<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-9627
ZENITH NATIONAL INSURANCE CORP.
[Exact name of registrant as specified in its charter]
Delaware 95-2702776
[State or other jurisdiction of [I.R.S. Employer
incorporation or organization] Identification No.]
21255 Califa Street, Woodland Hills, California 91367-5021
[Address of principal executive offices] [Zip Code]
(818) 713-1000
[Registrant's telephone number, including area code]
Not Applicable
[Former name, former address and former fiscal year,
if changed since last report.]
Indicate by check mark whether the registrant [1] has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and [2] has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Number of shares of Common
Stock, $1 par value per share, outstanding as of close of business on July 31,
1998: 17,055,364 excluding 7,791,770 shares of treasury stock.
1
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
(In thousands, except per share data) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments
Fixed maturities:
At amortized cost (fair value $42,504 in 1998 and $48,266 in 1997) $ 41,138 $ 46,948
At fair value (cost $727,349 in 1998 and $534,771 in 1997) 735,781 542,479
Floating rate preferred stocks, at fair value (cost $16,614 in 1998
and $14,614 in 1997) 17,708 15,670
Convertible and non-redeemable preferred stocks, at fair value
(cost $7,679 in 1998 and $6,672 in 1997) 7,756 6,602
Common stocks, at fair value (cost $23,715 in 1998 and $17,790 in 1997) 29,729 23,439
Short-term investments (at cost, which approximates fair value) 154,492 209,827
Other investments 33,591 35,008
---------- ----------
TOTAL INVESTMENTS 1,020,195 879,973
Cash (restricted cash $4,006 in 1998 and $5,524 in 1997) 9,738 12,504
Accrued investment income 15,461 9,523
Premiums receivable 133,247 72,813
Receivable from reinsurers, state trust funds, and
prepaid reinsurance premiums 503,120 106,067
Deferred policy acquisition costs 22,031 20,840
Properties and equipment, less accumulated depreciation 77,326 54,531
Federal income taxes 31,996 19,940
Intangible assets 81,526 4,992
Other assets 78,546 70,973
---------- ----------
TOTAL ASSETS $1,973,186 $1,252,156
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Unpaid loss and loss adjustment expenses $1,234,625 $ 613,266
Unearned premiums 170,953 128,469
Policyholders' dividends accrued 5,160 5,360
Other policyholder funds 2,538 6,407
Reserves on loss portfolio transfers 10,311 11,054
Payable to banks and other notes payable 16,054 13,742
Senior notes payable, less unamortized issue costs of
$465 in 1998 and $526 in 1997 74,535 74,474
Other liabilities 109,416 37,518
---------- ----------
TOTAL LIABILITIES 1,623,592 890,290
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par - shares authorized 1,000; issued and outstanding, none
in 1998 and 1997
Common stock, $1 par - shares authorized 50,000; issued 24,847,
outstanding 17,055 in 1998; issued 24,681, outstanding 17,819 in 1997 24,847 24,681
Additional paid-in capital 267,985 264,098
Retained earnings 192,442 186,268
Net unrealized appreciation on investments, net of deferred
tax expense of $5,456 in 1998 and $5,025 in 1997 10,134 9,332
---------- ----------
495,408 484,379
Less treasury stock at cost (7,792 shares in 1998 and 6,862 shares in 1997) (145,814) (122,513)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 349,594 361,866
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,973,186 $1,252,156
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except per share data) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONSOLIDATED REVENUES:
Premiums earned $137,554 $125,831 $256,338 $248,194
Net investment income 14,571 13,406 26,914 25,854
Realized gains on investments 3,754 1,996 6,174 3,872
Real estate sales 8,684 11,174 20,432 21,137
Service fee income 1,392 1,392
-------- -------- -------- --------
Total revenues 165,955 152,407 311,250 299,057
EXPENSES:
Loss and loss adjustment expenses incurred 94,581 89,180 178,509 176,947
Policy acquisition costs 26,710 23,248 48,989 46,362
Other underwriting and operating expenses 22,997 16,443 38,843 31,619
Policyholders' dividends and participation (120) 2 (63) (966)
Real estate construction and operating costs 8,544 10,495 20,038 20,199
Amortization of provisional goodwill 765 765
Interest expense 515 816 1,508 1,952
-------- -------- -------- --------
Total expenses 153,992 140,184 288,589 276,113
Income before federal income tax expense 11,963 12,223 22,661 22,944
Federal income tax expense 4,363 4,323 7,961 7,944
-------- -------- -------- --------
NET INCOME $ 7,600 $ 7,900 $ 14,700 $ 15,000
-------- -------- -------- --------
-------- -------- -------- --------
EARNINGS PER SHARE:
Net income per common share $ 0.45 $ 0.45 $ 0.86 $ 0.85
-------- -------- -------- --------
-------- -------- -------- --------
Net income per common share - assuming dilution $ 0.44 $ 0.44 $ 0.86 $ 0.84
-------- -------- -------- --------
-------- -------- -------- --------
Additional Required Disclosure:
Net income $ 7,600 $ 7,900 $ 14,700 $ 15,000
Change in unrealized appreciation/depreciation on investments 403 7,072 802 90
-------- -------- -------- --------
Comprehensive Income $ 8,003 $ 14,972 $ 15,502 $ 15,090
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Six Months Ended
June 30,
(In Thousands) 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Premiums collected $ 266,717 $ 257,706
Investment income received 23,654 25,281
Proceeds from sales of real estate 20,432 21,137
Loss and loss adjustment expenses paid (203,893) (173,034)
Underwriting and other operating expenses paid (75,496) (79,224)
Real estate construction costs paid (29,917) (18,894)
Reinsurance premiums paid (15,824) (14,810)
Dividends paid to policyholders 413 (308)
Interest paid (3,453) (3,883)
Income taxes refunded 644 104
Net proceeds from sales of trading portfolio investments 1,416
------------ -----------
Net cash provided by (used in) operating activities (16,723) 15,491
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments:
Investment securities available-for-sale (165,269) (53,997)
Other investments (1,403) (919)
Proceeds from maturities and redemptions of investments:
Fixed maturities held-to-maturity 5,688 2,620
Investment securities available-for-sale 42,203 14,338
Other investments 361
Proceeds from sales of investments:
Investment securities available-for-sale 131,178 45,265
Other investments 5,410
Capital and other expenditures (2,444) (10,136)
Net change in short-term investments 56,397 (14,744)
Other (5,880) 3,884
------------ -----------
Net cash provided by (used in) investing activities 60,470 (7,918)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of note assumed from RISCORP (15,000)
Cash payment to RISCORP (35,000)
Cash acquired in RISCORP Acquisition 29,553
Cash advanced from bank construction loans 20,222 17,749
Cash repaid on bank construction loans (18,280) (19,193)
Cash dividends paid to common stockholders (8,484) (8,826)
Proceeds from exercise of stock options 3,777 1,825
Purchase of treasury shares (23,301) (285)
------------ -----------
Net cash used in financing activities (46,513) (8,730)
------------ -----------
Net decrease in cash (2,766) (1,157)
Cash at beginning of period 12,504 12,125
------------ -----------
Cash at end of period $ 9,738 $ 10,968
------------ -----------
------------ -----------
</TABLE>
(continued)
4
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Six Months Ended
June 30,
(In Thousands) 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH FLOWS
FROM OPERATING ACTIVITIES:
Net income $ 14,700 $ 15,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,203 2,843
Realized gains on investments (6,174) (3,870)
Net proceeds from trading portfolio 1,416
Decrease (increase) in:
Accrued investment income (2,797) (379)
Premiums receivable (2,276) (8,844)
Receivable from reinsurers, state trust funds, and
prepaid reinsurance premiums 8,741 (1,749)
Federal income taxes 8,605 8,057
Deferred policy acquisition costs (1,191) (1,026)
Increase (decrease) in:
Unpaid loss and loss adjustment expenses (34,850) 7,353
Unearned premiums (693) 7,808
Policyholders' dividends accrued (200) (2,720)
Other policyholder funds (3,869) (2,821)
Other (1,922) (5,577)
------------ -----------
Net cash provided by (used in) operating activities $ (16,723) $ 15,491
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of this statement.
See Note 3 for non-cash financing activities related to the
RISCORP Acquisition.
5
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- -------------------------------------------------------------------------------
Note 1. Basis of Presentation
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
position and results of operations of Zenith National Insurance Corp. and
subsidiaries (collectively, "Zenith") for the periods presented have been
included. The results of operations for an interim period are not necessarily
indicative of the results for an entire year.
The initial recording of the RISCORP Acquisition is based on a purchase price
subject to a dispute resolution process. This dispute resolution process and
the valuation of the acquired assets and liabilities are continuing,
and the allocation of the purchase price and the provisional goodwill may
change materially.
Note 2. Computation of Earnings Per Share (EPS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except per share data) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(A) Net income $ 7,600 $ 7,900 $14,700 $15,000
- ----------------------------------------------------------------------------------------------------------------------
(B) Weighted average outstanding
shares during the period 17,049 17,683 16,999 17,669
Additional common shares issuable
under employee stock option plans
using the treasury stock method (1) 220 140 176 157
- ----------------------------------------------------------------------------------------------------------------------
(C) Weighted average number of common
shares outstanding assuming
exercise of stock options 17,269 17,823 17,175 17,826
- ----------------------------------------------------------------------------------------------------------------------
(A)/(B) Net income per common share $ 0.45 $ 0.45 $ 0.86 $ 0.85
- ----------------------------------------------------------------------------------------------------------------------
(A)/(C) Net income per common share -
assuming dilution $ 0.44 $ 0.44 $ 0.86 $ 0.84
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 1997 per common share data has been restated to conform to the provisions
of SFS No. 128.
6
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- ------------------------------------------------------------------------------
Note 3. Acquisition of RISCORP
On April 1, 1998, pursuant to an Asset Purchase Agreement dated June 17, 1997
(as amended from time to time, the "Asset Purchase Agreement") between Zenith
Insurance Company, a wholly owned subsidiary of Zenith ("Zenith Insurance"),
and RISCORP, Inc. and certain of its subsidiaries (collectively, "RISCORP"),
Zenith Insurance acquired substantially all of the assets and certain
liabilities of RISCORP related to RISCORP's workers' compensation business
(the "RISCORP Acquisition"). At the closing, Zenith Insurance paid $35
million in cash, and assumed and repaid $15 million of indebtedness of
RISCORP, Inc. The final purchase price, which will take into account the $35
million, is not yet known, is subject to a three-step determination process,
and will be the difference between the GAAP book value of assets purchased
and the GAAP book value of the liabilities assumed by Zenith Insurance as of
April 1, 1998.
As the first step of the three-step process to determine the final purchase
price, on June 9, 1998, RISCORP provided Zenith Insurance with a "Proposed
Business Balance Sheet" indicating that RISCORP's determination of the final
purchase price is approximately $141 million. As the second step of this
process, on July 9, 1998, Zenith Insurance provided RISCORP with proposed
adjustments to the Proposed Business Balance Sheet, which adjustments were
prepared in conjunction with Zenith Insurance's external accounting and
actuarial consultants. These proposed adjustments resulted in large part from
differences in the estimation of loss and loss adjustment expense reserves,
primarily related to differences in actuarial methodology and assumptions,
including anticipated loss development. As the final step of the price
determination process, RISCORP and Zenith Insurance have submitted all items
in dispute concerning the Proposed Business Balance Sheet to a nationally
recognized independent accounting firm which will serve as the Neutral
Auditor and Neutral Actuary to resolve all such disputes. On July 24,1998,
Zenith Insurance submitted to such firm a written analysis in support of its
proposed adjustments. Such adjustments would indicate that the value of the
liabilities assumed by Zenith Insurance exceeds the value of the assets
transferred to Zenith Insurance by as much as $71 million, and that the final
purchase price will be no greater than the $35 million already paid by Zenith
Insurance at closing. On July 24, 1998, RISCORP delivered to such firm
RISCORP's initial submission indicating that its determination of the final
purchase price is approximately $141 million. On July 31, 1998, Zenith
Insurance and RISCORP made additional submissions to the Neutral Auditor and
Neutral Actuary in support of the positions taken by the parties in their
submissions on July 24, 1998.
7
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- ------------------------------------------------------------------------------
The Asset Purchase Agreement originally called for the Neutral Auditor and
Neutral Actuary to issue a determination on the disputed items within 30 days
after completion of Zenith Insurance's review of the Proposed Business
Balance Sheet on July 9, 1998, which would have resulted in a final purchase
price no later than August 10, 1998. However, pursuant to agreement among
Zenith Insurance, RISCORP and the Neutral Auditor and Neutral Actuary, the
determination of the Neutral Auditor and Neutral Actuary is not required to
be available until 90 days after the Neutral Auditor and Neutral Actuary
received the submissions made by the parties on July 31, 1998. Also, the
parties have been advised by the Neutral Auditor and Neutral Actuary that the
availability of the determination may be delayed beyond that 90-day period
because the Neutral Auditor and Neutral Actuary had not received access to
certain workpapers as of July 31, 1998. Zenith cannot predict the outcome of
the price determination process, and the determination of the Neutral Auditor
and Neutral Actuary related to the final purchase price may not be known
until the fourth quarter of 1998. Accordingly, Zenith cannot predict the
final purchase price at this time.
The RISCORP Acquisition was accounted for as a purchase by Zenith Insurance
and the assets acquired, liabilities assumed and the results of operations
from RISCORP at April 1, 1998 are included in Zenith's consolidated balance
sheet and statement of operations as of and for the quarter ended June 30,
1998. Because of the considerable uncertainty and possible range of outcomes
surrounding the determination of the final purchase price, the assets
acquired and liabilities assumed from RISCORP reflected in Zenith's
consolidated balance sheet as of June 30, 1998 represent management's
estimate of their fair values at April 1, 1998, based on currently available
information and the assumption that the final purchase price will be $35
million.
Based on such estimates and the assumption that the final purchase price is
$35 million, the excess of the purchase price, including acquisition expense,
over the estimated fair value of net assets is approximately $74 million and
is being amortized over 25 years. Since the $74 million is based on estimates
and assumptions, it may materially change upon determination, and adjustment
of the allocation, of the final purchase price. Estimated amortization
expense of approximately $800,000 was recorded in the second quarter of 1998.
Evaluation and determination of the acquired assets and assumed liabilities
are continuing, including: premiums receivable; reinsurance recoverables;
state disability trust fund recoverable; accrued reinsurance commissions;
deferred acquisition costs; and unpaid loss and loss adjustment expenses.
Accordingly, the allocation of the purchase price may be adjusted.
Zenith Insurance has provided notice to RISCORP of certain breaches of
representations, warranties and covenants made by RISCORP in the Asset Purchase
Agreement. These breaches may result in recovery by Zenith Insurance of a
portion of the purchase price otherwise payable by Zenith Insurance. In
addition, Zenith Insurance believes it is entitled to receive certain assets of
RISCORP, including security deposits held by state insurance departments, that
were not transferred to Zenith Insurance at closing.
Zenith Insurance has entered into a binder pending the definitive contract to
purchase ceded reinsurance protection relating to development of the loss and
loss adjustment expense reserves assumed from RISCORP.
8
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- ------------------------------------------------------------------------------
The following table summarizes the estimated fair value of RISCORP's assets
acquired and liabilities assumed at April 1, 1998 assuming the Neutral
Auditor and Neutral Actuary agree with the adjustments proposed by Zenith and
assuming the final purchase price is $35 million.
<TABLE>
<CAPTION>
(In thousands) April 1, 1998
- ------------------------------------------------------------
<S> <C>
Assets
Invested assets, primarily U.S. Government issues $201,441
Cash 29,553
Premiums receivable 58,158
Receivable from reinsurers and state trust funds 355,794
Intangible assets 65,815
Other assets 54,090
- ------------------------------------------------------------
Total assets 764,851
- ------------------------------------------------------------
Liabilities
Unpaid loss and loss adjustment expense 656,209
Unearned premium reserve 43,177
Other liabilities 30,465
- ------------------------------------------------------------
Total liabilities 729,851
- ------------------------------------------------------------
Assumed purchase price $ 35,000
- ------------------------------------------------------------
</TABLE>
Pro forma total revenues for Zenith for the six months ended June 30, 1998
and 1997 (after giving effect to the RISCORP Acquisition as if it had been
consummated at the beginning of the respective periods) were $343,626,000 and
$406,485,000, respectively. Pro forma net income for such periods was
$3,081,000 an $15,926,000, respectively. Earnings per share for such periods
were $0.18 (diluted) and $0.18 (basic) and $0.89 (diluted) and $0.90
(basic), respectively
Such pro forma data has been derived in part from the historical statement of
operations data from RISCORP, Inc. as reported by RISCORP, Inc. for the three
months ended March 31, 1998 and six months ended June 30, 1997, and Zenith
specifically disclaims any responsibility for the accuracy or completeness of
such historical RISCORP, Inc. data or such pro forma data to the extent it is
based on such historical data. Further, such pro forma data may not
necessarily be indicative of future total revenues or future net income or
what they might have been if the RISCORP Acquisition had been consummated at
the beginning of each of the respective periods.
Note 4. Comprehensive Income
As of January 1, 1998, Zenith adopted SFAS No. 130 "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting
and presenting comprehensive income and its components in a full set of
financial statements. Comprehensive income includes all changes in
stockholders' equity (except those arising from transactions with
stockholders) and includes net income and changes in net unrealized
appreciation (depreciation) on investments. The new standard requires only
additional disclosures in the consolidated financial statements; it does not
affect the financial position or results of operations.
Note 5. Costs of Computer Software Developed or Obtained for Internal Use
Zenith adopted SOP 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1") effective January 1,
1998. SOP 98-1 requires certain internal and external costs associated with
computer software developed or obtained for internal use to be capitalized
following the criteria set forth therein.
9
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- -------------------------------------------------------------------------------
Note 6. Subsequent Event
On July 30, 1998, Zenith National Insurance Capital Trust I, a Delaware
statutory business trust (the "Trust"), all of the voting securities of which
are owned by Zenith, completed a Rule 144A offering of $75 Million of 8.55%
Capital Securities (Liquidation Amount $1,000 per Capital Security), at a price
of $996.24 per Capital Security. Each Capital Security pays semi-annual
cumulative cash distributions at the annual rate of 8.55 % of the $1,000
Liquidation Amount.
The Trust used the proceeds from its offering to purchase $75 Million of
Zenith's 8.55% Subordinated Deferrable Interest Debentures due 2028 (the
"Subordinated Debentures"), which constitute the principal asset of the
Trust. Zenith used $65 million from the net proceeds to make a capital
contribution to Zenith Insurance. The remaining net proceeds will be used for
general corporate purposes.
Interest payments on the Subordinated Debentures are payable semi-annually and
may be deferred by Zenith for up to ten consecutive semi-annual periods. The
Subordinated Debentures are redeemable at any time by Zenith at the then present
value of the remaining scheduled payments of principal and interest. Payments on
the Capital Securities, including distributions and redemptions, follow those of
the Subordinated Debentures.
The distributions on, and the liquidation amount generally of, the Capital
Securities are fully and unconditionally guaranteed by Zenith, to the extent the
Trust has funds legally available therefor. Zenith's guarantee of the Capital
Securities, as well as the Subordinated Debentures are subordinated to all other
indebtedness of Zenith.
10
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Zenith's principal source of consolidated earnings is the income, including
investment income, from operations of its property-casualty insurance business.
The comparative results of operations are set forth in the table below, followed
by a discussion of significant changes.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(In thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income, after taxes $ 9,616 $ 8,877 $17,898 $17,142
Realized gains on investments, after taxes 2,439 1,298 4,013 2,517
- --------------------------------------------------------------------------------------------
Sub-total 12,055 10,175 21,911 19,659
- --------------------------------------------------------------------------------------------
Property-Casualty underwriting, after taxes:
Income (loss) excluding catastrophes (2,975) (1,506) (1,343) (1,929)
Catastrophe losses (3,250) (910)
- --------------------------------------------------------------------------------------------
Property-Casualty underwriting loss (2,975) (1,506) (4,593) (2,839)
- --------------------------------------------------------------------------------------------
Income from real estate operations, after taxes 104 442 256 599
Interest expense, after taxes (335) (531) (980) (1,269)
Parent expenses, after taxes (1,249) (680) (1,894) (1,150)
- --------------------------------------------------------------------------------------------
Net income $ 7,600 $ 7,900 $14,700 $15,000
- --------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
Premiums earned, underwriting results and combined ratios before taxes for the
three and six months ended June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands) 1998 1997 Change 1998 1997 Change
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums earned
Workers' compensation
California $ 30,548 $ 35,292 (13%) $ 60,444 $ 69,237 (13%)
Outside California 43,659 27,586 58% 69,558 54,386 28%
--------------------------- -------------------------------
Total workers' compensation 74,207 62,878 18% 130,002 123,623 5%
Other property-casualty 56,079 54,751 2% 111,155 107,475 3%
Reinsurance 7,268 8,202 (11%) 15,181 17,096 (11%)
--------------------------- -------------------------------
Total $137,554 $125,831 9% $256,338 $248,194 3%
--------------------------- -------------------------------
--------------------------- -------------------------------
Underwriting income (loss) before taxes
Workers' compensation (10,856) (6,777) (16,177) (12,758)
Other property-casualty 2,472 1,664 1,751 2,636
Reinsurance 4,187 2,996 7,893 6,001
--------------------------- -------------------------------
Total $ (4,197) $ (2,117) $ (6,533) $ (4,121)
--------------------------- -------------------------------
--------------------------- -------------------------------
Combined loss and expense ratios
Workers' compensation
Loss and loss adjustment expenses 76.7% 77.7% 76.4% 78.0%
Underwriting expenses 38.1 33.1 36.1 33.1
Dividends to policyholders (0.2 ) (0.8)
--------------------------- -------------------------------
Combined ratio 114.6% 110.8% 112.5% 110.3%
Other property-casualty
Loss and loss adjustment expenses 64.6% 66.8% 67.2% 67.1%
Underwriting expenses 31.0 30.2 31.2 30.4
--------------------------- -------------------------------
Combined ratio 95.6% 97.0% 98.4% 97.5%
Reinsurance
Loss and loss adjustment expenses 19.7% 46.4% 29.5% 49.1%
Underwriting expenses 22.7 17.1 18.5 15.8
--------------------------- -------------------------------
Combined ratio 42.4% 63.5% 48.0% 64.9%
Total Property-Casualty
Loss and loss adjustment expenses 68.8% 70.9% 69.6% 71.3%
Underwriting expenses 34.4 30.8 32.9 30.8
Dividends to policyholders (0.1 ) (0.4)
--------------------------- -------------------------------
Combined ratio 103.1% 101.7% 102.5% 101.7%
- ---------------------------------------------------------------------- -------------------------------
- ---------------------------------------------------------------------- -------------------------------
</TABLE>
12
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
RISCORP Acquisition
On April 1, 1998, pursuant to an Asset Purchase Agreement dated June 17, 1997
(as amended from time to time, the "Asset Purchase Agreement") between Zenith
Insurance Company, a wholly owned subsidiary of Zenith ("Zenith Insurance"),
and RISCORP, Inc. and certain of its subsidiaries (collectively, "RISCORP"),
Zenith Insurance acquired substantially all of the assets and certain
liabilities of RISCORP related to RISCORP's workers' compensation business
(the "RISCORP Acquisition"). At the closing, Zenith Insurance paid $35
million in cash, and assumed and repaid $15 million of indebtedness of
RISCORP, Inc. The final purchase price, which will take into account the $35
million, is not yet known, is subject to a three-step determination process,
and will be the difference between the GAAP book value of assets purchased
and the GAAP book value of the liabilities assumed by Zenith Insurance as of
April 1, 1998.
As the first step of the three-step process to determine the final purchase
price, on June 9, 1998, RISCORP provided Zenith Insurance with a "Proposed
Business Balance Sheet" indicating that RISCORP's determination of the final
purchase price is approximately $141 million. As the second step of this
process, on July 9, 1998, Zenith Insurance provided RISCORP with proposed
adjustments to the Proposed Business Balance Sheet, which adjustments were
prepared in conjunction with Zenith Insurance's external accounting and
actuarial consultants. These proposed adjustments resulted in large part from
differences in the estimation of loss and loss adjustment expense reserves,
primarily related to differences in actuarial methodology and assumptions,
including anticipated loss development. As the final step of the price
determination process, RISCORP and Zenith Insurance have submitted all items
in dispute concerning the Proposed Business Balance Sheet to a nationally
recognized independent accounting firm which will serve as the Neutral
Auditor and Neutral Actuary to resolve all such disputes. On July 24,1998,
Zenith Insurance submitted to such firm a written analysis in support of its
proposed adjustments. Such adjustments would indicate that the value of the
liabilities assumed by Zenith Insurance exceeds the value of the assets
transferred to Zenith Insurance by as much as $71 million, and that the final
purchase price will be no greater than the $35 million already paid by Zenith
Insurance at closing. On July 24, 1998, RISCORP delivered to such firm
RISCORP's initial submission indicating that its determination of the final
purchase price is approximately $141 million. On July 31, 1998, Zenith
Insurance and RISCORP made additional submissions to the Neutral Auditor and
Neutral Actuary in support of the positions taken by the parties in their
submissions on July 24, 1998.
13
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
The Asset Purchase Agreement originally called for the Neutral Auditor and
Neutral Actuary to issue a determination on the disputed items within 30 days
after completion of Zenith Insurance's review of the Proposed Business
Balance Sheet on July 9, 1998, which would have resulted in a final purchase
price no later than August 10, 1998. However, pursuant to agreement among
Zenith Insurance, RISCORP and the Neutral Auditor and Neutral Actuary, the
determination of the Neutral Auditor and Neutral Actuary is not required to
be available until 90 days after the Neutral Auditor and Neutral Actuary
received the submissions made by the parties on July 31, 1998. Also, the
parties have been advised by the Neutral Auditor and Neutral Actuary that the
availability of the determination may be delayed beyond that 90-day period
because the Neutral Auditor amd Neutral Actuary had not received access to
certain workpapers as of July 31, 1998. Zenith cannot predict the outcome of
the price determination process, and the determination of the Neutral Auditor
and Neutral Actuary related to the final purchase price may not be known until
the fourth quarter of 1998. Accordingly, Zenith cannot predict the final
purchase price at this time.
The RISCORP Acquisition was accounted for as a purchase by Zenith Insurance
and the assets acquired, liabilities assumed and the results of operations
from RISCORP at April 1, 1998 are included in Zenith's consolidated balance
sheet and statement of operations as of and for the quarter ended June 30,
1998. Because of the considerable uncertainty and possible range of outcomes
surrounding the determination of the final purchase price, the assets
acquired and liabilities assumed from RISCORP reflected in Zenith's
consolidated balance sheet as of June 30, 1998 represent management's
estimate of their fair values at April 1, 1998, based on currently available
information and the assumption that the final purchase price will be $35
million.
Based on such estimates and the assumption that the final purchase price is
$35 million, the excess of the purchase price, including acquisition expense
over the estimated fair value of net assets is approximately $74 million and
is being amortized over 25 years. Since the $74 million is based on estimates
and assumptions, it may materially change upon determination, and adjustment
of the allocation, of the final purchase price. Estimated amortization
expense of approximately $800,000 was recorded in the second quarter of 1998.
Evaluation and determination of the acquired assets and assumed liabilities
are continuing, including: premiums receivable; reinsurance recoverables;
state disability trust fund recoverable; accrued reinsurance commissions;
deferred acquisition costs; and unpaid loss and loss adjustment expenses.
Accordingly, the allocation of the purchase price may be adjusted.
Zenith Insurance has provided notice to RISCORP of certain breaches of
representations, warranties and covenants made by RISCORP in the Asset Purchase
Agreement. These breaches may result in recovery by Zenith Insurance of a
portion of the purchase price otherwise payable by Zenith Insurance. In
addition, Zenith Insurance believes it is entitled to receive certain assets of
RISCORP, including security deposits held by state insurance departments, that
were not transferred to Zenith Insurance at closing.
Zenith Insurance has entered into a binder pending the definitive contract to
purchase ceded reinsurance protection relating to development of the loss and
loss adjustment expense reserves assumed from RISCORP.
14
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PROPERTY-CASUALTY INSURANCE OPERATIONS
The business acquired from RISCORP contributed $24.8 million of premiums
earned and an underwriting loss of $4.1 million in the three months and six
months ended June 30, 1998. The RISCORP Acquisition reduced earnings per
share in the second quarter of 1998 by $0.09 due to provisional goodwill
amortization and other expenses. Underwriting results in Zenith's workers'
compensation operation will continue to be adversely impacted by excess costs
in the former RISCORP business, pending the integration of such former
RISCORP business into Zenith's existing workers' compensation operations.
California wind and storm damage sustained by Other Property-Casualty
operations in the first quarter of 1998 also contributed to the decline in
the underwriting results for six months ended June 30, 1998 compared to the
corresponding period in 1997.
Competition in the workers' compensation business continues to be intense.
Excluding the effect of the additional premiums from the RISCORP Acquisition,
premiums earned by Zenith on workers' compensation written both inside and
outside of California decreased in the three months and six months ended June
30, 1998 compared to the corresponding periods in 1997. Profitability is
dependent upon the ability to maintain adequate rates, manage claims costs and
keep operating expenses in line with premium volume. Zenith is unable to predict
when its California workers' compensation operation will return to underwriting
profitability that is consistent with Zenith's historical experience.
Reinsurance premiums earned declined in the three months and six months ended
June 30, 1998 compared to the corresponding period in 1997 due primarily to
selected non-renewal of certain reinsurance treaties and softening of
property catastrophe rates. The decrease in loss and loss adjustment expense
ratio for Reinsurance is primarily due to favorable development for certain
treaties.
INVESTMENTS
Invested assets and cash of approximately $230 million were added in the
quarter ended June 30, 1998 as a result of the RISCORP Acquisition. The
investment portfolio acquired in the RISCORP Acquisition consists of
investment grade U.S. treasury notes, corporate debt and municipal debt.
At June 30, 1998, the unrealized appreciation on available for sale fixed
maturities was $8.4 million, before deferred taxes, compared to an unrealized
appreciation of $7.7 million, before deferred taxes, at December 31, 1997.
This change resulted in an increase in stockholders' equity of $447,000,
after deferred taxes, between December 31, 1997 and June 30, 1998.
Stockholders' equity will continue to be affected by volatility in the fixed
maturity securities market.
Investment income for the three and six months ended June 30, 1998 increased
from the corresponding periods in 1997 primarily due to the increase in invested
assets added by the RISCORP Acquisition.
15
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
The yields on invested assets, which vary with the general level of interest
rates, were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Investment yield, before taxes 5.9% 6.1% 5.8% 5.9%
Investment yield, after taxes 3.9% 4.0% 3.7% 3.9%
- ----------------------------------------------------------------------------------------
</TABLE>
Bonds with an investment grade rating represented 97% and 96% of the
consolidated carrying values of fixed maturities at June 30, 1998 and December
31, 1997, respectively. The average maturity of the investment portfolio was 4.5
years at June 30, 1998 and 4.2 years at December 31, 1997.
The change in the carrying value of Zenith's consolidated investment portfolio
during the six months ended June 30, 1998 is as follows:
<TABLE>
<CAPTION>
(In thousands)
- ----------------------------------------------------------------------------------------
<S> <C>
Carrying value at December 31, 1997 $ 879,973
Purchases at cost 166,672
Investments acquired in RISCORP Acquisition 201,441
Maturities and redemptions (47,891)
Proceeds from sale of available-for-sale investments (131,178)
Net realized gain
Available-for-sale 3,026
Other 3,148
-----
Total
Change in unrealized gains 6,174
Decrease in short-term investments 1,233
Net amortization of bonds and preferred stocks (55,335)
and other changes (894)
- ----------------------------------------------------------------------------------------
Carrying value at June 30, 1998 $ 1,020,195
- ----------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
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.
Zenith has three revolving lines of credit amounting to $100 million
available with aggregate availability at June 30, 1998 of $98 million.
The decrease in net cash provided by operating activities is primarily due to
increased loss and loss adjustment expense payments which are not offset by
premiums collected.
During January of 1998, Zenith repurchased 929,980 shares on the open market for
a total purchase price of $23.3 million. The repurchase was funded by
proceeds from the sale and maturities of certain securities.
On July 30, 1998, Zenith National Insurance Capital Trust I, a Delaware
statutory business trust (the "Trust"), all of the voting securities of which
are owned by Zenith, completed a Rule 144A offering of $75 Million of 8.55%
Capital Securities (Liquidation Amount $1,000 per Capital Security), at a price
of $996.24 per Capital Security. Each Capital Security pays semi-annual
cumulative cash distributions at the annual rate of 8.55 % of the $1,000
Liquidation Amount.
The Trust used the proceeds from its offering to purchase $75 Million of
Zenith's 8.55% Subordinated Deferrable Interest Debentures due 2028 (the
"Subordinated Debentures"), which constitute the principal assets of the
Trust. Zenith used $65 million from the net proceeds to make a capital
contribution to Zenith Insurance. The remaining net proceeds will be used for
general corporate purposes.
Interest payments on the Subordinated Debentures are payable semi-annually and
may be deferred by Zenith for up to ten consecutive semi-annual periods. The
Subordinated Debentures are redeemable at any time by Zenith at the then present
value of the remaining scheduled payments of principal and interest. Payments on
the Capital Securities, including distributions and redemptions, follow those of
the Subordinated Debentures.
The distributions on, and the liquidation amount generally of, the Capital
Securities are fully and unconditionally guaranteed by Zenith, to the extent the
Trust has funds legally available therefor. Zenith's guarantee of the Capital
Securities, as well as the Subordinated Debentures are subordinated to all other
indebtedness of Zenith.
On April 1, 1998, in connection with the closing of the RISCORP Acquisition,
Zenith paid $35 million to RISCORP and subsequently repaid a $15 million
indebtedness assumed from RISCORP, Inc.
17
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
On May 20, the Board of Directors declared a regular quarterly cash dividend of
$0.25 per share on the outstanding shares, payable on August 15, 1998 to
stockholders of record at the close of business on July 31, 1998.
CODIFICATION OF STATUTORY ACCOUNTING PRINCIPLES
In March of 1998, the National Association of Insurance Commissioners
approved the codification of statutory accounting principles, clearing the
way for states to adopt the codification which provides a comprehensive basis
of statutory accounting and reporting for use by insurance departments,
insurers, and auditors. Currently, it is not known which states will adopt
the codification; therefore, the implementation date cannot be determined.
Implementation of the codified statutory accounting principles may affect the
surplus level and the capitalization requirements of Zenith's insurance
subsidiaries on a statutory basis. Zenith has not determined the impact of
this condification.
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 Financial Condition and Results of Operations, in
other parts of this Report or in other written or oral information conveyed
by or on behalf of Zenith are intended to identify forward-looking
statements. Zenith undertakes no obligation to update such forward-looking
statements, which are subject to a number of risks and uncertainties that
could cause actual results to differ materially from those projected. These
risks and uncertainties include but are not limited to the following: (1)
heightened competition, particularly intense price competition; (2) adverse
state and federal legislation and regulation:(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; (10) uncertainties related to the RISCORP
Acquisition, including (a) the ability of Zenith to integrate on a profitable
basis the business acquired from RISCORP, (b) the determination of the final
purchase price, (c) the value of transferred assets and transferred
liabilities, (d) the ability of Zenith to recover from RISCORP certain assets
not transferred to Zenith at closing and (e) the ability of Zenith to recover
any amounts from RISCORP for breaches of representations, warranties and
covenants under the Asset Purchase Agreement; (11) changing environment for
controlling medical, legal and rehabilitation costs, as well as fraud and
abuse; and (12) other risks detailed herein and from time to time in Zenith's
other reports and filings with the Securities and Exchange Commission.
18
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Stockholders' Meeting of Zenith was held on May 20, 1998. The only
matter presented to Stockholders was the election of Directors.
The tabulation of votes for the nominees, all of whom were elected, is as
follows:
<TABLE>
<CAPTION>
Director Votes For Votes Withheld
- ------------------------------------------------------------------------------------------
<S> <C> <C>
George E. Bello 14,348,725 127,758
Max M. Kampelman 14,348,352 128,131
Jack M. Ostrow 14,348,252 128,231
William Steele Sessions 14,348,655 127,828
Harvey L. Silbert 14,347,223 129,260
Robert M. Steinberg 13,676,107 800,376
Saul P. Steinberg 14,346,704 129,779
Gerald Tsai, Jr. 14,349,712 126,771
Stanley R. Zax 14,345,655 130,828
- ------------------------------------------------------------------------------------------
</TABLE>
There were no votes cast against any Director, no abstentions, and no broker
non-votes.
ITEM 5. OTHER INFORMATION.
Pursuant to Rule 14a-8 promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), proposals of stockholders intended to be
presented at Zenith's 1999 Annual Meeting of Stockholders must be received at
the Zenith's principal executive offices not later than December 1, 1998, in
order to be included in Zenith's proxy statement and form of proxy relating
to the 1999 annual meeting.
On May 21, 1998, the Securities and Exchange Commission adopted an amendment
to Rule 14a-4 promulagated under the Exchange Act which governs a company's
use of its discretionary proxy voting authority with respect to shareholder
proposals not sought to be included in a company's proxy statement pursuant
to Rule 14a-8. Pursuant to the amended Rule 14a-4, if a company is not
notified of a shareholder proposal 45 days prior to the month and day of
mailing of the proxy statement for the prior year's annual meeting, then the
management proxies would be allowed to use their discretionary voting
authority when the proposal is raised at the annual meeting, without having
to include any discussion of the matter in the company's proxy statement. The
new Rule 14a-4 notice deadline is effective starting with the 1999
shareholders' meeting.
In the case of Zenith, the Rule 14a-4 deadline for written notice to Zenith
of shareholder proposals that are not sought to be included in Zenith's proxy
statement with respect to Zenith's 1999 Annual Meeting of Stockholders is
February 13, 1999.
19
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- --------------------------------------------------------------------------------
(a) Exhibits
3.1 Certificate of Incorporation of Zenith as in effect immediately prior
to November 22, 1985. (Incorporated herein by reference to Exhibit 3 to
Zenith's amendment on Form 8, date of amendment October 10, 1985, to
Zenith's Current Report on Form 8-K, date of report July 26, 1985.)
Certificate of Amendment to Certificate of Incorporation of Zenith,
effective November 22, 1985. (Incorporated herein by reference to
Zenith's Current Report on Form 8-K, date of report November 22, 1985.)
3.2 By-laws of Zenith, as currently in effect. (Incorporated herein by
reference to Exhibit 3.2 to Zenith's Annual Report on Form 10-K for the
year ended December 31, 1988.)
10.1* Employment Agreement, dated October 20, 1997, between Zenith and
Jack D. Miller.
11 Statement re computation of per share earnings. (Note 2 of the
consolidated financial statements included in Item 1 of Part I of this
Quarterly Report on Form 10-Q is incorporated herein by reference.)
27 Financial data schedule
- ----------------------------
* Management and compensatory plan.
(b) Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K dated April 1, 1998
on April 16, 1998, an amendment thereto on Current Report on Form
8-K/A dated April 1, 1998 on June 12, 1998 and a Current Report on
Form 8-K dated July 9, 1998 on July 9, 1998 in connection with the
acquisition by Zenith Insurance of substantially all the assets and
certain of the liabilities of RISCORP.
20
<PAGE>
ZENITH NATIONAL INSURANCE CORP.
Signatures
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ZENITH NATIONAL INSURANCE CORP.
Registrant
Date: August 14, 1998 /s/ STANLEY R. ZAX
----------------------------------
Stanley R. Zax
Chairman of the Board and President
(Principal Executive Officer)
Date: August 14, 1998 /s/ FREDRICKA TAUBITZ
----------------------------------
Fredricka Taubitz
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
21
<PAGE>
EXECUTION COPY
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into effective as of
the 20 of October, 1997 ("Effective Date"), on this 21 day of October, 1997
between ZENITH INSURANCE COMPANY, a California corporation (the "Company")
and wholly owned subsidiary of Zenith National Insurance Corp., a Delaware
corporation ("Zenith"), and JACK D. MILLER (hereinafter referred to as
"Executive").
WHEREAS, Executive has substantial experience as an executive in the field
of workers compensation insurance; and
WHEREAS, Company and Executive deem it in their respective best interests
to enter into an employment relationship and to enter into this Agreement
setting forth the terms and conditions of their relationship;
NOW, THEREFORE, it is AGREED as follows:
1. EMPLOYMENT.
(a) Subject to earlier termination as provided herein, the
Executive is employed as Executive Vice President and President Designate of the
Company's RISCORP Operations from the Effective Date through the Term of this
Agreement (as defined below). In this capacity, Executive shall devote his full
business time and energy to the business, affairs and interests of the Company
and matters related thereto.
<PAGE>
During the Term of the Agreement the Executive shall have no other employment
other than with Zenith or a subsidiary or an affiliate of the Company, except
with the prior written approval of the Board of Directors of the Company (the
"Board"). The Executive 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 assign from
time to time provided such assignments shall not be inconsistent with the
Executive's position with the Company. The Company hereby acknowledges and
agrees that the Executive 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 his duties to the Company hereunder.
(b) During his employment hereunder, the Executive shall
report to the Company's Chief Executive Officer.
(c) The Executive, once relocated to Florida, shall not be
required to relocate outside of the general vicinity of his office in Florida in
order to perform the services hereunder, without the Executive's consent, except
for travel reasonably required in the performance of his duties hereunder, and
except for a possible relocation to Southern California. The Company shall pay
reasonable expenses in connection with Executive's relocation to Florida from
Northern California.
-2-
<PAGE>
2. TERM. This Agreement shall be in effect for a term commencing on
the Effective Date and expiring on October 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. Executive shall be paid the sum of Four Hundred 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. DISCRETIONARY BONUSES. During the Term of this Agreement, the
Executive shall be entitled to such discretionary bonuses as may be authorized,
declared, and paid by the Board in its sole discretion.
5. DEFERRED COMPENSATION. In advance of the annual period for which
earned, the Executive shall have the right to defer all or any portion of his
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
Executive's rights and benefits under this Agreement that are based upon
Executive's salary or bonus or the sum thereof.
6. PARTICIPATION IN RETIREMENT AND EXECUTIVE BENEFIT PLANS. During his
employment hereunder, the Executive shall be entitled to participate in any plan
of the
-3-
<PAGE>
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
Executive 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 Executive.
7. FRINGE BENEFITS; AUTOMOBILE. In addition to the benefit plans
referred to in Section 6 hereof, the Executive 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 or bar associations, and any
other benefits that are commensurate with the duties and responsibilities to be
performed by the Executive 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
the Executive with a monthly car allowance in the amount of $1,300. The
benefits provided under this Section 7 shall cease upon the Executive's Date of
Termination (as defined below).
-4-
<PAGE>
8. VACATION; MEMBERSHIPS. During his employment hereunder, the
Executive shall be entitled to an annual paid vacation in accordance with the
Company's standard employment practices; provided, however, Executive shall be
treated for purposes of vacation as an employee with more than 120 months of
service. Upon termination of the Executive's employment for any reason, the
Executive 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 Executive.
During his employment hereunder, the Executive shall be entitled to
appropriate professional association and business club memberships, including
reimbursement of payment of dues and assessments pertaining thereto.
9. TERMINATION.
(a) DISABILITY. If, as a result of the Executive'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, and have exhausted his
Family Medical Leave and its California equivalent, 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 Executive's employment for "Cause" at any
time. Termination for "Cause" shall mean termination upon (1) the Executive's
continued
-5-
<PAGE>
willful failure 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 physical or mental illness, injury or
similar incapacity) after a written demand for substantial performance is
delivered to him by the President or the Board, which demand specifically
identifies the manner in which the President or the Board believes that he has
failed to substantially perform his duties, or has otherwise breached this
Agreement, (2) the Executive's conviction of a felony, (3) the Executive's
willful misconduct that is materially and demonstrably injurious to the Company
(4) the Executive's violation of Section 11 hereof; provided, however, that the
Executive shall not be terminated for "Cause" unless and until the President or
the Board has given the Executive 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 written notice
from the President or 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 Executive
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:
-6-
<PAGE>
(i) The Executive is removed or otherwise
prohibited or restricted in the performance of his duties as set
forth in Section 1 hereof, other than through fault of the
Executive;
(ii) Any payment due under this Agreement shall
remain unpaid for more than 60 days, after notice of non-payment and
request for payment have been given to Company by Executive pursuant
to Section 13;
(iii) 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 Executive 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 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
-7-
<PAGE>
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
Executive's employment by the Company or 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 Executive's employment under the provision so indicated.
(e) DATE OF TERMINATION, ETC. "Date of Termination" shall
mean (1) if the Executive's employment is terminated by his death, the date of
his death; (2) if the Executive's employment is terminated for Disability,
thirty days after Notice of Termination is given; (3) if the Executive's
employment is terminated for Cause, the date specified in the Notice of
Termination; and (4) if the Executive's employment is terminated for any other
reason, the date specified in the Notice of Termination.
10. COMPENSATION UPON TERMINATION OR DURING DISABILITY. The Executive
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 prior to Executive's termination:
-8-
<PAGE>
(a) During any period that the Executive 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, less any amounts payable
to him under the Company's disability plan or program or other similar plan
during such period, or under any governmental program, until his employment is
terminated pursuant to Section 9(a) hereof. If, during any period of
disability, the Executive's employment shall be terminated by reason of his
death, disability or the expiration of this Agreement, not withstanding the
provisions of Section 20, his pay shall cease and his benefits, if any, shall,
be determined solely 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 Executive'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 9(c) hereof), the Company shall pay him (or his appropriate
payee, as determined in accordance with Section 12 (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, if any, to which he is entitled
from the Company through the Date of Termination under any compensation plan in
each case 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
-9-
<PAGE>
the Executive's employment is terminated by reason of the Executive's death or
Disability, the Executive (or his appropriate payee) shall be entitled to
receive a pro rata portion of any bonus that would otherwise have been payable
to the Executive with respect to the year in which the Executive's employment is
terminated. For purposes of this provision, if the Executive's bonus for such
year has not been determined, the Executive shall be deemed to have been
entitled to a bonus equal to the bonus paid or payable to the Executive with
respect to the immediately preceding year.
(c) If the Executive's employment should be terminated by the
Company other than for Cause or Disability or by the Executive by reason of a
constructive termination pursuant to Section 9(c) hereof, he shall be entitled,
in exchange for a release of the Company, Zenith and any subsidiaries and
affiliates of the Company and their respective officers, directors, shareholders
employees and agents, to the benefits provided below ("Severance Payments"):
(i) The Company shall pay to the Executive 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 Executive, at the
time such payments would have been made had the Executive's
employment not
-10-
<PAGE>
been terminated hereunder, all salary payments that would have been
payable to the Executive pursuant to this Agreement had the Executive
continued to be employed for the greater of (x) the remaining Term of this
Agreement or (y) two years (the "Severance Period") (assuming for the
purpose of such continuing payments that the Executive's salary for each
year of such period is equal to his salary at the Date of Termination),
plus any bonus that would otherwise have been payable to the Executive
with respect to the Severance Period; provided, however, that to the
extent the Executive's bonus for any portion of such Severance Period had
not been determined, the Executive shall be deemed to have been entitled
to a bonus equal to the bonus paid or payable to the Executive 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 Executive, including, but not limited to, the Executive'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 Executive 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 Executive that are outstanding on the Date of
Termination shall lapse as of the Date of Termination;
-11-
<PAGE>
(iv) During the Severance Period the Company
shall, at its cost, arrange to provide the Executive 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 Executive 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 Executive pursuant
to this subparagraph if an equivalent benefit is actually received
by him from another employer or source at any time during the
Severance Period. Executive agrees to report any such benefit
actually received by him.
(d) The Company shall continue in effect for the benefit of
the Executive 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 Executive or the Company with
respect to all of his acts and omissions while an officer or director (if
applicable) 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) Notwithstanding anything to the contrary in this
Agreement, in the event that Executive becomes entitled to the Severance
Payments, if any of the
-12-
<PAGE>
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 Executive an additional amount (the "Gross-Up Payment")
such that the net amount retained by Executive, 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 Executive in connection with a Change in Control or
Executive'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 Executive, 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
-13-
<PAGE>
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, Executive 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 highest marginal rate of taxation in the
state and locality of Executive'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 Executive's employment,
Executive 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 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 Executive'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
-14-
<PAGE>
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. CONFIDENTIAL INFORMATION AND NON-COMPETITION.
(a) During the Term of this Agreement and thereafter, the
Executive 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 Executive 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 Executive 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
his employment for any reason whatsoever, the Executive shall promptly deliver
to the Company all documents (and all copies hereof) containing any Confidential
Information.
(b) During the term of this Agreement and any period the
Executive is entitled to benefits hereunder, the Executive shall not, directly
or indirectly, without prior written consent of the Company, provide
consultative service (with or without pay)
-15-
<PAGE>
to, own, manage, operate, join, control, participate in, or be connected (as a
stockholder, partner, or otherwise) with, any business, individual, partner,
firm, corporation, or other entity that is then in competition with the Company
or any of its subsidiaries or affiliates (a "Competitor of the Company");
provided, however, that the "beneficial ownership" by the Executive, 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 1934, 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 Executive were to compete with the Company or any
subsidiary or affiliate of the Company in violation of this Agreement.
(c) During the Term of this Agreement or for the period
ending on the last day of the one year period following termination of his
employment, the Executive 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) Executive recognizes that he 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 Executive recognizes that the
information he will possess about these other employees is not generally known,
is of substantial value to Company in
-16-
<PAGE>
developing its products and in securing and retaining customers, and will be
acquired by him because of his business position with Company. Executive agrees
that, during the Term of this Agreement and for the period ending on the last
day of the one-year period following termination of his employment, Executive
will not, directly or indirectly, solicit or recruit any employee of Company for
the purpose of being employed by his, or any business, individual, partner,
firm, corporation or other entity that is then in competition with Company
("Competitor"). The Executive further agrees that he will not convey any such
confidential information or trade secrets about other employees of Company to
anyone affiliated with him or to any Competitor.
(e) Executive further acknowledges that the remedy at law
for any breach by him of the covenants contained in this Paragraph 11 will be
inadequate and that in the event of a breach, or threatened breach, by Executive
of the covenants contained therein, Company shall be entitled to an injunction
restraining Executive from using, for his 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 Executive to return to Company any and
all memoranda, specifications, documents and all other material relating to
Company's business that he may have under his possession or control. Nothing
herein shall be construed as prohibiting Executive from pursuing professional
employment or
-17-
<PAGE>
investments utilizing his 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 Executive. The provisions of this
Paragraph 11 shall survive the expiration or termination, for any reason, of
this Agreement and of Executive's employment.
12. ASSIGNMENTS/MITIGATION.
(a) This Agreement and the rights, interest and benefits
hereunder are personal to the Executive and shall not be assigned, transferred,
pledged, or hypothecated in any way by the Executive, 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 Executive may, at his sole option, exercise his
termination rights under the provisions of Section 9(c)(iv) of this Agreement.
-18-
<PAGE>
(c) This Agreement shall inure to the benefit of and be
enforceable by the Executive and his personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Executive 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 designee or, if there is no such designee, to his
estate.
(d) The Executive shall have no duty to mitigate the
Company's obligations hereunder by seeking other employment or by becoming
self-employed; provided, however, that compensation including life, disability,
dental, accident, group health insurance and other health and welfare benefits
as well as salary, wage or other compensation received by the Executive during
or with respect to the Severance Period and attributable to services rendered
during such period by the Executive to persons or entities other than the
Company shall be applied to reduce the Company's obligation to provide
compensation and benefits under this Agreement. The Executive shall promptly
notify the Company of his securing other employment or his become self-employed
and shall account to the Company as to the amount of such compensation and
benefits; if the Company has paid amounts in excess of those to which the
Executive was entitled (after giving effect to the offsets provided above), the
Executive shall reimburse the Company promptly thereafter for such excess.
-19-
<PAGE>
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 Executive, to _______________________________ 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. Any provision of this Agreement which is deemed
invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction and subject to this paragraph be ineffective to the extent of such
invalidity, illegality or unenforceability, without affecting in any way the
remaining provisions hereof in such jurisdiction or rendering that or any other
provisions of this Agreement invalid, illegal, or unenforceable in any other
jurisdiction. Moreover, if any provision should be deemed invalid, illegal or
unenforceable because its scope is considered excessive, such provision shall be
modified so that the scope of the provision is reduced only to the minimum
extent necessary to render the modified provision valid, legal and enforceable.
-20-
<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. In the event there is any dispute between
Executive and Company which the parties are unable to resolve themselves,
including any dispute with regard to the application, interpretation or validity
of this Agreement or any dispute with regard to any aspect of Executive's
employment or the termination of Executive's employment, both Executive and
Company agree by entering into this Agreement that the exclusive remedy for
determining any such dispute, regardless of its nature, will be by arbitration
in accordance with the then most applicable rules of the American Arbitration
Association; provided, however, the breach of the obligation to provide services
under this Agreement or of the obligations of Paragraph 11 may be enforced by an
action for injunctive relief and damages in a court of competent jurisdiction.
In the event the parties are unable to agree upon an arbitrator, the
parties shall select a single arbitrator from a list designated by the Los
Angeles office of the American Arbitration Association of seven arbitrators all
of whom shall be retired judges who have had experience in the employment law,
who are actively involved in hearing private cases and who are resident in the
greater Los Angeles area. If the parties are unable to select an arbitrator
from the list provided by the American Arbitration Association, then the parties
shall each strike names alternatively from the list, with the first to strike
being determined by lot. After each party has used three strikes, the
-21-
<PAGE>
remaining name on the list shall be the arbitrator. Any arbitration shall be
administered by the American Arbitration Association only if both parties so
agree.
This agreement to resolve any disputes by binding arbitration shall extend
to claims against any shareholder or partner of the Company, any brother-sister
company, parent, subsidiary or affiliate of the Company, any officer, director,
employee, or agent of the Company, or of any of the above, and shall apply as
well to claims arising out of state and federal statutes and local ordinances as
well as to claims arising under the common law. The arbitrator shall apply the
same substantive law as would be applied by a court having jurisdiction over the
parties and their dispute and the remedial authority of the arbitrator shall be
the same as, but no greater than, would be the remedial power of a court having
jurisdiction over the parties and their dispute. The arbitrator shall, upon an
appropriate motion, dismiss any claim brought in arbitration if the arbitrator
determines that the claim does not state a claim or a cause of action which
could have been properly pursued through court litigation. In the event of a
conflict between the then most-applicable rules of the American Arbitration
Association and these procedures, the provisions of these procedures shall
govern.
Each party may be represented by counsel or other representative of the
party's choice and each party shall initially be responsible for the costs and
fees of its counsel or other representative. Any filing or administrative fees
shall be borne by the party incurring such fees. The fees and costs of the
arbitrator shall be borne equally between the parties. The prevailing party in
such arbitration proceeding, as determined by the
-22-
<PAGE>
arbitrator, and in any enforcement or other court proceedings, shall be entitled
to the extent permitted by law, to reimbursement from the other party for all of
the prevailing party's costs (including but not limited to the arbitrator's
compensation), expenses and attorneys' fees.
The arbitrator shall render an award and opinion in the form typical of
that rendered in labor arbitrations and the award of the arbitrator shall be
final and binding upon the parties. If any of the provisions of this paragraph
are determined to be unlawful or otherwise unenforceable, in whole or in part,
such determination shall not affect the validity of the remainder of these
provisions and this paragraph shall be reformed to the extent necessary to
insure that the resolution of all conflicts between you and the Company
including those arising out of statutory claims, shall be resolved by neutral,
binding arbitration. In the event a court finds that the arbitration procedure
set forth herein is not absolutely binding, then it is the intent of the parties
that any arbitration decision should be fully admissible in evidence, given
great weight by any finder of fact and treated as determinative to the maximum
extent permitted by law.
Unless mutually agreed by the parties otherwise, any arbitration shall
take place in Los Angeles. In the event the parties are unable to agree upon a
location for the arbitration, the location within Los Angeles shall be
determined by the arbitrator.
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 Executive
-23-
<PAGE>
as if such dispute did not exist during the pendency of such good faith dispute,
and, following the resolution of such dispute, the Executive shall reimburse the
Company for any overpayments.
18. COMPANY PROPERTY. The Executive 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 the Company's property, whether or not the Executive was the author
or recipient of such material.
19. 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 Executive 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, with respect to the subject matter
-24-
<PAGE>
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 and 18 shall survive the expiration, suspension or
termination, for any reason, of this Agreement or the Executive's employment
hereunder until such obligations created thereunder are fully satisfied. This
provision is not intended to create additional rights
-25-
<PAGE>
or obligations or to expand or otherwise alter rights and obligations created by
this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
ZENITH INSURANCE COMPANY
By: /s/ Stanley R. Zax
----------------------------
STANLEY R. ZAX, Chairman
EMPLOYEE:
/s/ Jack D. Miller
--------------------------------
JACK D. MILLER
-26-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 890,273
<DEBT-CARRYING-VALUE> 41,138
<DEBT-MARKET-VALUE> 42,504
<EQUITIES> 55,193
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,020,195
<CASH> 9,738
<RECOVER-REINSURE> 405,491
<DEFERRED-ACQUISITION> 22,031
<TOTAL-ASSETS> 1,973,186
<POLICY-LOSSES> 1,234,625
<UNEARNED-PREMIUMS> 170,953
<POLICY-OTHER> 2,538
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 90,589
0
0
<COMMON> 24,847
<OTHER-SE> 324,747
<TOTAL-LIABILITY-AND-EQUITY> 1,973,186
256,338
<INVESTMENT-INCOME> 26,914
<INVESTMENT-GAINS> 6,174
<OTHER-INCOME> 21,824
<BENEFITS> 178,509
<UNDERWRITING-AMORTIZATION> 48,989
<UNDERWRITING-OTHER> 37,058
<INCOME-PRETAX> 22,661
<INCOME-TAX> 7,961
<INCOME-CONTINUING> 14,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,700
<EPS-PRIMARY> 0.86
<EPS-DILUTED> 0.86
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
