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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): October 25, 1999
ZENITH NATIONAL INSURANCE CORP.
(Exact name of registrant as specified in its charter)
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Delaware 1-9627 95-2702776
(State or other jurisdiction of (Commission File No.) (I.R.S. Employer Identification
incorporation) No.)
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21255 Califa Street
Woodland Hills, California 91367-5021
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code:
(818) 713-1000
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ITEM 5. OTHER EVENTS
As previously reported, 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 ("Zenith Insurance"), a wholly
owned subsidiary of Zenith National Insurance Corp. ("Zenith"), 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").
The total purchase price for such acquired assets and liabilities was determined
by a three-step process in which RISCORP and its external accounting and
actuarial consultants and Zenith Insurance and its external accounting and
actuarial consultants made and presented their estimates of the GAAP values of
the assets and liabilities acquired by Zenith Insurance to an independent
third-party, acting as a Neutral Auditor and Neutral Actuary. Such estimates
varied considerably, particularly with respect to the value of premium
receivable and the liability for unpaid losses and loss adjustment expenses.
On March 19, 1999, the Neutral Auditor and Neutral Actuary issued its report
determining the disputes between the parties. As previously reported, Zenith
recorded the assets and liabilities acquired from RISCORP at their estimated
fair values consistent with the values determined by the Neutral Auditor and
Neutral Actuary. Zenith indicated that any new information that might become
available with respect to certain assets and liabilities 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 for the period
in which they occur.
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In October of 1999, Zenith completed a review of the liabilities for unpaid
losses and loss adjustment expenses in its Southeast Operations, which
principally consists of the operations acquired from RISCORP. The review was
conducted with assistance from independent actuarial consultants and took
account of recent developments, including data through the third quarter of
1999. As a result of the review, Zenith will record, in the third quarter of
1999, an increase of approximately $46.0 million ($29.9 million after tax) in
the estimated net liabilities for unpaid losses and loss adjustment expenses
acquired from RISCORP. The increase results primarily from adjustments to the
reserves for the years 1994 through 1997. Certain related receivables,
principally contingent commissions receivable under reinsurance contracts
assumed from RISCORP, will be reduced by approximately $19.0 million net ($12.4
million after tax). Such adjustments are adjustments to the values of the
acquired assets and liabilities and under generally accepted accounting
principles must be reported currently in results of operations.
As previously reported, Zenith Insurance purchased reinsurance protection for
adverse development of the unpaid loss and loss adjustment expense reserves
acquired from RISCORP. Such reinsurance allows Zenith Insurance to recover up to
$50.0 million in excess of $182.0 million for net unpaid losses and allocated
loss adjustment expenses acquired from RISCORP. The provisions of Statement of
Financial Accounting Standards No. 113 relating to accounting for retroactive
reinsurance transactions require a substantial amount of the benefit associated
with such reinsurance protection to be deferred and recognized in future
periods. In the third quarter of 1999, Zenith expects to record an increase in
the amount recoverable to $50.0 million and a benefit of approximately $9.0
million ($5.9 million after tax) associated with such reinsurance. An additional
benefit of approximately $25.0 million ($16.5 million after tax) associated with
such reinsurance will be deferred and recognized over approximately the next
four years, the settlement period of the reinsurance recoverable.
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As previously reported, Zenith Insurance and RISCORP have entered into a
settlement agreement, dated July 7, 1999 (the "Settlement Agreement"), providing
for the resolution of certain claims arising out of the RISCORP Acquisition.
Under the Settlement Agreement, Zenith received $6.0 million from an escrow
account established pursuant to the Asset Purchase Agreement. Zenith expects to
record the benefit of such settlement in the third quarter of 1999 to offset
certain unexpected expenses incurred by Zenith in operating the business
acquired from RISCORP.
The foregoing adjustments, in the aggregate, are expected to ultimately reduce
income and stockholders' equity by approximately $16.0 million after tax, or
$0.93 per share, over the current and next approximately four years. However,
because of the deferral of the reinsurance benefit, the impact of these reserve
adjustments on net income for the third quarter of 1999 is estimated to be a
decrease of approximately $32.5 million after tax, or $1.89 per share. When the
deferred reinsurance benefit is recognized over approximately the next four
years, net income is expected to increase by approximately $16.5 million after
taxes.
Under statutory accounting principles, the benefit of retroactive reinsurance
is recognized immediately as a separate component of surplus as regards
policyholders. Accordingly, the foregoing RISCORP-related adjustments, after
the benefit of the reinsurance protection for adverse development of the
unpaid loss and loss adjustment expense reserves acquired from RISCORP, are
expected to decrease the surplus of Zenith Insurance by approximately $25.0
million after tax in the third quarter of 1999.
As a result of continuing adverse operating trends in its Workers' Compensation
business and its world-wide property catastrophe reinsurance business, Zenith
expects to record an operating loss for the third quarter, excluding the impact
of the foregoing RISCORP-
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related adjustments. The amount of such loss may be in the range of the second
quarter of 1999 loss, but Zenith is unable to estimate it at this time. Zenith
expects to report its results for the third quarter of 1999 on or about November
4, 1999.
Zenith's Press Release dated October 25, 1999 is attached hereto as Exhibit 10.1
and incorporated herein by reference.
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 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; (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,
and (c) the resolution of RISCORP's claim set forth in the Settlement Agreement
that the Neutral Auditor and Neutral Actuary allegedly made an error in its
determinations with respect to the purchase price for the RISCORP Acquisition;
(11) the changing environment for controlling medical, legal and rehabilitation
costs, as well as fraud and abuse; and (12) other risks detailed from time to
time in Zenith's reports and filings with the Securities and Exchange
Commission.
ITEM 7. EXHIBITS
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EXHIBIT NO. DESCRIPTION
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10.1 Press Release of Zenith National Insurance Corp. Dated October 25,
1999
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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 hereunto duly authorized.
October 25, 1999 ZENITH NATIONAL INSURANCE CORP.
by: /s/ FREDRICKA TAUBITZ
Fredricka Taubitz
Executive Vice President
and Chief Financial Officer
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Exhibit 10.1
[LETTERHEAD]
PRESS RELEASE
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BUSINESS & FINANCIAL EDITORS FREDRICKA TAUBITZ
Executive Vice President
FOR IMMEDIATE RELEASE & Chief Financial Officer
ZENITH ANNOUNCES ADDITIONAL RISCORP-RELATED RESERVES
WOODLAND HILLS, CA October 25, 1999...................As previously reported,
Zenith National Insurance Corp (NYSE: ZNT) recorded the fair values of certain
of the assets and liabilities acquired from RISCORP on April 1, 1998 consistent
with the values determined by the Neutral Auditor and the Neutral Actuary in the
dispute resolution process associated with the determination of the purchase
price for RISCORP. Zenith reported today that it has completed a review of the
liabilities for unpaid losses and loss adjustment expenses in its Southeast
Operations, which principally consists of the operations acquired from RISCORP.
The review was conducted with assistance from independent actuarial consultants
and took account of recent developments, including data through the third
quarter of 1999.
As a result of the review, Zenith will record, in the third quarter of 1999, an
increase in the estimated liabilities for unpaid losses and loss adjustment
expenses acquired from RISCORP and certain other related adjustments. The
increase results primarily from adjustments to the reserves for the years 1994
through 1997. As previously reported, Zenith purchased reinsurance protection
for adverse loss development in connection with the RISCORP Acquisition. The
provisions of SFAS 113 relating to accounting for retroactive reinsurance
transactions require a substantial amount of the benefit associated with such
reinsurance protection to be deferred and recognized in future periods. After
the benefit of such reinsurance and of a previously reported settlement received
in July, 1999 from RISCORP, these adjustments are expected to ultimately reduce
net income and stockholders' equity by approximately $16.0 million after tax, or
$0.93 per share, through approximately the year 2003. However, because of the
deferral of the
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reinsurance benefit, the impact of these reserve adjustments on net income for
the third quarter of 1999 is estimated to be a decrease of approximately $32.5
million after tax, or $1.89 per share. When the deferred reinsurance benefit is
recognized over approximately the next four years, net income is expected to
increase by approximately $16.5 million after tax.
As a result of continuing adverse operating trends in its Workers' Compensation
business and its world-wide property catastrophe reinsurance business, Zenith
expects to report an operating loss for the third quarter, excluding the impact
of the foregoing RISCORP-related adjustments. The amount of such loss may be in
the range of the second quarter of 1999 loss, but Zenith is unable to estimate
it at this time. Zenith expects to report its results for the third quarter of
1999 on or about November 4, 1999.
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 this release 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; (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,
and (c) the resolution of RISCORP's claim set forth in the Settlement Agreement
that the Neutral Auditor and Neutral Actuary allegedly made an error in its
determinations with respect to the purchase price for the RISCORP Acquisition;
(11) the changing environment for controlling medical, legal and rehabilitation
costs, as well as fraud and abuse; and (12) other risks detailed from time to
time in Zenith's reports and filings with the Securities and Exchange
Commission.
