<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
June 30, December 31,
(Dollars in thousands, except per share data) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (Unaudited)
(Restated)
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) 136,377 209,827
Other investments 33,591 35,008
-------------- ---------------
TOTAL INVESTMENTS 1,002,080 879,973
Cash 9,738 12,504
Accrued investment income 15,006 9,523
Premiums receivable 161,665 72,813
Receivable from reinsurers, state trust funds, and prepaid reinsurance premiums 413,711 106,067
Deferred policy acquisition costs 23,035 20,840
Properties and equipment, less accumulated depreciation 77,326 54,531
Federal income taxes 21,527 19,940
Intangible assets 17,675 4,992
Other assets 77,607 70,973
-------------- ---------------
TOTAL ASSETS $ 1,819,370 $ 1,252,156
============== ===============
LIABILITIES
Policy liabilities and accruals:
Unpaid loss and loss adjustment expenses $ 1,055,934 $ 613,266
Unearned premiums 170,953 128,469
Policyholders' dividends accrued 5,560 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
Payable to RISCORP 51,359
Other liabilities 82,832 37,518
-------------- ---------------
TOTAL LIABILITIES 1,470,076 890,290
-------------- ---------------
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY
Preferred stock, $1 par - 1,000 shares authorized; issued and outstanding, none
in 1998 and 1997
Common stock, $1 par - 50,000 shares authorized; 24,847 shares issued
and 17,055 shares outstanding in 1998; 24,681 shares issued and
17,819 shares outstanding in 1997 24,847 24,681
Additional paid-in capital 267,985 264,098
Retained earnings 192,142 186,268
Net unrealized appreciation on investments, net of deferred
tax expense of $5,456 in 1998 and $5,025 in 1997 10,134 9,332
-------------- ---------------
495,108 484,379
Less treasury stock at cost (7,792 shares in 1998 and 6,862 shares in 1997) (145,814) (122,513)
-------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 349,294 361,866
-------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,819,370 $ 1,252,156
============== ===============
</TABLE>
The accompanying notes are an integral part of this statement.
2
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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands, except per share data) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Restated) (Restated)
CONSOLIDATED REVENUES:
Premiums earned $ 137,554 $ 125,831 $ 256,338 $ 248,194
Net investment income 13,583 13,406 25,926 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 164,967 152,407 310,262 299,057
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 23,196 16,443 39,042 31,619
Policyholders' dividends and participation (120) 2 (63) (966)
Real estate construction and operating costs 8,544 10,495 20,038 20,199
Interest expense 515 816 1,508 1,952
------------ ----------- ----------- ------------
Total expenses 153,426 140,184 288,023 276,113
Income before federal income tax expense 11,541 12,223 22,239 22,944
Federal income tax expense 4,241 4,323 7,839 7,944
------------ ----------- ----------- ------------
NET INCOME $ 7,300 $ 7,900 $ 14,400 $ 15,000
============ =========== =========== ============
EARNINGS PER SHARE:
Net income per common share - basic $ 0.43 $ 0.45 $ 0.85 $ 0.85
============ =========== =========== ============
Net income per common share - diluted $ 0.42 $ 0.44 $ 0.84 $ 0.84
============ =========== =========== ============
Additional Required Disclosure:
Net income $ 7,300 $ 7,900 $ 14,400 $ 15,000
Change in unrealized appreciation/depreciation on investments 403 7,072 802 90
------------ ----------- ----------- ------------
Comprehensive Income $ 7,703 $ 14,972 $ 15,202 $ 15,090
============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of this statement.
3
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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
(In thousands) 1998 1997
- -----------------------------------------------------------------------------------------------------------------
(Restated)
<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 (used in) provided by 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 (8,272) (10,136)
Net change in short-term investments 62,469 (14,744)
Other (5,880) 3,884
Cash payment to RISCORP (35,000)
Cash acquired in RISCORP Acquisition 29,309
----------- ------------
Net cash provided by (used in) investing activities 55,023 (7,918)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of note assumed from RISCORP (15,000)
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 (41,066) (8,730)
----------- ------------
Net increase in cash (2,766) (1,157)
Cash at beginning of period 12,504 12,125
----------- ------------
Cash at end of period $ 9,738 $ 10,968
=========== ============
(continued)
</TABLE>
4
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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 (Restated)
FROM OPERATING ACTIVITIES:
Net Income $ 14,400 $ 15,000
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,637 2,843
Realized gains on investments (6,174) (3,870)
Net proceeds from trading portfolio 1,416
Decrease (increase) in:
Accrued investment income (1,809) (379)
Premiums receivable (2,276) (8,844)
Receivable from reinsurers, state trust funds, and
prepaid reinsurance premiums 8,741 (1,749)
Federal income taxes 8,483 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 (used in) provided by 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.
RESTATEMENT - The Consolidated Balance Sheet, Consolidated Statement of
Operations and Consolidated Statement of Cash Flows as of and for the three
months and six months ended June 30, 1998 have been restated to incorporate the
resolution of the purchase price determination for the RISCORP Acquisition (see
Note 3). Zenith has adjusted the April 1, 1998 purchase allocation which was
previously based on an estimated $35 million purchase price to the final
purchase price of $92.3 million. The restatement impacted invested assets,
accrued investment income, receivable from reinsurers and state trust funds,
deferred policy acquisition costs, federal income taxes, intangible assets,
unpaid losses, policyholder dividends accrued, other liabilities, net investment
income, other underwriting and operating expenses and federal income tax
expense. As a result of the restatement, net income has decreased $0.3 million
for the three and six months ended June 30, 1998 and earnings per share
decreased $0.02 (basic) and $0.02 (diluted) for the three months ended, and
decreased $0.01 (basic) and $0.02 (diluted) for the six months ended, June 30,
1998.
Notes 2, 3 and 4 have been restated to reflect the above purchase price
determination.
Note 2. Computation of Earnings Per Share (EPS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(Restated) (Restated)
(Dollars in thousands, except per share data) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(A) Net income $7,300 $7,900 $14,400 $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 - basic $0.43 $0.45 $0.85 $0.85
-----------------------------------------------------------------------------------------------
(A)/(C) Net income per common share - diluted $0.42 $0.44 $0.84 $0.84
-----------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
1997 per common share data has been restated to conform to the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 128.
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, of
which $10 million was paid into an escrow account, and assumed and repaid $15
million of indebtedness of RISCORP, Inc. The final purchase price, which was
subject to a three-step determination process, is 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 would be 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. Such adjustments indicated that the
value of the liabilities assumed by Zenith Insurance exceeded the value of the
assets transferred to Zenith Insurance by as much as $71 million and that the
final purchase price would be no greater than the $35 million already paid by
Zenith Insurance at closing. As the final step of the price determination
process, RISCORP and Zenith Insurance submitted all items in dispute concerning
the Proposed Business Balance Sheet to a nationally recognized independent
accounting firm which served as the Neutral Auditor and Neutral Actuary to
resolve all such disputes.
On March 19, 1999, Zenith received the report of the Neutral Auditor and Neutral
Actuary which indicated that the value of the assets transferred to Zenith
Insurance exceeded the value of the liabilities assumed by Zenith insurance by
$92.3 million and that Zenith Insurance owed an additional $57.3 million above
the $35 million already paid to RISCORP. On March 26, 1999, after deducting
$6.8 million for the value of assets not transferred to Zenith Insurance by
RISCORP, Zenith Insurance paid $53.7 million to RISCORP including interest in
the amount of $3.1 million computed from April 1, 1998. Of this amount, $50.9
million was paid directly to RISCORP and $2.8 million was paid into an escrow
account. The escrow account has a balance of $12.8 million and is available to
satisfy RISCORP's indemnification obligations to Zenith under the Asset Purchase
Agreement. Although the determination of "Final Purchase
7
<PAGE>
Price" by the Neutral Auditor and Neutral Actuary is to be final, binding, and
conclusive under the Asset Purchase Agreement, it is uncertain whether RISCORP
will contest the determination.
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
The RISCORP Acquisition was accounted for as a purchase by Zenith Insurance and
the assets acquired, liabilities assumed and the results of operations of
RISCORP from April 1, 1998 are included in Zenith's consolidated financial
statements as of and for the three months and six months ended June 30, 1998.
The excess of the purchase price, including acquisition expenses, over the
estimated fair value of net assets acquired is $19.9 million, which is net of a
deferred tax asset of $10.2 million, and is being amortized over 25 years.
Amortization expense from April 1, 1998 was $0.2 million.
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 paid by Zenith Insurance.
On January 11, 1999, Zenith Insurance served RISCORP with a complaint filed in
the United States District Court in the Southern District of New York. The
complaint against RISCORP asserts various claims arising from the RISCORP
Acquisition, including claims seeking recovery of assets that were not
transferred to Zenith Insurance at the closing, as well as damages for breaches
of representations, warranties, and covenants in the Asset Purchase Agreement.
On January 22, 1999, RISCORP served Zenith Insurance with a complaint in an
action that RISCORP had filed against Zenith Insurance in the United States
District Court in the Middle District of Florida. In that action, RISCORP is
seeking damages based on the alleged failure of Zenith Insurance to comply with
certain indemnification provisions of the Asset Purchase Agreement, as well as
damages relating to the allegedly improper acquisition of certain assets.
Zenith is unable to predict the outcome of these litigations.
8
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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table summarizes the estimated fair value of assets acquired and
liabilities assumed from RISCORP at April 1, 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
April 1, 1998
(Dollars in thousands) (Restated)
- --------------------------------------------------------------------------------
<S> <C>
Assets
Invested assets, primarily U.S. Government issues $190,460
Cash 29,309
Premiums receivable 86,575
Receivable from reinsurers and state trust funds 288,483
Intangible assets 7,707
Other assets 46,962
- --------------------------------------------------------------------------------
Total assets 649,496
- --------------------------------------------------------------------------------
Liabilities
Unpaid loss and loss adjustment expense 482,518
Unearned premium reserve 43,177
Other liabilities 31,465
- --------------------------------------------------------------------------------
Total liabilities 557,160
- --------------------------------------------------------------------------------
Purchase price $ 92,336
- --------------------------------------------------------------------------------
</TABLE>
Included in intangible assets is $1.7 million of costs associated with
termination of employees from the former RISCORP operations.
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 $342.6 million and
$407.7 million, respectively. Pro forma net income for such periods was $6.8
million and $18.5 million, respectively. Earnings per share for such periods
were $0.40 (basic) and $0.40 (diluted) and $1.05 (basic) and $1.04 (diluted),
respectively.
Such pro forma data has been derived in part from the historical statement of
operations data of 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.
9
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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
Note 4. Contingencies Surrounding Fair Values of Certain Assets Acquired and
Liabilities Assumed From RISCORP
On April 1, 1998 Zenith Insurance acquired substantially all of the assets
and certain liabilities of RISCORP related to RISCORP's workers' compensation
business. See Note 3 for a full discussion of the RISCORP Acquisition. The
RISCORP Acquisition was accounted for as a purchase and the fair values of
the assets and liabilities acquired are set forth in Note 3. The total
purchase price for such acquired assets and liabilities was determined by a
three-step process in which RISCORP; Zenith Insurance and its external
accounting and actuarial consultants; and a third party, acting as Neutral
Auditor and Neutral Actuary, made certain estimates of the GAAP values of the
assets and liabilities acquired by Zenith Insurance. Such estimates varied
considerably, particularly with respect to the value of premiums receivable
and the liability for unpaid losses and loss adjustment expenses.
The carrying values of premiums receivable and the liability for unpaid
losses and loss adjustment expenses at June 30, 1998 reflect management's
estimates using available current information. Different actuarial
assumptions, particularly assumptions about long-lived workers' compensation
claims, suggest that the ultimate liability for unpaid losses and loss
adjustment expenses could be higher than Zenith's carrying value of reserves
for such claims at June 30, 1998. Also, Zenith's claims handling practices
vary in certain respects from those employed by RISCORP. The ultimate amount
of premiums receivable for retrospectively-rated policies is determined, in
part, by the amount and timing of losses sustained under such policies. Also,
certain of Zenith's billing and collections procedures differ from those
employed by RISCORP and Zenith is continuing to ascertain the impact such
differences may have on the collectibility of premiums receivable. Subsequent
re-interpretation of currently available data or any new information that
becomes available with respect to premiums receivable and liabilities for
unpaid losses and loss adjustment expenses acquired from RISCORP may change
the estimates of the carrying values of such amounts and such changes, if
any, will be reflected in the results of operations of the period in which
they occur.
Zenith Insurance has purchased reinsurance protection relating to development of
the loss and loss adjustment expense reserves assumed from RISCORP. Such
reinsurance would allow Zenith Insurance to recover up to $50 million in excess
of $182 million for net unpaid losses and allocated loss adjustment expenses
acquired from RISCORP. After deducting reinsurance premiums of $16 million,
Zenith has recorded reinsurance recoverable of $24.5 million and a deferred
benefit of $8.5 million at June 30, 1998. Future adverse loss development, if
any, of the reserves acquired from RISCORP would be recoverable up to the $50
million limit, although the benefit of such reinsurance recoverable would be
deferred and recognized over the recovery period of such reinsurance.
See Note 3 for litigation concerning the RISCORP Acquisition.
Zenith and its subsidiaries are defendants in various other litigation. In the
opinion of management, after consultation with legal counsel, such litigation is
either without merit or the
10
<PAGE>
ultimate liability, if any, will not have a material adverse effect on the
consolidated financial condition or results of operations of Zenith.
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
Note 5. 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 6. Costs of Computer Software Developed or Obtained for Internal Use
Zenith adopted Statement of Position ("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.
Note 7. 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.
11
<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,
(Restated) (Restated)
(Dollars in thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income, after taxes $8,959 $8,877 $17,241 $17,142
Realized gains on investments, after taxes 2,440 1,298 4,013 2,517
- --------------------------------------------------------------------------------------------------
Sub-total 11,399 10,175 21,254 19,659
- --------------------------------------------------------------------------------------------------
Property-Casualty underwriting, after taxes:
Income (loss) excluding catastrophes (3,002) (1,506) (1,370) (1,929)
Catastrophe losses (3,250) (910)
- --------------------------------------------------------------------------------------------------
Property-Casualty underwriting loss (3,002) (1,506) (4,620) (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 (866) (680) (1,510) (1,150)
- --------------------------------------------------------------------------------------------------
Net income $7,300 $7,900 $14,400 $15,000
- --------------------------------------------------------------------------------------------------
</TABLE>
12
<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 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(Restated) (Restated)
(Dollars in thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<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 $(11,055) $ (6,777) $(16,376) $ (12,758)
Other property-casualty 2,472 1,664 1,751 2,636
Reinsurance 4,187 2,996 7,893 6,001
-----------------------------------------------------------------------
Total $ (4,396) $ (2,117) $ (6,732) $ (4,121)
=======================================================================
Combined loss and expense ratios
Workers' compensation
Loss and loss adjustment expenses 76.7% 77.7% 76.4% 78.0%
Underwriting expenses 38.4 33.1 36.2 33.1
Dividends to policyholders (0.2) (0.8)
-----------------------------------------------------------------------
Combined ratio 114.9% 110.8% 112.6% 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 34.5 30.8 33.0 30.8
Dividends to policyholders (0.1) (0.4)
-----------------------------------------------------------------------
Combined ratio 103.2% 101.7% 102.6% 101.7%
==========================================================================================================================
</TABLE>
13
<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").
See Note 3 to the Consolidated Financial Statements on pages 7-9 ("Note 3") for
a full discussion of the RISCORP Acquisition which note is herein incorporated
by reference. The RISCORP Acquisition was accounted for as a purchase and the
assets acquired and liabilities assumed are set forth in Note 3. The total
purchase price for such assets acquired and liabilities assumed was the
difference between the generally accepted accounting principles ("GAAP") book
value of assets purchased and the GAAP book value of the liabilities assumed by
Zenith Insurance as of April 1, 1998, or $92.3 million. Such amount was
determined by a three-step process in which RISCORP; Zenith Insurance and its
external accounting and actuarial consultants; and a third party, acting as
Neutral Auditor and Neutral Actuary, made certain estimates of the GAAP values
of the assets and liabilities acquired by Zenith Insurance. Such estimates
varied considerably, particularly with respect to the value of premiums
receivable and the liability for unpaid losses and loss adjustment expenses.
The carrying values of premiums receivable and the liability for unpaid losses
and loss adjustment expenses at June 30, 1998 reflect management's estimates
using available current information. Different actuarial assumptions,
particularly assumptions about long-lived workers' compensation claims, suggest
that the ultimate liability for unpaid losses and loss adjustment expenses could
be higher than Zenith's carrying value of liabilities for such claims at
June 30, 1998. Also, Zenith's claims handling practices vary in certain
respects from those employed by RISCORP. The ultimate amount of premiums
receivable for retrospectively-rated policies is determined, in part, by the
amount and timing of losses sustained under such policies. Also, certain of
Zenith's billing and collections procedures differ from those employed by
RISCORP and Zenith is continuing to ascertain the impact such differences may
have on the collectibility of premiums receivable. Subsequent re-interpretation
of currently available data or any new information that becomes available with
respect to premiums receivable and liabilities for unpaid losses and loss
adjustment expenses acquired from RISCORP may change the estimates of the
carrying values of such amounts and such changes, if any, will be reflected in
the results of operations of the period in which they occur.
Zenith Insurance has purchased reinsurance protection relating to development of
the loss and loss adjustment expense reserves assumed from RISCORP. Such
reinsurance would allow Zenith Insurance to recover up to $50 million in excess
of $182 million for net unpaid losses and allocated loss adjustment expenses
acquired from RISCORP. After deducting reinsurance premiums of $16 million,
Zenith has recorded reinsurance recoverable of $24.5 million and a deferred
benefit of $8.5 million at June 30, 1998. Future adverse loss development, if
any, of the reserves acquired from RISCORP would be recoverable up to the $50
million limit, although the benefit of such reinsurance recoverable would be
deferred and recognized over the recovery period of such reinsurance.
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 $4.3 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 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 $219.8 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 $0.4 million, 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.
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
(Restated) (Restated)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment yield, before taxes 5.8% 6.1% 5.8% 5.9%
Investment yield, after taxes 4.0% 4.0% 3.9% 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
4.8 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>
(Dollars in thousands) (Restated)
- --------------------------------------------------------------------------------
<S> <C>
Carrying value at December 31, 1997 $879,973
Purchases at cost 166,672
Investments acquired in RISCORP Acquisition 190,460
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 6,174
Change in unrealized gains 1,234
Decrease in short-term investments (62,469)
Net amortization of bonds and preferred stocks
and other changes (895)
- --------------------------------------------------------------------------------
Carrying value at June 30, 1998 $1,002,080
- --------------------------------------------------------------------------------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Zenith is principally dependent financially 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 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.
16
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
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 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.
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.
On May 20, 1998 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 codification.
17
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
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 value of
transferred assets and transferred liabilities, (c) the ability of Zenith to
recover any amounts from RISCORP for breaches of representations, warranties
and covenants under the Asset Purchase Agreement and (d) whether RISCORP will
contest the determination of the Final Purchase Price for the RISCORP
Acquisition and, if so, the ability of RISCORP, to prevail on any such
attempt, as well as to recover any amount from Zenith Insurance for the
alleged failure to comply with certain indemnification provisions of 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 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 promulgated 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 at least 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>
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. (Incorporated herein by reference to Zenith's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998).
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/A is incorporated herein by reference.)
27 Restated 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, and 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: April 9, 1999 /s/ Stanley R. Zax
-----------------------------------
Stanley R. Zax
Chairman of the Board and President
(Principal Executive Officer)
Date: April 9, 1999 /s/ Fredricka Taubitz
-----------------------------------
Fredricka Taubitz
Executive Vice President
& Chief Financial Officer
(Principal Accounting Officer)
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<RESTATED>
<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> 735,781
<DEBT-CARRYING-VALUE> 776,919
<DEBT-MARKET-VALUE> 778,285
<EQUITIES> 55,193
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,002,080
<CASH> 9,738
<RECOVER-REINSURE> 413,711
<DEFERRED-ACQUISITION> 23,035
<TOTAL-ASSETS> 1,819,370
<POLICY-LOSSES> 1,055,934
<UNEARNED-PREMIUMS> 170,953
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 2,538
<NOTES-PAYABLE> 90,589
0
0
<COMMON> 24,847
<OTHER-SE> 324,447
<TOTAL-LIABILITY-AND-EQUITY> 1,819,370
256,338
<INVESTMENT-INCOME> 25,926
<INVESTMENT-GAINS> 6,174
<OTHER-INCOME> 21,824
<BENEFITS> 178,509
<UNDERWRITING-AMORTIZATION> 48,989
<UNDERWRITING-OTHER> 38,979
<INCOME-PRETAX> 22,239
<INCOME-TAX> 7,839
<INCOME-CONTINUING> 14,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,400
<EPS-PRIMARY> .85
<EPS-DILUTED> .84
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
