry. The 1997, 1996, and 1995
underwriting results for CAARP, CAIP and the Fair Plan together did not
materially impact the Other Property-Casualty underwriting results.
The private passenger automobile insurance market continues to be affected by
legislative actions. Both the mandatory insurance law and the "Personal
Responsibility Act of 1996" created by Proposition 213 were effective January
1997. During 1997, Zenith implemented the new rating factor regulations which
further limit the impact of territorial rating on automobile insurance rates.
During 1998, the California legislature is expected to continue its debate on
providing a low-cost auto policy to the uninsured drivers in California.
During the first quarter of 1998, California experienced wide-spread wind and
storm damage. Management is not able at this time to estimate the impact of the
storms on the results of operations of Zenith.
REINSURANCE
Zenith's assumed reinsurance operation emphasizes the reinsurance of
accumulated losses from catastrophes and the reinsurance of large property
risks. Whereas the number and severity of losses culminating with Hurricane
"Andrew" in 1992 pressured rates up followed by creation of additional industry
capacity, the absence of severe catastrophes in 1996 and 1997
CalFarm
The Zenith 29
<PAGE>
and available capacity have pressured prices down.
Underwriting results were favorable during 1997 and 1996 as a result of
absence of catastrophes. In spite of losses incurred in 1995 of $2.5 million
principally attributable to Hurricane "Marilyn", the 1995 underwriting results
were profitable. For the past three years, the decrease in loss and loss
adjustment expenses was primarily due to favorable development of certain
treaties, however, the 1997 underwriting results were partially reduced by
contingent profit commission paid as a result of such favorable development.
The outlook for profitability in the reinsurance operation continues to be
dependent upon, among other things, the level of rates for property and
catastrophe reinsurance and the frequency and severity of world-wide property
losses. Premiums earned in the reinsurance operation decreased in 1996 and 1997
due to selected non-renewal by Zenith of certain reinsurance treaties and
generally softening of such rates in the industry. If rates do not improve,
premiums may continue to decrease in 1998.
INVESTMENTS
At December 31, 1997, approximately 92% of Zenith's consolidated portfolio of
fixed maturity investments were classified as available-for-sale under the
provisions of Statement of Financial Accounting Standards No. 115 -- "Accounting
for Certain Investments in Debt and Equity Securities." The unrealized
appreciation or depreciation on investments which are classified as
available-for-sale is recorded as a separate component of stockholders' equity.
The effect on consolidated stockholders' equity of the increase in the value of
fixed maturities classified as available-for-sale in 1997 compared to 1996 was
an increase of $5.0 million, net of deferred taxes. Any future changes in
interest rates will impact stockholders' equity through changes in the values of
fixed maturity investments which are classified as available-for-sale.
Zenith's primary investment goal is to maintain safety and liquidity, enhance
principal values and achieve increased rates of return consistent with
regulatory constraints. The allocation among various types of securities is
adjusted from time to time based on market conditions, credit conditions, tax
policy, fluctuations in interest rates and other factors.
The change in the carrying value of Zenith's consolidated investment
portfolio in 1997 was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Carrying value at beginning of year $ 852,799
Purchases at cost 91,244
Maturities and redemptions (70,079)
Proceeds from sales of investments:
Available-for-sale ($104,809)
Other (16,627)
---------
Total proceeds from sales of investments (121,436)
Net realized gains:
Available-for-sale 4,108
Other 9,900
---------
Total net realized gains 14,008
Unrealized gains 13,545
Increase in short-term investments 103,115
Net amortization of bonds and preferred stocks and other changes (3,223)
- -------------------------------------------------------------------------------------------------
Carrying value at end of year $ 879,973
- -------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, and 1996, Zenith's consolidated investment portfolio
emphasized high-quality, taxable bonds and short-term investments. Bonds
constituted 67% and 77%, and short-term investments constituted 24% and 13%, of
the carrying value of Zenith's consolidated investment portfolio at December 31,
1997 and 1996, respectively. At December 31, 1997 and 1996, 96% and 97%,
respectively, of the consolidated carrying values
CalFarm
30 The Zenith
<PAGE>
of investments in bonds were rated investment grade.
Investment income during the years ended December 31, was as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------
(Dollars in
thousands) 1997 1996 1995
- ----------------------------------------------------
<S> <C> <C> <C>
Before taxes $ 52,332 $ 51,154 $ 46,150
After taxes 34,655 34,069 30,690
- ----------------------------------------------------
</TABLE>
The yields on invested assets vary with the general level of interest rates,
the average life of invested assets and the amount of funds available for
investment; and for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------
1997 1996 1995
- ----------------------------------------------------
<S> <C> <C> <C>
Before taxes 6.0% 6.1% 6.0%
After taxes 4.0% 4.0% 4.0%
- ----------------------------------------------------
</TABLE>
REAL ESTATE
Zenith recognized total revenues of $46.0 million, $41.6 million, and $31.7
million in 1997, 1996, and 1995, respectively, related to its real estate
operations which commenced in 1993. Total revenues include other realized gains
of $0.5 million in 1997 and none for 1996 and 1995. Income from real estate
operations before taxes was $1.7 million, $1.9 million, and $2.1 million in
1997, 1996 and 1995, respectively. Construction in progress, including
undeveloped land, was $53.1 million at December 31, 1997 compared to $45.1
million at December 31, 1996. In addition to continuing home construction,
Zenith may use some land presently owned for commercial construction.
PENDING RISCORP ACQUISITION
On June 17, 1997, Zenith entered into an agreement with RISCORP Inc. and
certain of its subsidiaries (collectively "RISCORP") to purchase all of the
assets of RISCORP related to its workers' compensation business, including
RISCORP's existing in-force insurance business as well as the right to all new
and renewal policies. Zenith will also purchase RISCORP's "First Call" managed
care workers' compensation system. After the transaction closes, RISCORP will no
longer engage in workers' compensation or managed care businesses.
Zenith will assume certain liabilities related to RISCORP's insurance
business in connection with the transaction. In addition, Zenith will assume or
repay $15 million in indebtedness of RISCORP. The purchase price paid by Zenith
to RISCORP will be the difference between the book value of the assets purchased
and the book value of the liabilities assumed by Zenith on the closing date,
subject to a minimum purchase price of $35 million, payable in cash. The
ultimate purchase price, however, cannot be determined at this time.
Zenith and RISCORP also entered into an agreement under which all RISCORP's
Florida in-force, and new and renewal policies issued after June 17, 1997 are
reinsured by Zenith in the event that RISCORP is declared insolvent prior to the
closing, at which time the related liabilities will be assumed.
The closing of the purchase is subject to certain conditions, including the
review and approval by appropriate regulatory agencies, compliance with contract
provisions and approval by RISCORP's shareholders. RISCORP has obtained the
necessary approvals from the Securities and Exchange Commission to solicit its
shareholders. The closing date cannot be determined at this time. However, if
closing does not occur by March 31, 1998, either party may terminate the
agreement.
Management of RISCORP has informed Zenith that it is currently in the process
of identifying and evaluating its computer and business systems with respect to
Year 2000 issues. At this time, however, management of RISCORP has neither
informed Zenith of the total cost of achieving Year 2000 compliance for its
systems nor presented a plan for doing so. If the transaction closes, Zenith may
be adversely impacted if substantial changes are required after the closing for
RISCORP's computer and business systems to achieve Year 2000 compliance, and if
such changes are not covered by indemnification rights contained in the purchase
agreement.
LIQUIDITY AND CAPITAL RESOURCES
Zenith's property-casualty insurance subsidiaries create liquidity because
insurance premiums are generally collected prior to disbursements for claims and
benefits. These net cash flows, as set forth on page 41 in the Consolidated
Financial Statements, are invested as described in "Investments" above. Net cash
flows from continuing operating activities were
CalFarm
The Zenith 31
<PAGE>
$27.0 million, $9.7 million and $9.6 million, for 1997, 1996 and 1995,
respectively.
Zenith's principal liquidity requirements in the long-term and the short-term
are the funds needed to pay its expenses, service its outstanding debt, pay any
cash dividends which may be declared to its stockholders and fund the land
acquisitions and development of its real estate subsidiary, Perma-Bilt. 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.
Currently, Zenith has three revolving lines of credit in place. These lines
provide Zenith with $100 million of revolving credit, all of which is currently
available, along with internal funds, to fund the closing of the pending
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. In the opinion of
management, Zenith's sources of funding are sufficient for its short-term and
long-term requirements for liquidity.
Zenith's insurance subsidiaries are subject to insurance regulations which
restrict their ability to distribute dividends. Such dividend capabilities are
set forth in Note 10 to the Consolidated Financial Statements. Such restrictions
have not had, and under current regulations are not expected to have, a material
adverse impact on Zenith. Zenith received dividends from its insurance
subsidiaries amounting to $22.75 million in 1997, $15.0 million in 1996 and
$10.5 million in 1995. Maximum dividend capability, without prior approval of
the Department, of Zenith's subsidiaries in 1998 is $27.8 million.
Perma-Bilt maintains certain bank credit facilities to provide financing for
its development and construction of private residences for sale. At December 31,
1997, maximum permitted borrowing under the facilities was $25.3 million, with a
balance outstanding of $11.4 million. Perma-Bilt is obligated under various
notes arising from its purchase of several parcels of land. The amount
outstanding for such notes at December 31, 1997 was $2.3 million.
Insurance companies are required to have securities on deposit for the
protection of policyholders in accordance with various states' regulations. At
December 31, 1997, investments carried at their fair value of $294.3 million
were on deposit to comply with such regulations.
At December 31, 1997, Zenith was authorized to purchase up to 1,085,000
shares of Zenith common stock pursuant to a share purchase program authorized by
its Board of Directors. These purchases, which are made at prevailing market
prices, are discretionary and can be adequately funded from Zenith's existing
sources of liquidity. As previously announced, on January 6, 1998, Zenith
repurchased 930,000 shares at $25 per share in the open market.
PROPOSED CODIFICATION OF
STATUTORY ACCOUNTING PRINCIPLES
The National Association of Insurance Commissioners is in the process of
codifying statutory accounting principles to provide a comprehensive basis of
statutory accounting and reporting for use by insurance departments, insurers,
and auditors. The codified principles have not yet been finalized; therefore,
the effective date has not been determined. Implementation of the codified
statutory accounting principles may affect the surplus level and the
capitalization requirement of Zenith's insurance subsidiaries on a statutory
basis. Zenith has not determined the impact of this codification.
RECENT DEVELOPMENTS IN
FASB ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 is
effective for periods beginning after December 15, 1997. SFAS No. 130 requires
companies to report comprehensive income and its components in a financial
statement which would include net income in addition to unrealized appreciation
(depreciation) on investments that are currently presented as components of
stockholders' equity.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 is effective
for periods beginning
CalFarm
32 The Zenith
<PAGE>
after December 15, 1997. SFAS No. 131 specifies revised guidelines for
determining an entity's operating segments and the type and level of financial
information to be disclosed. Zenith has not determined the final presentation
impact of SFAS No. 131 but does believe that additional segments will be
reported in 1998.
CalFarm
The Zenith 33
<PAGE>
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, Note 1997 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------
(Dollars and shares in thousands,
except per share data)
REVENUES 1
Property-Casualty insurance
operations
Premiums earned $ 488,721 $ 452,856
Investment income 52,332 51,154
Realized gains on investments 14,008 10,807
Real estate operations 45,419 41,554
Income from legal settlement
- -----------------------------------------------------------------
TOTAL REVENUES 1 600,480 556,371
- -----------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
AFTER TAXES AND
BEFORE REALIZED GAINS 1, 2 19,669 30,575
Per share* 1, 2 1.10 1.72
- -----------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
AFTER TAXES 5 28,100 37,600
Per share* 5 1.57 2.12
- -----------------------------------------------------------------
COMPONENTS OF NET INCOME 1
Underwriting income (loss)
Excluding catastrophe losses (10,217) 356
Including catastrophe losses (11,192) 356
Net investment income 34,655 34,069
Realized gains on investments 3 8,431 7,025
Real estate operations 1,079 1,251
Parent operations (4,873) (5,101)
Income (loss) from discontinued
life and annuity operations 5
- -----------------------------------------------------------------
NET INCOME 28,100 37,600
Per share* 1.57 2.12
- -----------------------------------------------------------------
CASH DIVIDENDS PER SHARE TO COMMON
STOCKHOLDERS 1.00 1.00
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING* 17,886 17,752
- -----------------------------------------------------------------
FINANCIAL CONDITION 1
Total assets 1,252,156 1,242,724
Investments 879,973 852,799
Property-Casualty unpaid claims 613,266 620,078
Senior notes, bank debt and other
notes payable 88,216 88,861
Total stockholders' equity 361,866 337,503
Stockholders' equity per share 20.31 19.17
Stockholders' equity per share,
excluding effect of SFAS No. 115 4 20.03 19.28
Return on average equity 8.3% 11.4%
- -----------------------------------------------------------------
PROPERTY-CASUALTY INSURANCE
STATISTICS (GAAP) 1
Paid loss and loss adjustment
expense ratio 66.9% 69.9%
Loss and loss adjustment expense
ratio 71.2% 69.5%
Underwriting expense ratio 32.1% 29.7%
Policyholder dividends ratio 0.1% .6%
Combined ratio 103.4% 99.8%
Net premiums earned-to-surplus
ratio 1.4 1.4
Loss and loss adjustment expense
reserves-to-surplus ratio (net
of reinsurance) 6 1.5 1.6
- -----------------------------------------------------------------
</TABLE>
*Amounts prior to 1997 have been restated as required to comply with SFAS No.
128 and represent diluted amounts per share and weighted average shares
assuming exercise of stock options. For further discussion of earnings per
share and the impact of SFAS No. 128, see Notes 1 and 16 to the consolidated
financial statements on pages 46 and 55, respectively.
CalFarm
34 The Zenith
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands,
except per share data)
REVENUES
Property-Casualty insurance
operations
Premiums earned $ 437,513 $ 438,829 $ 447,270
Investment income 46,150 40,068 39,309
Realized gains on investments 3,621 1,428 14,272
Real estate operations 31,736 30,220
Income from legal settlement 1,910 7,561
- ---------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 519,020 512,455 508,412
- ---------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
AFTER TAXES AND
BEFORE REALIZED GAINS 17,368 27,628 27,820
Per share* .95 1.45 1.44
- ---------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
AFTER TAXES 19,722 29,798 42,177
Per share* 1.08 1.56 2.19
- ---------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET INCOME
Underwriting income (loss)
Excluding catastrophe losses (226) 15,652 8,801
Including catastrophe losses (8,936) 5,707 7,436
Net investment income 30,690 26,995 26,888
Realized gains on investments 2,354 929 9,443
Real estate operations 1,349 1,423
Parent operations (5,735) (5,256) (1,590)
Income (loss) from discontinued
life and annuity operations (13,122) 8,102 11,023
- ---------------------------------------------------------------------------------------------------------------
NET INCOME 6,600 37,900 53,200
Per share* .36 1.99 2.77
- ---------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PER SHARE TO COMMON
STOCKHOLDERS 1.00 1.00 1.00
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING* 18,334 19,029 19,196
- ---------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION
Total assets 1,115,433 1,093,675 1,125,211
Investments 835,214 709,030 754,107
Property-Casualty unpaid claims 517,552 510,406 519,418
Senior notes, bank debt and other
notes payable 83,135 76,582 73,989
Total stockholders' equity 330,432 309,860 349,465
Stockholders' equity per share 18.58 16.35 18.55
Stockholders' equity per share,
excluding effect of SFAS No. 115 18.18 18.79 17.90
Return on average equity 2.0% 11.7% 16.3%
- ---------------------------------------------------------------------------------------------------------------
PROPERTY-CASUALTY INSURANCE
STATISTICS (GAAP)
Paid loss and loss adjustment
expense ratio 74.3% 69.6% 67.9%
Loss and loss adjustment expense
ratio 74.4% 66.9% 68.5%
Underwriting expense ratio 27.4% 26.9% 25.5%
Policyholder dividends ratio 1.3% 4.0% 3.4%
Combined ratio 103.1% 97.8% 97.4%
Net premiums earned-to-surplus
ratio 1.4 1.7 1.6
Loss and loss adjustment expense
reserves-to-surplus ratio (net
of reinsurance) 1.5 1.7 1.7
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 1993 and 1994 have been restated to include health insurance included in
property-casualty insurance operations.
(2)Excludes $1,241,000, or $.06 per share, in 1994 and $4,914,000, or $.26 per
share, in 1993 for the effect of legal settlement.
(3) Taxes on realized gains were reduced in 1993 for the tax benefit associated
with capital losses carried forward from 1990.
(4) Effective December 31, 1993, Zenith adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS No. 115"), under which the unrealized
appreciation or depreciation, net of deferred taxes, on debt securities
classified as available-for-sale is recorded in stockholders' equity.
(5) In 1995, Zenith sold CalFarm Life (see Note 15 to the Consolidated Financial
Statements).
(6) Computed including AGC-SIF net reserves of $65,429,000 acquired through
merger on December 31, 1996 (See Note 14 to the Consolidated Financial
Statements).
CalFarm
The Zenith 35
<PAGE>
PROPERTY-CASUALTY LOSS DEVELOPMENT
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
The table that follows shows analysis of development of loss and loss
adjustment expense liabilities as originally estimated on a GAAP basis at
December 31 of each year presented. The accounting policies used to estimate
these liabilities are described in Note 1 to the Consolidated Financial
Statements. Amounts represent all property-casualty operations. Information for
1994 and prior years has been restated to include the health insurance business
previously written by CalFarm Life Insurance Company.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996
<S> <C> <C>
- -------------------------------------------------------
(Dollars in thousands)
LIABILITY FOR UNPAID LOSS AND LOSS
ADJUSTMENT EXPENSES, NET $525,601 $526,427
- -------------------------------------------------------
PAID, NET (CUMULATIVE) AS OF:
One year later 209,346
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
- -------------------------------------------------------
LIABILITY, NET RE-ESTIMATED AS OF:
One year later 526,078
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
- -------------------------------------------------------
FAVORABLE (DEFICIENT) DEVELOPMENT $349
- -------------------------------------------------------
NET LIABILITY -- DECEMBER 31, $525,601 $526,427
Receivable from reinsurers and
state trust funds 87,665 93,651
- -------------------------------------------------------
GROSS LIABILITY -- DECEMBER 31, $613,266 620,078
Re-estimated liability, net of
reinsurance 526,078
Re-estimated receivable from
reinsurers 95,570
- -------------------------------------------------------
Re-estimated liability, gross 621,648
- -------------------------------------------------------
FAVORABLE (DEFICIENT) DEVELOPMENT,
GROSS $(1,570)
- -------------------------------------------------------
</TABLE>
The analysis above presents the development of Zenith's balance sheet
liabilities for 1987 through 1997. The first line in the table shows the
liability for loss and loss adjustment expense as estimated at the end of each
calendar year. The first section shows the actual payments of loss and loss
adjustment expenses that relate to each year-end liability as they are paid
during subsequent annual periods. The second section includes revised estimates
of the original unpaid amounts, net of reinsurance, including the subsequent
payments. The next line shows the favorable or deficient developments of the
original estimates for each year through 1997, net of reinsurance. This loss
reserve development table is cumulative and, therefore, ending balances should
not be added since the amount at the end of each calendar year includes activity
for both the current and prior years. Hence, the liability at the end of each
year includes an estimate of the amount yet unpaid and still due at the
subsequent re-evaluation date for all previously estimated liabilities. For
example, the liability at the end of 1996 includes an estimate of the amount
still due on the 1995 and prior liabilities. The loss and loss adjustment
expense data prior to 1995 have been restated to include health insurance.
Since conditions and trends that have affected loss and loss adjustment
expense development in the past may not occur in the future in exactly the same
manner, if at all, future results may not be reliably predicted by extrapolation
of the data presented.
CalFarm
36 The Zenith
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
LIABILITY FOR UNPAID LOSS AND LOSS
ADJUSTMENT EXPENSES, NET $463,123 $462,710 $474,499 $471,832 $447,702 $424,373 $386,445 $347,888 $293,981
- -----------------------------------------------------------------------------------------------------------------------------
PAID, NET (CUMULATIVE) AS OF:
One year later 185,764 175,488 173,699 184,498 184,593 162,642 129,605 118,332 105,939
Two years later 295,872 274,560 272,221 292,914 291,228 264,904 205,132 179,241 159,746
Three years later 331,532 325,916 355,710 352,208 323,685 258,632 216,321 189,980
Four years later 364,420 389,417 390,459 357,233 289,963 245,629 207,890
Five years later 416,297 412,600 380,524 309,524 263,971 225,849
Six years later 433,322 394,741 323,041 275,983 237,474
Seven years later 409,190 332,239 284,877 245,429
Eight years later 341,520 290,126 251,801
Nine years later 295,039 256,423
Ten years later 260,196
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITY, NET RE-ESTIMATED AS OF:
One year later 459,314 460,575 464,779 480,903 467,636 427,458 381,096 341,679 293,526
Two years later 464,830 450,675 453,497 483,334 485,399 442,332 371,272 332,541 290,002
Three years later 442,391 452,330 482,019 485,816 453,802 374,455 327,961 289,074
Four years later 446,746 487,447 488,723 454,744 380,983 325,457 285,801
Five years later 483,294 491,216 455,971 381,703 328,415 280,860
Six years later 488,826 456,860 382,280 328,640 281,385
Seven years later 453,475 382,219 329,058 282,498
Eight years later 377,410 328,465 282,882
Nine years later 322,236 282,454
Ten years later 279,103
- -----------------------------------------------------------------------------------------------------------------------------
FAVORABLE (DEFICIENT) DEVELOPMENT $ (1,707) $ 20,319 $ 27,753 $(11,462) $(41,124) $(29,102) $ 9,035 $ 25,652 $ 14,878
- -----------------------------------------------------------------------------------------------------------------------------
NET LIABILITY -- DECEMBER 31, $463,123 $462,710 $474,499 $471,832
Receivable from reinsurers and
state trust funds 54,429 47,696 44,919 33,070
- ---------------------------------------------------------------------------
GROSS LIABILITY -- DECEMBER 31, 517,552 510,406 519,418 504,902
Re-estimated liability, net of
reinsurance 464,830 442,391 446,746 483,294
Re-estimated receivable from
reinsurers 54,725 45,045 54,280 70,526
- ---------------------------------------------------------------------------
Re-estimated liability, gross 519,555 487,436 501,026 553,820
- ---------------------------------------------------------------------------
FAVORABLE (DEFICIENT) DEVELOPMENT,
GROSS $ (2,003) $ 22,970 $ 18,392 $(48,918)
- ---------------------------------------------------------------------------
</TABLE>
CalFarm
The Zenith 37
<PAGE>
CONSOLIDATED BALANCE SHEET
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31, Note 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
ASSETS
Investments
Fixed maturities:
At amortized cost (fair value $48,266, 1997 and $53,113, 1996) $ 46,948 $ 53,353
At fair value (cost $534,771, 1997 and $608,756, 1996) 542,479 605,630
Floating rate preferred stocks, at fair value (cost $14,614, 1997 and 1996) 15,670 14,071
Convertible and non-redeemable preferred stocks, at fair value (cost $6,672,
1997 and $750, 1996) 6,602 784
Common stocks, at fair value (cost $17,790, 1997 and $18,030, 1996) 23,439 22,771
Short-term investments (at cost, which approximates fair value) 209,827 106,712
Other investments 35,008 49,478
- --------------------------------------------------------------------------------------------------------------
Total investments 1, 2 879,973 852,799
Cash 12,504 12,125
Accrued investment income 9,523 10,973
Premiums receivable, less allowance for doubtful accounts of $1,575 in 1997
and $3,725 in 1996 72,813 80,545
Receivable from reinsurers, state trust funds and prepaid reinsurance premiums 8 106,067 119,524
Deferred policy acquisition costs 20,840 20,752
Properties and equipment, less accumulated depreciation 3 54,531 49,179
Federal income taxes 6 19,940 29,939
Other assets 1 75,965 66,888
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,252,156 $1,242,724
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
CalFarm
38 The Zenith
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, Note 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars and shares in thousands)
LIABILITIES
Policy liabilities and accruals
Unpaid loss and loss adjustment expenses 13 $ 613,266 $ 620,078
Unearned premiums 128,469 127,209
Policyholders' dividends accrued 5,360 7,670
Other policyholder funds 6,407 9,109
Reserves on loss portfolio transfers 11,054 8,359
Payable to banks and other notes payable 4 13,742 14,508
Senior notes payable, less unamortized issue costs
of $526, 1997 and $647, 1996 5 74,474 74,353
Other liabilities 37,518 43,935
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 890,290 905,221
- -----------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities 8
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 24,681, outstanding 17,819,
1997; issued 24,447, outstanding 17,604, 1996 9 24,681 24,447
Additional paid-in capital 264,098 258,875
Retained earnings 186,268 175,684
Net unrealized appreciation on investments, net of deferred tax expense of $5,025,
1997 and $284, 1996 1, 2 9,332 528
- -----------------------------------------------------------------------------------------------------------------------------
484,379 459,534
Less treasury stock at cost (6,862 shares, 1997 and 6,843 shares, 1996) 9 (122,513) (122,031)
- -----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 361,866 337,503
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,252,156 $ 1,242,724
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
CalFarm
The Zenith 39
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, Note 1997 1996 1995
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data)
CONSOLIDATED REVENUES:
Premiums earned 7 $ 488,721 $ 452,856 $ 437,513
Net investment income 2 52,332 51,154 46,150
Realized gains on investments 2 14,008 10,807 3,621
Real estate sales 45,419 41,554 31,736
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenues 600,480 556,371 519,020
- ---------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Loss and loss adjustment expenses incurred 7, 13 348,165 314,700 325,589
Policy acquisition costs 92,213 84,093 81,846
Other underwriting and operating expenses 68,003 53,413 39,882
Policyholders' dividends and participation 355 2,526 5,660
Real estate construction and operating costs 44,286 39,645 29,661
Interest expense 4, 5 3,980 4,877 6,960
- ---------------------------------------------------------------------------------------------------------------------------------
Total expenses 557,002 499,254 489,598
- ---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before federal income tax expense 43,478 57,117 29,422
Federal income tax expense 6 15,378 19,517 9,700
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 28,100 37,600 19,722
- ---------------------------------------------------------------------------------------------------------------------------------
Income from life and annuity operations of CalFarm Life (less income tax
expense of $3,463) 15 6,431
Loss on disposal of CalFarm Life, including income tax expense of $4,099 15 (19,553)
- ---------------------------------------------------------------------------------------------------------------------------------
LOSS FROM DISCONTINUED OPERATIONS (13,122)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 28,100 $ 37,600 $ 6,600
- ---------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE:
Income from continuing operations 16 $ 1.59 $ 2.14 $ 1.08
Loss from discontinued operations (.72)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ 1.59 $ 2.14 $ 0.36
- ---------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE - ASSUMING DILUTION:
Income from continuing operations 16 $ 1.57 $ 2.12 $ 1.08
Loss from discontinued operations (.72)
- ---------------------------------------------------------------------------------------------------------------------------------
Net income per common share - assuming dilution $ 1.57 $ 2.12 $ .36
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
CalFarm
40 The Zenith
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Premiums collected $ 521,588 $ 474,831 $ 457,907
Investment income received 52,242 46,167 45,606
Proceeds from sales of real estate 45,964 41,554 31,736
Loss and loss adjustment expenses paid (342,461) (316,949) (325,200)
Underwriting and other operating expenses paid (160,438) (127,975) (120,533)
Real estate construction costs paid (47,565) (54,480) (34,307)
Reinsurance premiums paid (27,336) (23,748) (21,586)
Dividends paid to policyholders (1,284) (5,985) (13,744)
Interest paid (6,910) (7,626) (8,390)
Income taxes paid (8,242) (23,090) (4,578)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operating activities, excluding cash from trading portfolio 25,558 2,699 6,911
Net proceeds from sales of trading portfolio investments 1,416 7,050 2,677
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operating activities, including cash from trading portfolio 26,974 9,749 9,588
Net cash from discontinued operating activities, including cash from trading portfolio 12,655
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 26,974 9,749 22,243
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments:
Debt securities held-to-maturity (5,342) (141,531)
Debt and equity securities available-for-sale (82,734) (447,251) (210,600)
Other debt and equity securities and other investments (8,510) (13,295) (13,885)
Proceeds from maturities and exchanges of investments:
Debt securities held-to-maturity 6,258 8,460 4,284
Debt and equity securities available-for-sale 48,338 173,287 16,869
Other debt and equity securities and other investments 15,483 2,085
Proceeds from sales of investments:
Debt and equity securities available-for-sale 104,809 261,410 293,024
Other debt and equity securities and other investments 15,211 9,656 5,086
Proceeds from the sale of CalFarm Life Insurance Company 120,000
Net change in short-term investments (103,115) 34,716 (38,522)
Other (8,108) (5,784) (6,289)
Net cash used in investing activities of discontinued operations (30,093)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (12,368) 15,857 428
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash advanced from bank line of credit 43,400
Cash repaid on bank line of credit (43,400)
Cash advanced from bank loans and other notes payable 39,729 27,935 30,657
Cash repaid on bank loans and other notes payable (40,719) (25,691) (24,225)
Cash dividends paid to common stockholders (17,695) (17,605) (18,273)
Proceeds from exercise of stock options 4,940 2,572 4,405
Purchase of treasury shares (482) (7,611) (29,318)
Net cash provided by financing activities of discontinued operations 15,644
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (14,227) (20,400) (21,110)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase in cash 379 5,206 1,561
Cash at beginning of year 12,125 6,919 5,358
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 12,504 $ 12,125 $ 6,919
- ---------------------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF INCOME FROM CONTINUING OPERATIONS TO NET CASH FLOWS
FROM OPERATING ACTIVITIES:
Income from continuing operations $ 28,100 $ 37,600 $ 19,722
Adjustments to reconcile income from continuing operations to net cash flows from operating
activities:
Depreciation and amortization 5,716 3,081 4,975
Realized gains on investments (14,008) (10,807) (3,621)
Net cash from trading portfolio 1,416 7,050 2,677
Net cash flow from discontinued operations 12,655
Decrease (increase) in:
Premiums receivable 7,732 (3,467) (3,243)
Receivable from reinsurers 13,457 (1,824) (6,168)
Deferred policy acquisition costs (88) (413) (1,833)
Real estate construction in progress and land held for development (8,038) (19,601) (5,596)
Increase (decrease) in:
Unpaid loss and loss adjustment expenses (6,812) (164) 7,416
Unearned premiums 1,260 7,618 2,234
Policyholders' dividends accrued (2,310) (5,570) (8,422)
Federal income taxes 6,385 (3,574) 4,946
Other (5,836) (180) (3,499)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 26,974 $ 9,749 $ 22,243
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
CalFarm
The Zenith 41
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED COMMON
THREE YEARS ENDED DECEMBER 31, 1997 NOTE STOCK $1 PAR STOCK $1 PAR
<S> <C> <C> <C>
- ---------------------------------------------------------------------------
(Dollars in thousands, except per
share data)
BALANCE AT JANUARY 1, 1995 $ 24,034
Net income for 1995
Net unrealized appreciation on
investments,
net of deferred tax expense of
$8,721 2
Exercise of 276,000 stock options 9 276
Tax benefit on options exercised in
1995
Purchase of 1,442,000 treasury
shares at cost
Cash dividends declared to common
stockholders ($1.00 per share,
paid quarterly)
- ---------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 24,310
Net income for 1996
Net unrealized (depreciation) on
investments, net of deferred tax
benefit of $4,468 2
Exercise of 137,000 stock options 9 137
Tax benefit on options exercised in
1996
Purchase of 317,000 treasury shares
at cost
Cash dividends declared to common
stockholders ($1.00 per share,
paid quarterly)
- ---------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 24,447
Net income for 1997
Net unrealized appreciation on
investments, net of deferred tax
expense of $4,741 2
Exercise of 234,000 stock options 9 234
Tax benefit on options exercised in
1997
Purchase of 19,000 treasury shares
at cost
Cash dividends declared to common
stockholders ($1.00 per share,
paid quarterly)
- ---------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 24,681
- ---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
CalFarm
42 The Zenith
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET UNREALIZED APPRECIATION
ADDITIONAL RETAINED (DEPRECIATION) ON TREASURY
PAID-IN CAPITAL EARNINGS INVESTMENTS STOCK TOTAL
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per
share data)
BALANCE AT JANUARY 1, 1995 $ 251,363 $ 167,025 $ (47,460) $ (85,102) $ 309,860
Net income for 1995 6,600 6,600
Net unrealized appreciation on
investments,
net of deferred tax expense of
$8,721 56,285 56,285
Exercise of 276,000 stock options 4,129 4,405
Tax benefit on options exercised in
1995 591 591
Purchase of 1,442,000 treasury
shares at cost (29,318) (29,318)
Cash dividends declared to common
stockholders ($1.00 per share,
paid quarterly) (17,991) (17,991)
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 256,083 155,634 8,825 (114,420) 330,432
Net income for 1996 37,600 37,600
Net unrealized (depreciation) on
investments, net of deferred tax
benefit of $4,468 (8,297) (8,297)
Exercise of 137,000 stock options 2,435 2,572
Tax benefit on options exercised in
1996 357 357
Purchase of 317,000 treasury shares
at cost (7,611) (7,611)
Cash dividends declared to common
stockholders ($1.00 per share,
paid quarterly) (17,550) (17,550)
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 258,875 175,684 528 (122,031) 337,503
Net income for 1997 28,100 28,100
Net unrealized appreciation on
investments, net of deferred tax
expense of $4,741 8,804 8,804
Exercise of 234,000 stock options 4,706 4,940
Tax benefit on options exercised in
1997 517 517
Purchase of 19,000 treasury shares
at cost (482) (482)
Cash dividends declared to common
stockholders ($1.00 per share,
paid quarterly) (17,516) (17,516)
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 264,098 $ 186,268 $ 9,332 $(122,513) $ 361,866
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
CalFarm
The Zenith 43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTE 1
SUMMARY OF ACCOUNTING POLICIES,
OPERATIONS AND PRINCIPLES OF CONSOLIDATION
Zenith National Insurance Corp. ("Zenith") is engaged through its
wholly-owned property-casualty insurance subsidiaries in the business of writing
workers' compensation insurance, approximately 54% of which is in California;
reinsurance, principally of world-wide property and catastrophe risks; and
automobile, homeowners, farmowners, commercial coverages and health insurance
and other coverages primarily in the rural and suburban areas of California.
Zenith's subsidiaries sell insurance and reinsurance through agents and brokers
and not directly to consumers. The market for insurance products and services is
highly competitive. Zenith also conducts real estate operations, developing
private residences for sale in Las Vegas, Nevada, through its wholly-owned
subsidiary, Perma-Bilt, a Nevada Corporation ("Perma-Bilt"). On December 31,
1996, Zenith acquired through merger the assets and liabilities of Associated
General Commerce Self-Insurers' Trust Fund ("AGC-SIF"), a Florida workers'
compensation self-insurers' fund (See Note 14). In 1995, Zenith sold its
wholly-owned life insurance subsidiary, CalFarm Life Insurance Company (See Note
15).
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") and include Zenith and its subsidiaries.
GAAP requires the use of assumptions and estimates in reporting certain assets
and liabilities and related disclosures and actual results could differ from
those estimates. All significant intercompany transactions and balances have
been eliminated in consolidation.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial instruments are contractual obligations that result in the delivery
of cash or an ownership interest in an entity. Disclosures, included in these
notes, regarding the fair value of financial instruments have been derived using
external market sources, estimates using present value or other valuation
techniques.
The following summarizes the carrying amounts and fair value of Zenith's
financial instruments as of December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1997 1996
---------------------- ----------------------
CARRYING FAIR Carrying Fair
(Dollars in thousands) NOTE AMOUNT VALUE amount value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments:
Trading securities 2 $ 2,982 $ 2,982 $ 4,149 $ 4,149
Other investments 2 876,991 878,309 848,650 848,410
---------- ---------- ---------- ----------
879,973 881,291 852,799 852,559
LIABILITIES:
Other notes payable 4 2,334 2,334 3,361 3,361
Payable to banks 4 11,408 11,408 11,147 11,147
Senior notes payable 5 74,474 82,365 74,353 82,406
- --------------------------------------------------------------------------------------
</TABLE>
INVESTMENTS
Zenith accounts for its investment portfolio in accordance with the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS No. 115") which
requires investments in debt and equity securities to be identified in three
categories as follows: held-to-maturity -- those securities, which by their
terms must be redeemed by the issuing company and that the enterprise has the
positive intent and ability to hold to maturity, are reported at amortized cost;
trading securities -- those securities that are held principally for the purpose
of selling them in the near term and are reported at fair value with unrealized
gains and losses included in earnings; available-for-sale -- those securities
not classified as either held-to-maturity or trading securities and are reported
at fair value with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity, net of deferred taxes.
When, in the opinion of management, a decline in market value of investments
is considered to be "other than temporary," such investments are written down to
their net realizable value. The determination of "other than temporary"
includes, in addition to consideration of other relevant factors, a presumption
that if the market value is below cost by a significant amount for a period of
time, a writedown is necessary.
The market value of investments was supplied by the Merrill Lynch pricing
service, with the exception of 32 items whose values were obtained from other
brokers making a market in the investment, the Bloomberg financial news service,
and analytical pricing
CalFarm
44 The Zenith
<PAGE>
methods for issues for which there is no market. These market values are
considered fair value.
The cost of securities sold is determined by the "identified cost" method.
Short-term investments include certificates of deposit, commercial paper and
debt securities with maturities of less than one year at the time of purchase.
For these short-term investments, the carrying amount is a reasonable estimate
of fair value.
CASH
Cash includes currency on hand and demand deposits with financial
institutions.
RECOGNITION OF PROPERTY-CASUALTY
REVENUE AND EXPENSE
Property-Casualty premiums are earned on a pro rata basis over the terms of
the policies. Premiums applicable to the unexpired terms of policies in force
are recorded as unearned premiums. Premiums earned reflect an estimate for
earned but unbilled audit premiums. Workers' compensation insurance premiums are
based upon the payroll of the insured.
Policy acquisition costs, consisting of commissions, premium taxes and
certain other underwriting costs, are deferred and amortized as the related
premiums are earned.
Zenith's insurance subsidiaries make provision for the settlement of all
incurred claims, both reported and unreported. The liabilities for unpaid loss
and loss adjustment expenses are estimates for the eventual costs of claims
incurred but not settled, less estimates of salvage and subrogation. Estimates
for reported claims are primarily determined by evaluation of individual
reported claims. Estimates for claims incurred but not reported are based on
experience with respect to the probable number and nature of such claims. The
methods for making such estimates and for establishing the resulting liabilities
are continually reviewed and updated and any adjustments resulting therefrom are
reflected in earnings currently. Estimates of losses from environmental and
asbestos-related claims are included in overall loss reserves and to date have
not been material. Due to the significant uncertainties inherent in establishing
such reserves, the ultimate exposure may vary from the amounts currently
reserved.
An estimated provision for workers' compensation policyholders' dividends is
accrued as the related premiums are earned. Such dividends do not become a fixed
liability unless and until declared by the respective Boards of Directors of
Zenith's insurance subsidiaries. Due to deregulation in California,
policyholders' dividends are not anticipated to be material in the foreseeable
future.
Property insurance and reinsurance coverages expose Zenith to the risk of
significant loss in the event of major adverse natural phenomena, known in the
insurance industry as catastrophes. These catastrophes may cause significant
contemporaneous financial statement losses since catastrophe losses may not be
accrued in advance of the event.
The concentration of Zenith's business in California makes the results of
operations highly dependent upon the State's economy, social and cultural
trends, legislative and regulatory changes, and catastrophic events such as
windstorms and earthquakes. In addition, premium revenues for most property and
casualty insurance coverages written in California (except workers' compensation
and health) are subject to prior approval of rates by the California Department
of Insurance.
REINSURANCE
In accordance with general industry practices, Zenith's insurance
subsidiaries annually purchase reinsurance to protect themselves against
liabilities in excess of certain limits on insurance risks they have
underwritten.
Such arrangements are known in the industry as "excess of loss" protection. The
purpose of such reinsurance is to protect Zenith from the impact of large,
unforeseen losses and such reinsurance reduces the magnitude of sudden and
unpredictable changes in net income and the capitalization supporting insurance
operations.
The ceding of reinsurance does not discharge the original insurer from
primary liability to its policyholder. Balances due from reinsurers on unpaid
losses, including an estimate of such recoverables related to reserves for
incurred but not reported losses, are reported as assets and are included in
receivables from reinsurers. Earned premiums are stated in the consolidated
financial statements after deduction of amounts ceded to reinsurers.
Approximately 52% of amounts recoverable from reinsurers at December 31, 1997
CalFarm
The Zenith 45
<PAGE>
are attributable to reinsurance arrangements with one large United States
reinsurance company. No material amounts due from reinsurers have been written
off as uncollectable in the three years ended December 31, 1997.
REAL ESTATE OPERATIONS
Land, land development costs and construction costs, including costs of
acquisition and development, property taxes and related interest are
capitalized. Such costs, and an estimate of the costs to complete a project, are
recognized pro rata against sales of completed units. Such capitalized costs are
included in other assets.
Profitable real estate operations are dependent upon real estate values,
interest rates, construction costs, competition and management ability.
PROPERTIES AND EQUIPMENT
Properties and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated principally on a straight-line basis using the
following useful lives: buildings, 10 to 40 years; furniture, fixture and
equipment, 3 to 10 years.
Expenditures for maintenance and repairs are charged to operations as
incurred. Additions and improvements to buildings and other fixed assets are
capitalized and depreciated. Upon disposition, the asset cost and related
depreciation are removed from the accounts and the resulting gain or loss is
included in income.
The cost of purchased software for internal use is capitalized and amortized
over the useful life of the software. The cost of internally-developed software
for internal use is expensed as incurred. Beginning in 1998, certain costs of
computer software developed or obtained for internal use will be capitalized and
amortized over the useful life of the software. The cost of modifying software
for Year 2000 compliance is expensed as incurred.
INTANGIBLE ASSETS
Purchased intangibles and the costs in excess of tangible assets acquired,
including those related to the acquisition of AGC-SIF discussed in Note 14, are
included in Other Assets. The amounts assigned to such assets acquired since
1970 are being amortized on a straight-line basis over 20 to 25 years.
Amortization expense was $405,000 in 1997, $412,000 in 1996 and $487,000 in
1995, and accumulated amortization was $6,573,000 at December 31, 1997 and
$6,168,000 at December 31, 1996. At December 31, 1997, intangible assets were
$7,001,000, of which $4,992,000 are amortizable.
EARNINGS PER SHARE
In 1997, the FASB issued Statement No. 128, "Earnings per Share" ("SFAS No.
128"). SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the SFAS No. 128 requirements.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 is effective for periods beginning after December
15, 1997. SFAS No. 130 requires companies to report comprehensive income and its
components in a financial statement which would include net income in addition
to unrealized appreciation (depreciation) on available-for-sale securities that
are currently presented as components of stockholders' equity.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 is effective
for periods beginning after December 15, 1997. SFAS No. 131 specifies revised
guidelines for determining an entity's operating segments and the type and level
of financial information to be disclosed. Zenith has not determined the final
presentation impact of SFAS No. 131 but does believe that additional segments
will be reported in 1998.
PROPOSED CODIFICATION OF STATUTORY ACCOUNTING PRINCIPLES
The National Association of Insurance Commissioners is in the process of
codifying statutory accounting principles to provide a comprehensive basis of
statutory accounting and reporting for use by insurance departments,
CalFarm
46 The Zenith
<PAGE>
insurers, and auditors. The codified principles have not yet been finalized;
therefore, the effective date has not been determined. Implementation of the
codified statutory accounting principles may affect the surplus level and the
capitalization requirement of Zenith's insurance subsidiaries on a statutory
basis. Zenith has not determined the impact of the codification.
RECLASSIFICATIONS AND RESTATEMENTS
Certain 1995 and 1996 amounts have been reclassified to conform to the 1997
presentation.
All 1996 and 1995 earnings per share data have been restated in accordance
with SFAS No. 128. See EARNINGS PER SHARE above and Note 16.
NOTE 2
INVESTMENTS
The amortized cost and fair values of investments held-to-maturity,
available-for-sale and trading securities were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
TYPE OF SECURITY
(Dollars in GROSS GROSS
thousands) AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1997 COST GAINS (LOSSES) VALUE
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY
Corporate debt $ 5,335 $ 371 $ 5,706
Mortgage-backed 41,613 947 42,560
- --------------------------------------------------------------------------
Total, held-to-
maturity $ 46,948 $ 1,318 $ 48,266
- --------------------------------------------------------------------------
AVAILABLE-FOR-SALE
U.S. Treasuries $ 131,929 $ 424 $ 132,353
Corporate debt 313,641 7,443 $ (954) 320,130
Mortgage-backed 70,190 788 (634) 70,344
Redeemable preferred
stocks 16,040 729 (52) 16,717
Equities 39,051 7,012 (399) 45,664
Short-term investments 209,827 209,827
- --------------------------------------------------------------------------
Total, available-
for-sale $ 780,678 $ 16,396 $ (2,039) $ 795,035
- --------------------------------------------------------------------------
TRADING
Corporate debt $ 2,971 $ (36) $ 2,935
Equities 25 $ 22 47
- --------------------------------------------------------------------------
Total, trading $ 2,996 $ 22 $ (36) $ 2,982
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
<CAPTION>
TYPE OF SECURITY
(Dollars in GROSS GROSS
thousands) AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1996 COST GAINS (LOSSES) VALUE
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------
HELD-TO-MATURITY
Corporate debt $ 5,339 $ (270) $ 5,069
Mortgage-backed 48,014 $ 36 (6) 48,044
- --------------------------------------------------------------------------
Total, held-to-
maturity $ 53,353 $ 36 $ (276) $ 53,113
- --------------------------------------------------------------------------
AVAILABLE-FOR-SALE
U.S. Treasuries $ 173,971 $ 57 $ (694) $ 173,334
Corporate debt 334,448 4,018 (5,036) 333,430
Mortgage-backed 77,906 197 (1,821) 76,282
Redeemable preferred
stocks 19,467 449 (196) 19,720
Equities 32,503 5,027 (1,189) 36,341
Short-term investments 106,712 106,712
- --------------------------------------------------------------------------
Total, available-
for-sale $ 745,007 $ 9,748 $ (8,936) $ 745,819
- --------------------------------------------------------------------------
TRADING
Corporate debt $ 2,964 $ (100) $ 2,864
Equities 891 $ 394 1,285
- --------------------------------------------------------------------------
Total, trading $ 3,855 $ 394 $ (100) $ 4,149
- --------------------------------------------------------------------------
</TABLE>
Debt securities at December 31, 1997, are due as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------
(Dollars in thousands) AMORTIZED FAIR
DECEMBER 31, 1997 COST VALUE
- ------------------------------------------------------
<S> <C> <C>
HELD-TO-MATURITY:
Due after ten years $ 46,948 $ 48,266
- ------------------------------------------------------
Total $ 46,948 $ 48,266
- ------------------------------------------------------
AVAILABLE-FOR-SALE:
Due in one year or less $ 267,594 $ 267,630
Due after one year through
five years 221,609 224,428
Due after five years through
ten years 136,128 138,853
Due after ten years 116,296 118,460
- ------------------------------------------------------
Total $ 741,627 $ 749,371
- ------------------------------------------------------
TRADING:
Due after one year through
five years $ 2,971 $ 2,935
- ------------------------------------------------------
Total $ 2,971 $ 2,935
- ------------------------------------------------------
</TABLE>
CalFarm
The Zenith 47
<PAGE>
Fluctuating interest rates will impact stockholders' equity, profitability
and maturities of certain debt and preferred securities. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Mortgage-backed securities are shown as being due at their average expected
maturity dates. Redeemable preferred stocks with sinking fund redemption periods
are shown as being due at the mid-point of the sinking fund period. During the
past three years, Zenith has not incurred any material losses due to the credit
quality of its investments and has not included in its financial statements any
allowance for possible future losses.
The gross realized gains on sales of investments classified as
available-for-sale during 1997, 1996 and 1995 were $5,067,000, $8,564,000, and
$4,161,000, respectively and the gross realized losses were $959,000,
$2,355,000, and $1,604,000, respectively.
Investment income is summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities
Bonds $ 42,837 $ 37,968 $ 37,019
Redeemable
preferred stocks 1,289 1,578 1,143
Equity securities
Floating rate
preferred stocks 872 876 1,229
Convertible and
nonredeemable preferred
stocks 337 402 281
Common stocks 595 758 571
Short-term investments 8,090 9,257 6,555
Other 1,489 3,608 1,703
- -------------------------------------------------------------------
55,509 54,447 48,501
Less investment expenses 3,177 3,293 2,351
- -------------------------------------------------------------------
Net investment income $ 52,332 $ 51,154 $ 46,150
- -------------------------------------------------------------------
</TABLE>
Investments carried at their fair value of $294,309,000 at December 31, 1997
and $305,440,000 at December 31, 1996 were on deposit with regulatory
authorities in compliance with insurance company regulations.
At December 31, 1997, Zenith and its subsidiaries owned $6,370,000, at fair
value, of securities issued by Reliance Insurance
Company, its parent and affiliates. Reliance Insurance Company is a major
stockholder of Zenith. During the fourth quarter of 1997, Zenith and its
subsidiaries sold $12,500,000 of securities in Delta Life Corporation for
$17,944,000 in cash resulting in $5,444,000 pretax realized gain. The former
Chairman, President and Chief Executive Officer of Delta Life Corporation is
also a Director of Zenith.
NOTE 3
PROPERTIES AND EQUIPMENT
Properties and equipment consist of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------
(Dollars in thousands)
DECEMBER 31, 1997 1996
- ------------------------------------------------------
<S> <C> <C>
Land $ 14,836 $ 14,836
Buildings 31,852 31,642
Furniture, fixtures and
equipment 37,627 32,249
- ------------------------------------------------------
84,315 78,727
Less accumulated depreciation 29,784 29,548
- ------------------------------------------------------
Total $ 54,531 $ 49,179
- ------------------------------------------------------
</TABLE>
Depreciation expense amounted to $5,788,000, $5,503,000, and $4,949,000 in
1997, 1996 and 1995, respectively.
NOTE 4
PAYABLE TO BANKS AND OTHER NOTES PAYABLE
Zenith has three lines of credit available with aggregate availability of
$100 million. As of December 31, 1997 and 1996, there were no outstanding
balances on these unsecured lines of credit. Interest on funds borrowed through
these three lines of credit is payable at the bank's prime rate, less .55%, or a
fixed rate chosen by Zenith; at the bank's prime rate, less .50%, or a fixed
rate chosen by Zenith; and at the bank's prime rate or IBOR plus a margin of
0.375%.
Under these agreements, certain restrictive covenants apply including the
maintenance of a specific level of net worth for Zenith and its insurance
subsidiaries.
There were no borrowings on the lines of credit in 1997 and 1996. The prime
interest rate was 8.50% and 8.25% at December 31, 1997 and 1996, respectively.
Perma-Bilt has two construction loan agreements, each providing for a
subdivision lot
CalFarm
48 The Zenith
<PAGE>
development loan and a construction revolving line of credit loan, bearing
interest at prime plus 1.0% and prime plus 0.75%, respectively. Each agreement
pertains to a separate residential housing project and the maximum that may be
borrowed under the two agreements combined is $25,275,000. At December 31, 1997,
$11,408,000 was outstanding with respect to these loans. The loans mature
between April 20, 1998 and June 5, 1999. The carrying value of these
variable-rate loans approximates fair value at December 31, 1997.
Perma-Bilt is also obligated under various notes payable arising from its
purchase of several parcels of property. Such notes are collateralized by the
land parcels and bear interest at rates between 8% and 12%, with a maximum
maturity of August 2004. The balance outstanding with respect to these notes was
$2,334,000 at December 31, 1997.
NOTE 5
SENIOR NOTES PAYABLE
Zenith issued $75,000,000 of 9% Senior Notes due 2002 (the "9% Notes") at par
in May 1992. Interest on the notes is payable semi-annually. The notes are
general unsecured obligations of Zenith. Issue costs of $1,213,000 are being
amortized over the term of the notes and $121,000 of such costs were amortized
each year for the three years ended December 31, 1997. Covenants contained in
the indenture include restrictions on the ability of Zenith and its subsidiaries
to incur secured debt and the right of holders of the 9% Notes to require Zenith
to repurchase the 9% Notes upon a decline in the rating of the 9% Notes within
ninety days after the occurrence of certain events. Those events are: (a) a
person or group becomes the beneficial owner of more than 50% of Zenith common
stock; (b) 10% or more of Zenith common stock is acquired by Zenith within any
12-month period; or (c) the sum of the fair market value of distributions (other
than
regular dividends or distributions of capital stock) and the consideration for
purchases of Zenith common stock by Zenith during a 12-month period is 30% or
more of the fair market value of outstanding Zenith common stock. The fair value
at December 31, 1997 of the 9% Notes is $82,365,000 based on a price published
by a rating agency.
Interest incurred on all borrowing is summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Interest capitalized for real estate
operations $3,755 $3,127 $1,572
Interest not related to real estate
operations 3,980 4,877 6,960
- ---------------------------------------------------------------------
Total interest incurred $7,735 $8,004 $8,532
- ---------------------------------------------------------------------
</TABLE>
NOTE 6
FEDERAL INCOME TAXES
The components of the provision (benefit) for taxes on income from continuing
operations are:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ------------------------------------------------------------
<S> <C> <C> <C>
Current $ 10,989 $ 19,979 $5,947
Deferred 4,389 (462) 3,753
- ------------------------------------------------------------
Total federal income taxes $ 15,378 $ 19,517 $9,700
- ------------------------------------------------------------
</TABLE>
The difference between the statutory federal income tax rate of 35% and
Zenith's effective tax rate on income from continuing operations, as reflected
in the financial statements, is explained as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax $15,217 $19,991 $10,298
Increase (reduction) in taxes:
Dividend received
deduction and tax-
exempt interest (693) (846) (710)
Other 854 372 112
- -------------------------------------------------------------------
Total federal income taxes $15,378 $19,517 $ 9,700
- -------------------------------------------------------------------
</TABLE>
CalFarm
The Zenith 49
<PAGE>
Deferred taxes are provided based upon temporary differences between the tax
and book basis of assets and liabilities. The components of the net deferred tax
assets and liabilities were as follows:
<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------
<CAPTION>
1997 1996
(Dollars in thousands) DEFERRED TAX Deferred Tax
YEAR ENDED DECEMBER 31, ASSETS LIABILITIES Assets Liabilities
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------
Differences between the tax
basis and carrying value of
investments, principally
unrealized appreciation on
available-for-sale
investments $ 5,521 $ 602
Deferred policy acquisition
costs 7,294 7,263
Purchased intangibles 1,747 1,991
Properties and equipment 4,371 2,385
Property-Casualty loss reserve
discount $ 27,039 $ 28,070
Limitation on deduction for
unearned premiums 8,513 8,515
Policyholders' dividends
accrued 1,876 2,286
Other 2,538 5,230 2,272 5,348
- ------------------------------------------------------------------------------
39,966 24,163 41,143 17,589
- ------------------------------------------------------------------------------
Net deferred tax assets $ 15,803 $ 23,554
- ------------------------------------------------------------------------------
</TABLE>
Zenith's deferred tax assets will be fully realized because all future
deductible amounts can be offset by future taxable amounts or recovery of
federal income taxes paid within the statutory carryback period.
Property-Casualty loss reserves are not discounted for book purposes, however
the Tax Reform Act of 1986 requires property and casualty loss reserves to be
discounted for tax purposes.
Current taxes receivable and deferred taxes were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1997 1996
- --------------------------------------------------------
<S> <C> <C>
Current taxes receivable $ 4,137 $ 6,385
Net deferred tax asset 15,803 23,554
- --------------------------------------------------------
Federal income taxes $ 19,940 $ 29,939
- --------------------------------------------------------
</TABLE>
Zenith files a consolidated federal income tax return. Zenith's insurance
subsidiaries pay premium taxes on gross premiums written in lieu of most state
income or franchise taxes.
NOTE 7
REINSURANCE
Reinsurance transactions reflected in the financial statements are as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995
- ------------------------------------------------------------
<S> <C> <C> <C>
Ceded reinsurance netted
against earned premiums
for the year $ 26,191 $ 24,642 $ 21,112
Ceded reinsurance netted
against property and
casualty loss and loss
adjustment expenses
incurred 10,491 12,396 15,532
Net assumed reinsurance
included in earned
premiums for the year 37,385 41,930 45,367
- ------------------------------------------------------------
</TABLE>
Zenith Insurance has an assumed reinsurance agreement with Reliance Insurance
Company, a major stockholder of Zenith. Estimated costs paid to Reliance
relating to this arrangement amounted to $97,000, $181,000, and $460,000 for
1997, 1996 and 1995, respectively. Zenith Insurance (through AGC-SIF) also
maintains aggregate and specific excess of loss reinsurance agreements with
Reliance Insurance Company. Included in receivable from reinsurers is
$14,872,000 relating to this reinsurance arrangement.
Zenith maintains excess of loss and catastrophic reinsurance protection which
varies based on the type of coverage. Excess of loss reinsurance covers losses
per occurrence in excess of $350,000 for property, $550,000 for workers'
compensation and $700,000 for liability and umbrella. Zenith's catastrophic
reinsurance coverage provides protection against aggregate losses per event up
to $80,000,000 for property and $100,000,000 for workers' compensation. Assumed
reinsurance business is not covered by such catastrophe reinsurance. Credit
quality of reinsurers may impact profitability and stockholders' equity. No
losses have been incurred from uncollectible reinsurance during the past three
years and no allowances are carried on the financial statements for
unrecoverable reinsurance.
CalFarm
50 The Zenith
<PAGE>
NOTE 8
COMMITMENTS AND CONTINGENT LIABILITIES
Zenith and its subsidiaries lease space for some of its offices expiring
through 2003, equipment on leases expiring through 1998 and automobiles on two
through five-year leases. The minimum rentals on these operating leases as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
(Dollars in thousands) EQUIPMENT
AND
YEAR AUTO FLEET OFFICES TOTAL
- ---------------------------------------------------------------
<S> <C> <C> <C>
1998 $ 939 $ 3,026 $ 3,965
1999 474 2,237 2,711
2000 114 1,771 1,885
2001 1,388 1,388
2002 1,156 1,156
Thereafter 352 352
- ---------------------------------------------------------------
Total $ 1,527 $ 9,930 $ 11,457
- ---------------------------------------------------------------
</TABLE>
Rental expenses for 1997, 1996 and 1995 amounted to $5,925,000, $5,358,000,
and $5,397,000, respectively.
Zenith and its subsidiaries are involved in certain litigation. In the
opinion of management and legal counsel, such litigation is either without merit
or the ultimate liability, if any, will not have a material effect on the
consolidated financial condition of Zenith.
CONTINGENCIES SURROUNDING
RECOVERABILITY OF STATE DISABILITY
TRUST FUND RECEIVABLES
Florida has created the Special Disability Trust Fund ("the Fund") which
assesses Workers' Compensation insurers to pay for what are commonly referred to
as "Second Injuries". Historic assessments have been inadequate to completely
fund obligations of the Fund. In late 1997, the Florida statute was amended so
that the Fund will not be liable for and will not reimburse employers or
carriers for Second Injuries occurring on or after January 1, 1998.
Zenith has recorded its receivable from the fund for Second Injuries based on
specific claims and historical experience prior to January 1, 1998. Management
believes that this receivable will be substantially recovered.
At December 31, 1997 and 1996, the receivable from the Fund was $5,094,000
and $8,096,000, respectively. During 1997, $3,053,000 was collected.
CONTINGENCIES SURROUNDING ESTIMATES OF
LIABILITIES FOR UNPAID LOSS AND
LOSS ADJUSTMENT EXPENSES
In 1995, Zenith's new workers' compensation computer system ("system") became
operational. Management observed certain unusual claim reserving trends and
patterns in 1995 and 1996, and to a much lesser degree, during the first three
quarters of 1997. Based on currently available data, these claim reserving
trends and patterns have stabilized. Any subsequent re-interpretation of new
information that becomes available from the system which may change the estimate
of such liabilities in future periods is not considered to have a material
impact on the financial position or results of operations.
NOTE 9
COMMON STOCK
Under employee non-qualified stock option plans adopted by the Board of
Directors and Stockholders in 1978 and in 1996, options are granted to officers
and key employees for the purchase of Zenith's common stock at 100% of the
market price at the date of grant. The options outstanding at December 31, 1997
expire five years after the date of grant or three months after termination of
employment. Options granted vest one-fourth per year after the first year. One
grant for one million shares is for a term of ten years and vests one-fifth per
year after the first year.
Zenith has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123") effective for the year ended December 31, 1996. Accordingly, no
compensation cost has been recognized for the stock option plans. Had
compensation cost for Zenith's stock option plans been determined based on the
fair value at the grant date for awards in 1997, 1996 and 1995 consistent with
the provisions of SFAS No. 123, Zenith's net income and net income per share
would have been reduced to the pro-forma amounts indicated as follows:
CalFarm
The Zenith 51
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands except per share data) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
AS REPORTED PRO FORMA As Reported Pro forma As Reported Pro forma
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 28,100 $ 26,583 $ 37,600 $ 36,647 $ 6,600 $ 6,541
Net income per common share 1.59 1.50 2.14 2.08 0.36 0.36
Net income per common share - assuming dilution 1.57 1.49 2.12 2.06 0.36 0.36
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1996 and 1995 earnings per share data have been restated in accordance with SFAS
No. 128.
The pro-forma effect on net income for 1997, 1996 and 1995 is not
representative of the pro-forma effect on net income in future years because it
does not take into consideration pro-forma compensation expense related to
grants made prior to 1995.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1997 1996 1995
GRANTS Grants Grants
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rates 5.70% 6.50% 6.20%
Dividend yields 4.10% 4.20% 4.20%
Volatility factors 16.94% 27.40% 27.40%
Weighted average expected life
Five-year term options 5 YEARS 4 years 4 years
Ten-year term options -- 10 years --
Weighted average fair value per share $4.07 $6.16 $4.43
- --------------------------------------------------------------------------------------
</TABLE>
Additional information with respect to stock options is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
(Options in thousands) SHARES PRICE
- -------------------------------------------------------------------
<S> <C> <C>
Outstanding at January 1, 1995 1,295 $20.62
Granted 509 21.52
Exercised 276 15.96
Expired or cancelled 394 21.24
- -------------------------------------------------------------------
Outstanding at December 31, 1995 1,134 21.94
Granted 1,422 24.51
Exercised 136 18.90
Expired or cancelled 72 22.56
- -------------------------------------------------------------------
Outstanding at December 31, 1996 2,348 23.65
Granted 590 26.95
Exercised 234 21.12
Expired or cancelled 74 25.31
- -------------------------------------------------------------------
Outstanding at December 31, 1997 2,630 $24.58
- -------------------------------------------------------------------
</TABLE>
Options exercisable at December 31, 1997, 1996, and 1995 were 737,000,
474,000 and 335,000, respectively.
Certain information on outstanding options is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
(Options in
thousands) WEIGHTED
RANGE OF AVERAGE OUTSTANDING OPTIONS
EXERCISE NUMBER REMAINING LIFE WEIGHTED AVERAGE
PRICE OUTSTANDING IN YEARS EXERCISE PRICE
- ------------------------------------------------------------------
<S> <C> <C> <C>
$23.63 1,000 8.2 $ 23.63
$20.94 -
$28.19 1,630 3.4 25.16
- ------------------------------------------------------------------
</TABLE>
Certain information on exercisable options is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------
(Options in EXERCISABLE
thousands) OPTIONS WEIGHTED
RANGE OF NUMBER AVERAGE EXERCISE
EXERCISE PRICES EXERCISABLE PRICE
- ------------------------------------------------
<S> <C> <C>
$23.63 200 $ 23.63
$20.94 - $28.19 537 23.96
- ------------------------------------------------
</TABLE>
At December 31, 1997, Zenith had authority from its Board of Directors to
repurchase 1,085,000 common shares at prevailing market prices.
NOTE 10
DIVIDEND RESTRICTIONS
State insurance regulations limit the maximum dividends that may be paid to
Zenith by its insurance company subsidiaries during any 12-month period without
prior regulatory approval. Stockholder's equity of Zenith's insurance
subsidiaries, in accordance with generally accepted accounting principles,
amounted to $346,097,000 as of December 31, 1997, of which $27,841,000 can be
paid in 1998 to Zenith in dividends without prior approval, leaving a restricted
balance of $318,256,000.
NOTE 11
STATUTORY FINANCIAL DATA
Capital stock and surplus and net income of Zenith's insurance subsidiaries
on a statutory
CalFarm
52 The Zenith
<PAGE>
basis as reported to regulatory authorities were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------
(Dollars in
thousands)
YEAR ENDED
DECEMBER 31, 1997 1996 1995
- ------------------------------------------------------
<S> <C> <C> <C>
Capital stock and
surplus $ 279,993 $ 265,341 $ 223,019
Net income 31,820 33,384 17,157
- ------------------------------------------------------
</TABLE>
The insurance business is subject to state-by-state regulation and
legislation focused on solvency, pricing, market conduct, claims practices,
underwriting, accounting, investment criteria and other areas. Such regulation
and legislation is constantly changing and compliance is essential and is an
inherent risk of the business.
NOTE 12
UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
(Dollars in
thousands
except per share
data)
YEAR ENDED MARCH JUNE SEPTEMBER DECEMBER
DECEMBER 31, 1997 31 30 30 31
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premium earned $ 122,363 $ 125,831 $ 120,475 $ 120,052
Net investment
income 12,448 13,406 13,272 13,206
Realized gains
on investments 1,876 1,996 1,861 8,275
Real estate sales 9,963 11,174 11,480 12,802
Net income 7,100 7,900 8,000 5,100
Net income per
common share .40 .45 .45 .29
Net income per
common share --
assuming dilution .40 .44 .45 .28
- -----------------------------------------------------------------------
</TABLE>
The first three quarters of 1997 have been restated in accordance with SFAS No.
128.
The fourth quarter of 1997 net income reflects an approximate $12,000,000 loss
and expense reserve strengthening for prior accident years.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
(Dollars in thousands
except per share data)
YEAR ENDED MARCH JUNE SEPTEMBER DECEMBER
DECEMBER 31, 1996 31 30 30 31
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premium earned $ 112,237 $ 108,255 $ 112,492 $ 119,872
Net investment
income 12,054 12,836 12,574 13,690
Realized gains on
investments 4,272 3,778 178 2,579
Real estate sales 5,985 8,810 11,822 14,937
Net income 12,400 10,700 9,100 5,400
Net income per common
share .70 .61 .52 .31
Net income per common
share -- assuming
dilution .70 .60 .51 .30
- ---------------------------------------------------------------------------------
</TABLE>
The 1996 quarterly earnings per share amounts have been restated to comply with
SFAS No. 128.
NOTE 13
LOSS AND LOSS ADJUSTMENT
EXPENSE RESERVES
The following table represents a reconciliation of changes in liabilities for
unpaid property-casualty loss and loss adjustment expenses for the three years
ended December 31, 1997.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995
- ---------------------------------------------------------------
<S> <C> <C> <C>
Beginning of year, net of
reinsurance recoverable $526,427 $463,123 $462,710
Incurred claims:
Current year 348,514 318,509 327,724
Prior years (349) (3,809) (2,135)
- ---------------------------------------------------------------
Total incurred claims 348,165 314,700 325,589
- ---------------------------------------------------------------
Payments:
Current year (138,393) (131,061) (149,688)
Prior years (209,346) (185,764) (175,488)
- ---------------------------------------------------------------
Total payments (347,739) (316,825) (325,176)
- ---------------------------------------------------------------
End of year, net of
reinsurance 526,853 460,998 463,123
Reinsurance recoverable 87,665 56,390 54,429
- ---------------------------------------------------------------
End of year, before AGC-SIF 517,388 517,552
- ---------------------------------------------------------------
AGC-SIF December 31, 1996
balances acquired:
Reserves, net 65,429
Recoverable from reinsurers
and state trust funds 37,261
Change in net reserves and
recoverables from
reinsurers and state trust
funds (1,252)
- ---------------------------------------------------------------
End of year, after AGC-SIF $613,266 $620,078 $517,552
- ---------------------------------------------------------------
</TABLE>
Statutory reserves differ from GAAP in 1997 and 1996 by the amount of the
deposit receivable from Reliance, which is treated as reinsurance recoverable
for statutory purposes.
Subsequent development of AGC-SIF net reserves acquired at December 31, 1996
is included in the Member distribution formula under the terms of the
acquisition. (See Note 14).
NOTE 14
ACQUISITIONS
ACQUISITION OF AGC-SIF
On December 31, 1996, Zenith completed the acquisition of AGC-SIF. Under the
terms of the acquisition, Zenith acquired by merger all of AGC-SIF's assets and
assumed its liabilities, including the liabilities of the insured Members of
AGC-SIF for future assessments. Over a three-year period, Zenith will distribute
to AGC-SIF's
CalFarm
The Zenith 53
<PAGE>
Members a minimum amount of $1.14 million to a maximum amount equal to AGC-SIF's
Adjusted GAAP Net Worth, as defined in the acquisition agreement, based on a
formula and audited by an independent certified public accounting firm.
The acquisition was accounted for as a purchase and the assets and
liabilities of AGC-SIF at December 31, 1996 were merged into Zenith's
wholly-owned subsidiary, Zenith Insurance Company, and are included in Zenith's
December 31, 1996 consolidated balance sheet.
PENDING ACQUISITION OF RISCORP
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. In addition, Zenith Insurance will assume or
repay $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 fund
the closing of this transaction 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 prior to the closing. 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. The assets in
such RISCORP trust account are not included in Zenith's consolidated balance
sheet. 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 December 31, 1997 would not be
material.
The closing of the purchase of RISCORP's assets and liabilities is subject to
certain conditions, including compliance with contract provisions, the review
and approval by appropriate regulatory agencies and approval by RISCORP's
shareholders. The agreement has been approved by the Boards of Directors of
Zenith, Zenith Insurance, and RISCORP.
The purchase price will be determined based on an audited statement of
transferred assets and liabilities of the business as of the closing date, after
agreement by Zenith or, if necessary, determination by neutral auditors and
actuaries of any disputed items in the statement. As a result, management is
currently unable to determine the purchase price.
Zenith will not be purchasing the stock of RISCORP or its affiliates or
assuming the liabilities that are unrelated to the insurance business, including
liabilities related to any present or future litigation against those companies.
CalFarm
54 The Zenith
<PAGE>
Set forth below is certain summary consolidated financial information with
respect to RISCORP and its subsidiaries excerpted from the information contained
in RISCORP's Annual Report on Form 10-K for the year ended December 31, 1996 and
RISCORP's Quarterly Report on Form 10-Q for the quarter ended September 30,
1997. Neither Zenith nor its independent accountants take any responsibility for
the accuracy or completeness of this information.
Selected Consolidated Financial Information of RISCORP
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
Nine Months Ended Year Ended
(Dollars in September 30, December 31,
thousands) 1997 1996 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating results:
Premiums earned $ 133,882 $ 131,855 $ 173,557 $ 135,887
Fee and other
income 17,969 23,079 31,838 23,413
Net investment
income 12,557 7,592 12,194 6,708
Total revenues 164,408 162,526 217,589 166,008
Net income 3,810 9,301 2,398 13,683
Balance sheet:
Invested assets 209,134 241,143 255,656 69,365
Receivable from
reinsurers,
state trust
funds and other 349,105 320,378 363,957 257,013
Total assets 769,276 741,135 828,442 443,242
Unpaid loss and
loss adjustment
expenses 460,428 406,354 458,239 261,700
Total liabilities 607,328 579,801 671,134 427,085
Stockholders'
equity 161,948 161,334 157,308 16,157
- ----------------------------------------------------------------
</TABLE>
Audits of RISCORP's financial statements were performed by an independent
accounting firm, other than Zenith's independent accounting firm, whose 1996
report included an explanatory paragraph describing several adverse developments
and uncertainties.
NOTE 15
DISCONTINUED OPERATIONS
During 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 taxes. The life and annuity operations of
CalFarm Life are presented as discontinued operations in the financial
statements. Group health insurance operations are included in the
property-casualty business segment.
Revenues for the discontinued operation were $88,610,000 for 1995.
NOTE 16
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
(In thousands, except per
share data) 1997 1996 1995
- ---------------------------------------------------------------
<S> <C> <C> <C>
(A)Income from continuing
operations $ 28,100 $ 37,600 $ 19,722
- ---------------------------------------------------------------
(B)Weighted average
outstanding shares during
the period 17,716 17,594 18,273
Additional common shares
issuable under employee stock
option plans using the
treasury stock method 170 158 61
- ---------------------------------------------------------------
(C)Weighted average number of
common shares outstanding
assuming exercise of stock
options 17,886 17,752 18,334
- ---------------------------------------------------------------
(A)/(B) Income from continuing
operations per share $ 1.59 $ 2.14 $ 1.08
(A)/(C) Income from continuing
operations per share
assuming dilution $ 1.57 $ 2.12 $ 1.08
- ---------------------------------------------------------------
</TABLE>
Options to purchase 407,000 shares of common stock at an average price of $28
per share were outstanding as of December 31, 1997 but were not included in the
computation of diluted earnings per share because the options' exercise prices
were greater than the average market price of the common shares, and, therefore,
the effect would be antidilutive.
NOTE 17
SEGMENT INFORMATION
Zenith's operations are conducted through two business segments. These
segments and their respective operations are as follows:
PARENT
Zenith is a holding company owning directly or indirectly all of the capital
stock of certain California insurance and insurance-related companies. In 1993,
Zenith commenced a real estate operation through a newly formed subsidiary,
Perma-Bilt.
PROPERTY-CASUALTY OPERATIONS
Zenith's property and casualty insurance operations offer multiple product
line direct insurance and reinsurance. Investments and related income of the
property and casualty insurance companies are available for payment of claims
and benefits and have not been identified with individual product lines.
CalFarm
The Zenith 55
<PAGE>
The following table is a summary of results by major segments:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands except per share data)
YEAR ENDED DECEMBER 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PROPERTY-CASUALTY
Net written premiums $ 487,113 $ 458,061 $ 439,882
Net earned premiums 488,721 452,856 437,513
Investment income 51,136 48,457 45,931
Underwriting income (loss) (16,459) 1,093 (13,600)
Income from continuing operations after taxes and before
realized gains(1) 24,929 32,629 21,608
Income from continuing operations after taxes 33,296 39,654 23,934
Identifiable assets 1,137,385 1,137,520 1,005,133
- -----------------------------------------------------------------------------------------------------
PARENT
Real estate sales 45,419 41,554 31,736
Investment income 1,196 2,697 219
(Loss) from continuing operations after taxes and before
realized gains(1) (5,260) (2,054) (4,240)
(Loss) from continuing operations after taxes (5,196) (2,054) (4,212)
Identifiable assets 117,877 108,350 115,429
- -----------------------------------------------------------------------------------------------------
CONSOLIDATED TOTAL
Net earned premiums 488,721 452,856 437,513
Real estate sales 45,419 41,554 31,736
Investment income 52,332 51,154 46,150
Underwriting income (loss) (16,459) 1,093 (13,600)
Income from continuing operations after taxes and before
realized gains(1) 19,669 30,575 17,368
Income from continuing operations 28,100 37,600 19,722
Loss from discontinued life and annuity operations, net
of taxes (13,122)
Net income(2) 28,100 37,600 6,600
Per share 1.59 2.14 .36
Per share-assuming dilution 1.57 2.12 .36
Total assets(3) $ 1,252,156 $ 1,242,724 $ 1,115,433
- -----------------------------------------------------------------------------------------------------
(1) Realized gains on investments after taxes were as
follows:
1997 1996 1995
---------------------------------------
Property-Casualty $ 8,367 $ 7,025 $ 2,326
Parent 64 28
---------------------------------------
Consolidated Total $ 8,431 $ 7,025 $ 2,354
(2) 1996 and 1995 amounts have been restated in accordance with SFAS No. 128.
(3) Reflects elimination entry of $3,106,000, $3,146,000, and $5,129,000 in 1997, 1996 and 1995,
respectively.
</TABLE>
NOTE 18
UNAUDITED COMMON STOCK MARKET PRICES
The following table shows the high and low common stock prices during each
quarter for the past two years.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1997 1996
------------------ ------------------
HIGH LOW High Low
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31 27 7/8 25 7/8 24 7/8 21 1/8
June 30 27 1/2 24 5/8 28 7/8 23 7/8
September 30 28 5/8 26 5/16 28 1/2 26 1/4
December 31 28 3/4 25 7/16 28 25 1/4
- -----------------------------------------------------------------------------------
</TABLE>
NOTE 19
SUBSEQUENT EVENT
As previously announced, on January 6, 1998, Zenith repurchased 930,000
shares of its common stock on the open market at $25 per share, reducing the
outstanding shares to 16,889,000.
CalFarm
56 The Zenith
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
OF ZENITH NATIONAL INSURANCE CORP.
WE HAVE AUDITED THE ACCOMPANYING CONSOLIDATED BALANCE SHEET OF ZENITH NATIONAL
INSURANCE CORP. AND SUBSIDIARIES AS OF DECEMBER 31, 1997 AND 1996, AND THE
RELATED CONSOLIDATED STATEMENTS OF OPERATIONS, CASH FLOWS, AND STOCKHOLDERS'
EQUITY FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997. THESE
FINANCIAL STATEMENTS ARE THE RESPONSIBILITY OF THE COMPANY'S MANAGEMENT. OUR
RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE FINANCIAL STATEMENTS BASED ON
OUR AUDITS.
WE CONDUCTED OUR AUDITS IN ACCORDANCE WITH GENERALLY ACCEPTED AUDITING
STANDARDS. THOSE STANDARDS REQUIRE THAT WE PLAN AND PERFORM THE AUDIT TO OBTAIN
REASONABLE ASSURANCE ABOUT WHETHER THE FINANCIAL STATEMENTS ARE FREE OF MATERIAL
MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A TEST BASIS, EVIDENCE SUPPORTING
THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL STATEMENTS. AN AUDIT ALSO INCLUDES
ASSESSING THE ACCOUNTING PRINCIPLES USED AND SIGNIFICANT ESTIMATES MADE BY
MANAGEMENT, AS WELL AS EVALUATING THE OVERALL FINANCIAL STATEMENT PRESENTATION.
WE BELIEVE THAT OUR AUDITS PROVIDE A REASONABLE BASIS FOR OUR OPINION.
IN OUR OPINION, THE FINANCIAL STATEMENTS REFERRED TO ABOVE PRESENT FAIRLY, IN
ALL MATERIAL RESPECTS, THE CONSOLIDATED FINANCIAL POSITION OF ZENITH NATIONAL
INSURANCE CORP. AND SUBSIDIARIES AS OF DECEMBER 31, 1997 AND 1996, AND THE
CONSOLIDATED RESULTS OF THEIR OPERATIONS AND THEIR CASH FLOWS FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997, IN CONFORMITY WITH GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES.
COOPERS & LYBRAND L.L.P.
LOS ANGELES, CALIFORNIA, FEBRUARY 4, 1998
CalFarm
The Zenith 57
<PAGE>
CORPORATE DIRECTORY
CalFarm
The Zenith
<PAGE>
CORPORATE DIRECTORY
ZENITH NATIONAL INSURANCE CORP.
DIRECTORS
Also Directors of Zenith
Insurance Company
GEORGE E. BELLO
Executive Vice President
and Controller of Reliance
Group Holdings, Inc.
MAX M. KAMPELMAN
Attorney, Of Counsel,
Fried, Frank, Harris,
Shriver & Jacobson
JACK M. OSTROW
Attorney and Certified
Public Accountant
WILLIAM S. SESSIONS
Attorney
Sessions & Sessions, L.C.,
Security Consultant
HARVEY L. SILBERT
Attorney, Of Counsel,
Loeb & Loeb LLP
ROBERT M. STEINBERG
President and Chief
Operating Officer
of Reliance Group
Holdings, Inc.
SAUL P. STEINBERG
Chairman of the
Board and Chief
Executive Officer
of Reliance
Group Holdings, Inc.
GERALD TSAI, JR.
Management of
Private Investments
STANLEY R. ZAX
Chairman of the
Board and President
OFFICERS
STANLEY R. ZAX
Chairman of the
Board and President
FREDRICKA TAUBITZ
Executive Vice President
& Chief Financial Officer
WESTLEY M. HEYWARD
Senior Vice President
MICHAEL W. JACOBSON
Senior Vice President
JAMES P. ROSS
Senior Vice President
JOHN J. TICKNER
Senior Vice President
and Secretary
HYMAN J. LEE, JR.
Vice President
TRANSFER AGENT-
COMMON STOCK
ChaseMellon Shareholder Services, L.L.C.
Los Angeles, CA
Internet Address:
www.chasemellon.com
TRANSFER AGENT-
SENIOR NOTES
Norwest Bank
Minnesota, N.A.
Minneapolis, MN
CORPORATE
HEADQUARTERS
21255 Califa Street
Woodland Hills, CA 91367-5021
Internet Address:
www.zenithnational.com
NYSE TRADING SYMBOL
Common stock -- ZNT
INDEPENDENT
ACCOUNTANT
Coopers & Lybrand L.L.P.
Los Angeles, CA
THE ANNUAL REPORT
on Form 10-K, for
the fiscal year ended
December 31, 1997
may be obtained
free of charge upon
written request to:
Chief Financial Officer
Zenith National
Insurance Corp.
21255 Califa Street
Woodland Hills, CA 91367-5021
CalFarm
The Zenith 59
<PAGE>
CORPORATE DIRECTORY
ZENITH INSURANCE COMPANY
OFFICERS
STANLEY R. ZAX
Chairman of the
Board and President
FREDRICKA TAUBITZ
Executive Vice President &
Chief Financial Officer
JACK D. MILLER
Executive Vice President
JAMES P. ROSS
Senior Vice President,
President of Workers'
Compensation Division
STEPHEN J. ALBERS
Senior Vice President
JOHN E. BRODERICK
Senior Vice President
JOHN V. D'ALUSIO
Senior Vice President
DAN M. HAIR
Senior Vice President
JOHN C. HASBROUCK
Senior Vice President
WESTLEY M. HEYWARD
Senior Vice President
PHILIP R. HUNT
Senior Vice President
COREY A. INGBER
Senior Vice President
MICHAEL W. JACOBSON
Senior Vice President
EDWARD G. KRISAK
Senior Vice President
ROBERT E. MEYER
Senior Vice President
and Actuary
TERRY D. MOORE
Senior Vice President
WILLIAM J. SAAKE
Senior Vice President
DOUGLAS L. SYMES
Senior Vice President
JOHN J. TICKNER
Senior Vice President,
General Regulatory
Counsel and Secretary
KEITH E. TROTMAN
Senior Vice President
CHRIS L. USELTON
Senior Vice President
GLEN R. ZEPNICK
Senior Vice President
BRYAN A. ANDERSON
Vice President
NORMAN H. BAKER
Vice President
JEFFREY J. BEAUDOIN
Vice President
JOHN P. BENSON
Vice President
SUZANNE M. CHAPAN
Vice President
RONALD W. CRABTREE
Vice President
CHARLES R. CRONIN, JR.
Vice President
GERALD D. CURTIN
Vice President
F. STEPHEN FETCHET
Vice President
ROBERT L. HERNANDEZ
Vice President
CAROLYN HINSON
Vice President
DAVID G. HOPPEN
Vice President
FRED A. HUNT
Vice President
MARK M. JANSEN
Vice President
HYMAN J. LEE, JR.
Vice President
ALLAN T. LENO
Vice President
LINDA K. MANGONE
Vice President
COLIN S. MITCHELL
Vice President
DORIS M. OBERHARDT
Vice President
DAVID A. O'CONNOR
Vice President
WILLIAM J. OWEN
Vice President
MICHAEL J. PALADINO
Vice President
ANGELA PARMALEE
Vice President
STEPHEN D. PETRULA
Vice President
S. ROBIN REEVES
Vice President
DIANE E. SCHAEFER
Vice President
ALAN I. STEINHARDT
Vice President
JOHN A. SWIFT
Vice President
TERRY B. THOMPSON
Vice President
JESSICA ANN VASQUEZ
Vice President
DAVID A. WEISMAN
Vice President
PAUL M. WILLIAMS
Vice President
NORMAN C. WINTERS
Vice President
LAURA F. YAMANAKA
Vice President
CalFarm
60 The Zenith
<PAGE>
CORPORATE DIRECTORY
THEZENITH MARKETING, UNDERWRITING AND CLAIMS OFFICES
LOS ANGELES
Corporate Headquarters
21255 Califa Street
Woodland Hills, CA 91367
818/713-1000
Internet Address:
www.thezenith.com
PLEASANTON, CA
(San Francisco Bay Area)
4309 Hacienda Drive
Suite 200
Pleasanton, CA 94588
510/460-0600
FRESNO, CA
575 E. Locust Avenue
Suite 101
Fresno, CA 93720
209/432-6660
SAN DIEGO, CA
1660 N. Hotel Circle Drive
Suite 400
San Diego, CA 92108
619/299-6252
AUSTIN, TX
1101 Capital of Texas
Hwy, South, Bldg. J
Austin, TX 78746
512/306-1700
DALLAS, TX
5430 LBJ Freeway
Suite 270
Dallas, TX 75240
972/701-5700
HARRISBURG, PA
4400 Deer Path Way
Suite 200
Harrisburg, PA 17110
717/221-7000
ORLANDO, FL
3504 Lake Lynda Drive
Orlando, FL 32817
407/380-9144
SALT LAKE CITY, UT
4 Triad Center
Suite 150
Salt Lake City, UT 84180
801/741-4900
SPRINGFIELD, IL
2105 West White Oaks Drive
Springfield, IL 62704
217/726-2900
CONWAY, AR
824 Front Street
Conway, AR 72032
501/450-6884
CALFARM INSURANCE COMPANY
OFFICERS
WESTLEY M. HEYWARD
President
FRANKLIN V. ADAMS
Executive Vice President
PHILIP M. JOFFE
Executive Vice President
and Chief
Operating Officer
JOHN P. O'BRIEN
Executive Vice President
KARI L. VAN GUNDY
Senior Vice President, Finance
and Treasurer
MICHAEL W. JACOBSON
Senior Vice President
SUSAN J. MCGINNESS
Senior Vice President
ROBERT E. MEYER
Senior Vice President
STANLEY K. MIYAO
Senior Vice President
and Actuary
JAMES P. ROSS
Senior Vice President
FREDRICKA TAUBITZ
Senior Vice President
JOHN J. TICKNER
Senior Vice President,
General Regulatory
Counsel and Secretary
KEITH E. TROTMAN
Senior Vice President
JAMES R. ZUEHL
Senior Vice President
LARRY W. BROGAN
Vice President
THOMAS F. CARROLL
Vice President
SUZANNE M. CHAPAN
Vice President
PHILIP S. COLE
Vice President
DIANE F. HARVELL
Vice President
WALTER P. KRAUSE
Vice President
RICHARD J. KRUGMAN
Vice President
HYMAN J. LEE, JR.
Vice President
DONALD C. MARSHALL
Vice President
SARA E. MARTIN
Vice President
CRAIG G. MCINTOSH
Vice President
PETER M. OCCHIALINI
Vice President
STEPHEN D. PETRULA
Vice President
CRAIG C. THOMSON
Vice President
PAUL M. WILLIAMS
Vice President
HEADQUARTERS
CalFarm Insurance Company
1601 Exposition Boulevard
Sacramento, CA 95815
916/924-4000
Internet Address:
www.calfarm.com
CLAIMS/LEGAL OFFICES
Fresno
Sacramento
Santa Ana
CalFarm
The Zenith 61
<PAGE>
CORPORATE DIRECTORY
CALFARM INSURANCE AGENCY
OFFICERS
WESTLEY M. HEYWARD
Chairman of the Board
and President
KELLY S. MILLER
Executive Vice President
FREDRICKA TAUBITZ
Senior Vice President
JOHN J. TICKNER
Senior Vice President,
General Regulatory
Counsel and Secretary
PHILIP M. JOFFE
Vice President
WILLIAM S. TAYLOR
Vice President
JOHN P. VALENTINE
Vice President
KARI L. VAN GUNDY
Vice President, Treasurer
and Assistant Secretary
GARY L. WOOLSEY
Vice President
PERMA-BILT, A NEVADA CORPORATION
OFFICERS
DANIEL SCHWARTZ
President
JOHN M. LOBROVICH
Executive Vice President
FRED W. LESSMAN
Vice President
RUTH E. OCHOA
Vice President
HEADQUARTERS
7150 Pollock Drive
Suite 104
Las Vegas, NV 89119
702/896-9100
CalFarm
62 The Zenith
<PAGE>
ZENITH NATIONAL INSURANCE CORP.
AND
SUBSIDIARIES
(AS OF DECEMBER 31, 1997)
Zenith National Insurance Corp.
CalFarm Insurance Agency
Cal-Ag Insurance Services, Inc.
Perma Bilt, a Nevada Corporation
Zenith Insurance Company
CalFarm Insurance Company
CalRehab Services, Inc.
Zenith Star Insurance Company
ZNAT Insurance Company
Zenith Risk Management
Zenith Insurance Company of Florida
Zenith Insurance Management Services, Inc.
- ---------------
Each subsidiary is one hundred per cent owned by the subsidiary shown in the
tier above it.
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